It’s been two decades since Jeff Bezos began lighting the way to a customer-centric future, yet many legacy insurers still don’t get it. And, going forward, it could be costly.

That’s a significant theme and key takeaway from the recently released Novarica insurance trends report called the Novarica Nine for 2016.

For example, to assess the status of trends in customer-facing technologies, Novarica asked insurers for the meaning of ‘digital strategy.’ Although other industries heavily leverage analytics to fulfill customer needs and deliver appropriate customer experiences, only 28 percent of insurers ‘definitely’ included analytics in their definition. What’s more, fully 17 percent actually excluded analytics from their definition.

“Many insurers still think in terms of analytics being about risk management or company performance, but not about the channel,” report author Matthew Josefowicz, Novarica president and CEO.

Beyond analytics, the broader definition of ‘digital strategy’ is all over the map. “There’s almost no consistent definition,” Josefowicz said. “A ‘strategy’ with such fuzzy edges is challenging, to say the least.”

Significant capital backing new, customer-centric entrants

According to the report, another notable trend is the emergence of potentially disruptive new entrants – backed by significant capital. Such upstarts are exploiting traditional insurers’ lack of customer understanding by beginning with the customer experience expectations and then working backwards to create their operating model.

“Recently, Sequoia Capital invested $13 million in a startup peer-to-peer insurer,” noted Josefowicz. “Also, Berkshire Hathaway announced they're planning to sell insurance directly to businesses online.”

“Big picture, there’s a real re-orientation to putting customer needs and experiences at the center, as opposed to starting from the vantage point of risk,” he added. “We’re seeing it across personal and commercial lines. This requires investment and improved capability from the technology side, because delivery is technology driven.”

However, the report further states that tactical innovation, in the form of technology investments, is only half of the picture. Insurers also need to innovate strategically, taking risks at the organizational level, to fix broken experiences and business models. Here, traditional insurers continue to struggle.

“The culture of the industry is about continuity, stability and staying in business for the long-term,” Josefowicz said. “It’s not about risk-taking, which is ironic for an industry that is built on understanding and pricing risk. Other industries are more comfortable fast-failing.”

The winners: Those who start changing course, now

Despite the industry’s cultural inertia, Josefowicz argues the winners among traditional insurers will be those who start committing to a new direction right away. Although the impact of some report trends “won’t necessarily impact your 2016 results, they’re certainly going to impact your results in 2020,” he said.

Other highlights from the report’s nine covered trends:

  • 66 percent said they are planning to grow or enhance intrusion detection and application security in 2016.
  • Over 25 percent said they are replacing or performing “major enhancements” on 13 of 17 types of core systems.
  • 74 percent said agile methodology is having positive impact on end-user satisfaction with delivered projects.
  • Hard dollar ROI has fallen to fourth place in terms of important metrics for determining the value of IT projects.

“In addition to using a wider range of metrics, more insurers are also eliminating the need for the formal hard dollar ROI business case and integrating IT more into business operations,” Josefowicz said. “Insurers are saying, ‘we need these capabilities, let's deliver them,’ as opposed to, ‘you guys over there, do a calculation to see if it's worth investing it in new capabilities.’ In other words, there's a lot of pull for new capabilities that make the hard dollar ROI business case start to become obsolete.”
On the security front, the report states that security consumes less than 10 percent of IT budgets, but more than half of Board member bandwidth as it relates to IT.

“Security is the one thing every board member knows about technology,” said Josefowicz, who believes strategies need to focus on continuous improvement and recovery planning rather than the impossible goal of invulnerability. “There’s a real distinction between large insurers, that have a CISO and mature security methodology, and smaller insurers that have less mature capabilities in terms of detection and recovery planning.”

While the report’s nine trends can be viewed in terms of industry challenges, Josefowicz points out the flip side is gaining a competitive edge. “All of the trends also present opportunities that insurers are taking advantage of in different ways,” he said.

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