Recognizing a growing threat by potential new entrants, insurers have acknowledged the need to transform core operations by implementing custom front ends, according to an in-depth study by Ovum titled, "Core Operations Modernization in the Global Insurance Industry."
The research, which used interviews with 530 senior IT decision-makers at insurance companies worldwide, cited major shifts in demographics, economic power, regulation, and technology over the next few years that will bring about the biggest reorganization that the global insurance industry has ever seen.
While the field has historically taken a "wait and see" approach in regards to change, threats posed by the aforementioned new entrants, as well as "agile start-ups," are forcing a sense of urgency among many insurers that are planning to make their core operations environments "fit for purpose."
Across the board, researchers found that the attitudes and expectations of the "millennial" generation, an increasingly important segment, are much different from those of their predecessors -- they demand convenience, transparency, flexibility, and control when interacting with an insurer. Unfortunately, the industry has been slow to respond to these expectations.
"The insurance industry tends to be very conservative and cautious about adopting new technology," said Charles Juniper, who authored the study, and who is also the Principal Insurance Analyst, Financial Services Technology for Ovum. "However, a perfect storm of new pressure has built up. The majority of new insurance customers want mobile interaction. These millennials are heading towards the insurance market for the very first time and they're questioning 'why do I need to do things like this? [the way the industry has done historically]?'”
In order to support the growth strategy cited in the research, which was sponsored by SAP, 42% of carriers believe in an "integrated channel" model that combines digital channels and core processing functionality within a single platform; however, 46% of carriers will need at least two more years to implement this model. This delay will place the majority of the industry at a competitive disadvantage and also exposes it to disruption by new entrants. If they hope to combat this problem, insurers must still find a way to accelerate core operations transformation efforts.
Ovum believes that many insurers will be exposed to this threat either from carriers that are further advanced in their core operations transformation, start-ups, or new entrants from outside the insurance industry.
"[The industry] kind of needs to get its act together, to get over the complacency, and to start thinking outside of the box more," Juniper said. "There are no real physical problems stopping it from changin . It's just a question of a certain mindset and moving away from the culture of doing things the same way."
Another key issue currently facing insurers is that many run multiple and fragmented core systems--with 41% of all carriers operating 11 or more core operations platforms, while 30% of carriers use a core operations environment that is mainly made up of in-house developed systems.
In addition, the study also found that insurers in emerging markets are aggressively implementing Software-as-a-service (SaaS) and cloud technology in an effort to bring about quick changes to their core operations. Insurers have been strong adopters of SaaS and cloud technology across the wider organization, but the study shows that only 6% of respondents are currently using the technology specifically in support of their core operations.
"Cloud is beneficial for insurers because it lets them see inside of the less crystal part of the business and also helps them learn what is actually doable," Juniper said. "I think that cloud really has the capabilities to help the insurance industry get around many of its problems. It's not a panacea, but it does help greatly."
In these emerging markets, 23% of carriers plan to use cloud to support the majority of core processing within 24 months, nearly twice the proportion in mature markets such as North America and Europe where many economies remain sluggish along with high levels of market penetration and commoditization.
This indicates that many insurance sectors will experience weak overall growth, and increased competition. However, demographic shifts in many markets, along with an aging population with more wealth, also presents new opportunities to both protect and manage expansion in the retirement, health, and long-term care insurance sectors.
Other economies where their emergence is tied to an explosion of the middle class, such as India, China, and Latin America, means that hundreds of millions of customers will be entering the insurance market for the first time. This, in turn, will offer insurers a great deal of growth opportunities over the next decade.
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