Capital's role in spurring insurance transformation

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The pandemic has caused a massive amount of disruption in the insurance industry, encouraging a traditional sector of financial services to more rapidly embrace new technologies on a faster timeline. To both survive and thrive, carriers must accelerate their technology adoption and implement digital processes to meet the needs of improved compliance, servicing and distribution. As we look at this evolving landscape, investors have the ability to play a central role in supporting carriers and other insurance players as they accelerate their digital strategies.

Digital revolution or digital evolution?
It has been encouraging how many businesses within the insurance industry have adapted to a new digital norm. However, this digital revolution has not been spurred by the pandemic; instead this global tragedy has acted as a catalyst to accelerate the digital evolution of the industry that has been bubbling under the surface. The industry will be expected to keep up with the pace of innovation and continue evolving processes long after we emerge from the pandemic.

The past year has upended insurance processes from both ends, resulting in an increase in certain types of claims activity and workplace challenges around modifying workflows and enabling employees to work remotely. Carriers are navigating complexities in responding to client claims notifications around business interruption, workers’ comp, and other risks. This comes at the same time as insurance industry players are responding to an active hurricane season and extensive wildfires on the United States’ west coast. Not only is this exposing insurers and reinsurers to claims liabilities, but it is also putting a strain on their capacity and capability to process claims effectively and efficiently. Being unable to adapt to changes in claims processes can result in errors and have regulatory and reputational damage that could impact both the top and bottom line for years beyond today.

Prior to the pandemic, both personal and commercial line claims saw a trend towards increased use of technology and artificial intelligence to reduce the cost and time for handling claims and provide a better experience for customers. Moreover, this trend has been further advanced through investment in technology by adjusting companies and other firms servicing claims. While this development has not been all encompassing in the industry and many claims continue and will continue to require human expertise to address, COVID-19 has accelerated the need for carriers, brokers and services firms to invest in technology advancement.

Satisfying shifts in customer demands
It is no surprise that in response to the pandemic, the industry is seeing an increased appetite from brokers, insurers and reinsurers to invest in technology to create digital and automated insurance experiences, capture data digitally and then use that data across their internal and external ecosystems to generate greater value. We anticipate consumers of insurance products will be looking for increased levels of digitization of existing services and communication channels, and that the push for digital transformation will be increasingly driven by consumer demand for new services and products, rather than a just motivation to remain competitive with peers. In return, increased investments in technology and the transformation of business systems can provide carriers with improved data quality and opportunities to harness data to optimize underwriting, claims processing, business operations and management decision making.

To respond to and satisfy these customer demands quickly and cost efficiently, we believe that the industry will display a heightened enthusiasm for collaboration and strategic partnership. Simply put, the pandemic has exposed some of the industry’s pressure points, which will lead to an increase in outsourcing. Carriers will likely want to focus on what they do well, while allowing best-in-class service providers to handle the components of the process that the business may not be as familiar with. Outsourcing will allow insurers to navigate the new frontier of insurance with the industry’s top service providers in areas of compliance, claims management, data and back office solutions while being most efficient with time, cost and resources.

The Investor Perspective
As insurers consider the long-lasting changes that the pandemic will bring and how to adapt to them, they’ll need to assess the resources they have access to, including their own technological infrastructure and capital. Carriers must also define what this vision looks like and recognize that it is just as important to invest in business operating models and capabilities as it is the technology underpinning the business.

Furthermore, evaluating these critical elements may give insurers an idea of what improvements need to be made to their already existing infrastructure and what capital is available for these improvements or establishing partnerships with service providers that they can outsource relevant tasks to. At the same time, service providers, distributors and insurtech companies will need to consider how to effectively scale their operations to address the needs of a quickly evolving industry.

These conditions offer an opportunity for private investors that can provide companies across the insurance value chain with the capital and strategic input necessary for navigating a post-pandemic world. For example, the tendency for businesses to prioritize reducing costs during this time is understandable, however, these quick fixes to a company’s struggles aren’t guaranteed to hold up in the future. In fact, businesses in the insurance industry must be prepared to disrupt from within and think in new ways in order to pivot operations to keep up and grow post-COVID. Private equity firms with experience in this space should serve as trusted advisors and partners to carriers, service providers and distributors as they undertake this new challenge. The benefits of having access to a private equity firm can be significant, however, perspective based on experience and access to a robust network for establishing partnerships or evaluating strategic growth opportunities sit atop of the list.

As carriers, distributors, service providers and insurtechs consider how to adapt these initial pandemic responses into long-term strategies, we see great potential growth for this sector and a heightened interest from investors to provide strategic support.

Cables run into the back of a server unit inside the data center of FinTech Group AG's campus offices in Frankfurt, Germany, on Tuesday, April 12, 2016. Photographer: Krisztian Bocsi/Bloomberg
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