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Differentiating in a Radically Changing Marketplace– Customer-Centricity in Insurance, Digital Innovations

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Sweeping technological advances have created major growth opportunities in the Global insurance space, both for industry leaders and for innovative third-party providers. Insurers are reinventing their consumer engagement experience models, digitizing their distribution and operations, and embracing big data and analytics as they seek to lead the industry wherever they find themselves.

Against this background, many insurers all over the world are leveraging new Technologies to gain the upper hand from their data and transform their new and old business models to align with the new digital age.

Today’s consumers have more complex needs and are more knowledgeable about their choices and needs and therefore require personalized offerings as well as customized communications. They expect insurers to deliver services that meet the high benchmarks set by global digital giants with offerings that gives shorter response times; personalized service, top of the range quality services, seamless interaction among others. To survive in this new digital natives’ market-space, insurers must become truly customer-centric, embrace innovation to remain relevant, satisfy and retain their customer in today’s radically changing marketplace.

Why has is it Become Necessary to Innovate:

Moving towards customer-centric Insurance through digital innovations, there are some critical questions that as insurers we must ask ourselves:

  1. How effective would digital and mobile channels help insurers achieve growth and profitability in the market by retaining existing customers and most importantly gaining new customers.
  2. What are the best steps to take to close the communication gap and strengthen relationships with customers – this emanates from the fact that the modern consumers want frequent, meaningful and personalized communications.
  3. And thirdly, how can insurers build on first-generation agency portals with new capabilities through digital innovations to support distribution channels – this is because, insurance sales executives, agents and brokers always want better data and tools to better serve their customers and most important compete for new businesses.

The scale, reach and pace of tech-driven disruption in the insurance industry continue with such unprecedented speed pushing insurers to a new phase – adaptation of underlying business models.

Digital innovation through new technologies is the key driver of change in the insurance sector hence leading to customer-centric gains.

Innovation and new technologies have the potential to affect the fortunes of insurance companies. Examples the world over shows that the rewards are significant for companies that create strategies that successfully use digital channels.

These channels allow insurers to engage directly with customers, a critical requirement in the new digital age when customers expect continuous interactions with their service providers. Again, through these innovative channels, insurers can gain insight into unmet needs that provides ideas for new offerings. Third, insurers can gather information that helps them improve how they underwrite and market their products. 

In answering the above question on why has it become necessary to innovate, I dare say that innovation has become an imperative for insurers because without a strong digital strategy to differentiate oneself in the digital natives’ market-space,  insurance companies could lose the slice of the margins they earn from distribution and eventually impact their bottom line negatively.

How insurers responds to these economical and society-wide technological innovations, and provide insurance processes and policies that integrate such changes to bring about differentiation in the industry is a discourse worth considering.

Permit me to share with you a good example of one such disruptive innovation that has led one company to differentiate from the competition in the insurance space.

The Case of BIMA

BIMA is a leading insurance tech player that uses mobile technology to disrupt the global insurance industry. Even though it is a Swedish Microfinance Company, BIMA provides insurance services in developing and emerging markets in Africa in particular.

In Ghana, BIMA mostly provides mobile-delivered insurance and health services to the underserved market mostly within the informal sector thus pushing the agenda of micro insurance and insurance penetration forward. BIMA is less than ten years in Ghana but through its disruptive digital strategy, it currently serves and adds about 575,000 customers to its base monthly bringing about 75% first timers to insurance on board.

The BIMA business model allows their customers to register for an insurance policy via their mobile handset and pay for cover through deduction of prepaid airtime credit, or through their postpaid bills.  BIMA has developed an industry leading pay-as-you-go (‘PAYG’) insurance product that is the first of its kind in most markets.

The concept of real-time visibility has become a reality. This is the observation of processes or events in the precise time of occurrence. Real-time visibility helps in improving customer experience by proactively solving needs and concerns, cuts down on operating costs and improves business agility. Internet technologies and the use of digital hand held devices are making it possible for insurers across many markets bring about differentiation. Smart contracts have become enabled by the use of blockchain technology which has dramatically decreased paper-based transactions and turnaround times.

Cloud technology strategy is another digital innovation which provides an agile, scalable and flexible technology to improve the overall modeling capabilities for insurers.  These cloud technologies are been used in delivering value to business customers as well as building and managing bespoke IT systems to give cost competitive advantage and differentiation to many insurers. As pointed out by an article in The Record in the winter 2017 issue, “by leveraging high-performance computing (HPC) in the cloud, insurers are achieving levels of risk modeling that were not possible before”.

Despite the intense competition within the insurance industry, new non insurance-industry entrants into the insurance space is also raising the levels of competition and consequently increasing choice and consumer expectations.

To remain relevant in this radically changing marketplace, tomorrow’s insurance leaders and winners must prepare for the adoption of these new digital innovations. Great strides have been made in this direction and insurers leading the pack on the innovative front are taking action and making investments now that will help them become more customer-centric, improve their pricing to stay ahead of the competition and create operational efficiencies.  With these ever-changing digital environment, the question is, “where are the right areas to focus to achieve the expected goals”?

  • Research done by Celent found out that 37% of insurance customers prefer using smart technology rather than having someone physically to talk to. This gives customers immediate answers to their questions, their inquiries whenever they want. This empowers consumers and facilitates quick decision making. For example, Progressive Insurance’s Flo Chatbot that combines Artificial Intelligence (AI) and quoting technology to answer questions and start the auto insurance quoting process on Facebook Messenger  has created a niche that reaches the younger generation that are hooked to new technologies. This innovative approach has separated Progressive Insurance from its competitors in its market.
  • As indicated by Accenture, a global management consulting and professional services firm that provides strategy, consulting, digital, technology and operations services “The biggest innovations in insurance over the next three years will not be in the technology tools themselves, but how insurers design them with customers, agents, employees and other human partners in mind”.

In conclusion, a research conducted by Goldman’s Sachs Investment Research Department in 2016, found out that there is a strong recognition that the millennial cohort, which is one of the largest age group worldwide and are entering their highest consumption period and have a preference for digital solutions available for transactions.

As insurers, differentiating in a radically changing marketplace and becoming customer-centric in our insurance delivery through digital innovation is a must!

For our customer-centric based systems, we need to be strategic and take advantage of the various modern technologies such as AI, Blockchain and the cloud to help us deliver to customers’ expectation, profitability and remain highly competitive.

Whilst deploying these technological and innovative digital systems to ensure that our companies are the most efficient and customer-centric in our industry, we equally have a responsibility to develop clear strategies for fostering and managing these digital innovations.

These strategies must aim at enhancing the capabilities of our workforce and the efficiency of our operations.

Again our strategies must address the issue of integration where insurers extend the benefits of our technology enabled value chain to other industries to create dependable ecosystems with other service providers.

And finally, our insurtech strategies should grow and position our companies to share and possibly sell developed, tested and deployed innovative technology solutions to other industries.

The insurance industry has recognized this new phenomenon and through introspection, the industry is reviewing how to approach product and service distribution, claim management among other processes. The millennials are clearly dissatisfied with the conventional insurance solutions hence it has become imperative for our industry to adapt to solutions that digitally innovative so we can remain differentiated and relevant in the face of radical changes in our marketplace.

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Insurance

Climbing the Power Curve: Winning in the Insurance Market

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Insurers can take concrete, evidence-backed actions to move them in the right direction and, cumulatively, improve their odds of long-term success. Purposeful, bold moves aimed at shifting resources, boosting underwriting margins and productivity, and delivering on a series of programmatic M&A deals can dramatically improve an insurer’s odds of reaching the top quintile of economic profit. While these moves may sound instinctive, many companies fail to pursue them rigorously. In fact, these moves are most powerful when undertaken in combination, at or beyond the thresholds of materiality described in this narration. The point isn’t that there’s a magic formula for achieving strategic differentiation. Rather, by taking a hard look at the potential of your key initiatives to achieve bold results in these areas, one can get a realistic forecast of the odds that one’s strategy will transform performance.

Understanding the power curve and how to apply it

Research identified a power curve—proof that economic profit is unevenly distributed among insurance companies (exhibit) across geographies from 2013 to 2017. The power curve illustrates the uneven distribution of insurance industry economic profit.

These findings may come as a wake-up call to insurers that find themselves outside the top quintile—but embarking on an effort to move up the power curve is difficult.

How to move up the power curve

Research shows that moving up the power curve requires a laser focus on the factors such as foundational factors and bold moves that have an outsized impact on success, measured as economic profit.

Pursuing the five bold moves by Insurers

While the five bold moves may seem intuitive, and many companies may already be doing them in some form, two factors set these actions apart. First, magnitude and intensity matter; these efforts force insurers to break free from their standard processes of investment and initiative prioritization. Even if a company is doing something in each of these dimensions, how much it is doing often makes a difference. In other words, strategy is not only about the directionality of moves but also their materiality.

Second, the impact of these moves is cumulative. Companies that employ three or more of these moves in concert are likely to be propelled up the curve. Findings show empirically that companies that focus on multiple moves over time can learn from and adapt to them, reaping even further benefits.

Dynamically shift resources between businesses

Some carriers offer customers too many legacy products that do not produce meaningful profit. These legacy products take attention away from distribution, product development, and policy administration. Instead, companies should reallocate capital to higher return-on-equity (ROE) activities and away from lower-ROE lines of business. Proactive measures are critical given the sector’s highly competitive pricing environment.

Resource allocation should also be employed across various strategic lines, not just products. Based on research, the threshold for outperformance is the reallocation of 60 percent of surplus generated over a decade. Insurers that optimize their business mix accordingly have a better chance of improving their odds of ascending the power curve. This threshold parallels our findings across industries that dynamic resource reallocators gain approximately three to four more percentage points of total return to shareholders each year compared with low reallocators.

Other companies have increased economic profit by divesting underperforming assets. In the wake of the financial crisis of 2007–08, a number of companies exited underperforming businesses through closed-block transactions through either legal entity sales or reinsurance transactions. These transactions were with organizations that were more natural owners of the distressed assets by virtue of their capital structures or business models. These back-book transactions, when thoughtfully structured, have freed up capital that helped move sellers up the curve.

Reinvest a substantial share of capital in organic growth opportunities

Reinvesting earnings in profitable and well-performing businesses is a reliable way to increase economic profit, but finding these opportunities has been challenging for many insurers over the past ten years. Companies meet the threshold in this area if they are in the top 20 percent of the industry by strategic reinvestment relative to new business premiums; typically, that means spending 1.7 times the industry median.

Often considered innovators in the industry, companies that achieve this high ratio of reinvestment to sales have a track record of introducing disruptive products and services, enabling them to grow faster than their peers. Indeed, these insurers are successful at finding accretive internal rates of return. And as they push the boundaries of new offerings, they are often able to achieve higher margins (and ROEs) thanks to the reduced competition at the vanguard.

Pursue thematic and programmatic M&A

The third move centers on the use of programmatic M&A, an important approach for insurers with financial flexibility and access to available targets. A programmatic approach to M&A focuses on executing a series of deals in which no individual deal is larger than 30 percent of market cap but in which the total over ten years is greater than 30 percent of market cap. This is often done in thematic areas of technology and capability building or in extensions to new product lines and geographic markets. Typically, programmatic M&A outperforms both pursuing very large transactions and avoiding M&A altogether. By using a series of small, thoughtfully curated transactions to advance innovation and growth, programmatic acquirers have several advantages: they can simplify integration, avoid competitive bidding, and facilitate the exploration of new opportunities without committing large amounts of capital up front. This approach to M&A also enables more effective acquisition of new capabilities, such as digital and analytics.

Enhance underwriting margins

The fourth bold move involves making ROE improvements through better underwriting and lower loss ratios—a particularly important objective given how, as a core competency of all insurers and particularly in the P&C segment, underwriting efficiency can serve as a differentiating factor that leads to higher economic profit. Insurers accomplish these results either through privileged access to particular customer segments or better use of customer or risk data through analytics. Benefits from productivity improvement are often reinvested to improve product margins. To maximize the odds of moving up the curve, companies need to be in the top 30 percent of the industry by gross underwriting margin.

Make game-changing function improvements in productivity

Insurers feel continued pressure to reduce costs because of increasing price transparency, the effects of digitization, and low interest rates. Indeed, new entrants are closing the gap on incumbents. It’s generally recognized that even though the loss ratio has the greatest leverage, insurers benefit significantly from improving efficiency, lowering expense ratios, and increasing revenues per employee. Many executives in the industry believe that a dramatic wave of efficiency and retooling will crest in the next three to five years, and many are embarking on these high-ambition, enterprise-wide efficiency journeys now. Research reveals that to maximize the odds of entering the top quintile, companies should aim for a cost improvement that is in the top 30 percent of the insurance industry.

The odds of moving up the curve become exponentially larger as insurers pull more levers, while a strategy that does not incorporate any of the moves will likely fail. Indeed, the CEO, CFO, other senior executives, and board members can often use these bold moves as a test of strategies brought to them by their teams. Strategies that neglect to engage these actions typically have a one in ten chance of succeeding, compared with one in two (or better) for those that do.

Rather than thinking about strategy as primarily a matter of frameworks and broad themes, leaders should ask themselves what they are doing to make bold moves along the five dimensions that matter and whether efforts already underway are truly significant. The extent of the moves matters a great deal—materiality matters, not just directionality. And CEOs are in a unique position to calibrate materiality; this, in fact, is one of the greatest aspects of their role and a productive means of challenging their teams. If proposed plans don’t meet the required threshold of activity to bend the odds of moving up the power curve, they are likely not aggressive enough. What often gets in the way is a resource allocation process hindered by social dynamics. Other common obstacles include a lack of objectivity on opportunities and an insufficient understanding of critical thresholds needed to move the needle. As a result, too many companies simply check the box on certain priorities while investing too little in the ones that truly matter.

Improved economic profit is within reach for insurers that can adjust their business models in the face of an efficient market and inject a newfound objectivity into their strategic processes. Indeed, insurers that have a favorable endowment, navigate industry and geographic trends, and make bold moves will be in a good position to climb the power curve.

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