Insurance Modernization: A Strategic Game of Chess
- June 29, 2023
In the ever-evolving landscape of the insurance industry, modernization has become a key imperative for insurers to stay competitive and meet the changing needs of their clients. However, navigating the complex process of modernization can feel like a strategic game of chess, requiring careful planning, adaptability and foresight. Let’s examine a few of the key challenges, common objectives and strategies for insurers to succeed in their modernization efforts.
The key challenges in today’s insurance modernization journey
Insurers today face several challenges that hinder their modernization efforts. One primary concern is high combined ratios, primarily driven by claims expenses. From 2020 to 2021, premiums across all product lines have increased by 10%; however, operating costs have also risen. Despite this, rate increases haven't been able to keep up with the cost of managing policy/claims, resulting in a major problem. And inefficient claims management processes (claims leakage) have caused a cost erosion resulting in about $67 billion for insurers every year, which is equivalent to 6% of total claims payments. To address this, insurers need to find ways to optimize their claims processes and reduce expenses with a low-touch experience and a faster response for the claimant.
Another significant challenge lies in the complex technology landscape, characterized by deeply entrenched legacy systems. These systems often pose constraints on scalability, time-to-market and interface flexibility, limiting insurers' ability to leverage modern technology efficiently.
Insurers who have made initial investments in cloud adoption are looking to realize their promised return on investment. But simply lifting and shifting legacy systems to the cloud may not yield the desired long-term outcomes. Insurers need to assess whether their cloud adoption strategy aligns with their business goals; enables them to adapt to evolving business and operating models and generates expected ROI.
The role of insurtechs in core modernization
To successfully introduce new products and improve user experiences, insurers must first address the flexibility, scalability and interface capabilities of their core systems. Leveraging data for efficient underwriting and streamlined claims handling can help deliver a faster time to market. Additionally, AI-enabled claims, pricing and risk mitigation can help insurers achieve optimal results. Core modernization plays a crucial role in empowering insurers to overcome these constraints and unlock the full potential of their operations.
Furthermore, while insurtech solutions exist to solve specific problems in the industry, insurers face challenges in stitching together these solutions to drive outcomes across the insurance value chain. This integration is crucial to achieve seamless communication and collaboration between the various systems involved — from distribution to the experience of policy holders.
Strategic moves in the modernization game
As in chess, insurers need to carefully plan their moves and prioritize their modernization efforts. Here are two possible starting points for insurers:
1. Managing Legacy Assets: Insurers can focus on replacing specific legacy applications, such as billing or claims systems, with more flexible and interface-able alternatives. This move allows for gradual modernization without disrupting the entire technology landscape.
2. Cloud Adoption: Insurers at various stages of cloud adoption can strategize their next moves accordingly. Late adopters can aim for immediate gains by shifting select applications to the cloud. Mid-term adopters need to assess whether their cloud strategy aligns with promised benefits regarding infrastructure cost savings and functional integration. Successful cloud adoption leads to the desired outcomes expected by the Claims, Underwriting, Operations and eventually policy holder.
Driving value through integration
Insurers must focus on integrating various solution providers, including insurtechs, to derive maximum value and benefits. At NTT DATA, we recommend they start with one functional value chain, the one that impacts their combined ratio the most. With a tough year for P&C, most carriers are focusing on claims. Most major economies have been experiencing inflation at its highest levels in decades; the increasing inflation adds pressure to the top line as clients adjust their coverages and take on more risks to reduce costs. This leads to loss costs and reserve requirements, which hurts the bottom line and has resulted in an estimated $8 billion in incremental inflation across U.S. commercial lines in 2021. Although inflation rates may have peaked in 2022, certain lines remain in the hardening market with rate increases and flat limits, even as asset values increase.
To address loss costs, insurers should explore solutions for claims document management, fraud detection and analytics and seamless data exchange with third-party systems. By strategically selecting and integrating these solutions into an ecosystem, insurers can automate processes, enhance efficiency and improve the overall claims experience for both claimants and insurers.
Decision making and collaboration
In the realm of insurance modernization, business leaders drive the decision-making process. Whether it is the Chief Claims Officer, Chief Underwriting Officer, Chief Customer Officer or Chief Operating Officer, these individuals outline the desired outcomes and performance metrics. The CIO evaluates the options and implements the chosen strategies, but the decisions are driven by the business needs and goals.
Win the modernization game
While the path to insurance modernization may be challenging, insurers who approach it strategically and embrace the opportunities presented by emerging technologies will be well-positioned to thrive in the ever-evolving insurance landscape. Addressing challenges such as high combined ratios, legacy systems and cloud adoption requires insurers to make informed decisions and prioritize their modernization efforts. Core modernization and integration with insurtech solutions play a crucial role in unlocking the full potential of insurers' operations and improving efficiency across the insurance value chain.
In this modernization game, business leaders play a vital role in driving decision-making and collaboration. Insurers must carefully plan their moves, adapt to changing circumstances and stay agile to navigate the modernization journey successfully.