Digital Transformation and the Digital Divide in Insurance

The term “digital divide” was coined in the mid-1990’s by consumer groups who were concerned that the growth and spread of the Internet would lead to those who had access to the Internet, and those who did not.

Executive Summary

Some insurers are already on the road to the mature stages of digital transformation—digital evolution and digital intelligence. Others are just beginning to build their digital houses. Here, X by 2 Principal Oleg Sadykov describes the digital divide, highlighting the ways in which modern digital platforms can let carriers “zoom in” to individual risk characteristics, give customers 24/7 access to information and support, and ultimately allow carriers to be proactive in anticipating customer needs.

The digital divide definition has expanded to include access to healthcare and education, to name just a couple of key areas.

But the root cause of any digital divide is some sort of digital transformation.

For example, the creation of the public Internet and the e-commerce platforms it engendered was a digital transformation. The digitalization of healthcare and the ability to work remotely are the results of this most recent digital transformation cycle, one that has the potential to create a digital divide in the insurance industry.

Digital transformation in the insurance industry began late compared to other industries. It started slowly, about a decade ago, as cloud services, smart devices and the promise of advanced analytics began to move the industry toward a more digitized business processing model. Some insurers began to develop data and application architectures that could support the move to a more digital world. However, those insurers were typically the ones with deeper pockets and more resources, and whose strength in the marketplace allowed them to make the necessary investments. They developed digital strategies and architectures that laid the foundations for leveraging cloud services, predictive analytics, machine learning, artificial intelligence, next-gen data, cyber risk solutions and in some cases blockchain.

From Reactive to Proactive

It seems fair to say that the need for digital transformation has been thrust upon the insurance industry, as opposed to the industry embracing it early on as a studied reaction to the seemingly obvious macro and demographic trends that reshape most industries. Those trends—evolving customer service expectations, technological disruptions to marketplaces, the need for operational agility in rapidly shifting business environments and many more—are not going away.

The reasons for the industry’s stilted and uneven reaction to the new digital reality are many and include government and industry regulation, product and process complexity, and abundant capital. That is all changing quickly, however. Insurance regulation is not keeping pace with new technologies. InsurTech startups are attacking complexity. Industry capital is being eroded by market performance, inflation, and increased investments in overall industry modernizations and transformations.

That is why it is critically important for insurers to begin—or continue—to build their new digital houses.

Digital transformation, more than any other transformative effort, addresses the three most basic elements of insurance: the customer, the claim and the capital. When everything else is stripped away, that’s what insurance is.

Digital CX addresses the customer by meeting and exceeding new service, shopping and purchasing expectations.
Through AI, advanced analytics and M/L, insurers can address the claims payment decision.
Lastly, it addresses the capital by discovering new market and product opportunities and by leveraging the InsurTech ecosystem and the venture capital that supports it.

For example, an emerging trend powered by modern digital platforms enables insurers to “zoom in” on the characteristics of individual risks, thus enabling more accurate product pricing and claims adjudication. The ability to “zoom in” involves several elements: scouring the Internet for publicly available info; using M/L to do image recognition to see signs of trouble, such as trees close to the property; incentivizing consumers to use sensors to measure their driving habits, etc. Such approaches require insurers to leverage digital platforms and tools, and in the end, they lead to better outcomes for customers and insurers. These and many more benefits make digital transformation an urgent goal for insurers.

The Coming Digital Reality

Part of the promise of digital transformation is its potential to change the risk model emphasis from mitigation to avoidance. Large incumbent insurers are already in the process of making this shift, while medium and small insurers are falling behind. That will have implications for merger and acquisition activity and for the ability of smaller insurers to survive in the new digital reality.

The ability to “zoom in” involves several elements: scouring the Internet for publicly available info, using M/L to do image recognition to see signs of trouble, incentivizing consumers to use sensors to measure their driving habits, etc.

In general, most insurers, even small and medium-size insurers, have digital transformation plans in place and are executing them to one degree or another. However, having a transformation plan is just table stakes for any insurer. The payoff for any digital transformation effort is what it leads to: digital evolution and digital intelligence.

Digital evolution is the next stage of maturation in the transformation process. When they evolve, insurers reap the benefits of improved processes fueled by AI, ML and advanced analytics platforms. Functions like policy approvals and renewals, claims payments, underwriting decisions, and billing remittance are fully automated and require less human intervention. It also allows customers to enjoy an improved user experience that includes 24-hour access to information, service and support. Finally, the digital evolution stage enables insurers to improve business decision-making through modernized data platforms and real-time analytics support.

The final evolutionary stage of digital transformation is digital intelligence. This is where fully digitalized insurers generate analytical insights into their markets, products, processes and customers. Here, the strategic thrusts of the enterprise become proactive and opportunistic, allowing an insurer to anticipate customer needs and to create products that are customized for specific markets.

The Only Choice

Real digital transformation requires commitment, persistence, time and money. Many insurers can claim to have two or three of these elements as part of their transformational approach, but very few have all four. That’s by no means a knock, it’s just the reality of the daily economic and competitive pressures that insurers face. Some insurers will be able to overcome all of this and achieve a true digital transformation, while others will fall short for any number of reasons. The truth is that there is no other choice for insurers—or for the industry—but to keep working toward whatever flavor of digital transformation they can achieve.

A digital divide already exists in the insurance industry, but individual insurers can mitigate that divide by continuing their own digital transformations.