As digitization across the insurance industry accelerates, it can be tempting for insurers to jump on the proverbial bandwagon and devote resources to every new technology that promises fundamental change for the industry. And while it is true that insurers will need to embrace next-generation technologies to remain competitive in the future, not all technologies are created equal.

Countless studies, including the ACORD Insurance Digital Maturity Study, have found that there is no correlation between IT spend—as a percent of premium—and returns for insurers. Simply put, “throwing money” at technology will not necessarily yield positive results. Insurers must instead discern which technologies and capabilities have the potential to truly transform their business and the broader industry and practice sustainable, thoughtful investment in these tools. But with so much hype around the latest emerging technologies, it can be difficult to know which ones will have material, industrywide impact.

Incremental vs. Transformative

In assessing which technologies will live up to their hype—and which ones won’t—insurers can separate them into two main categories: technologies that offer incremental change versus ones that are transformative. These groups are characterized by several key distinctions.

Incremental technologies are largely tools that are designed to enhance an insurer’s existing processes, making them more efficient or effective at what they already do. Transformative capabilities, by contrast, have the potential to upend traditional processes. While they may also be applicable to existing systems, these tools often introduce new methods and models that increase both efficiency and effectiveness around fundamental aspects of the business.

Further, incremental technologies are typically of limited applicability within the enterprise. They are suited to discreet, isolated use cases, often concerning back-end or peripheral aspects of the business. Technologies that are truly transformative have multiple uses across the entire insurance value chain, with a particular application toward optimizing the core insurance functions—claims and underwriting.

Finally, while incremental capabilities can marginally improve business processes and functions, transformative technologies will do so on a far greater scale. These tools promise exponential change, significantly reducing costs, increasing speed and enhancing effectiveness of central business functions while also expanding the reach and scope of the organization.

Technologies that meet the criteria of being transformative can open up new options and value propositions, expand insurers’ operational and strategic degrees of freedom, enable new products and solutions, and tap into previously unreached customer segments and geographies.

With that said, it is important to note that an innovation by itself cannot fundamentally transform a business. It is the implementation of that technology in the context of the organization’s overall processes, structure and strategy that matters. When leveraged properly, transformative capabilities can provide a significant competitive advantage.

Incremental Technologies

Of the technologies that have been attracting attention throughout the industry, some do have legitimate use cases but do not live up to their hype as industrywide game-changers.

Despite the excitement around distributed ledger technologies (DLT), such as blockchain, these capabilities are not likely to be transformative across the industry. DLTs are expensive and complex, and though they have many potential use cases in several industries, they have few within core insurance functions. Blockchain-based capabilities likely have some place in the future of the industry, but it is unlikely that they will transform insurance operations in a fundamental way.

Insurers can also expect low-code/no-code development platforms (LCDP) to be of incremental, rather than transformative, value. LCDPs have been promising transformation since the early 1990s, and successive iterations have failed to deliver against their lofty goals. While LCDPs may reduce the complexity, costs and time surrounding the development and launch of a new app or product by empowering “citizen developers,” they are not the silver bullet many believe them to be. They still require a level of expertise on the part of the developer, they often require users to license the product in perpetuity, and they tend to limit degrees of freedom over the long term.

Drones, too, will prove useful but not transformative for the insurance industry. They have been, and will continue to be, helpful in expediting inspections and cutting back on costs in some insurance processes—particularly property underwriting and catastrophe-related claims. However, even at their best, drones can only marginally improve efficiency and effectiveness. A host of regulatory and technological challenges have inhibited their widespread adoption in the industry and will continue to pose barriers moving forward.

Transformative Technologies

What emerging technologies, then, do have the potential to truly transform the industry?

The explosion of Internet of Things or “smart” devices has led to an abundance of data that is highly accessible, accurate and cheaply acquired. In an industry that relies so heavily on data, the ability to access it quickly via these IoT technologies has already started to transform core business functions, such as evaluating and preventing risks, as well as increasing efficiencies around claims processing. IoT has many use cases throughout the industry, and its impact will be felt across both personal and commercial lines. IoT data is also key to revolutionary applications of “digital twin” technology.

Similarly, artificial intelligence will continue to benefit insurers in assessing and pricing risk through more readily accessible and accurate data. Additionally, AI has proved effective at detecting fraudulent insurance claims through machine learning algorithms that notice and flag abnormalities that may otherwise be missed by legacy processes. With the increasing importance of data and analytics across the value chain, AI-driven improvements can have an impact in almost every aspect of the insurance business.

Quantum computing also offers potential for insurers going forward, particularly in catastrophe modeling. This technology will greatly improve the speed and accuracy of complex datasets and modeling exercises to better assess and manage risks, with potential uses in simulating weather systems, among others. It will expand the horizon of what is practically computable, allowing insurers to expand into previously inaccessible areas of prediction and analysis.

Imperatives

As new technologies continue to emerge, and digital maturity becomes increasingly important for insurers, consider three key priorities when assessing which capabilities will drive fundamental transformation.

Incremental change is good—but it’s not enough. Ongoing improvements are essential; a business must continue to update its existing processes and infrastructure to remain competitive. But that strategy alone is not sufficient in the long run. Insurers that only invest in technologies that provide marginal improvements will weaken themselves over time, losing out on the opportunities for expansion that transformative innovations can offer.

Be willing to fail. Carriers that truly want to move beyond incrementalism must be open to taking risks on potentially transformative digital tools. The uptake of new technologies is happening faster than ever before—those who wait for widespread market adoption before they invest are already behind. Insurers will do well to thoughtfully invest in technologies that have the potential to be transformative to their businesses, even at the risk of failure. This requires increased tolerance for failure and the accompanying ability and willingness to learn and try again. Avoiding failure is not the same as succeeding. Remember—there is no effective “doing” without making some mistakes.

It’s an ongoing search and investment. New technologies are constantly emerging. Many of them are promising that they will revolutionize the way the industry conducts business. Insurers must be constantly aware of these new capabilities, evaluate the potential value toward their organization and the wider industry, and quickly identify those that hold the potential to truly transform. At the same time, they must continually modernize their existing infrastructure and minimize the accumulation of “technical debt.” Ongoing renewal of IT capabilities is required to fully leverage transformative technologies as they arrive.