Why insurers must digitize now or never

As an industry, insurance has traditionally been cautious about change. But traditions change – and the rapid advancement of new technologies has been a major driver of change in recent years. Competition is coming from insurtechs and other industries that never had anything to do with insurance but are using data, artificial intelligence, and other advanced technologies to move into this sector.

Insurers have long understood the importance of data. Actuaries have been using data for centuries to assess risk, policy features and costs. What has changed is the scale of data available, the way it is gathered, and the tools available to use it. Unlike in the past, data can be collected and analyzed in a matter of seconds – and it can be deployed for customers and organizations via apps and other digital systems immediately. Insurance companies that can’t operate at this level of data collection, analysis, and deployment are likely to find themselves losing business and opportunities to those that can.

Many companies in the industry do not operate at this level. Will these companies – and the insurance industry overall – be able to remain relevant, overcoming challenges both external and internal? In some areas, insurance is already playing catchup – but there are opportunities traditional companies can take advantage of in order to remain relevant.

Major insurance categories – notably life and health – are still awaiting substantial innovation, and are in fact largely outdated. It’s in those areas that insurance companies can build a winning digital/AI strategy, and ensure that they remain competitive and relevant for customers. 

Thanks to digitization – the use of AI, advanced data analysis and apps that allow customers to work with insurance companies on their own terms – the auto industry, for example, is moving into the insurance business. Examples abound: EV maker Tesla already offers car insurance in several states, using data from its cameras and sensors to determine risk, damage and liability – and it claims that its rates are as much as 30% lower than those offered by other insurance companies. Mercedes also offers insurance for some of its EV models, and General Motors is planning to do so as well. In China, meanwhile, EV maker NIO has set up its own insurance company, offering policies to purchasers of its vehicles, basing rates and risk on collected data.

EV makers aren’t the only companies using data to upend the insurance market; Lemonade uses AI to analyze claims for its property insurance products, as do Clearcover and Cape Analytics, among others. Many of these companies – which customers connect with via apps – work with traditional insurers, but in many cases that is due to regulation issues; with enough capitalization, any one of these companies could strike out on their own.

The push to digitize comes from both the available technology – and from customer desire. Younger customers, especially, are used to consuming services via digital platforms, and they want the same from their insurance, as well. And for companies, younger customers – who tend to be underinsured – present the best opportunity for growth. 

But it’s not just younger customers; according to some polls, some 90% of customers prefer to interact with insurers using digital channels. If companies want to retain customers – much less recruit new, younger ones – traditional insurers need to elevate their digital capabilities.

There are advantages to AI-based digital insurance for both companies and customers, especially in areas like health and life, where traditional insurers still dominate. Insurance firms can get better and more accurate information about customers, offering them more relevant products, as well as diversifying products, such as microinsurance, tailor-made policies based on lifestyle, and more. For customers, such coverage can mean lower costs and more relevant products, with customers paying only for services they actually need, based on their own choices. 

But studies indicate that transformation may not be so easy. According to a 2020 survey, for example, over 50% of top-level insurance industry executives realize that they need to grow digitization and automation if they are to remain competitive – but issues such as legacy systems, employee culture, and lack of data on customers may stymie their efforts. In addition, getting top talent needed for digitization has proven to be a challenge. 

At the same time, the ability to offer AI-based digital products has never been greater. For example, the widespread use of wearable health devices like trackers, watches, even shoes – provides an opportunity for companies to develop insurance products, with personalized policies that incentivize adopting healthier lifestyles for lower prices.

There are a wide variety of technical challenges which insurers will need to overcome to take advantage of the growing data set; from how they collect and access this new data, to how they ingest and analyze it, to how they are able to translate new insights into changed workflows and customer interactions. These changes will require the selected deployment of new technologies, the replacement of existing ones, and a willingness to try new approaches and methods.  

Such policies will also require companies to ensure that customer data remains secure and is used in manners that don’t put ‘their customers’ trust at risk. Otherwise, getting customers on board will be difficult, and companies could find themselves at the heart of a PR nightmare due to anything from a high-profile cyber attack to a published example of customer data being misused.

To get these offerings right, insurers will need to reshape how they test and enhance their service offerings to keep pace with their customers’ expectations.  Historically-stagnant service offerings will need to be radically transformed, and insurers will need to test these changes with customers continually, a new concept for this industry.  For example, under what circumstances will customers be willing to share more of their personal data? What types of new services will customers find valuable enough to change the way they engage with their insurers? This continuous and rigorous customer testing is de rigueur in the corporate world, but not necessarily for insurance companies – and it needs to be.

Insurance companies play an essential role in society to help mitigate risk and manage the unexpected. New technologies can make them even more effective in that role. But time is of the essence; experts suggest that if companies are to survive beyond 2030, they will need to have secured the tech capabilities they need.

To achieve that, they may want to partner with digital platforms that can utilize AI technology for underwriting and analysis. Several insurance companies, including Guardian and Pacific Life, are already doing so. Companies that haven’t moved forward sufficiently need to accelerate their efforts; otherwise, they may find their customers moving on to digital competitors and newcomers, en masse.