Digital insurance: opportunities and challenges for insurance companies

Discover the power of digital insurance and find out about particular challenges it might bring for insurance companies.

For a long time, insurance companies needed to take advantage of the opportunities offered by digitization. This, however, has massively changed in recent years. Just as in retail or banking, digital transformation is rapidly altering the rules of the game in the insurance industry. We will show you how to utilize the potential of digitization for insurance companies.

Digital insurance reduces costs

Most insurers have long since recognized the necessary change towards a digital future: Taking out new policies and managing existing ones, comparing dental offers, the insurance processes submitting bills, and reporting a car accident – all these can now be done online. There are two reasons for this: Costs and customers.

“We have to reduce further costs. In this respect, there is inevitably pressure in the industry to improve efficiency continually,” explained the former President of the German Insurance Association (GDV), Alexander Erdland, to the Handelsblatt. He also knows how cost-cutting should work: “For this, we need more employees in new technologies.”

However, the ability to digitally optimize processes and thus reduce costs is one of many drivers of digitization in insurance companies.

Customers are driving the digitization of the insurance industry

To digitize the insurance industry, the changing (and growing) demands of policyholders are, besides pure efficiency, the essential second driver of innovation.

The study Insurances: The Digital Challenge by Bain & Company caused some astonishment among the experts: Not only because 40% of the insurance customers surveyed said they were willing to switch. But above all, even then, around 60% considered that, in the future, web-based communication channels would be the most important means of interacting with insurance companies.

Regarding “customer focus,” this was a wake-up call for the industry. While, before this, the majority of the insurance industry had, for decades, been sure of their customer base, this foundation of successful sales began increasingly to waver. Digitizing the insurance industry makes it easier for customers to access information, enables simple comparisons between providers, and accelerates closing processes – even with the competition.

Interview with Stefan Butzlaff (tecis / Swiss Life)

Stefan Butzlaff is a member of the Management Board of this Finanzdienstleistungen AG and Managing Director of Swiss Life Deutschland Vertriebsservice GmbH. He connects the two innovation drivers, “efficiency” and “customers,” in the overarching digital strategy of Swiss Life’s companies in Germany.

“Our central focus is on knowing the needs of our user groups. Every technology innovation, every project, starts from the user. A detailed analysis of the current pain points is the basis of every newly developed digital solution. A cultural change of perspective, i.e., anchoring a positive assessment of change, is also indispensable for constant progress. Another key success factor for sales in the future is to consolidate and radically simplify complex work steps through digitization. This requires an agile and pragmatic approach. In a rapidly growing FinTech market, speed is required to remain competitive in the long term.”

The trend whereby customer wishes to set the policy management direction has intensified in recent years. In addition, policyholders are transferring their experiences from other areas of life, such as convenient online shopping, and are adapting their expectations of insurance providers accordingly.

Increasing investment in this area demonstrates the importance and value of digitization for the insurance industry regarding internal processes and end-customer business and service. According to Insider Intelligence, insurance companies spent around €4.7 billion on this—a record high. Moreover, spending on digital transformation and insurance technology will rise by more than 25% between 2022 and 2026..

Challenges for the insurance industry: Legacy IT drives costs and hampers innovation

One of the insurance industry’s most significant challenges in digitization is the historical growth of the IT landscape in many companies. This affects practically all insurers (except for young Insurtech companies). Insurance companies have always, though, been quick to discover new technologies. And it is no paradox that this is precisely where the problem lies today. For example, a lot of modernization work is needed for a broker to visit his customers with an iPad instead of a file folder.

A survey carried out by Bain & Company identified that “More than two-thirds of the world’s non-life and life insurers were still using legacy systems from the 1970s and 1980s.” Though much complex modernization work has been done since then, the structure and organization of many of these so-called “back-end” systems still reflect complex corporate organizations. And data silos are still commonplace.

The IT systems from the first phase of digitization are still posing problems for personalized service providers today:

1. At the digital interface (the front-end) to their insurance providers, policyholders often have to deal with complex solutions – dominated by back-end processes – instead of being able to focus exclusively on their own needs. This is precisely the opposite of the user experience customers otherwise experience online.

2. Technology projects in large companies generally go on for a very long time, often years, because existing systems need to be maintained and serviced, and changes are a significant challenge. Often newly developed solutions need to be updated before they go live.

As a result, many customers perceive their insurance policies as inflexible and not very customer-oriented. And this, despite all the investments.

See how digital transformation succeeds with insurance companies

The short innovation cycles in the further development of web technology, which continually gives users new opportunities and raises expectations, contrast with the very long development cycles in integrating existing infrastructures.

Long runtimes are the rule for technology projects in those companies with historically grown, complex IT landscapes and typically overloaded IT and specialist departments. However, it is often overlooked that it is not only the technology customers use (smartphones, browsers, etc.) that develop rapidly. New enterprise solutions are also constantly being created to offer current trends quickly to the broadest possible range of users.

With software such as front-end layers or API gateways, for example, fast iterations can be implemented at all direct interfaces to customers without having to intervene in the core systems existing IT: A bimodal approach combining stability and innovation.

Four key factors for success

What should a roadmap to a digital company with no customer expectations and a consistent customer focus look like? Four key factors determine success and are the basis for planning:

1. Radical customer orientation

2. Short time to market

3. High transparency

4. Unrestricted support by the management

The compulsion to be customer-oriented (1.) requires rapid implementation (2.) and transparent communication with customers as well as employees (3.). This cannot succeed without support – not only financial – at the board level (4.)

The importance of digital insurance distribution

A study by the German digital association “Bitkom” suggests that the digitization of insurance sales is well received by German customers: more than one in two (55%) has already purchased an insurance product online at least once. Moreover, the figure is even significantly higher in the target group of under 30-year-olds (65%).

However, the study of 1,003 people aged 16 and over, representing the German market, also shows how important personal contact is: 92% of all insurance policies are not taken out online but preferably through an intermediary.

Nevertheless: In Germany, “online contracts are on the fast track,” as was reported in the trade magazine AssCompact. Although the number of contracts concluded in the branch office is still ahead by 38%, pure digital business already accounts for 35% of the total volume. However, 23% of all transactions are concluded in the customer’s private environment through brokers, agents, or consultants. Thus, personal coverage, the amount to 61%, is still far ahead of online sales. So how can online sales be “on the fast track”?

To find the answer, one should look at the pricing of individual products separately. After all, the top 5 insurance products taken out online in Germany in 2022 were all straightforward, standardized products: personal liability, health, car insurance, dog insurance, and travel insurance. Only two more complex products are among the top 10: BU Insurance (8th place) and private pension provision (10th place).

Complex products require more explanation, expertise, and often individual advice so customers can understand and buy them. In this respect, human insurance professionals are still ahead of automated digital distribution channels. But this will change as digital assistants or AI systems improve and more “digital natives” join the customer base for insurance products. If the established providers do not want to lose market shares to new, purely digital competitors, they must rethink and expand their existing online insurance offerings.

Three tips for more customer focus in digital sales

First and foremost, the customer is the starting point for all developments. The customer’s needs should be the focus of all new customer interface solutions – not your company’s internal processes. An optimal customer journey for your customers is the goal for every digital sales channel. Check your approach and your projects to see if this is reflected there.

Second, transformation works better outside-in. For example, many large insurance companies want to begin the transformation of their business processes and products from the inside out by modernizing their corporate culture, internal processes, and basic IT infrastructure. It is, however, better to reverse the process and begin the transformation to a digital enterprise at the interface with the customer. After all, a change from the outside to the inside leads to success much more quickly in complex organizational structures.

Third, early feedback prevents undesirable developments. Digital solutions should not be developed “to the end” in silence but should be provided with intermediate goals presented and tested, internally or publicly. Initially, a Minimum Viable Product (MVP) can only fulfill the minimum requirements. Still, based on this, the project management can check the user acceptance of the upcoming product.

The role of brokers in digital distribution

What role in the future will brokers continue to play in the digital interaction with providers and customers? Will sales soon be exclusively digital? Indeed, not so soon. In an interview, the founder of the German InsurTech start-up “flypper,” Dominik Groenen, said: “In our opinion, the orientation ‘exclusively digital’ bypasses the actual interest of most customers.”

From a sales point of view, we are not yet living in the digital age, but in the customer-centric age: the customer’s wishes are the focus, not the technology (this is only a means to an end). Digitalisation offers brokers a real opportunity to spend more time on their core business: Building trust. Nowadays, correspondence still often takes up much time – e.g., policies, applications, and changes must be checked and mailed –the focus is shifting towards person-to-person contact. Digitization does not mean people will no longer have a task. Somewhat, tasks will change with increasing digital transformation.

Brokers continue to be an essential asset for insurance providers. It is now a matter of moving into the digital future together – and not letting any competition with online sales develop. As with the end customers, providers must explain the advantages and benefits of digitization to their brokers:

• Sales support: Not simply “tablet instead of a file,” but also by digitizing internal processing procedures.
• Digital products instead of digitized products: Insurance products are also subject to trends. Anyone who cannot offer “cyber insurance” today misses out on business.

This ensures that digitization is adopted and accepted. At this point, let’s proceed to discover a special customer request and technical challenge at hand.

Customer request and technical challenge: bundled products

Brokers can do what the software of many insurers still needs to do: Offer customers individual bundled products. They can do this because they listen carefully and quickly recognize information relevant to the up-sell. However, for digital systems, this is still a challenge. Ultimately, insurance products are often so monolithic that combining individual modules to make up an offer does not lead to success.

Both sides, customer and provider, would surely like a customer journey that could look like this:

John Doe has bought a new bicycle he wants to insure against theft. He selects an insurer via an online comparison platform and ends up on their sales website. The insurer already knows that the potential customer is a cyclist. With only a few additional data, they can calculate whether offering accident or household insurance, including the bicycle, makes sense.

Implementing this customer journey is a technical challenge and is still up in the air for most providers. Older IT back-end systems, especially, e.g., for risk calculation, are not designed to receive data from the front-end, process it quickly, and return a result directly to clients. However, solutions for this enable linking a wide variety of (even historical) systems.

Digital insurance case studies illustrate the point

Efforts made by the insurance industry to digitize have often been smiled upon. Old companies were considered too cumbersome to keep up with the young fintech. So a doomsday scenario was devised: Classical insurers would, in the future, become pure “infrastructure providers” who would provide services but hand over sales and, thus, contact their customers to the new online platforms.

However, this proved to be false. Today, many examples of how insurers have taken essential steps in digital transformation quickly and successfully.

HDI Firmen Digital

It is mandatory today to offer a fully digital online policy for simple products such as liability insurance.

On the other hand, supplemental insurances are complex insurance policy requiring more individual configuration effort – such as commercial insurance. However, this is precisely what the German HDI Group has successfully mastered: “Firmen Digital” is an online portal that maps an entire process, from application to the completed policy.

“The portal is an important building block in our digitization strategy. We needed to integrate the new technology seamlessly into our IT infrastructure. Thanks to Firmen Digital‘s online calculator, we can significantly reduce the complexity of the consulting process for commercial insurance policies. This creates transparency for our customers and supports our sales partners.”

Firmen Digital works with enterprise data protection services visualizations, automates many processes, and creates a consulting protocol according to IDD standards. The implementation was successful with the help of a special API gateway that connects various data sources (e.g., a company directory) to the front end. Thus, black box processing is possible without affecting the inventory IT.

Swiss Life

Digital insurance distribution is only the first step. First, of course, you can acquire customers here – but those who take out policies online do not want to manage them offline. Therefore, the next logical step is to set up customer portals to self-administrate all master and contract data 24/7. Swiss Life Germany has taken on this undertaking and successfully relaunched the following customer portals, Swiss Life Select, Tecis, Horbach, and Proventus.

Since 2015, Avenga’s predecessor company “Sevenval Technologies” has been supporting Swiss Life Germany to sharpen its digital strategy and implement it for the individual companies in their Group. Currently, Swiss Life Germany is cooperating with Avenga:

“Avenga has already supported us in digitally transforming our company in many completed projects. In addition, Avenga convinced us with their fast and efficient implementation of ideas. We are therefore looking forward to further intensifying our partnership-based cooperation.”

Large parts of the implementation were the responsibility of the Sevenval team during that time.

Future trends for insurance companies

Digital technology is developing at a rapid pace. Of course, many things are only progressing in small steps, but some technical ideas have become industry trends. Blockchain, AI, and Big Data applications, for example – every major insurer is dealing now with these topics.

A brief look at these three critical trends in the insurance industry:

• Blockchain for insurances

• Big data for insurance companies

• Artificial Intelligence for insurance businesses

1. Blockchain for insurances

With its advanced cryptographic techniques for transaction verification, blockchain technology is considered a “game changer” for the insurance industry. Blockchain forms the foundation for convenient and continual secure access by all parties to the distributed data of a contract.

This means that insurers, brokers, and customers can always rely on having the same information – and no one can alter it unnoticed for their benefit. For the first time, blockchain enables a secure “single point of truth” for all parties involved, creating lasting trust and reducing operating and transaction costs.

Blockchain-based insurance systems can massively simplify claims management and processing, especially in the event of serious or catastrophic events. In addition, they can reduce the workload of insurers and brokers who process large volumes of documents from claimants, assessors, lawyers, and experts.

2. Big data for insurance companies

With increasing digitization, the amount of data and the number of data points is growing faster and faster – and their intelligent use in predictive analytics has long since become an existential question for insurers. Today, the technology for collecting, storing, and processing data is so advanced that providers can concentrate fully on evaluating the results: New customer segments can be discovered here, as well as insights into customer needs, ideas for new products and services, or ways for targeted marketing.

These are all prerequisites for remaining competitive, managing fact-based risks, and developing services and products specifically tailored to their customers’ needs.

3. Artificial Intelligence for insurance businesses

Artificial Intelligence (AI) is critical to efficient and consistent business customer service. For example, according to an Accenture study, 74% of consumers want AI-based insurance advice. A suitable solution could be an around-the-clock chatbot that accepts, understands, and correctly processes customer requests.

Operational efficiency can also be improved through targeted AI deployment: Process automation, managing vast amounts of data, or damage report analysis are classic tasks for AI.

Insurance fraud can also be curbed with AI, as suspicious customers can be identified faster, and countermeasures can be initiated earlier. Biometric AI can, for example, recognize images and faces with high accuracy and concisely uncover suspicious activity.

The bottom line: insurtech startup – role model instead of competition?

Anyone who starts into the “digital age of the customer” without any technical legacy will find it easier in many respects to be at the cutting edge of technology. Only a few years ago, this was considered a threat to the market position of established insurers. However, they also have a decisive advantage over newcomers: They have a large customer base and have the means to present new services and products to their customers. What this might be can be increasingly found in Insurtech’s startups.

The Startup, Lemonade, for example, illustrates what speed means today: The digital insurer enables immediate conclusion of an insurance policy via an app or website, with easy-to-understand questions, within 90 seconds. The “Zero Everything” tariff option excludes all deductibles and future price increases. Claims are usually settled within three minutes. This is the speed that customers expect in the digital age.

Or Trōv, an “on-demand insurance platform” which offers its customers insurance coverage for around 10,000 specific products with a simple and user-friendly “Mobile-First” approach. All concluded micro-duration insurance covers are stored in the app and can be switched on and off with a swipe.

The Haftpflicht Helden has accomplished another feat: They offer extremely focused products and strive to position themselves in a way that can be explained in one sentence and addresses a clearly defined target group. If the customer can already see from the brand name what services are to be expected, this is an ideal introduction to a focused insurance solution.

Ready to explore even more cases of digital transformation in insurance or want to be a part of our success stories? Contact us, and we will get you started.