Digital Insurance Agenda

Solving the digitization trilemma

Written by Manuel Holzhauer, Managing Director InsurTech Hub Munich on Oct 2, 2019

The fourth stage of the industrial revolution brings huge opportunities for insurers to hedge new risks and digitize processes. To seize these opportunities, the industry should not see innovation and tradition as contradictory. Solving the ‘digitization trilemma’ means overcoming the limitations of legacy IT systems and traditional corporate cultures.

In the second half of the 19th century, a new disease connected both physicians and scientists: Railroads were an upcoming means of transportation, moving at unprecedented speed, leading some passengers to complain about exhaustion, irritability and indigestion. This was a lifestyle disease typical for that time, comparable to the ‘texting thumb’ that people suffer from these days. But you could also look at it as a timeless expression of scepticism about technology, in which the risks and side effects are emphasized instead of praising the progress being made.

 

According to this logic, many assume that risk-averse industries such as insurance don’t really move forward in times of great change. However, in retrospect, the opposite is true: the insurance industry, like the economy, has profited massively from the innovations created during the three stages of industrialization. The value of production plants, which were initially equipped with steam power, then with assembly lines, and finally with computers, has risen considerably – and so has the need for hedging risks

 

The same is true for the fourth stage of the Industrial Revolution. Take cyber ​​risks related to hacker attacks or incorrectly programmed algorithms for example, both require completely new concepts to cover risks. At the same time, digitization is creating new opportunities that seem to be specifically tailored to the insurance industry. Big Data, Data Lake or Predictive Analysis are much more than buzzwords. They are fundamental opportunities for the industry. Drone and satellite imagery for instance support both underwriting and claims handling.

The digitization trilemma
Unlocking the potential of digitalisation, takes a lot of courage, entrepreneurial spirit and an open corporate culture.

For a long time, incumbents treasured the (brand) value of traditions – which seems to contrast when wanting to emphasize innovation. Some companies communicate this actively: Allianz, being in business for more than 125 years, recently proclaimed a strategy of ‘Heritage and Renewal’. In the company portrait of Munich Re, founded in 1880, you can read that it’s ‘heritage is based on innovation and solidity’. And Generali, which has been in existence since 1831, says that it’s about to write ‘a new chapter of our history’.

Virtually everyone agrees that the main obstacle is the ‘machine room’ of insurance companies: IT structures, which are quintessential to insurance as a virtual good, have often been in place for over decades. The dilemma becomes a trilemma, since it seems you must disconnect from one objective to capture the other objectives. We all know the trilemma when investing money: ‘high returns’, ‘high security’ and ‘permanent availability’ appear as equivalent goals, but are difficult or even impossible to harmonize. Translated to insurance in the digitization age: How do you innovate when your core values are constancy and secureness? Figuratively speaking, how do you speed things up with an engine that dates back to pre-railroad times?

Corporate culture iceberg
Corporate culture resembles an iceberg: a small part is visible, but the largest part stays below the surface. At the top of the iceberg, the old and new world – established companies and start-ups – do converge. Wearing sneakers to work, building cross-functional teams, innovation labs or digital factories – all of this can be seen in many companies already. And that’s a great thing.

Having said that, we also notice that many of the large companies are still organized in a hierarchical way. In times when few changes take place, this has proven successful. A significant part of the brand value is based on understatement: insurers being highly reputable, traditional, and sometimes even downright boring, provided customers with what they were looking for in a long-term service such as life insurance: Reliability.

Yet, when implementing radical changes, these structures are hardly suitable: Innovation requires smaller, fluctuating teams with flat hierarchies, people who can decide independently and critically question the status quo. These are qualities that can be found in startups. Emerging insurtechs usually are not gamblers or daredevils, as some traditional insurers might think. On the contrary, the founders are well aware of the value of a brand built up over decades. But they use other metrics to measure success, such as activation ratio or customer turnover.

Corporate profits are no longer the gold standard when it comes to measuring the success of companies like Amazon or Tesla. Tesla would have had to close down long ago had it been evaluated solely on profit – and we would probably not have witnessed e-cars disrupting the market today. In fact, the competition from Silicon Valley and other regions of the world might even reignite the ‘entrepreneurship spirit’ in established companies.

Question existing structures
Many companies use IT systems that date back to the last century. High maintenance characterizes this system landscape in which product or tariff adjustments are tedious and costly. The necessary IT know-how for radical innovation is often not available in-house. All of this impedes insurers to move and innovate fast in an era when the market is becoming increasingly demanding; be it situational insurance, products related to new sorts of risks (think e-scooters) or completely new interfaces for interacting with the customer. In the past, customers only complained when things went terribly wrong or took unusually long – nowadays they also criticize a lack of innovation. Apps of new players like N26 or Ottonova constantly remind customers that there is another, more innovative way of doing things.

Changes in the existing IT systems are associated with such high costs that a ‘trial and error’ approach is economically not justifiable. But it’s this very principle of trying out and adapting solutions (or quickly dropping ideas), that’s fundamental in an everchanging world. Cloud based, real-time, end-to-end, fully automated: that’s what future systems have to look like. Changing the landscape will devour millions, if not billions, it will be politically challenging and tie up important resources. Still, tech budgets, the acquisition of IT talent and – above all – a willingness to abandon the old and question existing structure are key success factors.

Carriers should combine forces
The opportunities digitalization, the fourth phase of industrialization, brings, are obvious. But the rules of the game have changed tremendously compared to previous decades and centuries. New competitors from the US or Asia have already entered the local markets. These are mostly young companies that are digital to the core, that continuously scan customer needs and often own powerful platforms. The insurance industry, as we’ve known it, might lose its interface to the customer – without which it cannot react in time to constantly changing behaviours and needs.

In the current situation, insurers should combine their forces and use their available resources to exploit the opportunities of digitization. Long established corporate culture or slow-going systems should not be used as an excuse for not doing so. BMW and Daimler, and their collaborations in autonomous driving and mobility services, are an impressive example of how former rivals can become partners in a global showdown with tech giants. But also cooperating with tiny start-ups might be of massive help improving processes and systems and eventually even change the culture in the company.

‘What would Google do?’ is a business wisdom often heard in the past few years. To resolve the described trilemma, it might be beneficial to see things from a different perspective. To mix and mingle with insurtechs could be a great first step.

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