The future of digital insurance a sutherland perspective

Insurance Thought Leadership Whitepaper

The Future of Digital Insurance: A Sutherland Perspective

February 2015

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Table of Contents 1. EXECUTIVE SUMMARY 2. CUSTOMER PREFERENCES FOR DIGITAL INSURANCE 2.1 Retail Insurance 2.2 Commercial Insurance

3. CURRENT DIGITAL MATURITY 4. ALIGNMENT OF INVESTMENT SPEND

5. DIFFERENTIATION THROUGH CREATIVE SOLUTIONS 5.1 Mobile-Based Telematics 5.2 Predictive Analytics 5.3 Internet of Things (Iot 5.4 Gamification

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Whitepaper The Future of Digital Insurance : A Sutherland Perspective

1. EXECUTIVE SUMMARY Consumer Preferences

become critical for insurers to explore adoption of creative digital solutions to counter the existing low communication between insurers and consumers, and increase profitability.

Digital Spending Retail: The Internet is fundamentally changing the consumer behavior across the insurance value chain. While access to online product descriptions and online personalized quotes is common, consumers are now also increasingly willing to buy insurance from providers who can offer online professional advice.

Commercial: In the US and the UK, insurance brokers/ intermediaries have till date remained the dominant sales channel (~50%) for SMEs. However, recent studies have revealed a steady shift in preferences, in which businesses are now gradually turning to e-commerce platforms. Studies also indicate that construction and professional services industries are increasingly leveraging the online placement channels to purchase insurance services.

Digital Maturity

Given the ubiquity of the Internet, mobile and social media platforms, the traditional insurance distribution process is progressively getting re-configured from its standard intermediary functions. While sales through the Internet and mobile devices command only a small fraction of premiums today, the purchasing journey has got spread across different touch points between insurance carriers, brokers, and customers.

Despite this distribution split, recent studies reveal insurers’ continued sluggish growth in digital adoption, especially in after-sales support, social media coverage, personalized services, and mobile apps.

According to industry experts, replicating internet capabilities to mobile is not only expensive but also lacks the competitive difference which insurers look for. Hence, it has 4

Most insurers invest only 10% (or less) of their IT budget on digital. Among them, the less-advanced life sector is currently investing a little more (compared to non-life) as part of its upgradation program. Insurers expect their digital investments to increase 5%- 10% over the next year, 10%25% in three years, and 25%-50% over five years.

The low share of digital spends is reflective of insurers’ focus on other priorities and lack of organizational and technological capacity/capability.

Currently, legacy/core system modernization, information and resource management capability development are the immediate focus of insurers.

Potential Opportunities

Mobile-Based Telematics: It offers innovation opportunities in usage-based insurance (UBI), especially in auto; the technology enables linkages between the premium rates and driving behavior.

Predictive Analytics: It leverages advanced statistical techniques and data analysis to identify and focus on the most profitable customers, and can help customize products and services. Firms can gain immediate feedback on marketing campaigns and make adjustments mid-campaign based on initial results.

Internet of Things: Insurers can use external sensors to move from passive to proactive guidance. Analyzing nontraditional insurance data could reveal new risk factors

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enabling pricing differentiation or new value propositions.

Gamification: Game mechanics can be designed to stimulate desired behavior through challenges, incentives and rewards. These incentives can range from awarding achievement levels or badges to earning loyalty points and discounts.

2. CUSTOMER PREFERENCES FOR DIGITAL INSURANCE 2.1 Retail Insurance Insurance needs of consumers have largely remained the same for the past 10 years, but their behavior has changed radically. Customers are now regularly using the Internet to inform, compare, buy, and interact with insurers. Majority of customers prefer buying insurance products from entities other than insurers; of them a few could consider purchasing from online service providers such as Google and Amazon.

Today’s customers know what they want, and will switch providers to get it.

Furthermore, UK consumers have indicated their willingness to use the Internet for buying life insurance if providers offer professional online advice. Significant numbers of insurers believe that online advice from a professional provider would be an important persuasive factor in moving their business online. Consumers that have already purchased life insurance online have highlighted cost effectiveness, ease of access, and the ability to compare online as the top three reasons for opting for this channel, and a large portion of consumers would consider using an app from their insurance provider.

2.2 Commercial Insurance Some commercial markets are witnessing increased online sales. In mature markets such as the US and the UK, online distribution of commercial auto insurance, business owner and professional liability cover for small and medium enterprises (SMEs) has become more commonplace. While around half of US SMEs continue to purchase insurance through a broker, businesses are increasingly turning to ecommerce channels.

Subsequently, studies have indicated that around half of USbased SMEs are also somewhat likely to buy insurance online directly from an insurer. Today, SME owners realize that it is not easy to decide on the level of insurance cover they need, and they may require help of experts (i.e. the intermediaries).

The 2013 Vero SME Insurance Index report adds to these findings that while intermediaries continue to be the dominant go-to segment for SMEs, young business owners are less likely to use an intermediary than their older counterparts.

Furthermore, studies have indicated that the construction and professional services industries are increasingly leveraging online placement channels to purchase insurance services; whereas, for other industries like agriculture, where use of digital is less popular, intermediaries are the preferred channel.

3. CURRENT DIGITAL MATURITY New technology is gradually fragmenting the insurance purchasing process; however, digital adoption has so far remained tepid. Innovations in technology are splitting up the traditional insurance distribution process and reconfiguring the standard intermediary functions. Distribution has expanded progressively from an own sales force versus the agent/broker concept, to a wide variety of direct and indirect channels between insurers and existing/potential customers.

The newest direct sales channels – the Internet and mobile devices – currently command a small portion of the insurance market in terms of premiums. Agents/brokers and other intermediaries such as retailers, banks and affinity groups continue to dominate sales. Furthermore, the purchasing journey has now got somewhat fragmented and spread across different interaction or touch points among insurance carriers, intermediaries, and customers.

Given that digital innovation is driving a significant change in consumer expectations, insurers will require a different set of skills, culture and measurement. According to a recent study on global insurance digital, insurers acknowledge their 5

Whitepaper The Future of Digital Insurance : A Sutherland Perspective

current low levels of digital maturity owing to various internal factors, such as lack of organizational capacity, slow pace of delivery, and cultural constraints.

Currently, most policy-related activities enabled online by insurers offer only a standard feature: Apart from auto and some household insurance, the option to purchase online is not available for many products. However, product information and customized quotes are extensively available on the provider websites. Furthermore, digital enablement of

segmentation and customer value management (retention, up-sell and cross-sell) has the lowest maturity levels at present. As a result, insurers fail to communicate at critical periods and miss opportunities to engage with customers through digital retention triggers and predictive modelling during the life cycle of a policy. As these areas have the most 6

ambitious target future states, these are the biggest gaps to close.

Digitization of after-sales support needs further development: Most of the leading international insurance firms support online submission of claims (~58% cases have a complete online claims process, while 38% have a partial online claims process), with the final steps being confirmed by a service employee.

However, ‘Track and Trace’ of claims is the least developed capability; around 43% of international insurers currently do not provide customers with an online overview of their claims status.

Social networks are predominantly used for marketing: Insurers recognize the importance of social networks; majority of insurance providers offer “Webcare” on social

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networks, primarily for product promotions. Although peer reviews and ratings are commonplace in online retail and travel, they are difficult to find in the insurance sector.

Customer service needs a significant digital boost: A majority of insurers offer online platforms for collecting information and products/price comparisons. This has led to personalized services and digital customer interactions gaining more importance than ever. With the consistent rise in customer interactions through digital channels, demand for personalized online services and digital customer interaction using tools such as ‘Webchat’ and ‘Call me Back’ has increased.

integrated ecosystem, inefficient analytics and other tech capabilities. 

Operations – Fragmented business process, old operating models, lack of analytics & intelligence, and lack of customer-centric services.

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Collaboration – Too many partners & complex governance model, conflicting IT & market needs, and lack of co-ordination between partners.

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Customer – Changing customer base & preferences, lack of unified marketing efforts, and lack of integration between web, social, mobile & online channels.

Mobile applications are also at an adolescent stage: 4. ALIGNMENT OF INVESTMENT SPEND Although a number of insurers provide mobile Insurers need to increase their digital apps for insurance quotations, policy spending to close the gap between the maintenance and insurance claims Insurance services existing state and future ambitions. Most submission, recent findings suggest very provided through insurers spend less than 10% of their limited usage of mobile even for the most mobile websites and business and IT development budget on digitally-enabled customer interactions, such apps are currently digital. Majority of non-life companies as providing company information and also spend less than 10%, while around 1 limited; customer self-service facilities. Even the nonin 10 spend in the range of 10%-20%. In life market, with simpler, shorter-term functionalities contrast, most life insurers spend less products that can be more digitally enabled, offered are also than 10%; while 1 in 4 spend in the range significantly underutilizes the mobile channel. mostly basic of 10%-20%. This is reflective of the However, some international insurers are current state of the sector capability, with beginning to take steps to develop apps in the less-advanced life sector currently line with their websites; with 1 in 5 supporting spending more to transform the business. policy changes through the app and 2 in 5 letting customers According to industry experts, adoption of new creative track their claims after submission through the app. technologies is going to be the key for insurers to build For optimum utilization of mobile apps, it is important for competitive differentiation as against only doing catching up insurers to select services that support customer experience with peers on this front. and measure its success.

While most insurers want to pursue digital initiatives, lack of Recent studies have indicated that ~59% of apps do not expertise is proving to be an impediment. Today, most break even; many organizations forget to measure customer insurers feel that there is a demand to progress faster with a experience after launching mobile apps. digital agenda, but more than half of these companies have cited their lack of organizational and technological capacity/ While the insurance industry is looking to make a fast capability as barriers in that direction. transformation, it is also struggling with a number of challenges related to: 

Technology – Disparate technology platforms, lack of an

Only a few international insurance providers have planned to significantly increase their digital investments. Most insurers 7

Whitepaper The Future of Digital Insurance : A Sutherland Perspective

expect their digital spends to increase by only 5%-10% over the next year, 10%-25% in three years, and 25%-50% over five years. However, a large number of insurers seem to be unclear about how much they spend on digital, highlighting the disparity between ambition and delivery.

Legacy/core system modernization and information & resource management capability development are today the immediate priorities of insurers.

Currently, the key business priority for European life insurers is reducing operating costs. This is driving IT investment in legacy system modernization, online channels, and fraud detection systems. The region is expected to see expansion of IT budgets in support of consolidation/transformation and core system replacement projects, with an annual spend increasing at a CAGR of 3.8% from 2014 to reach nearly $5 billion by 2017, exceeding $14 billion by 2018. This growth is primarily driven by a focus on customer retention, with online portals being the key, as well as legacy system updating, which is vital in improving operational efficiency and reducing costs.

This, however, differs from North America, where life insurers have to comply with emerging regulations, leading to increased investment in enterprise risk management (ERM) and enhanced management information systems (MIS). Experts believe that this increased investment will cause life insurance IT spend to increase at a 4.9% CAGR, reaching nearly $16 billion by 2018.

According to Insurance Networking reports, insurers in the US are shifting their IT spending focus from reducing cost to enabling new capabilities. Furthermore, while 38% of light outsourcing users plan to boost spends in 2014, ~42% heavy outsourcing users indicate to cut spending.

The most significant growth in life insurance spend is expected to occur in the Asia-Pacific, with a forecast of 7.9% CAGR between 2014 and 2018, rising to $13.5 Bn. This projected expansion is based on life insurers needing to build core systems in order to cope with the strong growth opportunities in the region.

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5. DIFFERENTIATION THROUGH CREATIVE SOLUTIONS

Most insurance enterprises believe in the importance of digitalization to deliver the customer experience, and have also established a digital presence. However, many insurers have expressed concern about being left behind due to lack of appropriate operating models (especially the mobilebased) that facilitate digital. To stay in the game, these insurers will have to quickly upgrade both their online and mobile digital capabilities. Furthermore, replicating internet capabilities to mobile will be costly and may create only limited differentiation compared with other insurers.

Therefore strategically, the successful adoption of mobile in insurance may require more creativity to counter the existing low communication between insurers and consumers.

5.1 Mobile-Based Telematics This technology enables innovations in usage-based insurance (UBI), particularly in auto, where premium rates are linked to driving behaviors. UBI is an innovation that uses telematics to more closely align driving behaviors with premium rates.

Integration of telecommunication and information processing has the potential to fundamentally transform insurance distribution by mobilizing the data collection process.

So far, most applications have been in auto insurance, where mobile devices installed in cars record real-time data points on driver behaviours such as location, miles driven, and time of day, rapid acceleration of the vehicle and hard breaking or cornering.

Value proposition for insurers: Can foster risk-reducing behavioral change among customers – Develops new products using the data collected via mobile devices including pay-as-you-go/pay-how-you-drive insurance

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products to help customers track their own actions and get incentives for safe driving.

Improves auto underwriting and customer engagement – Helps in assessing underwriting risks and potential opportunities to cross-sell/up-sell.

Example: London-based Aviva piloted its first UBI program before the iPhone and the modern smartphones were launched. In this program, the company introduced a new pay-how-you-drive app on smartphones called ‘Aviva RateMyDrive’ with the target of signing up 5,000 drivers. It has used a technology that monitors a motorist on aspects such as acceleration, braking and cornering. The data collected is then turned into an individual score to help determine the motorist’s premium. According to Aviva, by testing the app, motorists could earn discounts of up to 20% on their insurance premiums.

5.2 Predictive Analytics Insurers can use advanced statistical techniques and data analysis to target the right customers and provide personalized insurance products and services. To that end, insurers can use predictive analytics in real time with data from web search histories and social media networks, and other digital tracking information. This business intelligence technology offers firms instant feedback on marketing campaigns, helping them make adjustments mid-campaign based on initial results.

Value proposition for insurers: Can have a better sell rate than broad-based campaigns such as advertising – The use of advanced statistical techniques and data analysis to evaluate the impact of multiple explanatory factors on a particular variable.

Predictive analytics can boost cross-sell/up-sell of supplementary products and policy features – Through monitoring and analyzing each interaction with prospective customers, insurers can gauge customers’ appetite for extra cover.

Example: Swiss Re’s predictive underwriting model for life insurance applies statistical techniques to past data (banking and life insurance) to ascertain new health

'predictors’. These predictors are then used to pre-select a group of customers to target a life insurance offer with minimal underwriting.

5.3 Internet of Things (IoT) Insurers can use external sensors to move from passive to proactive guidance: Advanced but cheap networked sensor technology combined with available wireless communication is expected to stimulate growth of devices and smart objects connected to the Internet to up to 50 Billion by 2020. As sensors are already built into smartphones for geo-location, consumers with high medical costs could be alerted by geolocation, highlighting the additional coverage needed for travel or health insurance.

Value proposition for insurers: Analyzing real-time data extracted from sensors could reveal new risk factors, enabling pricing differentiation or new value propositions— For instance, with Google Glass, claims inspections can be made easier, cheaper, and even better when facial expression recognition techniques are used to verify fraud.

Example: The German insurance company Allianz (in 2011) took an interesting step towards connected cars using its mobile app as a platform to centralize its policy holders’ car information. While the mobile app is free for customers, data tracking through the app is bundled with a plug-in hardware under a contract. To create the plug-in device, Allianz collaborated with the GPS company TomTom. Users plug this device into their car’s on-board diagnostics (OBD) port, which is used by Allianz for tracking data to be sent to the mobile app. The OBD helps Allianz help track data such as the number of hard brakes the driver has experienced, the number of over-speed and the abruptness of acceleration, the manner in which the driver turns at an intersection, the period of time he is driving, etc.

5.4 Gamification Use of game thinking and game mechanics in a non-game environment has the potential to increase customer engagement. Gamification concept is designed to stimulate desired behavior through challenges, incentives and rewards. These incentives can range from awarding 9

Whitepaper The Future of Digital Insurance : A Sutherland Perspective

achievement levels or badges to earning loyalty points and discounts. By leveraging gamification techniques, insurers can provide better insights, peer benchmarking, potential under- or over-insurance alerts, and prevention tools.

Value proposition for insurers: Opportunity for market penetration by enticing customers through a fun-filled gaming application – An insurer engages the end-user in a very interesting game, during the course of which the player realizes the necessity and the benefits of insurance.

Example: Allianz (insurance company) recently transformed the popular game ‘Frogger’ into a live interactive experience on Facebook. Through this virtual game, Allianz advises consumers on road safety in an entertaining way, underlining that everyone can easily prevent real-life dangers. Allianz integrated real-time heavy São Paulo traffic feeds with the popular game to create the Facebook app and generate awareness through a fun way. This was achieved by placing a 24/7 camera on the rooftop of a building, which live-streams the view of a busy street. Using the Facebook app, people can log in to help amphibians cross safely to the other side of the road while jumping in between real cars.

6. CONCLUSION

While insurers today are making progress in supporting online sales & service transactions, they are struggling to provide truly holistic, mobile, and differentiated solutions.

Given that digital disruptions in the future insurance value chain is likely to be all pervasive, insurers will have to not only quickly upgrade their online platforms, but also provide creative digital solutions to strengthen their personalized customer services and support profitability.

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Š Copyright Sutherland Global Services Sutherland Global Services 1160 Pittsford-Victor Road Pittsford, NY 14534 Produced in the United States of America February 2015

This document is current as of the initial date of publication and may be changed by SGS at any time. Not all offerings are available in every country in which SGS operates

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Established in 1986, Sutherland Global Services is a global provider of business process and technology management services.

Sutherland offers an integrated portfolio of analytics-driven backoffice and customer facing solutions that support the entire customer lifecycle. One of the largest, independent BPO companies in the world, it serves global leaders in major industry verticals.

Headquartered in Rochester, N.Y., Sutherland employs over 30,000 professionals and has locations across the United States, Canada, Brazil, Mexico, Colombia, Jamaica, Slovakia, Estonia, Sweden, Bulgaria, UK, Morocco, UAE, Egypt, Malaysia, Philippines, India and China.

For more information, visit www.sutherlandglobal.com

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