Different market segments require different approaches

The insurance industry is a rather traditional one. There was no need for transformation for decades. But this is changing now. The drivers for transformation are changing regulation, financial crisis, changing customer expectation, and digitalization – just to name a few. The challenges linked to these drivers are quite different but need to be managed if you want to be successful in the insurance industry. In order to be able to cope with these challenges insurance companies need to start substantial business process transformation.

The “product” of the insurance industry is rather different to products of other industries. From the insurance company’s perspective a significant part of the insurance business is to take risks from the insured and sell the trust to be the right partner to stand in if the risk becomes a claim or benefit case. If insureds lose trust they will move away and look for another “trustworthy” partner (i.e. other insurance companies). However, there are still some other factors which influence the customer loyalty. Insurance needs to be easy to understand, to consume, and offered at a low price.

Even though these factors seem to be key influencers for insurance customers, we need to consider and differentiate between two major market segments: The “old” traditional market which is rather saturated for insurance business, and the “new” emerging market with high growth potential.

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Customers and insurance companies of these two different markets act quite differently. That’s something that global insurance players have to bear in mind when thinking about their business strategy. In traditional markets the focus is on how to find the “right” customers (i.e. someone who is highly profitable with long lasting policies and relatively modest risks). For insurance companies the essential question is: how do we know which customer and which business is the most profitable with little risks?

This leads to a need for sophisticated solutions which support the insurance business analysis. Predictive analytics will be the key to check if your business will still be profitable in the next one or two decades. Analytical solutions can help you to identify the risks and opportunities. A very important component for this analysis is to dertemine  if underlying assumptions and models are still in line with current conditions.

If you signed long-term contracts where future interest income was considered in the premium calculation, then you need a powerful asset management solution which helps you to identify, monitor and mitigate financial risks and their impact (e.g. the effect of low interest rates in the capital markets). Many insurance companies now need to rethink their business. Insurers need to minimize costs of operation, optimize customer services, and increase readiness for new compliance rules and regulatory requirements.

Any transformation at an insurance company needs to be made very carefully. With an existing portfolio of customers who are trusting in an established “old” brand it’s not easy to change and transform into “new” business models (i.e. for example switch the business model from agent to internet based insurance sales). In emerging markets with little saturation rates the situation is different. Parameters like time-to-market for new products and business agility are in focus. In such markets the customer experience and simplified products are of importance. First movers with innovative products will be able to lead the competition.

Compared to traditional markets, we see in emerging markets a higher degree of business agility with a focus on how to attract new customers. While “old” traditional markets are focused on long term business, the emerging markets prefer business agility and short term opportunities.

How can transformation of insurance business be managed?

Depending on an insurance company’s strategy, the transformation of business processes can be managed with different approaches.

1. Industrialization and Standardization

As a first but very efficient step, insurance companies can start with a standardization of their business processes and IT landscapes by using end-to-end solutions (like SAP for Insurance). Many insurance companies have already implemented centralized procurement and shared services for human resources management and financial accounting. With predefined standards and centralized centers of excellence they are able to minimize costs, ensure constant service levels, and speed up response times.

For core insurance business, standardized insurance products can be used to address different channels and different brands. The standardization and simplification of the insurance business is actually the most often seen field of transformation. Once business processes are standardized it’s easy to industrialize them and reduce the costs of business operations. Process automation needs clear business rules, task management, and assignment of responsibility in order to be cost efficient.

2. External service provider

Standardization is often recognized as a prerequisite for business process outsourcing.  Standard processes help a lot when insurance companies need to define what kind of outsourcing services and which service levels are needed. In the insurance industry the use of outsourcing is often seen in only a few processes .  This may be due to data protection laws or compliance rules which prevent the use outsourcing. However, often it’s the lack of standardized processes and openness concerns by insurers to use external support.

The reasons why insurance companies are conservative about outsourcing services often vary. Insurance companies often feel that any shift from internal processes to external service partners is also a shift of workforce. In “old” traditional markets it’s often not easy to replace the internal workforce with external services. Besides strict labor legislation, there are also public employee protection laws which need to be considered. Internal workforce reassignment  is often an important part of every transformation process.

Woever, once a balance is found between external service provider integration and internal resource management the benefits can be very high.

3. Business networks and collaborative scenarios

This kind of transformation is already known and well established in the insurance industry. In auto insurance, for example, where repair shops, loss appraisers, and car rental companies are connected to insurance companies by special tools, collaboration is already established. Nevertheless there is much room to expand the collaboration via business networks like ARIBA. This helps insurers to minimize the costs of operations and speed up customer services.

Collaboration between the insurer and service provider saves time because the service provider has: all of the car details, I can arrange an appointment at any repair shop near your location, and check if the spare parts are available or need to be ordered.

4. Innovative and flexible products

There is a need to shift from provider-oriented to customer-oriented products. Customers do not want to buy products which don’t fit their needs. They want to pay for what they really need instead of buying bundled products which cover risks that they never will be exposed to. For this reason insurers need to increase their flexibility for new products in order to be able to serve customers with tailored insurance offers.

Customers expect innovative and easy to understand products which cover the risks of their individual needs. Insurers often struggle with such requirements because existing application silos are not flexible enough to manage innovative products which may cross different lines of business.

Today in the digital world most customers educate themselves and compare insurance offers before signing a policy. If insurance companies are not able to make a positive impression during the first contact, the prospect or customer will probably look for a competitor. Thus, it’s very important for insurance companies to sell a product called “trust” anf improve their chances for success.

5. New business models

Traditional business models for insurance companies are reaching their limits. If insurers want to expand their footprint or improve their revenue it’s necessary to think about new alternative business models. Sometimes it helps to rethink the entire insurance value chain (i.e. which services can be reused or provided in order to increase income and profits, while at the same time minimize total costs). But sometimes it’s necessary to take a look beyond existing borders and start with innovative ideas.

The most important first step is simplification of business processes and system landscapes. It’s the precondition for standardization and industrialization. Once standards and simplified processes are established, the next level can be outsourcing or the extension of collaboration and business networks usage.

The time and money which can be saved by simplification can get reinvested in product innovations and new business models. It’s not a strict path to follow but a valid approach to transform the insurer’s business.

Where to start with transformation?

Many insurance companies do not know where to start with their transformation processes. Often questions come up, like:

– What are the priorities of the transformation?

– What kind of benefits can we expect?

– How much will it cost and how much can we save?

– Are we prepared for new the digital world?

– What is the impact on our existing strategies?

There is no simple answer to these questions, but there are a lot of tools and methods available from partners and SAP to help customers find the right answers.

For example, insurance companies who would like to know if they are already prepared for the digital transformation can run a digital fitness assessment. This gives them insight into where they actually stand compared to peer insurers, what steps they need to take, which benefits they can achieve, which business priorities they should focus on, and a roadmap aligned to their strategy.

In my next editorial I will elaborate on different methods which can be used for business transformation support.

Karsten Tecklenburg

Industry Principal Insurance – MEE (Middle & East Europe)

SAP Deutschland SE & Co. KG, Hasso-Plattner-Ring 7, 69190 Walldorf, Germany

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