Over the past five years, a focus on “Digital Transformation” has become an oft-repeated mantra for insurers of all sizes.
Leo Gavelas, CEO of the London-based Acronex Group and a former executive at MetLife, reflects on the fundamental industry changes that have occurred in recent years, how the US and European markets have adapted, and what the future holds for insurers across the globe.
PART I: The Distribution of Change
When new technologies and innovations are created, the distribution of those innovations is often imperfect.
Question: What is the most important force driving change in insurance? Are internal competitive forces or consumer needs more impactful?
Large insurers are forced to change due to competitive forces. Senior management at the top 20 carriers are looking at their competitors as benchmarks – they are watching each other and copying each other’s moves. The mirroring is further supported by the help that carriers receive from global consulting firms that are all working off roughly the same playbook.
Missing from most of this change is a primary focus on customer needs. Although some smaller carriers and InsurTechs are taking a customer-centric approach, they still represent a small proportion of the overall market.
Where in the world do you see the fastest implementation of new insurance technologies?
The fastest implementation is happening in Europe and Asia. Carriers like Allianz have a global plan that they are implementing region by region. Most of this innovation is controlled by the most influential country manager in the insurers. However, as a general rule, these “fast” implementations are still comparatively slow compared to other industries and are often massive projects that end with average results from a customer experience perspective.
Given that most of the largest insurance companies were founded more than a century ago, how do today’s carriers overcome their legacy technical debt?
Most of the technical debt is overstated by carriers. They have a mental block because they are used to thinking about integration or complete digital transformation. However, this ‘all or nothing’ approach is no longer necessary; effective transformation is coming from carriers that can think about bite-sized innovation that can run parallel to legacy systems.
Do you think InsurTech or external innovation is the ultimate solution for legacy transformation, or do you believe that Insurers need to start over from within – using internal divisions like Spire by Nationwide or Iptiq by SwissRe?
External and internal innovation needs to be in balance. Internal divisions can be important to help move the company forward, but they often get folded into the traditional bureaucratic environment and lose their effectiveness.
External innovation is important for carriers that want to focus on what can be done in terms of days instead of years. Many InsurTech capabilities can be integrated in a matter of days and should be the first priority projects because they can produce the most yield.
PART II: The European Market vs the US Market
Many of the world’s largest insurers have expanded their reach to capitalize on opportunities across both the US and European markets – accelerating the division of those markets into a wide variety of smaller niches and sub-markets.
The US market is often considered one of the more difficult markets when it comes to regulations. Do you believe US regulations deter innovation?
The biggest issue in the US market is that the innovation needs scale. Since you have a lot of regulated sub-markets, it contradicts the number one concept of innovation: scalability. If you cannot replicate a model, it is difficult to make it cost-effective.
Without standardized rules of disclosure, data confidentiality, and distribution, it makes it difficult to reach scalability. The advantage of the European market is that the EU has created standards like the data confidentiality standard under GDPR, which means everyone knows what needs to be done in order to enter a market. As a result, it’s much easier (and faster) to move into several markets and get the full value of innovation.
The London market has become known for its innovative products and creative underwriters. Do you believe London will maintain its position post-Brexit?
London has already lost much of its reputation and value. Most of mainland Europe’s innovation groups have left London – Hannover Re and Allianz are both moving out of London and into Frankfurt and Berlin. Unfortunately, London may have permanently lost its place as the dominant market for insurance innovation.
New areas are already taking advantage of this vacuum – innovation centers are cropping up across the world, including Tel Aviv, Israel, Athens, Greece and Milan, Italy. The future will be about managing a huge network of distributed, innovative technologies.
Which market do you believe is better prepared for societal change due to risks like pandemics or climate change – the US or EU?
Reinsurers are taking the lead in thinking about future problems. SwissRe, MunichRe, and Lloyds are already using advanced data and analytics to understand long-tail risk. Most of these long-term planning capabilities are coming from Europe.
However, the US market will quickly follow Europe because most European insurers are operating in the United States. The challenge is more about how legacy technology exists in the US versus in Europe, so it makes it more difficult for US carriers to integrate new data sources quickly.
Is the EU or US market better at working with InsurTechs? Why or why not?
The good news is that, because they are copying each other, the partnerships are forming at roughly the same pace. Speaking specifically about the European market, we have already seen how effective this partnership approach is with major European carriers through our work with Livegenic. We have also seen rapid partnerships with Allianz and a number of British companies like Aviva.
PART III: Tomorrow’s Trends and the Future of Insurance
The use of robotic process automation (RPA) has been talked about for the last 10 years as an innovation that could change the way insurance is underwritten and claims are processed. Do you believe RPA has reached its point where mass adoption can happen?
Personally, I am not optimistic about the use of RPA. Fundamentally changing the way that claims are processed isn’t going to come from deploying a single, massive RPA solution; instead it will come from the use of many smaller, more specialized solutions like video collaboration tools and chatbots.
There is already so much low-hanging fruit for carriers to focus on today – in just the Claims space alone you have things like e-signatures and digital onboarding that have yet to be fully implemented. The Insurers that can implement smaller, “bite-sized” solutions are going to be much better off than those that focus on waiting to try and reinvent entire Claims processes from top to bottom.
How are smart insurance companies leveraging AI? Is it a value-add, or is it still just a shiny toy?
There are only 10 to 15 mature AI solutions in claims right now, and so far none of them have made the substantial impacts that they advertised yet; and in underwriting AI is only being used in a small part of the process. Insurers are better off focusing on simple solutions like self-service processes and reducing manual data entry. AI will certainly be prevalent in the future, but when it comes to data it’s not quite dependable enough yet.
Given that Claims make up more than 60% of the premium dollar, what do you think savvy insurers are doing to reduce Loss Adjustment Expenses?
Only around 15 percent of the total market has automated claims. In the EU Allianz and Aviva have introduced a lot of innovation, but that still only represents around 15 percent of the innovation processes.
As an industry, we are overcomplicating the work that we need to do. The business and technology people do not trust each other. Maybe in 2021, we can reach 30 percent digitization of claims and 100 percent by 2026.
There’s no reason to try and solve the difficult problems of tomorrow when we already have plenty to do today. The industry should focus on solving the easy problems that we already face – get all the right IT people, business people, and the intermediaries who know how to run transformational projects and start solving all these simple problems that have known, existing solutions.
What single innovation has the biggest impact on the insurance market over the next 10 years? Will it come from the US or EU?
The most impactful innovation won’t come from a particular technology, but from innovation in how people work. The industry will be able to move forward the fastest when people are comfortable in cross-disciplinary environments and can implement change in rapid fashion. This is not a US versus EU issue, this is a global issue. Trust needs to be built between InsurTech providers and large carriers, with business analysts acting as the glue to hold them together.
Once this model has been implemented, then changes will happen quickly. Video collaboration is a great example of an innovative technology that the “business side” may overestimate the complexity of using. With proper support from business analysts and better cohesion with IT, many carriers could implement video collaboration without much difficulty. Successfully adopting smaller solutions will build internal confidence in deploying larger and more complex solutions as well. As a result, rather than a single solution, we will see a large aggregation of many disparate innovations and solutions.