There is growing acceptance that trying to squeeze more efficiency out of existing systems and processes is folly in an industry that must make fundamental changes. But are insurance and reinsurance companies ready for the cultural and digital change this necessitates?

In an article in Wired magazine, Google X lab director Eric “Astro” Teller (whose business card describes him as “Captain of Moonshots”) suggested that it might actually be easier to make something 10 times better than 10 percent better. Squeezing out a further 10 percent in efficiency typically involves tinkering with existing flawed processes and systems. It’s not always necessary to take a “moonshot,” but making something 10 times better involves taking bold, innovative steps and tearing up the rule book where necessary.

The term “moonshot” came from IBM, describing how they foresaw the impact of Cloud in the future of healthcare, specifically its impact in the hunt for a cure for cancer. IBM argued a new architectural strategy — one based on open platforms and designed to cope with rampant data growth and the need for flexibility — was required in order to take cancer research to the next level.

But is the 330-year-old insurance industry — with its legacy systems, an embedded culture and significant operational pressures — ready for such a radical approach? And should those companies that are not ready, prepare to be disrupted?

In the London and Lloyd’s market, where the cost of doing business remains extremely high, there are fears that business could migrate to more efficient, modern competitor hubs, such as Zurich, Bermuda and Singapore.

“The high cost of doing business is something that has been directly recognized by [Lloyd’s CEO] Inga Beale amongst others; and it’s something that has been explicitly highlighted by the rating agencies in their reports on the market,” observes Mike van Slooten, head of business intelligence at Aon Benfield. “There is a consensus building that things really do have to change.”

The influx of alternative capacity, a rapidly evolving risk landscape — with business risks increasingly esoteric — a persistently low interest rate environment and high levels of competition have stretched balance sheets in recent years. In addition, the struggle to keep up with the explosion of data and the opportunities this presents, and the need to overhaul legacy systems, is challenging the industry as never before.

“You’ve got a situation where the market as a whole is struggling to meet its ROE targets,” says van Slooten. “We’re getting to a stage where pretty much everyone has to accept the pricing that’s on offer. One company might be better at risk selection than another — but what really differentiates companies in this market is the expense ratio, and you see a huge disparity across the industry.

“Some very large, successful organizations have proved they can run at a 25 percent expense ratio and for other smaller organizations it is north of 40 percent, and in this market, that’s a very big differential,” he continues. “Without cost being brought out of the system there’s a lot of pressure there, and that’s where these M&A deals are coming from. Insight is going to remain at a premium going forward, however, a lot of the form-filling and processing that goes on behind the scenes has got to be overhauled.”

“Efficiency needs to be partnered with business agility,” says Jon Godfray, chief operating officer at Barbican Insurance Group. Making a process 10 times faster will not achieve the “moonshot” an organization needs if it is not married to the ability to act quickly on insight and make informed decisions. “If we weren’t nimble and fast, we would struggle to survive. A nimble business is absolutely key in this space. Things that took five years to develop five years ago are now taking two. Everything is moving at a faster pace.”

As a medium-sized Lloyd’s insurance group, Barbican recognizes the need to remain nimble and to adapt its business model as the industry evolves. However, large incumbents are also upping their game. “I spent some years at a very large insurer and it was like a massive oil tanker … you decided in January where you wanted to be in December, because it took you four months to turn the wheel,” says Godfray.

“Large organizations have got a lot better at being adaptable,” he continues. “Communication lines are shorter and technology plays a big part. This means the nimble advantage we have had is reducing, and we must therefore work even faster and perform better. Organizations need to remain flexible and nimble, and need to be able to embrace the increasingly stringent regulatory climate we’re in.”

Creating a culture of innovation

Automation and the efficiencies to be gained by speeding up previously clunky and expensive processes will enable organizations to compete more effectively. But not all organizations need to be pioneers in order to leverage new technology to their advantage,” adds Godfray. “We see ourselves as a second-level early adopter. We’d love to be at the forefront of everything, but there are others with deeper pockets who can do that.”

“However, we can be an early adopter of technology that can make a difference and be brave enough to close an avenue if it isn’t working,” he continues. “Moving on from investments that don’t appear to be working is something a lot of big organizations struggle with. We have a great arrangement with our investor where if we start something and we don’t like it, we stop it and we move on.”

The drive for efficiency is not all about technology. There is a growing recognition that culture and process is critical to the change underway in the industry. Attracting the right talent, enabling bold decisions and investments to be made, and responding appropriately to rapidly changing customer needs and expectations all rest on the ability for large organizations to think and act more nimbly.

And at the end of the day, survival is all about making tactical decisions that enhance an organization’s bottom line, Godfray believes. “The winners of the future will have decent P&Ls. If you’re not making money, you’re not going to be a winner. Organizations that are consistently struggling will find it harder and harder as the operating environment becomes less and less forgiving, and they will gradually be consolidated into other companies.”

Much of the disruptive change that has already occurred within the industry has occurred within general insurance, where the Internet of Things (IoT), artificial intelligence and product innovation are just some of the developments underway. As we move into an era of the connected home, wearable devices and autonomous vehicles, insurers are in a better position to both analyze individuals and to feed back information to them in order to empower and reduce risk.

But even within personal lines there has not been a remarkable product revolution yet, thinks Anthony Beilin, head of innovation and startup engagement at Aviva. “The same can be said for disruption of the entire value chain. People have attacked various parts and a lot of the focus so far has been on distribution and the front-end customer portal. Maybe over the next 10 years, traditional intermediaries will be replaced with new apps and platforms, but that’s just a move from one partner to another.”

Innovation is not just about digitization, says Beilin. While it is important for any (re)-
insurance company to consistently improve its digital offering, true success and efficiencies will be found in redesigning the value chain, including the products on offer. “It isn’t just taking what was a paper experience onto the Internet, then taking what was on the Internet onto the mobile and taking a mobile experience into a chatbot … that isn’t innovation.

“What we really need to think about is: what does protecting people’s future look like in 50 years’ time? Do people own cars? Do people even drive cars? What are the experiences that people will really worry about?” he explains. “How can we rethink what is essentially a hedged insurance contract to provide a more holistic experience, whether it’s using AI to manage your finances or using technology to protect your health, that’s where the radical transformation will come.”

Beilin acknowledges that collaboration will be necessary. With a background in launching startups he understands the necessary and complementary characteristics of niche players versus large incumbents.

“It is an agreed principle that the bigger the company, the harder it is to make change,” says Beilin. “When you start talking about innovating it runs contrary to the mantra of what big businesses do, which is to set up processes and systems to ensure a minimum level of delivery. Innovation, on the other hand, is about taking the seed of an idea and developing it into something new, and it’s not a natural fit with the day-to-day operations of any business.”

This is not just a problem for the insurance industry. Beilin points to the disruption brought about in the traditional media space by Netflix, Facebook and other social media platforms. “Quite frankly startups are more nimble, they have more hunger, dynamism and more to lose,” he says. “If they go bankrupt, they don’t get paid. The challenge for them is in scaling it to multiple customers.”

This is where investments like Aviva’s Digital Garage come in. “We’re trying to be a partner for them,” says Beilin. “Collaboration is the key in anything. If you look at the success we’re going to achieve,  it’s not going to be in isolation. We need different capabilities to succeed in a future state. We’ve got some extremely creative and talented people on staff, but of course we’ll never have everyone. We need different capabilities and skills so we need to make sure we’re interoperable and open to working with partners wherever possible.”

Achieving 10X: A platform-centric approach

Together with increasing speed and agility and initiatives to drive down the transactional cost of the business, technology and how it enables better risk selection, pricing and capital allocation is seen as a savior. Analytics, and fusing the back office where the data lives, through to the front office — where the decision-makers are — is imperative. 

According to 93 percent of insurance CEOs surveyed by PwC in 2015, data mining and analysis is the most strategically important digital technology for their business. Many (re)insurance company CIOs have taken the plunge and moved parts of their business into the Cloud, particularly those technologies that are optimized to leverage its elasticity and scalability, in order to enhance their analytical capabilities. 

When it comes to analytics, simply moving exposure data, contract data, and existing actuarial and probabilistic models into Cloud architecture will not enable companies to redesign their entire workflow, explains Shaheen Razzaq, director, software products at RMS. 

“Legacy systems were not designed to scale to the level needed,” he adds. “We are now in a world dealing with huge amounts of data and even more sophisticated models and analytics. We need scalable and performing technologies. And to truly leverage these technologies, we need to redesign our systems from the ground up.” He argues that what is needed is a platform-centric approach, designed to be supported by the Cloud, to deliver the scale, performance and insurance-specific needs the industry needs to achieve its moonshot moment. Clearly RMS(one)®, a big data and analytics platform purpose-built for the insurance industry, is one solution available.