The ubiquity of the internet and the ease of access thereto has given consumers more informed buying power and instantaneous ability to satisfy their requirements for goods and services. Organizations that can meet and likely exceed consumer expectations will dominate their industry(ies).
For insurance, the obstacles are obvious: high cost of delivery, service challenges, historic resistance to change, product and insurance vertical stakeholder complexity. All these challenges are interrelated; industry/product complexity naturally lead to service challenges and higher distribution costs. Compounding the problem is an insurance industry-wide entrenched resistance to change.
How big is the problem and how will it be solved? Anyone somewhat familiar with the insurance industry would agree that the cost of distribution is too high. In fact, current technology has done very little to cut distribution costs despite the increased spending on technology. Traditionally total distribution costs have ranged from mid-high 20% to low 30% depending upon the line of business. Surprisingly, or maybe not, direct vs. agency distribution only has a slight impact on distribution costs.
Is a 30% distribution expense really a problem? The insurance industry delivers paper (or better described as an intangible promise to pay in the event of an insured peril). Paper was the traditional delivery packaging, but electronic documents are becoming quite prevalent (not withstanding regulatory requirements). In drastic comparison the automotive industry’s distribution costs are about 15% (a recent PwC paper “2017 Automotive Trends” by Rich Parkin, Reid Wilk, Evan Hirsh, and Akshay Singh confirms this statistic). The obvious observation is that the automotive industry can distribute vehicles for about half the cost (as a percentage of product cost) than insurance.
In an industry a little closer to home, the travel industry, which has changed dramatically over the last 20 years has a distribution expense ratio between 4% and 20% depending upon the distribution channel chosen and the nature of travel. This is much like insurance with regards to the wide array of distribution options. I think that most can appreciate that less complex insurance solutions (like many personal lines products) can and are moving to the self-serve continuum in favor of greater savings. While more complex commercial solutions will tend to require more professional advice and advocacy in addition to a greater emphasis on advocacy, advice and risk management adds on.
Solutions that challenge the current status quo in insurance distribution must embrace the fact that distribution costs are a key element to creating happier customers with lower costs. As well as the acceptance that insurance distribution will never be “one size fits all”.
How will current insurance organizations and stakeholders be successful in dealing with the reality of creating a more efficient and less costly distribution system? The following are a few things that rank very high on my list of priorities that should be considered by any insurance company wishing to stay relevant to customers.
Automation, commonly referred to as Robotic Process Automation (RPA), can drive dramatic reductions in overall costs in distribution. Insurers spend far too much on manual processes that could easily be replaced with RPA. Internal policy administration costs, depending upon the level of manual processes and complexity of products can be reduced by half if not up to 75% of current expense levels.
Most current solutions are developed to solve only part of the problem. Take policy administration systems for insurers and agency management systems for agents. They do not naturally work together. It takes a lot of resources to create integrated solutions between the multitude of agency and policy management systems. The industry would do well to recognize itself as an ecosystem and look to create solutions that work for the benefit of all entities in the ecosystem including customers.
In fact, a recent article in the January 2018 McKinsey Quarterly, “Why Digital Strategies Fail” by Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmot, wisely makes a point of identifying that “platforms that allow digital players to move easily across industry and sector borders are destroying the traditional model with its familiar lines of sight.”
The insurance industry is very much an ecosystem where insurers can be both competitors and partners. Reinsurers, Agents, MGAs, Insurers are intertwined almost like no other industry. Indeed, the very nature of insurance is the spread of risk.
It takes multiple stakeholders to share in risk to fulfill market needs (up, down and sideways in the insurance vertical). If those stakeholders were able to seamlessly work together and share information in a common platform it would open tremendous opportunities for new products and markets and reduce the frictions that drive costs up.
Artificial intelligence (AI) driving many technological advancements, including chatbot technology, holds lots of opportunities for greatly improving customer experience without tremendous impact on costs. AI can also help with customer experience in the form of improving product recommendations to more closely match the requirements of individual customers.
Insurers starting their digital journey shouldn’t look for the Holy Grail of solutions. I say this, having personally witnessed the failed implementations of more than a few insurers that undertook a “next generation” approach to systems replacement. For any organization the amount of change required would be an incredible test, but for insurance it is a herculean challenge. Keep the projects contained and small, seek quick wins.
Let your organization learn in small easy to digest pieces. Many opportunities won’t require a full immediate integration with an organization that may otherwise seek to kill the opportunity, almost like the way the human body will seek to destroy viruses that it identifies as a threat to its health.
Now most new “disruptive” opportunists are seeking to cut out the broker function to reduce overall distribution costs; as one of these “disrupters” puts it: “Insurance help without the Insurance agent.” However, the broker serves a critical function in the insurance vertical. Insurers have been supportive of comparative raters that may ultimately drive customers directly to their portals. Other means of diminishing the broker function as a cost reduction tool are several new direct writers who have entered niche markets.
Customers don’t just want comparisons or quotes, they want advice (especially when it comes to insurance). That form of advice is not necessarily verbal advice from an agent. If we are going to meet those customer expectations as an industry we are going to have to be creative on how we can give customers great advice without the traditional elements that drive prices up.
The key issue is that fundamentally insurance customers are served not only by the lowest cost, but by choice, advice and advocacy and neither comparative rater nor direct writer can meet those consumer needs. What the insurance industry needs to do is become more customer friendly by changing our view of the industry and leveraging technology to achieve not only lower distribution costs but improved customer satisfaction.