Insurance companies value modernizing systems, improving policyholder experience, and developing new products, platforms, and services. However, many insurers focus more on enhancing legacy systems than true innovation. This report explores what’s keeping insurers from innovating and how to view InsurTechs as innovation partners, not vendors to set the stage in becoming an insurer of the future.
Explore the top findings about insurance innovation in today’s market:
Innovation covers a wide gamut of insurance company efforts, from upgrading and digitizing legacy operations; to enhancing the experience of policyholders, distributors, and employees; and, ultimately, to more disruptive changes in products, platforms, and services. All three elements are valuable in assuring the industry’s long-term competitiveness in an increasingly customer-centric economy.
To gauge the state of the industry in terms of innovation, we spoke with insurance carriers, InsurTech facilitators, and rating agencies. Without prompting, most estimated no more than 10 percent of innovation resources are going toward fundamentally changing how insurers do business, versus 90 percent to keep them running as they always have—only hopefully better, faster, and cheaper. The resource gap between maintaining and evolving how insurers do business will need to be narrowed to fuel bigger picture innovation.
Most of the emphasis in insurance innovation these days is placed on patching and shoring up its plumbing—upgrading and digitizing core systems or making small changes under the banner of innovation to demonstrate that something is being done. Far less is generally being spent on bolder innovations to enhance stakeholder experience—for customers, distributors, and employees. And even fewer resources are usually dedicated to what one rating agency referred to as “innovation with a capital ‘I’”—thinking and acting differently to develop new products, markets, services, and business models.
InsurTech startups over the past decade have drawn $16.51 billion in investments to spur innovation in an industry that historically has been slow to change. At first, many insurers may have considered InsurTechs a threat. But as we enter the second wave of the InsurTech boom, the reality is most startups have been launched to support, rather than displace, incumbent carriers.
The positive is that insurers can tap into a much more diverse and entrepreneurial ecosystem for innovative ideas and solutions. The negative is that too often InsurTechs are serving incumbent carriers as any traditional tech supplier would, helping make incremental upgrades to bolster the status quo rather than working in tandem to reinvent insurance for the long term.2
What’s more, InsurTechs shouldn’t be viewed as a silver bullet. Instead, carriers can start thinking about adding together the capabilities of multiple InsurTechs to solve important business challenges, such as policyholder engagement or agent enablement.
Insurers should consider putting in place a systematic, sustainable approach to initiate, manage, implement, and measure the impact of innovation. If not, they’ll likely have to do more work to provide detailed explanations to investors, stock analysts, regulators, and especially, rating agencies. One agency said while not all insurers have to be “tech trailblazers,” many still need to learn to use innovation “offensively, not just defensively to stay in the game and stand in place. Most are just trying to keep up, rather than get ahead.”
Innovation has become a major factor in the overall assessment process of the rating agencies with whom we spoke. A.M. Best, for example, is working to formalize draft criteria for quantifying the maturity level and effectiveness of insurer innovation approaches and outcomes.
The credit rating agency, which says it historically has captured innovation indirectly during its rating process, explained that it intends to remain “agnostic” rather than be prescriptive about how insurers innovate. The agency will systematically assess factors contributing to innovation as well as measurable outcomes to determine how advanced insurers are on a five-level scale.5
While the other rating agencies we interviewed aren’t currently considering an approach similar to Best’s, they all emphasized that innovation already ranks very high in their overall assessment criteria. Insurance innovation will also continue to grow in importance as the industry evolves due to technology disruption.
Reinventing an organization’s operating model and culture to expedite innovation may be a daunting prospect. Many insurers are understandably focused on making incremental fixes and upgrades necessary to maintain and bolster their aging infrastructure. Yet those we interviewed repeatedly emphasized that insurers also should start thinking and acting in a much bolder and more organized way to achieve the kind of differentiating innovation likely to be required to remain relevant, competitive, and profitable in a rapidly changing society and economy.
To get started, insurers should consider the following steps:
1. Create a business architecture that facilitates greater collaboration on sustainable innovation, both internally and externally
2. Manage innovation expectations and incentivize experimentation with measurable goals, benchmarks, and rewards
3. Learn fast and shift gears quickly
4. Look beyond technology to transform other essential innovation components, especially talent.
Long-term competitive threats are looming, and these will likely require far more differentiating innovation down the road. Traditional silos between personal and commercial lines are cracking in the face of changing customer behavior and needs. Digitization is putting pressure on all industries to customize products and services and make them available on demand, in real time, over multiple platforms.
Incremental innovations to maintain status quo systems, distribution options, and business models aren’t likely to suffice in the face of such dramatic changes in society and the economy. Fundamentally changing how insurers operate and provide value is becoming a make-or-break necessity. That means most insurers can no longer afford to merely dabble in innovation. They should be reimagining their value propositions to serve consumers for a very different future and start taking more substantial steps to get there before others beat them to the punch, whether from within or outside the industry.
Insurers aren’t victims of circumstance, or at least they don’t have to be. They still have time to raise their game through innovation and disrupt themselves before others disrupt or even displace them.
Vice chairman and US insurance leader
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Managing director | Deloitte Services LP
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Research leader | Deloitte Services LP
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Principal | Deloitte Consulting LLP
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Principal | Deloitte Consulting LLP
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