Digitization opens up Growth Opportunities for the Insurance Industry
Development in the 21st century is moving at lightning speed, primarily due to digitization. Technological advancements have radically changed the way industries function, and the multimillion-dollar insurance industry is no exception. As technology has gained a solid footing in the world of insurance, market opportunities in the industry have grown fourfold, making digitization the most lucrative option.
The insurance industry is improving its multiple layers of operating channels through digital tools and technology, and is venturing into smarter and faster approaches through technological upgradation. Digital innovation is not only creating more efficient channels for underwriting, policy processing, customer service and claims management, but is also identifying fraud. Fair pricing and transparency have reached new heights.
Digital insurance has an edge over traditional insurance due to its efficiency and effectiveness. Technological advancements have a substantial impact on insurers’ revenue and costs. Studies show that insurers that have implemented technology in their operations and are seeing marked increases in revenue due to lower policy administration costs and claims payouts. Industry analyses indicate that digitization would to a large extent reduce the cost potentials of multiple components, like net claims, loss adjustment expenses, acquisition costs, underwriting and policy administration costs in the coming years. For example, with digitization net claims, which constitute more than 50% of an insurer’s total operating expenses, will go down by 15%-20%, three to five years down the line.
Technologies implemented by the insurance industry such as digital sales, the Internet of Things, advanced analytics and machine learning in risk management are having a positive effect on insurers’ operations. We believe the following key technologies will accelerate industry growth:
- Transformation of physical channels: A fair share of physical activities — such as policy purchases, claims, renewals, servicing and payments — will be digitized in the near future.
- Algorithmic approach to risk management: Insurance companies are moving towards implementation of real-time algorithmic computing technologies to make decisions about policyholders. Risk management is not only about forecasting risk anymore; it also involves managing and mitigating risk in real time. Insurers are using continuous algorithmic analysis for risk management through data streaming. They also use sophisticated algorithms to track consumer loyalty and sales opportunities.
- Internet of Things (IoT) in insurance: Insurers are increasingly focusing on the IoT as a major source of data streaming. The IoT includes
- Wearable or personal technology (fit-tech)
- Location-based sensors (including smart thermostats)
- Sensors on objects (which measure distance, speed and frequency of travel of personal and commercial vehicles and shipping containers) and
- Geographic Information Systems (GIS; these provide geographical, hydrological and climatological data)
- Advanced analytics and machine learning: These processes help insurers to get crucial insight into customer preferences. Machine learning makes insurers’ information systems adapt swiftly to new data, without the need for re-programming. Insurers use machine learning for policy underwriting, pricing products and claims management
These technologies share a common feature — practical relevance. Many insurers have already included these technologies in their value chains, and we expect them to be freely accessible in the next five years.
Multiple factors drive demand for digitization in the insurance industry. The main one is millennials’ demand for convenience as they wish to have the same level of accessibility, for example, as in online retailing, travel booking and banking. They require information and services on mobile applications and websites, increasing demand for digital content. The emergence of fully automatic cars is also making digitization an indispensable option for insurers, who need to capture new data related to such vehicles, to analyze and to take pre-emptive measures in response to regulatory pressures. Automotive insurance would also need to soon adapt to driverless vehicles, a completely new concept.
Amid this push for digitization, insurers should look beyond technological modification and innovate newer and better ways of serving the customer, with support from skilled employees motivated to work in a digital milieu.
Acuity Knowledge Partners Corporates and Consulting team regularly studies and analyzes trends in this multibillion-dollar industry, to help clients identify such trends and improve their growth curves.
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