Predicting the future of insurance

Predicting the future of insurance can be somewhat
straightforward. Both the history and temperament of the
industry constrain the realms of potential changes for
this industry. This business is steeped in the paramount
nature of its guiding principles and is equally tied to the
information provided by the record of its transactions.
Periodic forays into the art of forecasting by insurers just
confirm doctrine instead of establishing a foothold for
change. The projected uses of technology tend to focus
on point solutions or keeping up with market peers.
Overall, predictions tend to be short range and aimed at
optimizing current operations and are linear projections
for business outcomes.
Over the ensuing decades, it is easy to see the potential
for robust market activity. The combination of classic
protection products and an increasing number of
financial services in an expanding global economy
creates a target-rich environment. Traditionally, the task
going forward would be to navigate the opportunities
while efficiently servicing stakeholders. However, as we
approach the end of the first decade of a new century, it
is very important to increase the scope of our vision and
consider what the insurance industry could become.
There is a concern that the current mode of operations,
regardless of the line of business in question, will reach
a point of diminishing returns in the near term. The
aggregate capabilities of current technologies and the
unexplored potential of emergent ones almost guarantee
that the next several years will mark a fundamental
change in the insurance industry. The question is how can
insurance carriers profit from these changes? How can
consumers be better served?
To gain a perspective on the challenges insurers
will confront in the future and the strategies that can
be employed to create new levels of performance,
the following questions must be considered: What
fundamental trends will shape the insurance marketplace?
What strategic challenges will serve as catalysts for
change? How must the industry evolve to meet the needs
of demanding customers? And how can companies
distinguish themselves in a market where the playing field
is increasingly leveled by technology?
Such inquiries need to be considered over a time span
that would reasonably allow for a chance of action and
change. A view 15 years into the future of insurance
escapes the constraints of traditional strategy creation,
which typically only looks forward three to five years. It
also incorporates the fact that the current pace of change
within most companies will initially impair their ability to
transform at an optimal rate.
The IBM Institute for Business Value considered all these
elements in the course of conducting interviews and market
research among global industry executives about the future
state of the insurance industry. It became clear that change
is on the mind of insurers around the world (see Figure 1).
The analysis of the collected information determined that
there are four large-scale trends that will likely confront
insurers and their stakeholders in the year 2020.
0% Unrecognizable
70% Significant change
30% Incremental change
0% No change
Figure 1. Amount of change expected in the insurance industry
by 2020.
Source: Insurance 2020 Survey 2006 (Sample size = 30).
IBM Global Business Services
The four large-scale or “mega-trends” are:
• Active and informed consumers across demographic
groups reward nontraditional operators – The impact
of modern information networks and the ongoing
transfer of financial responsibility to end customers
will drive attitudes regarding increased services and
convenience. Applicants and policyholders from a
range of demographic groups will give business to
carriers that consistently meet their expectations.
• Technology virtualizes the value chain and lowers
barriers to entry – The rising tide of technology will
enable an increasing number of niche service providers
from inside and outside of the traditional value chain.
The 15-year time frame will inevitably produce a greater
number of partially and even totally virtual insurance
companies to meet the needs of consumers and
businesses.
• Mainstream insurance products are dynamic and
provide more consistent performance – Dealing
with a global population that eagerly consumes and
thrives on communication and personalization will
drive carriers to develop products that are flexible and
adaptable. The aforementioned rising tide of technology
also empowers insurance underwriters to bring their
products closer to realtime interaction via sensor
networks and enlightened privacy regulations.
• Regulatory coordination and use of affirmed industry
standards broaden to global scales – The globalization
of all industries and the need for efficiency drives the
coordination of consumer and business protection
across geographies. The same search for efficiency
drives increasing automation, which demands industry
standardization.
Given these trends, the potential for a dynamic and
successful future state within insurance is clear. Getting
to that state will require something more than existing
mechanisms and business models. To be clear, the
existing model of insurance operation would achieve
success, but it would very likely produce suboptimal
results. To realize the full potential of these trends requires
a new context.
This context emerged as a theme from the research and
analysis of the industry’s potential future as compared to
similar periods in its recent past. The theme is centered on
the idea that simply optimizing today’s “business as usual”
will not be enough to create value and achieve success
in 2020. This is a clear case of hoping that previous
performance is not indicative of future returns.
Key findings
The trends frame the discussion of how insurers can
respond to the impending realities of technological and
social change. Upon review and analysis, this framework
supported the following key findings:
• The mega-trends will force the industry to innovate
• Old modes of thinking threaten the industry’s ability to
innovate
• Interlopers will increasingly disrupt traditional insurance
operations
• Industry leadership will require experimentation in
operating models, processes, products and customer
relationships
• Strategic investment in innovation today is critical to
success in 2020.
These findings address the fact that the transition to the
future will take effort and intention. It may be as simple as
walking through a door into another range of possibilities
but that threshold needs to be crossed.
The four mega-trends as outlined earlier force the industry
to change and innovate because they will not be denied.
By this we mean that even though a carrier could ignore
changes in demographics, or stick to a traditional value
chain, there will be an increasing number of companies
that will react to these changes, produce innovative
services around them and profit by doing so. There will
be inherent value in trying something new and investing
to make it work. Learning to be innovative in a consistent
manner is in itself a major goal in this time frame.
Insurance 2020
Next, it is crucial to recognize that the current operational
mode among the majority of carriers is deeply rooted in
the past. The fallback position or retort for this behavior
is that it has provided relative security over time. The
problem is that we are now in an era in which technology
can transcend nagging industry problems. Some carriers,
such as Progressive and Allstate, are already exercising
technology to win the old game. They are not succeeding
because of a given set of IT tools, but because they
recognize the power of the available tools to execute
business strategies – they are innovating to help maximize
their positions. And yet this is all being done in the old
model of insurance.
Around the world, traditional carriers have integrated
banking and insurance services to deliver what is
commonly known as bancassurance. Its success varies
from geography to geography, but where it works at
all, it usually works quite well. This is an example of an
interloper (banks) integrating their service offerings as
it occurs today. Over the next 15 years, we expect that
technology will enable a broader class of enterprises that
provide parallel products and services. Insurance carriers
will need strategies to deal with these market intruders
as competitors or as partners. Some companies may
settle into the role of manufacturer for the virtual insurance
service providers that will appear on the scene in this
time frame.
One of the most important research findings is the
need for experimentation. This is coupled directly with
the power of innovation, especially as it refers to the
development and nurturing of new ideas. Without experimentation,
insurers will be caught in the old cycle of
process optimization. This has gone on for so many years
that it has developed into a proxy for innovation.
Executives need to provide the leadership within their
companies to emphasize the importance of innovation,
especially when insurers need to create new business
models. This conclusion was verified by the 2006 IBM
Global CEO Study which showed both the need for
executive leadership in innovation and the important role
of business model innovation in profitable growth (see
Figures 2 and 3). Finally, investing in innovation also means
committing to the build up or creation of flexible and
adaptable IT infrastructures. These empower an organization
to take advantage of opportunities as they occur.
Products/services/
markets
Operations Business
model
Percent of CEOs leading by innovation type 50
40
30
20
10
0
Business model innovation often led by CEOs
35% CEOs/Leaders
24% Functional Managers
14% Division Managers
27% No owner
Responsibility for innovation leadership
Figure 2. Innovative change starts at the corner office.
Source: The IBM Global CEO Study 2006.
IBM Global Business Services
Insurance industry mega-trends
Active and informed consumers across demographic
groups reward nontraditional operators
Just like death and taxes, the grouping of individuals
for a variety of reasons is something you can count on.
Governments, marketers, popular entertainment vendors
as well as a host of others all rely on the classification
and enumeration of a human population within a given
geography. The commonly used term of a “generation”
used to simply imply a 20-year span of time, but really
includes people that shared events, like marriage,
education or being born in a specified period. For
example, the “Baby Boomers” are that group of people
who were born to the survivors of World War II. Another
demographic group might be more specific and refer,
for example, to the Chinese population that was directly
affected by the construction of the Three Gorges Dam in
Hubei province (about 1.2 million people, not counting the
laborers). That project started in 1993 and is scheduled to
be completed in 2009.1
In 2020, the insurance industry will need to deal with the
broad diversity of demographic groups and their needs.
At the same time, it will have to recognize the commonalities
among groups such as increasing familiarity with
and confidence in electronic commerce. Carriers will
need to exploit analytics (including psychometrics and
psychographics) to engage consumers with products that
meet their needs and reflect their shared experiences.
Somehow, the current concept of customer relationship
management seems inadequate to deal with this reality;
its successor will have to work in a world where customer
centricity is the rule, not the exception. Truly placing the
customer ahead of product considerations will mark the
nontraditional operators.
Figure 3. The IBM 2006 Global CEO Study findings independently validate the concept of “innovating beyond old models.”
6
5
4
3
2
1
0
-1
Products/services/
markets
Operations Business model
Operating margin growth of business model
innovators exceeds competitive peers
Percent CAGR over 5 years
All industries
Underperformers Outperformers
Business
model
Operations
Product/services/
markets
Source: The IBM Global CEO Study 2006.
100
90
80
70
60
50
40
30
20
10
0
Percent of emphasis by innovation priority
Strong financial performers are more likely to
emphasize business model innovation
All industries
Insurance 2020
The world in 2020 will include several generations that
have worked and lived with an increasingly networked
society. Service-oriented architecture will be considered
old technology, and the population will be focused on the
quality and convenience of the active risk management
services available. A nontraditional operator in this
context refers to any player, even an insurer, that can
meet the requirements of a population that has come to
believe in the new catchphrase for the industry – “trusted
convenience.”
Technology virtualizes the value chain and lowers barriers
to entry
In discussions held today around the topic of business
process outsourcing (BPO), the insurance perspective
has been a cautious “wait and see.” This timid approach
is ironic considering the number of carriers that already
outsource portions of their value chain.
The modern value chain is the collection of processes
and services that are linked together to create, develop,
sell, deliver, process and service an insurance policy over
the life of the contract.
Already, insurers outsource their sales and distribution
functions to independent agents, brokers or other distribution
channels. Many companies also offload the
processing of active and closed books of business to
outsourcing firms to save money. Some insurers outsource
marketing or actuarial portions of their business. Others
use third-party administrators to handle claims and
customer service functions. What will be different about
this approach over the next 15 years will be the impact
of automation and intelligent systems, in particular on the
dispersal of value chain elements.
An increasing number of insurance companies in the
future will make use of standardized Web services
(or whatever the follow-on mechanisms are called by
this time) that they did not create themselves. Large,
mainstream companies will do this for specific lines of
business, and smaller companies can contemplate the
degree to which they want to “go virtual.”
Enterprises that wish to specialize in providing insurance
services will subscribe to software companies that
specialize in creating specific insurance service
components. Once the prescribed number of
components is selected, they will be reviewed for
accuracy and then tested as a system to determine
if they can work with the library of Web services the
company already uses. In this way, the business elements
needed to facilitate a virtual value chain will be procured,
combined and then used to meet business goals.
What is intriguing about this approach is that the
enterprise that wants to provide insurance services may
not be an insurance company. It could be a firm that
provides superior customer care in a services business
and feels that its in-house developed Web services
could make a profitable difference in the local insurance
market. With barriers to entry lowered by technology in
this manner, we can be assured that competition will
change in 2020. Study participants felt that partnership
and collaboration will be crucial in the insurance economy
of the future (see Figure 4).
40% Totally agree
40% Partially agree
15% Partially disagree
5% Totally disagree
Figure 4. There will be increased partnership and
collaboration across stakeholders in 2020.
Source: Insurance 2020 Survey 2006 (Sample size = 30).
IBM Global Business Services
Mainstream insurance products are dynamic and provide
more consistent performance
In the past, property and casualty (P&C) insurance
products were basically in force for a period of time that
balanced the cost and effort needed to renew the policy
in mechanical terms with the need to assess the potential
change in risk exposure that the policy represented. The
normal duration for an auto policy was six months; for a
home, it was 12 months. New information was assessed
at renewal time and changes in premium were relayed
to the policyholder. While the duration was more fixed in
the life insurance business, these companies also based
their price structure and therefore their profit potential on
the aggregate statistics of mortality tables and the skill
of their underwriters to allow for existing health issues
or dangerous occupations. The pace of insurance was
measured at best.
The forecast over the next decade calls for a significant
increase in the flexibility of insurance products and use of
pervasive computing technology to make this possible.
We expect that calculating the cost of a specific risk,
regardless of whether it is a personal or commercial
exposure, will make use of inexpensive sensors tied into
the next-generation Internet. The data provided by such
sensors supports the near realtime calculation of risk
based on the collection of appropriate data and tallies a
running charge for the proper amount of premium based
on the actual risk presented. This works equally well for
life risks as it does for property ones.
These same mechanisms also support a broad range of
potential policy durations. They will facilitate “just-in-time
insurance” as a person moves through a set of “spaces.”
Each step of the journey represents a different risk such
as car-to-train-station, train-to-city-station, station-tooffice,
and so on. Each leg of the trip truly represents a
varying amount of risk. A “pay-as-you-live” product would
trade some location and time-of-day privacy data for
lower insurance bills overall. And in the spirit of active
risk management, the same network of sensors could
also provide convenient information (such as advice
on avoiding an overloaded expressway) relayed on the
appropriate device such as the car audio system, a phone
and, then, in e-mail or as a phone call in the office.
Each step helps assure maximum efficiency in risk
pricing, which reduces underwriting leakage and supports
longer retention via services that enhance the quality
of the policyholder’s life. This mechanism also serves to
dampen the underwriting cycle in P&C insurance, while
reducing anti-selection for life insurers.
Regulatory coordination and use of affirmed industry
standards broaden to global scales
Insurance is one of the most heavily regulated of all
industries, and even when it is afforded some deregulation
(in the form of the Financial Modernization Act of 1999,
also known as the Gramm-Leach-Bliley Act or GLBA),
the result is more rules. The United States is struggling
with decades-old provisions that set the individual states
as masters of their own insurance markets. Calls for an
optional federal insurance charter are growing louder
at the same time. In Europe, the “Comité Européen des
Assurances,” or CEA, works to coordinate European
insurance regulation and faces challenges from individual
countries that try to maintain both tradition and national
advantages. In the emerging economies of Asia,
regulators are trying to strike a balance between deregulation,
the need for controlled growth, and consumer
protection. As the world works to engage these markets,
as well as ones in Africa and Eastern Europe, there will
be opportunities for experimentation and exploration of
business models.
Despite these challenges, certain concepts and rules are
finding their ways around the world. The advantages of
having common regulatory frameworks generally exceed
any individual country’s need for sovereignty, especially in
a climate of intense globalization. Some of the executives
polled for this research did not foresee much progress
along these lines even in the 15-year time frame of the
study, especially in light of existing national struggles
with cross-border agreements. Other important global
business regulations, such as the International Financial
Reporting Standards, are moving forward and will further
support globalization of business.
Insurance 2020
The calls for increases in the development and use of
insurance IT standards around the world are significant
since such efforts broaden the applicability of commercial
software, and will be crucial for the global maturation
of service-oriented architectures. Insurance executives
need to be active in standards organizations to accelerate
adoption as part of the foundational support for innovation
(see Figure 5).
Figure 5. Standards organizations influencing the insurance
industry’s use of IT.
ACORD Association for Cooperative Operations
Research and Development
CIECA Collision Industry eCommerce Association
CLIEDS Canadian Life Insurance EDI Standards
CSIO Centre for the Study of Insurance Operations
eEG7 Western Europe EDIFACT Insurance Group
GDV Gesamtverband der Deutschen Versicherungswirtschaft
IFX Forum Interactive Financial eXchange Forum
LMBC London Market Brokers Committee
Polaris Polaris, UK Ltd.
ORIGO Origo, UK-based, life insurance standards
Imperatives for 2020 success
How can carriers prepare for the mega-trends that
solidify as we approach 2020? Carriers must transform
to prepare for new business and operational models
while salvaging the value of knowledge and experience
from today. The plan has to start from both the top of an
organization’s management structure and at the bottom
of its IT infrastructure.
The transformation that starts from the top is probably
less expensive in terms of hard dollars and will likely
be more expensive in terms of time spent realizing it.
This plan is the installation of a culture of change and
innovation. To develop new business and operational
models, companies must encourage experimentation
and establish a rugged, but not too rigid, process for
innovation. IBM established the following innovation
lessons from the 2004 Global Innovation Outlook
initiative:2
• Innovation is increasingly:
– Open
– Collaborative
– Multi-disciplinary
– Global
• New business designs emerging that thrive on
collaborative innovation
• Standards must take hold in every industry
– Beyond IT standards
– Intelligent intellectual property reform
• The world revolves around the primacy of the individual.
These concepts can help form the basis of an innovation
plan for a company that is committed to achieving more
than just optimization.
The bottom-up process of establishing a flexible and
adaptable infrastructure keys directly into the fourth
2020 mega-trend. The new model of infrastructure is
flexible because it makes use of open standards for IT
development and invests in the development of corporate
architectures, including service-oriented architectures.
Another imperative for the insurance industry is to make
the switch to customer versus product centricity. In the
highly connected world of 2020, policyholders will have
much greater access to products and the ability to
make decisions on their own. The concept of agency will
eventually succumb to the power of advocacy so that
individuals will look to financial services advocates to
provide advice as they navigate insurance and financial
services markets. The traditional agency channel will not
be gone by 2020, but will likely be in decline in the face of
smart software and the salaried advocate model.
IBM Global Business Services
Social innovation. Another idea to help deal with
establishing some sort of positive control over how an
insurance organization addresses institutional change
is a form of social innovation. When carriers look to
undertake change, they are often faced with an amalgamation
of cultural, political and otherwise human factors
combined with the cyclic nature of insurance that creates
specific patterns of behavior. These patterns of behavior
worked their way into policies and survived as examples
of heuristics or “rules of thumb” that became part of the
fabric of the business. Another name for these patterns of
behavior is a meme.
A meme, which is pronounced “meem,” is an idea, style or
the above mentioned pattern of behavior that is passed
from person to person, usually by an observer copying an
aspect of another person’s or group’s behavior in various
situations. This mechanism accounts for the way that
styles are spread throughout a population, or how urban
legends propagate even though they seem unlikely. A
meme can describe any number of behaviors or ideas,
but all share properties that are remarkably similar to
genes in that they can be passed on to other people,
they can be mutated and they can combine to produce
new ideas or trends. And memes are passed around
not by biological processes like genes, but through
simple imitation and the persistence or reinforcement
of the concepts they entail. The concept of memes was
first introduced in 1976 by Richard Dawkins in his book,
The Selfish Gene, as a way to abstract the concepts of
biological evolution and genetics into the world of ideas
and behaviors.3
So, how do memes impact insurance? It appears that
perhaps the most powerful reason behind the lack of
significant innovation in our industry is that our memes
are particularly strong and persistent, given the riskaverse
nature of insurance. Individuals, departments and
even companies observe what works and then copy
the memes. But what sets insurance apart, and makes
our memes more of a restrictive force? One theory is
based on the fact that operational realities such as downtrending
equity markets, merger and acquisition activity,
restrictive regulation and catastrophes all tend to reset the
existing population of memes back to the fail-safe level
that is required to meet our obligations. Memes involving
innovation are too often caught up in the rush to return to
solid ground and are lost when the waves of any storm
come crashing in.
Dealing with animosity. One of the persistent challenges
that have faced the insurance industry over the years is
public animosity. There could be any number of reasons
that individuals and groups feel the way they do, or take
actions that are literally designed to spite our industry.
Animosity seems to be generated, in large part, due to
emotional reactions to situations where consumers feel
cornered by a lack of process understanding, incorrect
information or bad process execution within the insurance
value chain. This state of affairs leads to soft fraud in
the form of padded claims, shortened retention and
expensive legal actions, some of which even threaten the
basis of insurance law. The question that remains is what
can be done to change this situation? Or, more appropriately,
how could insurers innovate to produce a change or
at least encourage a better situation?
An innovative approach might entail broad public
education campaigns that are coordinated among all
industry players. Today, individual carriers publish fullpage
advertisements after catastrophes to engender
emotional connections with claimants. Others produce
thinly veiled marketing campaigns that hint at the overall
need for understanding of complicated issues. What
insurers could do is create public service announcements
that educate and promote understanding of the
industry. Such campaigns would need to be persistent
and work across the spectrum of insurance stakeholders
from the uninsured, to policyholders, agents and brokers,
claimants, and service providers.
Active expectation management. Once an approach
to educating the public was underway, carriers could
integrate active expectation management into customer
relationship activities. This innovation would use intelligent
Insurance 2020
systems technology to recognize situations where
consumers and policyholders are likely to believe in and
be influenced by negative memes about the industry or
a specific process in the value chain. Customer service
representatives would be prompted to correct misconceptions
or misinformation by systems that monitor the
context and semantics of a conversation. Investing in the
active education and management of potentially negative
situations could lead to higher retention, reduction in soft
fraud, and even higher revenues as consumers come
to understand the intrinsic value of risk management
and how the purchase of insurance can increase their
economic viability overall.
Conclusion
Innovation needs to become part of every business and
operational model within the insurance industry. The
ability to create new modes of operation will rely on the
aforementioned transformations to improve corporate
infrastructures and support a new foundation of IT that is
flexible and adaptable.
This bottom-up method helps to ensure that the inflexible
and confining approach that produced the legacy system
problems of the past is not repeated. Once the transformations
to modern architectures are completed, and
innovation makes its way back into the collective mindset
of the industry, then the type of competitive advantage that
insurers have sought for decades will be at hand. Finally,
remember that the future of the insurance industry is not
controlled by technology as much as it is controlled by the
will to be innovative in pursuit of strategic business goals.
Call to innovation – questions to ask yourself:
• Do you have a vision for the next 15 years?
• Are you investing to realize the vision?
• What are your company’s impediments to
innovation?
• How are you preparing your team for a future of
technological, economic and cultural change?
• What metrics will you use to measure gamechanging
performance?
To learn more about this IBM Institute for Business Value
study, please contact us at iibv@us.ibm.com. For a full
catalog of our research, visit:
ibm.com/iibv
About the author
James Bisker is the Global Insurance Industry Leader for
the IBM Institute for Business Value. He can be contacted
at jbisker@us.ibm.com.
About IBM Global Business Services
With business experts in more than 160 countries, IBM
Global Business Services provides clients with deep
business process and industry expertise across 17
industries, using innovation to identify, create and deliver
value faster. We draw on the full breadth of IBM capabilities,
standing behind our advice to help clients implement
solutions designed to deliver business outcomes with farreaching
impact and sustainable results.
References