It’s pretty obvious that digital innovation is imperative for businesses in pursuit of maximizing efficiency. But it is important to understand the distinction between the effects of digitization and digitalization.
While digitization represents the application of new data and technologies to existing business processes to reduce costs or improve effectiveness, digitalization, on the other hand, takes an outside-in — or customer-centric — view of the organization, and uses innovative strategies, products, processes and experiences to create revenue. It offers enhanced efficiency, but is mainly concerned with seeking new opportunities for generating customer value, often outside the confines of the traditional business model and industry norms. Furthermore, it often differentiates the brand from its competitors, but it may also cause disruption to the traditional way of conducting business.
The difference between digitization and digitalization is reflected in a clear divide between carriers that regard digital as a tool for incrementally improving their existing business activities and those whose aims are much more ambitious, according to a recent Accenture survey.
The survey calls these ambitious carriers “Digital Transformers,” who strive for growth through customer-centricity and the development of new business models, rather than relying on traditional or conventional practices. They know how to use digital technologies to add value.
And while the digitization group — the “Digital Followers” — also believe that digital is likely to have a large impact on the insurance industry, they are often impeded from taking advantage of the digital integration by a multitude of constraints.
According to survey results, some of these carriers view digital as an approach that can complement their business strategy, whereas Digital Transformers see it as the integral driver of strategy. Furthermore, some of these carriers also maintain a traditional business mindset — often captive to a legacy mindset — that can make it difficult to focus on the customer’s perspective and develop solutions that range beyond the traditional. Others have not been able to progress further than the exploratory stage of digital innovation.
But Accenture also claims that digital transformation is imperative for the insurance industry. Just as manufacturers in the Victorian era had to convert from steam energy to electricity to stay relevant, so too will insurers need to embark on a digital transformation to remain competitive.
Accenture also asserts that the gap between digital transformers, digital followers, and the rest of the industry is likely to widen as the Transformers begin to reap the benefits of their investments.
The Accenture Digital Innovation Survey provides perspective regarding insurers’ position within this process of change, outlining priorities. The research consists of the survey results of 141 insurers in Europe, the Americas, South Africa and Japan. Most interviewees were C-level executives responsible for driving their companies’ digital strategy.
From the survey results, Accenture deduced six important conclusions regarding the transformation of the insurance industry related to digital innovation. But only half of the survey respondents feel that digital technologies are creating more opportunities than challenges. While change might be necessary moving forward, it is not always welcomed.
As a whole, the data reveals that a digital transformation is underway, and insurers expect to see the benefits linked to their strategic investments.
The survey’s key findings reveal:
1. Insurers expect digital transformation to be a top priority for the next five years.
According to the research, a majority of insurers believe digital technologies are transforming the fundamentals of the industry. The survey’s implications reveal that digital transformation occupies an important place on most carriers’ agendas, seen in a variety of areas.
From customer behavior to new channels and technologies, to the value chain, few (if any) elements of the business are expected to be unaffected by digital innovation within the coming years.
2. Digital initiatives are expected to generate additional growth
There’s also a link between digital initiatives and digital growth. P&C insurers, for example, expect revenue income to grow by 5 percent as a result of digital initiatives, while life insurers anticipate growth to exceed 7 percent.
But several other growth levelers will come into play in the process of digital transformation:
- Respondents see innovation as a key driver of growth. One in three respondents expect innovation to increase the innovator’s market share by as much as 10 percentage points. But interestingly, respondents also believe existing insurers stand to gain more from innovation than new entrants. Established industry carriers have an advantage to those entering the market, survey results reveal. However, these incumbents need to use their advantage effectively.
- Relatedly, 29 percent of respondents expect the main driver of premium growth to be the expansion of their customer bases through the use of digital channels.
- One-third of respondents expect usage-based insurance to account for more than 6 percent of total auto insurance premiums by 2017, demonstrating the relationship between innovation and growth. However, these results represent a more conservative forecast than that of the National Association of Insurance Commissioner’s, which predicts that up to 20 percent of all vehicle insurance in the United States will incorporate some form of usage-based insurance within the next five years.
3. Radical extension of the insurance value chain is key to success
Insurers understand that they need to expand traditional value chains, or even create new ones, in order to weather disruption. Creating new partnerships, investing in innovative companies or broadening their offerings to include non-insurance products are just some of the ways companies can prepare and initiate change.
The survey reveals that those who have made changes have also had the most progress in distribution. 72 percent are planning to form new distribution partnerships in the future, or have already done so. Targets for future partnerships often include banks (69 percent), internet players including Google, Apple and Facebook (44 percent) and aggregators (44 percent).
At the same time, however, many insurers are taking an approach with a much broader reach. Sixty-one percent are planning to offer non-insurance products and services, or have already begun doing so. This expansion and mutation of the risk landscape, Accenture claims, correlates with findings in Accenture’s Consumer-Driven Innovation Survey, stating that customers want insurers to adopt a broader role by, among other things, helping them to manage risk, while also insuring it. According to the Digital Innovation Survey, insurers are looking for non-insurance products and services to expand their role.
Additionally, 43 percent of respondents plan on completing (or have already completed) the acquisition of a start-up or innovative competitor to help them extend their value chains and better position themselves for digital innovation. Most carriers expect their industry peers to make acquisitions over the next three years (82 percent). New insurance start-ups are expected to make up 59 percent of these acquisitions, followed by companies specializing in telematics (47 percent), aggregators (43 percent) and analytics companies (38 percent).
As insurers enhance their understanding of customer intimacy in the current business environment, Accenture also expects to see a growing number of industry initiatives to provide a greater range of value-added services to clients.
4. The majority of insurers are Digital Followers, concentrating on incremental rather than transformative change
While insurers see digital technologies as a means of transforming the insurance value chain over the long-term, many are still at the early stages of the journey,
More than 50 percent of survey respondents do not have a digital strategy that covers the full value chain, although those that do (47 percent) has increased by seven percentage points since last year. Furthermore, most insurers have adopted a hybrid strategy, in which digital initiatives are running in parallel with traditional business models (55 percent), with digital technologies being used to enable traditional channels (64 percent) rather than to develop potentially disruptive innovations.
But the results also reveal that a minority of insurers regard customer-centricity as an integral way to conduct business. Only 25 percent have a single view of the customer, and are working to improve the customer experience across multiple contact points. And even though an additional 35 percent of insurers are working to achieve these goals, the combined total still represents less than two-thirds of Accenture’s survey sample.
The report claims that additional progress will need to be made in this area, particularly since there is a clear link between digitalization and customer-centricity. This will entail a much more far-reaching process of transformation.
However, this does not come without difficulties. What insurers know should be done and what they are actually doing reflects a disparity. Accenture notes that this may be due to overcoming the challenges of overcoming legacy systems, which respondents identified as the No. 1 obstacle in executing a digital strategy. Other factors might include insurers’ mixed views about the digital revolution.
Only half of the survey respondents feel that digital technologies are creating more opportunities than challenges. While change might be necessary moving forward, it is not always welcomed.
For many companies, incremental change is the easiest approach. As a result, 59 percent of respondents describe their digital activities and investments as “exploratory,” although many do have clear priorities when it comes to digital strategies, closely linked to opportunities for value creation.
5. Carriers expect successful distributors to ride the digital wave
Nearly two-thirds of respondents indicate their digital strategy is currently focused on digitally enabling traditional channels, and given the importance of the agent channel in most geographical locations, it makes sense that agents and brokers are expected to be major beneficiaries of new digital initiatives.
Survey results reveal that 93 percent of insurers believe intermediaries should improve their abilities to find and convert new leads, and 90 percent expect a better rate of cross- and up-selling products and policies.
Significantly, carriers also expect successful agents, brokers and advisors, as important members of the existing value chain, to leverage digital technologies in a variety of ways to respond to the disruption of the value chain. Actions cited in the survey include making better use of customer data (41 percent) and leveraging the contact-center and self-service capabilities provided by the carrier (40 percent).
Findings confirm that insurers view traditional distribution channels as one of their key strengths. At the same time, many insurers see them playing an important role in their multi-channel and digital strategies.
Results also emphasize the continuing importance of agents, especially as insurers transform their distribution channels digitally.
6. Insurers are expected to invest more than $40 million in digital projects
Where can the importance of digital transformation be reflected the most? It’s all in the budget. P&C carriers intend to invest $47 million on average over the next three years. For the life and annuity sector, this figure is slightly lower, at $40 million.
But Accenture’s analysis suggests that carriers will be investing approximately .2 percent of premium income per year on digital initiatives over the next three years. Data shows they have already made investments in mobile communications and apps, data mining and predictive modeling and the monitoring of social media.
Accenture predicts open data and big data will be the next priority.
Investments of this nature are usually focused on increasing sales and improving sales efficiencies through existing channels (64 percent), the survey reveals. But digitizing existing processes and operations, as well as developing customer-centricity and personalization capabilities are not far behind, with 56 percent and 39 percent of insurers directing their attention to these areas.
These findings are consistent with industry trends, and are logical responses to the current macroeconomic environment in the developed world, according to Accenture. The increase of customer-centricity, enabled by digital technologies, will be the strongest force in protecting existing market share, the report claims.
However, it is important to note that more and more investment emphasis is being placed on personal lines, according to the survey. But as connected insurance and the Internet of Things continue to build momentum, Accenture expects opportunities in commercial lines to emerge.