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Harnessing the power of digital: Are life insurers up to the task?

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It’s long been understood that life insurers have lagged other sectors in digitizing their business processes and directing money to new technologies to try to gain a competitive edge.

The only question is, how much have they underinvested?

One answer comes from McKinsey & Co. In a new report, “Harnessing the Power of Digital in Life Insurance,” the market research firm suggests that most carriers will have to “quadruple” spending on information technologies — back-office policy administration and underwriting systems, customer-facing web portals, mobile solutions for agents and advisors, among other business operations — to boost sales and their bottom line. The task is all the more urgent, the report warns, because of two forces buffeting the industry:

  1. a marked decline in industry revenue (annual sales of new policies have dipped from about 17 million contracts in the 1980s to roughly 10 million today); and

  2. growing competition from non-traditional players — including banks, wealth managers and brokers — that don’t have an insurance focus and may be looking to steer clients to alternative vehicles.

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Potential disrupters also include nimble technology firms that are increasingly making their presence felt in the “insurance value chain.” Friendsurance, PolicyGenius, WeChat, Zenefits and Lemonade are among the companies redefining products for social and mobile platforms.

Other potential distributors (think Google and TenCent) are looking to revamp other business functions such as underwriting, risk selection and customer relationships. Still others (Alibaba, Oscar, Vitality Group) are kick-starting innovative offerings, such financial health and wellness programs, that could eat into insurers’ market share.

To protect and expand their turf, insurers can’t take a scattershot approach to digital investments, the report cautions. Given limited IT budgets, the spending will have to be directed to a few key areas that will have the most bang for the buck. But, the report’s authors note, they needn’t allocate IT dollars in one fell swoop.

Savings gained from well-targeted investments — for example upgrading back-office policy administration systems — could help to “self-fund” other needed digital initiatives, as well as preserve cash reserves for non-IT business priorities, according to Parker Shi (pictured), an analyst and senior partner at McKinsey & Co.

Funding aside, a big challenge for the industry has been a lack of consistency. Some insurers are digitally upgrading their operations from top to bottom. Others are making small tweaks; or they view digital investments as a longer-term proposition.

“The recognition that digital solutions will be critical to the life insurance industry over the next 5 to 7 years has been reinforced in every discussion we’ve had with insurers,” says Ramnath Balasubramanian, an analyst and partner at McKinsey & Co. “However, the intensity about the need to act has varied significantly.”

Also a mixed bag are results achieved on digital investments made to date. The more successful ones, observes Balasubramanian, involve the various stakeholders — customers, agents and advisors, home-office employees and other supporting staff — in co-designing and developing solutions. Successful carriers also need to increase adoption of proposed technologies by establishing meaningful metrics (meetings per customer, value of sales, customer satisfaction scores, reduction in sales cycles and costs, etc.) against which to measure return on investment.

Related: 4 tips for surfing the barrel: How to turn disruption into opportunity

Life insurers will have to create self-service portals that make insurance-buying a hassle-free experience. (Photo: Thinkstock)

Dollars for digital

Which aspects of the business are most in need of a digital overhaul? The study identifies several, including product development, “consideration and evaluation” (marketing, distribution and advice), and purchasing (underwriting and policy issuance).

Related: 21 emerging risks for the insurance industry and global economy

In respect to the first, life insurers will have to develop products that lend themselves to online purchasing. They’ll also have to create self-service portals that make insurance-buying a hassle-free experience, especially for people most in need of protection products: folks in the middle market.

One company to watch in this space is Policy Genius, a New York-based firm backed by several insurers, including AXA Strategic Ventures, MassMutual Ventures and Transamerica Ventures. The tech firm has developed an online platform where prospects can buy multiple types of insurance including life, disability income, renters and pet insurance.

Related: The top 4 life insurance brands of 2016

The site includes an “insurance checkup” feature to determine how much coverage an applicant needs. Prospects can get a quote, access educational resources, and complete an application online.

McKinsey estimates that life insurers can boost sales by 3 to 5 percent through such streamlined web portals. On the distribution front, revenue gains can be achieved by equipping agents and advisors in the field with productivity-enhancing “digital advice tools.”

Mobile apps that let advisors connect with clients via a video service are chief among these tools. Others include cloud-based software that lets producers graphically view sales- and marketing-related data to better tailor outreach to new or existing clients; and solutions that let them dispense with physical office space, such online document storage services.

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Alliances with third-parties that help expand the market for insurers extends to companies specializing in health and financial wellness solutions.(Photo: Thinkstock)

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The value of teaming up

As to a longstanding industry bottleneck —underwriting — the McKinsey report estimates that insurers can substantially reduce sales “cycle times” (from 50 to 70 percent) and administrative costs (from 20 to 30 percent) by digitizing functions that ease and speed the process. Examples: streamlining the procurement of attending physician statements (APSs); and developing simplified issue term insurance products that require little or no medical underwriting.

To expand the applicant pool, insurers can also team up with companies that are researching underwriting risks associated with certain medical conditions. Among them: diseases that insurers have traditionally been loath to underwrite or to issue policies for on preferred basis.

Last December, for example, Prudential Financial began offering 10- and 15-year term life policies to people living with HIV — a community that (in the U.S.) had heretofore been largely uninsurable. The product rollout stems from an unusual partnership with Aequalis, an independent organization that conducted extensive research into the feasibility of availing the HIV community of life insurance products.

Related: Aequalis: leveling the playing field for those living with HIV

Alliances with third-parties that help expand the market for insurers, the McKinsey reports add, extend to companies specializing in health and financial wellness solutions. On the cutting edge in this space is John Hancock Financial, which in 2015 teamed up with the Vitality Group, a provider of incentive-based wellness programs.

John Hancock policyholders now can save on their annual premiums, and earn rewards and discounts, by taking steps to improve their health. As part of the initiative, policyholders are given a Fitbit, a high-tech wristband that tracks the user’s number of steps walked, quality of sleep and other personal metrics.

“These partnerships, whether focused on customer acquisition, marketing or client engagement, can be a win-win for companies across the insurance value chain,” says Balasubramanian (pictured above). “What’s particularly important is that insurers effectively manage their portfolio of partners.”

“That often requires a venture capital mindset,” he adds. “In many cases, the partner will initially fill a capability gap, but over time, the insurer will want to bring those capabilities in-house.”

Related: Bringing long-overdue innovation to a premium pricing model

How successful life insurers are with their digital initiatives, say McKinsey’s analysts, will depend in part on digital leadership at the top. (photo: Thinkstock)

Foundations for success

The McKinsey report goes on to list 5 “building blocks” that life insurers will need to digitally transform their companies. Among them:

    • Developing a “digital strategy” for overhauling business operations — from record-keeping and policy administration to product development, marketing, and sales activities — by aligning digital investments with long-term objectives;

    • Capturing “digital value” by building, among other things, a “digital front-office” (a “remote advice” or call center) where agents and advisors can serve customers via phone, e-mail, web chat, or video; and by setting up an independent company to experiment with new products, user experiences, underwriting and servicing;

    • Investing in technical capabilities, including flexible and modular hardware and predictive analytics software that enables the “mass-customization” of products, services and other customer-facing solutions;

    • Creating a “digital culture, talent and organization” that heightens carriers’ focus on customers’ needs (for example, by incorporating consumer insights and market testing into product design); and

    • Developing a “digital road map” that integrates the aforementioned elements into blueprint for achieving ongoing innovation, the map to be tailored to the insurer’s “digital maturity,” product and market focus.

Related: Digitizing the insurance process – are you ready?

Many life insurance executives know what they have to do, but postpone making digital changes because of the financial risks and challenges, says McKinsey’s Shi.

Getting from here to there

How fast might all this come to fruition? Much will depend, the McKinsey analysts say, on digital leadership at the top — executives in insurers’ C-suites. And that could require a cultural makeover, one that values agility and speed, is willing to experiment with new ideas, and prepared for failure.

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“These cultural shifts are hard to bring about in a tradition-bound life insurance company,” says Shi. “Many executives know what they have to do, but postpone making changes because of the financial risks and challenges.”

One way to address the cultural challenge is to offload the digital legwork to a more agile dot.com company that’s well-versed in the ways of Silicon Valley and isn’t shy about tackling technical, financial or market obstacles head-on. But this path, too, could pose issues for insurers.

“In the end, you face the same challenge: how to integrate separate companies with different operating cultures, so they can work together,” says Shi. “Upgrading your existing capabilities versus making a clean sweep by starting up or investing in a new company are different approaches. Both have pros and cons.”

Related:

The coming IoT revolution: a 6-point plan for life insurers

8 tech trends that will change how carriers to business

How life insurers must adapt to an omnichannel world: Part 3

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