How the Insurance Industry Can Harness Technology in the Wake of COVID-19

By Paul Rohan

The insurance industry is facing a seismic shift in the wake of COVID-19. This article examines three specific goals that leaders should aim for as they seek the right balance between short-term tactical cost reductions and longer-term strategic cost initiatives.

The COVID-19 pandemic presents significant challenges for the insurance industry, which faces large exposures as major events are cancelled. Global businesses are at risk of failure, with aviation and hospitality industries under huge stress. The payouts on travel insurance policies will be way outside the norm. The investments that insurers rely on to give them the funds to pay claims are sharply marked down in value.

Many leaders in the insurance industry are probably considering or executing short-term tactical cost measures, such as clampdowns on expenses and hiring. Some may be pausing the portfolio of discretionary capital investment projects for review. And the prioritization of immediate actions will be filtered by the speed, simplicity, and capacity of management to execute these decisions.

However, to achieve high performance, insurers need the right balance between short-term tactical cost reductions and longer-term strategic cost initiatives. Insurers who pursue only crude and tactical cost-reduction measures may achieve cost benefits quickly. But in the long run, this approach threatens to leave them unable to sustain those cost reductions.

Leading insurers should realize the importance of taking out costs and investing the savings in strategic capabilities and business-model innovation. In recent years, insurers have been investing to bolster core systems, with artificial intelligence among the emerging methods explored to gain better market insights. Insurers have also been experimenting with new business partners and new sources of data to improve the customer experience, all while aiming to engage with policyholders more often, rather than only at renewal. These forward-looking efforts should not be suspended as insurers seek to cut costs — and with the right approach to IT, insurers can increase their flexibility to not only save but also pursue long-term competitive advantages.

While some innovative insurers have made a good start, a general lack of penetration of untapped market segments suggests a more robust strategy is required. Insurers need to do more to fully harness the power of connectivity and the new data being generated by alternative sources. Insurers also need to leverage their extensive resource of consumer data for more cost-effective targeting and servicing of underserved segments. Specifically, while containing costs by “doing more with less,” insurers should also aim for three simple but challenging goals:

• Collaborate more effectively with business partners
• Understand API products
• Be more effective at analyzing and leveraging new types of data

Collaborate more effectively with business partners

According to a Financial Times article, health insurers such as United Healthcare are “turning to wearable devices to encourage employees to engage with their own health — long before they fall ill.” The article goes on to state that “Discovery, a South African health insurer and owner of Vitality, pioneered this type of effort. Francois Millard, senior vice-president and chief actuarial officer at Vitality Group, said the project was initially modelled on airline frequent-flyer programmes. The insurer realised it was ‘uniquely situated to benefit if our members get healthier’ — so it should share the upsides with participants.”

Life insurers that are examining the potential of data from wearable devices and other sources to accelerate the underwriting process and avoid time-consuming and expensive medical tests are just one example of insurers seeking new models for collaboration with business partners. Some insurers are working with auto manufacturers to offer coverage on newly purchased vehicles. Builders of smart homes and commercial properties can help insurers tie coverage terms and conditions to real-time, sensor-driven data.

These sorts of innovative collaborations between insurers and business partners represent non-routine design work by teams distributed across locations, enterprises, functions, and cultures. As these teams are empowered to make key design decisions, effective coordination of the solutions they deliver is vital. The duration in which any single team works together may be short, and the desired output will be unique. Teams may have members from more than one enterprise and will have members from more than one function. Team members may transition on and off the team. Teams can be geographically dispersed over more than one time zone. In the post-pandemic era, more team members will likely be empowered to work from home. Teams may have members from more than two national cultures and may have members whose native language is different from the majority.

Given these significant coordination challenges across locations, enterprises, functions, and cultures, API products can provide a foundation for achieving the desired synergies and outputs.

Understand API products

API products are bundles of application programming interfaces, or APIs, intended to give developers manageable, simple, and reliable access to systems and functionality they need in order to combine digital assets in new ways, connect to partners’ systems, or otherwise innovate. These bundles abstract the complexity of underlying systems, which makes connecting, combining, and recomposing digital assets significantly simpler, faster, and more manageable. Much of innovation today relies less on reinventing the wheel from the ground up than in arranging existing functionality and data in new ways for new uses or in connecting legacy systems and digital assets to new technologies — which means, in short, that API products are key inputs in the collaborative design process because they are pre-codified, reusable, and can be modularly connected.

These pre-codified inputs should be extensively documented to support the specific type of innovation. Onboarding of team members from outside the enterprise can be automated, and best practices can be captured in self-service portals and forums from which team members access the digital assets they need. In sum, because they are reusable, modular expressions of both the insurer’s and the business partners’ respective capabilities, APIs can reduce the costs and risks of innovation processes while still allowing new kinds of partnerships, and the new business strategies attached to them, to be pursued.

Analyze and leverage new types of data

Insurers will likely pursue upgrades to their analytics capabilities. More advanced demographic analytics can drive new value, both before and after a customer applies for an insurance product. Identifying customers who are experiencing life or asset changes can help insurers anticipate those customers’ needs and offer products to fulfill them, for example. Targeting consumers during transformative life events can significantly increase the likelihood they’ll consider an insurance marketing message.

More advanced analytics also involve a greater focus on AI. This can help insurers evaluate and price insurance risks through new kinds of modeling and data, potentially enabling superior underwriting and delivering a competitive advantage. AI can be used in claims processing, fraud detection, and customer service, among other areas. For example, to improve customer experience, insurers are investing in virtual agents in call centers, letting customers engage with intelligent chatbots that eschew wait times, answer common questions, and hand off information to a human agent.

But such innovative uses of advanced analytics and AI can be futile if insurers lack the data management and risk controls to execute these strategies. Opaque insurance models that use AI without effective risk management could both increase the risk of data protection breaches and impede the insights insurance executives and regulators need to justify decisions made using these new technologies. Insurers will need to be careful to ensure that bias is not designed into the decisions, whether introduced at the outset or via an evolving dataset. Risk controls will need to ensure that an inappropriate model is not applied to the wrong situation or decision.

Data management will be crucial in the era of AI in insurance. New insights and customer touchpoints driven by intelligent automation will unlock value only if they interact appropriately with legacy CRM, sales, and marketing systems. Insurers will need to be sure that inappropriate feedback to a training model is detected, that incorrect data from upstream systems is not used by the model, that the model can access necessary data, and that legacy systems and models interact reliably and consistently. In this regard, APIs will be vital as the interface between newly intelligent automation and legacy automation.

Getting to work

Ultimately, the key should be for insurers to evaluate their business model now against scenarios ranging from best case to worst case, and to start acting before the full impact of the COVID-19 pandemic and other ongoing disruptions play themselves out. The long-term winners will likely be those that begin stabilizing and building for the future by adopting flexible operating models to accommodate threats and opportunities as they emerge. A significant ingredient in this process, and in turning ambitious C-suite strategies into everyday reality, will be the API. Digital technologies will be hamstrung without APIs, making API products the essential workhorses for insurers in this new era.

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