Digitization Done — digital transformation coming up
Discussing the Current Status Quo
This article was written by Fadata’s CTPO, Eike Schmidt, who discusses the “technology paradox” we are currently in and how digitalization is not synonymous with digital transformation, and most importantly — what are the implications for the insurance business.
I remember that in my childhood days, the world was still essentially an analogue place. We found phone numbers in a physical book and our curious questions were answered either by our parents or by a printed encyclopedia. In fact, as late as 1986, 99.2% of the world’s storage capacity was still analogue.
Then came the spread of affordable compute and storage. Analogue information was translated into streams of ones and zeros to make it accessible to these technologies. This process is what is called digitization. And in 2007, only 21 years later, 94% of storage was digital. Digitization helped us to perform our tasks more efficiently: we now have our phone numbers stored in the cell phone and look up the information we seek on the internet. We write letters in a text processor instead of a typewriter and send them via e-mail instead of physical “snail” mail.
The fact that phone numbers, articles and letters constitute information is rather obvious. But with progressing digitization we started digitizing data that was less so: processes, workflows, business rules. It seemed that computers learned to understand the meaning of data, turning — in information theory terms — data into information. This enabled the computers to help us even more: using dedicated applications, computers could organize and orchestrate work, apply business rules, and make connections between different kinds of data. In other words, spreadsheets and text processors were replaced by CRM systems, ERP systems, data warehouses and of course core insurance systems.
Surprisingly, despite all the advancements described above, worldwide productivity growth has slowed down, rather than accelerated.
This has come to be known as the “productivity paradox”, famously described by economist Robert Solow in this quote: “you can see the computer age everywhere but in the productivity statistics”. While there are many theories around the reasons for this, one thing is clear: digitization alone does not create new value. It just makes it easier to deliver existing value! As such, digitization has taken a lot of manual effort from us and has rendered many jobs obsolete. It has done things by new means, but it hasn’t done new things!
Digitization alone does not create new value.
Enter digital transformation: when a business domain is freshly digitized, it usually still looks very much as it looked before. All the processes and structures are very much the same. So is value creation. Digital transformation starts with the realization that digitized businesses can create additional value by working in a different way.
Digital transformation starts with the realization that digitized business can create additional value by working in a different way.
Take music, for example, the digitization of music, i.e., commercial digital recording started in the 60s. It became available to the public in a digital form essentially with the invention of the CD in 1982. While practically unaffordable in the beginning, the CD quickly became a competitor to the classical LP and tape deck. The user experience, of course, was much improved: better, consistent sound quality, easier handling of the media and even skipping of songs. And yet, the value creation was still essentially the same. You would go into a shop to buy a media containing an album. Consequently, the music industry kept working pretty much the same way: instead of pressing vinyl discs, they now pressed CDs. Covers became smaller. But all the processes and structures stayed in place.
With advancements in data coding and internet speed, the downloading of music became a possibility. And that is when it happened: we redefined the value from “possession of” to “access to” music. And this changed the entire value stream of the music industry. The rest is history.
We all know similar transformation stories, from car/ride sharing, e-scooters to room rentals, movie rentals, and so on. The common denominator in all these stories is: digitization has first streamlined an existing non-digital process. Then someone framed a new value creation based on the digital model available.
Looking at the insurance industry from this perspective, it might become obvious, why I am so excited to work here now.
In 2021 we have insurance software systems that handle information, orchestrate processes, and apply business rules. In other words: we are performing all the old processes with digital tools. This has much improved our efficiency. But we are still creating essentially the same value we have always done. In other words: it looks as if the industry is digitized, but not yet digitally transformed. Ergo the biggest, most exciting step of the digital journey is still ahead of us!
How will it happen? That is of course the million-dollar question! Instead, we can discuss why it didn’t happen already. Arguably the biggest factor is regulation: Insurance in essence is about sharing risk. This is a big economical enabler, as it frees capital that would otherwise be stacked away “for a rainy day”. In the insurance model, I am paying money so that in the event of loss I get paid back even more. This is a great concept, but like in banking and (sorry) lottery, it requires a lot of trust that when the time comes, I am treated fairly.
Due to its positive economic influence, governments around the world are trying to increase this trust by regulatory intervention. That is all good when one caveat: regulation is usually defined with the existing way to run the business in mind. Hence, it has the tendency to cement the status quo. Look for example at the need for physical signatures: Germany alone has about 3,000 rules and regulations that require a physical signature — and hence create immense resistance for digital transformation.
The regulation also leaves its mark on InsurTech: according to a 2018 McKinsey report, 61% of InsurTech companies are trying to raise efficiency in the existing value chain. These companies are operating within the current processes, avoiding conflict with current regulations. 30% of InsurTechs are trying to remove intermediaries from the chain. While shortening the chain, they are keeping its structure intact. Only 9% of all companies are aiming at fundamentally changing the insurance value chain.
So, what about AI?
Although we have not yet seen most of it, artificial intelligence — or better machine learning — is arguably the most groundbreaking technical advancement in this decade. In classifying data, machine learning can mimic the decision patterns of humans. In other words: ML can replace human decisions with machine decisions. This can accelerate procedural steps and free human work, greatly improving efficiency. In and of itself, however, machine learning does not transform value creation. So, while it is an extremely exciting technology, I see it as an enabler for transformation more than being a contributor to digital business transformation.
We observed that regulation is making digital transformation harder. Does that mean that regulated businesses can’t be transformed?
Take for example the payment industry: “Alexa, pay for gas!” With this voice command drivers of Alexa enabled cars can pay at Exxon filling stations using Google Pay. Or look at the advent of self-driving cars. In conclusion, it seems that regulation might slow the process down. But when technology is ripe and the advantages become too undeniable, regulation will not stop it.
So digital transformation will come to insurance.
We are already seeing a host of InsurTechs entering, with $7.1bn invested across 377 deals in 2020 alone. InsurTechs are still not really making money yet — just like Amazon in its first decade. I think we will see the next confirmation of the wave when the big players are starting to lash out to these flies — or just buy them off. Indeed, these are very interesting times between the digitization and the digital transformation of the insurance market!
