When the Outsourcing Center asked four of the outsourcing experts in the insurance space to enumerate the biggest challenges the insurance industry faces in 2015, the unifying answer was that the industry needed some serious remodeling…because economic forces have moved their cheese.
Here’s why; “Though long considered recession-proof, large insurance companies today are finding themselves at the center of a storm. Even those that maintained conservative, risk-adverse strategies are facing plenty of tough new challenges,” observes Trupti Mukker, general manager, Wipro.
One of the biggest challenges is money to keep the lights on. Here the cheese moved big time. Ajay Marar, insurance industry leader, GBS global delivery, India for IBM, explains what happened: “Lack of growth and catastrophes across the globe impacted their operating income. Market economic factors have not helped investment income, either.”
But the second biggest challenge of the year is the industry’s vaunted conservatism, which makes it an industry traditionally slow to adopt change. “I’ve never seen an industry so stuck in the ‘80s,” observes John Pierce, senior vice president and head of the insurance vertical for NIIT.
The impetus to change
The experts Outsourcing Center interviewed believe insurance companies must address their slow-to-change mindset in three major areas: people, sales channels and technology.
- Attracting new IT talent. Pierce of NIIT says most insurance companies operate using old mainframe systems. “Young people don’t want to work on mainframes,” he says.
So who is manning the machines? The gray hairs! John Sarich, senior solution architect within the insurance vertical for NIIT, adds that retired insurance IT executives whose 401(k) retirement plans were devastated by the recession are coming back to work because they know how to run these mainframes. Rebadging retirees, however, is a 2015 fix, not a long-term solution.
- Attracting new agency talent. Pierce adds that many insurance agency owners are retiring and their children don’t want to take over their agencies. He says big banks like Wells Fargo are much more interested.
- Retaining skilled specialists. This will be a challenge in 2015 as the job prospects improve with the economy. In the past, according to Wipro’s Mukker, insurance companies promoted their star specialists to managerial roles as a reward. However, they discovered these people are great at what they do and felt “bogged down” in administrative duties. So they left. This year the industry has to find a more meaningful way to reward their specialists so they don’t jump ship, she posits.
This year Mukker says insurers must match their channel focus to the preference of their customers. Adds NIIT’s Sarich, “Today, insurance customers don’t want to buy insurance the way the insurance companies want to sell it to them.”
There are four challenges here:
- Interacting with Gen X and Y: Today the traditional way to sell insurance is through agents (intermediaries.) Pierce of NIIT says Gen X (people born between 1960-1982) and Y (people born between 1982-2000) don’t like talking to agents. He says their favorite intermediary is Google. “They go to a Web site to buy insurance. When they hit the buy button, it shows them to a list of agents in their zip code. Wrong. They want to buy right there at the Web site,” Pierce adds.
In addition, he says there are Baby Boomers who also now feel this way. “These buyers shop until they get the best deal,” says Pierce.
Gen X and Gen Y have become a force to deal with; their numbers are so large they are too big to ignore. Ganesh Pai, senior vice president and head, Insurance Market Unit for MphasiS, points out that today more young people are in the work force who can afford to buy homes and automobiles. “They are tech and digital media savvy. They don’t want to buy insurance through traditional channels,” he says.
Insurance companies are going to have to deal with this issue because they had promised to give the agents all their business and now they need to sell on the Internet too. “They are wrestling with this issue now,” the NIIT executive notes.
- Creating a mobility strategy. Pai says whole segments of the insurance buying market want to make premium payments from their phones. Most insurance companies don’t know how they want to handle mobility, notes Pierce of NIIT. They’d better figure it out if they want to get those payments!
- Creating a social media strategy. Pierce says insurers are “in a quandary” about this, too. This is a problem because Pai of MphasiS says the tech savvy buyers are already looking to their social networks to make insurance buying decisions. “This is already impacting the way insurance companies do business,” he says.
- Selling to new demographics. Over 50 percent of the population of California is non-Caucasian. Forty percent are immigrants. The NIIT executive asks insurers serving California, “How is your business model changing? Who is going to sell to these demographics?”
This year, the experts all believe technology will play an increasing role in the distribution of insurance products. “That’s why it is imperative for insurers to keep their technology environments updated to retain their end users,” Mukker of Wipro says.
Because the insurance industry typically is “conservative and risk adverse, this mindset means it adopts technology changes slower than other industries.” In 2015 Mukkersays “that needs to change.”
Here are some of the insurance’s industry’s 2015 challenges:
- Bad data. Insurance companies want to use predictive analysis to determine things like when a theft might take place or even be able to price their products properly. But Pierce says this is only possible if they have good data. He asks insurance executives about the IQ of their data. “Then I will tell if it has intelligence or not,” he jokes. Much of the dirty data happens when analysts find a mistake. They only correct it in the back-end reports, not in the original data. Then the companies use the original, incorrect data for analytics.
- No documentation. Pierce of NIIT says the old mainframe systems rarely have any documentation. “All the knowledge is in the IT specialists’ heads,” he observes. As the “silver tsunami” surges and these seniors retire, no one will know how to fix the system. The best answer: move to 2015 technology like cloud.
New pressures for insurers
Add to this list new pressures insurers will face in 2015:
- Investment income. Pierce of NIIT says in the past most insurance companies lived off their investment income, which was routinely eight percent or more. So, if they took in $1 in premium, they could pay out $1 in claims and still operate and profit from the investment income. With those days long gone-returns are between one and two percent, Pierce adds- today insurance companies “have to focus on effectiveness and efficiency.” Pai of MphasiS predicts insurance companies will continue to face this challenge for at least the next two years. This had led to a drive to improve processes and reduce costs.
- Growth. Pai says “growth has been a challenge” for insurance companies in 2015, especially in mature economies like North America, Europe, Australia, New Zealand and Japan.
- Economic uncertainty. Mukker of Wipro says a huge challenge for 2015 is the uncertain investment market, coupled with struggling domestic and global economies. Shee says the insurance companies have faced a double whammy in the past. A drop in bond yield put upward pressure on insurance rates. This hurt their competitive advantage in attracting low-risk clients (see no. 4). At the same time, decreased economic activity led to fewer high-premium policy sales. This year he says insurance companies will have to figure out how to remain profitable by doing a better job of dealing with the changing economy.
- Pool optimization. Optimizing the pool has always been a central challenge for insurance companies. Pools become unbalanced if the competition lures away the low-risk customers with more competitive premium rates. Insurers will have to do a better job of identifying low-risk customers and retaining them to keep their pools balanced, according to Mukker.
- Billing system integration. Pierce of NIIT says many companies, particularly in the property and casualty area, need to integrate their various systems for greater efficiency.
- Changing competition. The pressures will increase because of vertical integration, according to Mukker of Wipro. Reinsurers are moving into insurance. In addition, bankers are acquiring agencies, says Pierce. And then there are new entrants.
- Regulatory changes. A 2012 IBM study of C-suite insurance executives found they will have to increase their investment on legal and compliance issues this year. There are many reasons why. Pai of MphasiS points out a particular new challenge for European carriers. In the UK automobile insurers could charge women a higher premium than men. A new law prohibits them from gender discrimination in pricing. “This new law is creating a huge impact,” he observes. And it’s a big opportunity for service providers.
- Operating globally. Marar of IBM says the governance, risk and compliance challenges become “more pronounced when the company operates globally.”
- Time-to-market pressures. Marar adds profitability requires insurance companies have the ability to launch new products with short time spans. Pai of MphasiS says speed-to-market is especially crucial when insurers are entering new markets. Outsourcing is an answer here. Pai says providers can deal with short launch dates “because we can leverage everything we already own.”
- Limited resources. How do you meet these challenges without the necessary capital?
Wipro’s Mukker says insurers “recognized they need to eliminate inefficient business processing functions, improve the quality of service and become both fast and easy to conduct business with. They are outsourcing because they need partners to help them innovate and transform their operations.” This, of course, also reduces cost.
Outsourcing provides solutions
So how can service providers help insurers meet 2015’s challenges so they can become more productive and hence more profitable? The answer is simple (move the cheese): “Insurers need to simplify their business and transform their operations,” the Wipro executive says.
Here are five ways service providers can help insurers:
- Technology-enabled models. “Technology will be central to the industry’s ability to respond to these challenges and develop new, more profitable operating models,” Mukker observes. Pai of MphasiS adds outsourcers can standardize and automate processes “to make an operational difference.”
- Cloud–based analytics. Mukker says cloud solutions “will provide the foundation for new data-driven underwriting models and pool optimization.” That’s because cloud computing supports the aggregation and storage of vast amounts of data the service provider can combine with actuarial models to calculate risks and maybe even predict events. He says cloud-based analytics “could lead to a more proactive and less reactionary approach to underwriting.”
- Customer segmentation. Marar of IBM says it’s crucial for insurers to be able to segment their customer base and then understand their needs and delivery models.
- Growth. Pai of MphasiS says carriers in mature markets that don’t have the capital to go global are searching for new segments in existing markets. “They are trying to sell more products to their existing customers or find new customers who are similar to the niches they already serve,” he reports.
- Emerging markets. Once insurers have “a truly global technology infrastructure, they can expand operations and service offerings to customers in emerging markets,” says Wipro’s Mukker. Pai reports the large carriers are aiming to capture business from “the rapidly rising middle class in Latin America and Asia.” The opportunity is huge: Pai says the percentage of the population in India and China that have insurance products is in the single digits. He says they are expanding directly or through joint ventures.
How service providers can help
Solving these challenges for insurance clients is “a huge opportunity” for outsourcers who “understand the industry intimately,” according to Pierce of NIIT. He says none of the solutions are “rocket science. They are just ‘what the heck’ challenges” for outsourcers who live in the insurance vertical.
On the growth front, for example, Pai of MphasiS says any insurer entering a new market has an advantage since it becomes a green field project not constrained by legacy systems. “We tell them, ‘You focus on designing new insurance products for your new customers and we will host the IT and operational infrastructure.'”
The IT landscape will have to undergo a major transformation to make the industry more profitable. Marar predicts this year and next insurance companies will make “significant investments toward core transformation, channel and risk management, and consumer insight,” assuming they can find the money.
Pai says it’s ironic that insurance companies are in the risk business but are the most risk-adverse industry there is. He says many insurers are still doing everything in house. Welcome to the 21st century. It’s time to outsource, people!
Is 2015 shaping up the way you thought it would?