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Growth without Takeoff: Insurance Making Baby Steps into Digital Future
Insurance is transforming even though there is no technological breakthrough. Yury Kuvshinov, CEO, Mains Lab, elaborates on key trends shaping the future of the industry.
Moscow, August 28, 2019

Transformation of the insurance industry is progressing quite slowly when compared to overall digitalization. A study published by the Insurance and Social Economics Department of the Finance University under the RF Government in June 2019 says that, of all insurers:

  • 57% use big data technology;
  • 47% use the latest production technologies;
  • 40%, use wireless communication;
  • 30% use AI technology.
Other new digital technologies, listed in the RF Government's Digital Economy program, including the blockchain technology, are practically unused by insurers. For comparison, digitalization progresses at a much higher pace in online banking. According to data shared by Visa, the annual digitalization development rate in banking services is currently higher in Russia than in Europe, i.e. 7% vs. 3% respectively.

Insurers offered the following causes for the slow rate of digital activity development in their industry:

  • High cost of new digital technologies (50%);
  • Lack of demand for digitalized insurance programs (47%);
  • Insufficient adjustment of digital technologies for insurance services (47%)
    Insurance industry development – Key trends
    Even though there is no technological breakthrough, digital is taking over insurance slowly but surely. There are several key trends defining insurance industry development on a global scale:

    • Incremental penetration of online insurance,
    • Gradual digitalization of business processes,
    • Functional de-integration (outsourcing of a steadily growing number of functions, e.g. claims settlement, contract administration, some servicing functions, to specialized digital players).
    Online insurance development

    The share of online sales on the MOD market was as high as 23% in Europe in 2018. Meanwhile, in Russia, according to Central Bank data, they accounted for only 1.4% of the individual MOD market, which is estimated at RUB 106 bn. This share was virtually the same in 2017.

    Despite the efforts taken by local companies, development of online insurance and establishment of ecosystems, which is currently talked about by many insurers, will take at least three to five years.

    Insurers may take the following role models for ecosystem development:

    • China's Ping An, where clients have simultaneous access to insurance, banking, medical, and other services;
    • South Africa's Discovery, which combines a broad network of partner offers in the Vitality program and offers access to it as part of a health insurance polic

    Higher-than-market sales growth in online insurance is accompanied abroad by a higher profitability of this sector. McKinsey estimates efficiency of insurance operations (combined ratio) of online MOD insurers at 90–95%, while traditional insurers have it at 95–115%. The difference is achieved through lower administration costs (5% vs. 10%), as well as through a lower loss ratio (80–85% vs. 85–90%).

    Even though the offline insurance policy sales volume is still higher than the online policy sales volume, automation at all links in the insurance product development chain is becoming inevitable.

    Process digitalization

    This is currently a matter of survival for an insurance company. Insurers digitalize entire stages of customer interaction in the policy administration process, as well as the claim settlement process. And this list is far from exhaustive.

    Customer targeting, adaptive pricing, online claim settlement, targeted cross-selling – all these product value generation stages are currently the areas of various digital initiatives run by insurers. As a result, they get higher process efficiency, greater customer satisfaction, and better risk management for a profitable insurance portfolio.

    McKinsey estimates the impact of such initiatives on claim settlement as follows: NPS (net promoter score – ed.) increase by 20%, administration cost reduction by 25–30%, claim payout decline by 3–5%.

    Process de-integration and emergence of specialized players

    Insurance aggregators, actuarial services (services calculating insurance rates – ed.), fraud management companies are among intermediaries that provide services to insurance companies, bringing up efficiency of selected processes.

    The market share controlled by these companies grows annually. Insurance aggregators had totally insignificant shares in total sales just two or three years ago, while in 2018, they accounted for about 17% of overall motor insurance sales in Europe, according to our estimates.
    A simple example: a chatbot asks a male about his age directly in the beginning of a conversation, but when talking to a female, it finds out her birth year first and asks the question later.

    Aggressive development of chatbots has become a global phenomenon. The market of chatbots using the NLU (natural language understanding) technology was booming in Russia in 2018. According to Just AI, the market volume reached RUB 524 Mio by the end of 2018, which is more than 2.2. times higher than in 2017. Analysts expect it to reach RUB 33 bn by the end of 2023.

    Insurers did not stand aside, and many of them used the popular technology in claims handling. It is of interest that companies refuse specialized offers, as people worldwide prefer interactive communication in any field. At a European insurance digitalization conference in June 2019, it turned out that more than a quarter of its participants were specializing in chatbot development for insurance companies.

    Insurance policy sale, policy administration, claim settlement – all these key processes of customer interaction with an insurance company can take the form of a chat. This makes it possible to customize the customer journey as much as possible and, consequently, increase policy sales conversion, streamline and speed up claim settlement, make inquiry responses as quick as possible. Foreign insurers achieve maximum customization of speech technology in chatbots.

    This is just one of the approaches that enable companies to change in a flash, preventing the moment when a customer may drop off the chat.

    Photo-based damage assessment in motor insurance

    Remote claim settlement based on online car survey is yet another future technology. A few companies have been known to invest to development of a service enabling them to calculate car repair costs on the basis of photos. None of them have achieved perfection, though: some boast high accuracy, but the covered range of car models is narrow, while others have a process that requires a lot of manual input.

    At the moment, 100% of damage assessment is made manually, but this indicator will go down with time. It will not happen quickly, but all insurers agree in assigning importance to introduction of this technology. This will improve customer experience significantly by reducing claim settlement timeframes, and this will also cut down the volume of claims paid by reducing the share of fraudulent cases.

    Changes on the insurance market are inevitable. Insurers strive to make their products and services convenient and transparent. Maximum customization of the insurance offer is a key trend for the future. Insurance is the field where the number of emerging technological startups is the highest. Insurance technologies have a quite serious export potential. Development of up-to-date insurance technologies is among the best investments that will pay off for sure. Creating such technologies is a long journey, and the time to set off is now.