Other parts of this series:
- China: A Decade of Blazing a Digital Trail
- Juggling Act – Part 1: Transforming the claims space
- Juggling Act – Part 2: Keep the Customer Satisfied
- Juggling Act – Part 3: Modernising core platforms for P&C insurers
- Juggling Act – Part 4: Modernising core platforms for life insurers
- Digital decoupling: Unlock value and protect your market
Over the past year, we’ve fielded many questions from clients about digital decoupling – in particular, what it means and the business impact such a transformation can have. Those questions stem from the seismic shifts upending insurance, a sector in which change used to be measured in decades.
That timeframe has shortened significantly. Consider the advent of digital new entrants. Even though most have yet to take much in the way of market share, they have attracted large sums of capital, which in turn has put pressure on incumbents to create shareholder value. Newcomers are also reshaping customer expectations, adding to the challenge.
COVID-19, meanwhile, has accelerated digitalisation. Overnight, agents couldn’t see customers, call centres were shuttered, and bancassurance sales fell as branches closed. Remote, distributed operations are now the norm, and the digital business model of new entrants has become the standard. It’s easy to imagine that by 2025, the industry will be digital-by-default.
Transformation, then, is crucial. But getting rid of paper is easier said than done – for instance:
- How do you replace long workflow processes carried out in back offices with straight-through-processing delivered via an app?
- How can virtual agents work effectively if they can’t get real-time answers from back-end support systems that are designed to process batch requests?
- How do you simplify the rules and clauses for P&C products to fit a mobile interface, yet without customers needing to reach out to call centres?
On top of this, insurance is one of those rare sectors where the computer programme is the factory. Insurers were among the first to use mainframes in the ‘70s and ‘80s, and many-core policy and claims systems are still in use. As a result, numerous players have significant technical debt.
Since the millennium, engineering fixes have come and gone. Many were costly, complex and time-consuming. Today, though, there is a far wider range of solutions on offer from service providers and insurtechs. The art is in how to integrate them into the IT stack.
The value of these offerings is even more significant given that insurers know they need to act fast. The best solutions provide a way to counter new entrants by giving customers, agents and other stakeholders in the insurance ecosystem – repair shops or hospitals, say – an outstanding digital experience that lets them integrate services into their business processes.
Creating an outstanding digital experience requires a digital solution stack, and that needs to tick a number of boxes: it should, for example, offer a great mobile experience; it should live on the cloud; and it should use machine-learning and other analytics to drive underwriting, pricing, marketing and claims handling.
All well and good, you might say, but how can my firm connect our legacy systems to this cutting-edge tech? Given that legacy systems run on old code, are often inflexible and can’t respond in real-time, aren’t we at risk of opening Pandora’s Box?
This is where digital decoupling comes in. Simply put, digital decoupling accelerates and de-risks digital transformations for insurers by connecting data lakes (which could be in a data centre or in the cloud) in real-time with the data held in legacy systems.
In this way, any change made to legacy policies or on the legacy claims system is replicated in the data lake in real-time, without having to touch the legacy code. A modern digital stack, with its powerful machine-learning, can seamlessly manage these disparate sources of data.
Although implementing an entire decoupling project does take time, insurers typically find that putting in place the basic operational infrastructure takes six months. At that point, they can power up their digital transformation and bring online new business functionality at speed using agile digital factories.
The aim should be to generate business benefits in short cycles so that insurers can enjoy initial results in a matter of months. Pilot projects that focus on specific areas can prove useful in delivering in such a timeframe.
Then, as insurers add new functions to the digital stack, they can hollow out parts of their legacy systems on a step-by-step basis, shrinking its footprint. That’s far better than re-engineering reams of old code.
Transforming in this way brings numerous benefits. New features, for example, can include dynamic pricing, flexible and more modular contracts, and support for virtual agents – which can in turn cut call-centres workloads. We’ve seen that insurers implementing such changes, including eliminating paper, can reduce their cost-to-serve by 35-40 percent.
Paring back legacy systems to be just a system-of-record also lets firms create new product suites supported by the digital stack. Additionally, some large insurers have added cloud-based, fintech-type small core systems to bring in new classes of products. This not only decouples new and legacy systems; it allows them to separate executing their business strategy from resolving technical debt. Step by step they can become more agile and nimble, with modern product sets and services on a par with new entrants.
Lastly, a digital decoupling approach lets incumbents turn the tables on new entrants by leveraging the strengths that newcomers lack: risk management experience, balance sheet strength, and the scale and depth of the existing distribution network.
Next, we will examine how insurers can prepare for and deliver digital decoupling to achieve their goals. We’ll also highlight pitfalls to avoid and some of the innovations that this approach makes possible.