As the insurance industry emerges from recession, it faces a sea of challenges. The economic slowdown has intensified price competition, hitting margins at a time when market turmoil has depressed revenue streams from many insurance holdings. Similar difficulties in adjacent financial sectors have brought new competitors—for instance, joint ventures between banks and financial advisers—into the insurers’ traditional terrain. Structural changes continue to shift global revenue pools to emerging markets, while customer behavior is shifting as more transactions move online.
In this environment, the industry must not only focus its strategic attention on areas from better financial and risk-pool management to M&A but also develop innovative, growth-oriented products that can secure the loyalty of existing customers and attract new ones. Yet in the face of this challenge, insurers may be neglecting an important tool: technology. Across a number of industries, rapidly changing technologies have been changing the postrecession competitive dynamic. Web and communications technologies are spurring ways of creating products and reaching customers, as well as opening doors to more efficient and effective ways of delivering products and services. They are also giving rise to entirely new business models.
For two reasons, some insurers may find crafting a new approach to technology difficult. One is that they often see IT primarily as a cost center prone to overruns and a megaproject mentality; the industry spends 25 percent of its operating budget on IT, and executives often lament poor returns on the investment. Second, the industry is built on high levels of trust in product offerings and often on personal relationships between company representatives and customers. As a result, insurers fear to experiment with new technologies that could damage these fundamentals.
With costs and competition rising and growth facing limits, this is a good time for insurers to reexamine their IT options. Rapidly evolving technologies will probably change the industry’s competitive patterns. Forward-looking companies are already taking steps to gain first-mover advantages through the intensive use of technology, which could facilitate new types of interactions with customers and company agents. In a growing number of areas, for example, IT may allow insurers to automate processes and cut costs without damaging service delivery. Customized products that rely on data and better risk analysis could provide new avenues for growth-boosting innovations. Finally, the combined effects of technology could change the nature of insured risk, leading to market disruptions that insurers will need to understand.
None of this is to say that the industry should pursue technology at the expense of core strengths, like empathy, service, and trust. Technology cannot replace the trust-based relationship between insurers and their clients but it can enhance it—offering better ways to understand and satisfy customer needs. We believe that business and IT leaders together should begin examining technology at a level that matches their strategic goals and appetite for change.