There’s no denying that insurtechs have some impressive technology, which can (and does) give insurers new capabilities. The concepts they present sound exciting, and buyable. Why, then, are insurers not yet seeing the benefit?
If you look at how much insurers have spent on technology over the last decade, return on investment is negligible. In fact, it’s becoming clearer that insurtech is caught in a paradox of intentions whereby each organisation, convinced of its ability to add value to the insurer, only adds to a growing web of complexity – a spaghetti mess of systems.
The reality is that the sector has a growing, as opposed to shrinking, technology problem. Almost all insurers have too many systems, doing too many different things, which eats into internal resources instead of saving time and making life easier.
Clever, but counterproductive
It starts with a misalignment of needs. Insurers are first and foremost experts in understanding and writing risks. They’re not experts in understanding and implementing technology, so they know they need to look externally for technology. Insurtechs on the other hand are usually built by younger, tech professionals, and backed by Venture Capital firms, neither of which have the sector experience to truly understand the needs of insurers.
And all of this takes time. Behind every new system lies a lengthy decision process, likely with several rounds of pitches and meetings involving senior stakeholders. Then, once decided, the technology is seldom ready to go and the insurer has to work closely with the tech firm to implement their product and get it working. It is a flawed process that can be a colossal distraction and stands in the way of actual progress.
This unfortunate dynamic also means insurtechs fail to see how they are contributing to complexity. Each company usually solves one specific problem – one piece of a very large jigsaw. As a result, the market is saturated with a range of different solutions that cannot yet interact and complement one-another.
Part of the problem here is that both parties use very different terminology and vocabulary. For example, common tech buzz-phrases like API integration, full stack, no-code, and cloud-based, are terms that are little-understood outside of the tech teams in insurance firms.
The misalignment is, therefore, largely a matter of communication. The fact is insurtechs are only really guessing what insurers need because of a structural lack of dialogue and collaboration when developing solutions.
As a consequence, insurtechs tend to be technology-led businesses. They start with clever technology and then try to apply it to insurance, which often cannot be scaled to meet demand. It should be the other way around: find out what the insurer needs, then develop the technology.
Stuck on outdated architecture
That being said, the internal structure of the insurance business also stands in the way of progress. The problem is – if you will – far more systemic.
All insurance companies have a central record policy administration system, most of which were built thirty or even forty years ago and are therefore very outdated. Not only does their limited functionality mean other technology is often needed, but insurers will typically build new systems – whether developed in-house or sourced externally – on top of this outdated architecture instead of evolving and upgrading it.
Over year and years, teams within the insurance business have pushed for new technologies such as CRM tools, claims platforms, or sophisticated analytics, as they have come to market. Each system then needs people to set it up and run it, further taking up internal resources.
While this might provide the relevant team with the tech they needed in the short term, it is detrimental for the long term. The insurer – especially those operating across multiple regions and product lines – ends up with an ever-expanding myriad of individual systems plugged into a clunky central architecture. As a benchmark, the last business where I was Chief Information Officer had 2,500 systems across the business. But most have a similar problem.
Only now is the scale of the problem emerging. To move off old central systems would mean re-building all systems onto a new central infrastructure, essentially starting from scratch, which it turns out would cost many insurers more than the value of their entire company. As such, many companies have dug themselves into a hole, paralysed of real growth
Something has to change. But how can insurers move off central systems when the cost is so high?
Putting an end to the spaghetti
The task is far from simple and there is no magic solution. But what is clear is that insurtech must fundamentally reconsider its objective and focus on the needs of the insurer.
Boil it down and the primary goal of insurtech is to improve processes across the insurance value chain. So, as a starting point, insurtechs must think more holistically about the processes across the risk cycle and make each step smoother.
Conceptually, we insurers should be able to simply tap into a service that drastically cuts down processes across the business. If they could streamline processes and scale more easily, it could take points off the insurers combined ratio and fuel growth.