By Tony Tarquini, director of insurance, EMEA at Pegasystems
Insurtechs are entering into the insurance industry with unique thinking and a fresh perspective, placing pressure on large traditional competitors to do more and encouraging big players to improve service for their own customers. While this is a good thing, not all of them succeed. Billions have been squandered on failed insurtech start-ups.
Willis Towers Watson estimated in a January 2020 report that total global funding commitments to insurtechs in 2019 was $6.37bn. Despite this, around 184 funded insurtechs shut up shop in the past three years – a lot of investment gone that cannot be got recouped. Instead, this money could have been used to solve existing insurers’ biggest business technology challenges, namely successful digital transformation and resolving their myriad legacy IT issues.
Insurtechs vs. insurer legacy technology replacement
Capital funders in insurance appear to be committed to dispensing large sums into new insurtech start-ups, a lot which do not survive past a few months, as opposed to established organisations. This prompts the question, “If a great percentage of what is being invested does not add value, what is the point?”. Insurance companies have massive legacy technology issues, and $6.37bn a year could buy a lot of replacement technology and resources. Rather than putting so much capital into new ventures, insurance companies should look at proven technology solutions that would go a long way to getting rid of legacy systems. This does not mean replacing old IT with like for like modern code that will then soon become a legacy itself, but removing legacy altogether with the introduction of no-code/low-code IT. Such platforms would help traditional insurers transform into the agile insurance equivalent of Amazon or Google, enabling them the ability to aggressively tackle the challenge of innovation.
The issue of failing insurtech start-ups is critical, and one that will haunt the insurance industry for years to come unless a change of thinking occurs. Even the COVID-19 pandemic may not be enough to dissuade legacy players from going on the hunt to find the next insurtech start-up to invest in that promises to ‘transform their organisation’. So many insurtech start-ups have failed in the last three years alone that it is clear that insurers planning to start a new insurtech internally to showcase digital transformation is not the right strategy for success. Yes, some thrive, but they are in the minority, so what is the alternative?
Change needed in investment provision processes
Right now, there are different criteria for budgeting money towards insurtechs than into insurers’ internal IT teams. Instead, there should be a consistent approach for how money is invested. Investors should take one or both of the following steps – option one: apply the same rigorous thinking to the insurtech community that they do to their spend on vendor technology, option two: free up the budget that would have been invested speculatively on a new insurtech to use on upgrading the existing insurance business’s IT solutions. If there was consistency on how money was spent, insurers would have significantly fewer problems, better IT and an improved means of challenging the world of innovation.
Option one: apply a more rigorous insurtech investment review process
Applying a more rigorous evaluation process can reduce the risk that an insurtech start-up will fail and investment will be lost. This can be achieved by ensuring those making decisions about how budgets are spent funding insurtechs are provided with more insight and evidence from individuals pitching for capital. This means providing a robust business case with a highly detailed business plan and defined outcomes. Too many insurtech founders fall in love with their solution without understanding the real problem they are trying to solve. As the COVID-19 pandemic has highlighted, an explanation of how the business would be able to survive through situations of adversity would not go amiss either. This would give investors confidence and assurance their money will not go to waste.
Option two: free up external spend to replace legacy technology
Another option is to free up spend that might have gone towards an insurtech for an internal IT project instead. The people who know the answer to the question, “How can we create a successful future for our insurance business?” already work at the insurance company and are ready and waiting for the tools they need to do their jobs better. They know where the technology problems lie, what their customers want and what needs to be done to fix internal technology issues because they have the experience – they just need to be listened to. Incumbent suppliers have a wealth of new ideas and technology which can deliver significant innovation at pace and scale. The key to success here is finding those vendors you can trust to deliver on the vision.
Agile technology that doesn’t become legacy is needed
Software is available that allows insurers to fix their legacy technology issues by replacing their monolithic legacy IT – which was not designed to interact directly with customers – with a unified, low code platform, controlling customer facing processes that helps them build for change and facilitate any future innovation quickly and easily. This software breaks down silos by bringing information together into a single hub, eliminating the need for manual work copying information across different channels. Edits to business applications in the platform can be made quickly and easily with drag and drop functionality as time spent manually coding changes is not needed. By positioning the business logic of what your company uniquely does (versus your competition) in this central layer, you can deliver innovative software in days, not weeks or months. Now IT is no longer the inhibitor and it is down to business to decide what innovation to initiate.
This software leverages intelligent automation and case management enabling insurers to make service customer-centric and deal with each customer case with a consistently high level of service. For example, if a customer gets in contact with a query about their policy, a case can be set up, next steps can be instantly defined, and tasks can be automatically assigned to employees based on their role and expertise. This software provides a single source of truth on customer requests and is made visible to multiple teams so everyone is on the same page about what should be done by whom and by when. It easily simplifies data management and automates a lot of the manual processes often involved in customer service, speeding up customer response times and boosting satisfaction.
Tools such as AI and natural language processing are also available that can further optimise customer service, finding new tasks that can be automated, such as understanding customer sentiment from the language they have used in an email. If a customer is angry and threatening to cancel a policy for example, the urgency required to remedy the situation, along with a list of recommendations about how best to do so would be provided to the customer service agent, enabling them to provide the best service possible and thus arrive at the optimal outcome. All of these capabilities are available now and being extensively deployed successfully in other industries. Why fund a tech startup to hard code this kind of technology for your business, usually restricted to a single product or line of business, when it is already generically available?
The way forward
It is great that insurtechs are attracting new, entrepreneurial individuals to the industry who otherwise might not be interested in insurance and that innovation is being celebrated. However, there is a disconnect between the entrepreneurs who seek to resolve the symptoms evident in the insurance industry and the industry practitioners who understand the underlying causes, so it is vital any business case for investment into insurtechs is more carefully considered. It is also important that established insurers are being heard and supplied with the innovative technology solutions they need to solve their own problems. A lot can be achieved by equipping established insurance organisations with the technology they need to say goodbye to legacy IT issues, but this success cannot be realised without the same investment as insurtechs, which are a far riskier investment.
