Innovation
The Pandemic Has Accelerated the Pace of Digital Transformation and Product Innovation in Insurance

• Lori Chordas
• March 2021
• 

Key Points

• A Changing Landscape: COVID-19 has changed the way people live and work and spurred some mammoth changes in insurance.
• Eye on Innovation: Insurers are responding to the changing environment by accelerating their moves to digital technology and increasing their focus on product innovation and policy language changes in response to the evolving risk landscape.
• Passing the Test: So far, insurers have successfully lived up to many of their promises and are delivering the innovations needed in what many now call the new normal.

Axa has long pursued digital transformation. For instance, in 2019, it launched a digital platform called Axa Affiliates that enables partners to integrate the company's insurance solutions within their websites or apps. That focus on innovation has been an asset in ensuring business continuity during COVID-19 and to serve customers in an unprecedented context.

During the height of the novel pandemic last spring, Axa leveraged digital approaches to shift its entire 160,000-member staff to remote working, connect with clients and employees in nearly three million weekly virtual calls and make 75,000 simultaneous remote connections to its servers.

“That's unprecedented,” said Axa group chief information officer Giovanni D'Aniello.

While COVID-19 has changed the way we live and work, it's also become a catalyst for innovation and fast-tracked digital transformation in insurance.

Last year, Heng Swee Keat, Singapore's deputy prime minister and coordinating minister for economic policies and minister for finance, spoke of that shift at the 2020 Singapore International Reinsurance Conference RE-MIND virtual event: “If there is a silver lining, COVID-19 has raised awareness of future risks and provided greater impetus to close the protection gap and that the insurance industry can build on this impetus, to transform the industry by riding on two shifts—public-private partnerships and digital transformation.”

Sure, insurance executives had been considering digital innovation long before the pandemic. But COVID forced insurers to rethink existing business and operating models, and amplified the speed in which they have had to make the paradigm shift to digital technology, said Connor Brach, a senior financial analyst at AM Best.

So far, he said, the industry has lived up to many of those promises. But he isn't surprised. While other sectors struggle to keep afloat in the uncharted waters of the pandemic, Brach said the insurance industry—as it has done many times before—has proven its resiliency.

One of the most significant transformation developments to come into focus over the past year is customer engagement, both in terms of sales and distribution along with claims, said Robert Hartwig, a clinical associate professor of finance and director of the Risk and Uncertainty Management Center at the University of South Carolina's Darla Moore School of Business. COVID-19 has reshaped consumer behavior and “simply accelerated an existing trend toward digitization of the customer experience—likely compressing two to three years of innovation and implementation into the span of just 12 to 18 months.”

Also during that time, insurers have increasingly focused on migrating to the cloud, digitally enabling their sales forces and supply chain interactions and using data as a navigator to build technology systems and resilience into their operations, said Kenneth Saldanha, Accenture's global insurance lead.

Saldanha said the pandemic has also propelled the need for insurers to rethink their products and services and uncover ways to innovate simpler offerings, such as needs-based insurance, that infuse customer insights and leverage the potential of new technologies.

Saldanha doesn't expect the recent pace of innovation in the industry to slow down anytime soon—not even after the growing availability of COVID vaccines helps reduce uncertainty.

“I don't think anyone is expecting to go back to the way things were before, and many of the transformations we've seen over the past year are here to stay,” he said. “Born out of adversity has been some acceleration of issues that are very good for the industry and its customers. This isn't crisis management time; rather it's a new sustained way that we do insurance.”

Diving into Digital

According to a Deloitte survey, one of the discoveries to arise out of the pandemic has been shortcomings in some organizations' digital capabilities and transformation plans.

But sweeping changes ushered in by COVID-19, including the rapid transition to remote work arrangements and the need for insurers to shift large portions of their business toward an entirely digital environment, signaled the need to overcome those deficiencies and transition many nice-to-haves into necessities and created what Saldanha calls “a real step change” for the industry.

“One insurance CEO recently told me his company was forced to do five years' worth of technology innovation in just 12 months,” he said. That's a big task during an unprecedented crisis that has challenged insurers' legacy systems and more traditional types of business models, Saldanha said.

Axa, largely due to the significant investments it's made in digital transformation over the years, has once again proven itself a digital leader in the industry by digitizing work processes, equipping staff with a fully portable digital work environment and developing a “solid and resilient” IT architecture during the pandemic, D'Aniello said.

Last year, the company also connected with customers in more than 500,000 teleconsultations—a feat for technology that, he said, “was still marginal a few years ago.”

Insurance is a risk-oriented business and insurers are well aware that “whenever you make changes there is some risk associated with that,” said Steven Chirico, a director at AM Best. “The pandemic has accelerated that mindset and forced insurers to say, 'Maybe we should be trying new things and utilize them on a regular basis. So far companies of all sizes, even smaller captives, haven't missed a beat.”

While the pandemic has propelled the need to digitize quoting and submissions processes in commercial lines, insurers have also been busy integrating agents and brokers into their digital environments and, on the claims front, “accelerating existing trends related to seamless straight-through processing, particularly in personal auto where computing vision now outperforms human adjusters,” AM Best's Brach said.

New demands created by COVID-19 have also shifted insurers' focus away from functions and operational changes and more onto intent, Saldanha noted. “Digital journeys have elevated the need to build those experiences in a way that builds trust.

“Things were already happening to digitally drive efficiencies in functions like underwriting, claims, service and billing,” he said. “But what the past year changed was an acceptance that this has to be an experience of trust because there's still a difference between how customers experience human interaction versus machine interactions. We're now seeing a greater blending of the two.”

Last year's rise of widespread remote workforces, along with more data and applications moving outside the traditional security perimeter, have placed an emphasis on cybersecurity—an area in which nearly two-thirds of companies plan to increase their spending, according to Deloitte.

Those and other recent changes beg the question: Have insurers so far lived up to the digital transformation stress test posed by COVID-19? Many insurance chief technology officers and chief operations officers think so but an Accenture survey revealed some chief human resources officers remain skeptical about the industry's response and preparedness to deal with the crisis and its ability to reconfigure technology needs.

Saldanha believes insurers have done a good job of elevating the level of customer data exchange needed to support their digital journeys. “Also, COVID has brought discontinuity to how technology is being viewed as a business enabler and amplified insurers' need to say, 'I can't build this all internally on my legacy systems so let's talk to providers about how we can tap into scaling in the cloud,'” he said.

The good news is that companies are willing to make those investments. Nearly 80% of enterprise decision-makers reported that COVID-19 has increased budgets for digital transformation, according to a 2020 Twilio survey.

New Risks, New Changes

Experts say another pronounced shift to come from the pandemic has been a changing risk landscape and a renewed emphasis on product innovation.

Over the past year, according to reports, there's been a rise of new and evolving coverages such as more parametric policies, which pay upon the occurrence of a triggering event, and customized personal lines usage-based insurance products.

“Risks are different than they were 15 years ago and we need to be better at providing coverage for those new risks, particularly digital and nonphysical type exposures,” said Guy Carpenter Chairman David Priebe. “We are a ways off from providing that proper set of solutions, but COVID shined a spotlight on that need.”

Renaud Guidée, Axa's group chief risk officer, said the insurance industry has reached a tipping point, with “a profound transformation of major risks that are increasingly complex and interconnected, but also global in scope, with a disruptive impact on our economies and societies.

“Some insurers like Axa already had dedicated models for the impact of pandemics on their mortality tables. But no one had anticipated total lockdowns and the quasi-shutdown of the world economy,” he said. “What is true today with coronavirus may also happen tomorrow with a global cyberattack, or with the increasingly numerous and deep effects of climate change.”

Crises such as pandemics bring many unknowns and are a reminder for companies to expect the unexpected, AM Best's Chirico said. “Who would have thought things like business interruption policy language and policy loss in that coverage could be construed as a virus—something companies took for granted before COVID?”

That's a significant change for the industry, Hartwig said.

“Every crisis provides insurers with new perspectives and a refreshed understanding of risk,” he said. In the case of COVID-19, one of the greatest risks insurers encountered were massive losses from business interruption claims, which early in the pandemic, he noted, were “potentially solvency threatening” and measured in tens or even hundreds of billions of dollars.

“That said, there is already well underway a universal tightening of policy language related to communicable disease risks and business interruption coverage,” Hartwig said.

“The additional clarity on the scope coverage for pandemic-related losses—with very little coverage available pre-COVID—creates opportunities for insurers to meet what will likely be very high demand for specialized pandemic-related policies to cover property, business interruption and liability-related risks,” he said. “Insurers are already working to bring these new products and coverages to market.”

AM Best's Brach expects product innovation, along with a renewed emphasis on enterprise risk management, to remain big priorities for insurers even after the pandemic. “ERM isn't just a document you draw up and place on the shelf,” he said. “The pandemic is affecting nearly every aspect of insurers' operations and has presented a real-life stress test of their ERM programs, as disaster recovery and continuity planning came to the fore. What we saw was insurers with defined risk appetites and those who knew their risks and had mitigation strategies in place before the event, generally fared the best.”

Guy Carpenter's Priebe hopes one of the few silver linings to arise out of the pandemic will be greater consumer awareness about the need for insurance products.

“But I fear that if people aren't getting coverage for this event it may end up making them more cynical and leery of insurance. That's why it's important—now more than ever—that we are very clear about what is covered, what isn't and make sure there are no surprises for consumers,” he said.

The Road Ahead

March marks the one-year anniversary of the World Health Organization declaring COVID-19 a pandemic, and companies are anxiously looking ahead to a post-COVID world.

Priebe expects that world to be filled with new risks, emerging technologies, some coverage issues that are yet to be decided and continued transformation around public-private partnerships created to address systemic risk posed by the pandemic and future events.

“The industry has already been taking steps to address those changes but the speed of change is now accelerating and from what I've seen, people are ready to embrace that speed of change and quickly adopt new technologies that deliver greater efficiency and customer experience,” he said. “While we're not through the end of the tunnel yet, at least we see the light at the end and so far have managed through it extremely well.”

Many company executives expect that over the next five years COVID-19 will fundamentally change the way they do business, and 85% anticipate it will have a lasting impact on their customers' needs and wants, according to a September 2020 Six Paths Consulting study.

Are companies ready? Only 21% of respondents believe they have the expertise, resources and commitment to successfully pursue new growth, and two-thirds expect the pandemic will be the most challenging moment in their executive careers.

But University of South Carolina's Hartwig is confident those in the insurance industry are up to the challenge and will continue making what he calls “accelerated evolutions.” He said that's different from “transformations” because insurers are still in the midst of experimenting with new and different operating models.

Hartwig expects some of those models to be proven successful. Others will not. “Insurance is a highly competitive business, so only those evolutionary strategies that are successful will come to define how the industry is ultimately transformed,” he said.

While Hartwig said the first two decades of the 21st century were quite tumultuous, he anticipates the coming years could also bring more unprecedented challenges. “However, what COVID-19 demonstrated unequivocally for the first time is that insurers can rapidly harness and adapt technology in ways that assure not only their future viability but an ability to grow profitability amid a rapidly shifting landscape of risk.”

As Priebe looks to the future, he's excited about what lies ahead and expects those in the industry to emerge from the pandemic “far better as individuals,” he said.

“Clearly the path forward is one that will be different; we won't return to where we were before,” he said. “But we are headed in a new, improved and more effective innovative direction.”