Digitization is driving change in commercial and industrial insurance. Whether you succeed in taking the step into the digital future will in the long term determine your company’s business success. Read in the first part of our series how digitization is influencing how the actors act in the market and what aims and opportunities that leads to for the insurance industry.
When the wind of change is blowing, some build walls and others build windmills.” Do you know this Chinese proverb? In the insurance industry this age-old adage is more relevant than ever in the course of digitization. It does, after all, involve a critical decision that every company must make. The crucial question is whether to abide by good practices or to set sail and play an active part in shaping change.
The answer to this question will determine future activity in a rapidly changing market. Reports of new acquisitions, cooperation arrangements or innovative developments make headline news almost daily. Digitization is kicking up dust in the industry and ushering in a wide range of challenges for commercial and industrial insurers – but also an opportunity for renewal and growth.
The aims of digitization: Shape changes on two levels
Yet digitization is not a one-way street; strategically and operationally it proceeds on two levels. The innovation process goes on not only within the company; it is influenced from outside by market drivers. That leads to the following digitization approaches:
- Optimize your offering of products and services. New technologies help to reduce complexity and create lean and more efficient work processes.
- Structure your in-house underwriting knowhow and map it in the form of specialized products.
- Consolidate cooperation with existing partners in order to safeguard and develop your market position.
- Change the balance of power in the market such as by launching an innovative product or penetrating a market segment previously occupied by others.
While the aims of the first two bullet points result from an intrinsic motivation, the last two reflect external influence. They result primarily from the pressure of competition and innovation in the market.
The specifics of the market environment play just as much of a major role in the analysis of digitization opportunities as in internal ambitions and transformation processes. In the commercial sector insurance companies operate in a B2B market environment that is characterized by dynamics and market forces of its own. There is a relationship of tension between market activity, insurance product, and sales channel. So in commercial and industrial insurance, which bears hallmarks of an oligopoly, every market movement has a significant effect on all of the actors. This starting point influences future decisions and, with them, digitization opportunities too.
The influence of insurtechs
New players such as CyberDirekt or Sobrado are also responsible for the pressure of innovation in the market by exemplifying a digital business model. They use the latest Web technologies and advertise with a fast and customer-friendly contract processing of standard products. CyberDirekt, for instance, promises “protection from cyberattacks in just 5 minutes.” That makes its offering attractive for Internet-savvy target groups. At the same time customers have rising expectations in respect of technical standards. They simply expect insurers to provide modern, intuitive online platforms. This sense of entitlement is a consequence of digitization and forces traditional insurers to further develop their business models. This is an opportunity to upgrade or replace outdated IT systems.
Customers’ demands with regard to technical standards are also a source of innovative pressure.
The entry of young and agile insurtechs into an industry that has tended to opt for stability exemplifies the culture change that digitization has triggered in the insurance industry. The digital trendsetters are not only injecting innovative technology; their business model takes competition for market shares to a new level. That is why the innovative activity of the established insurers is frequently focused on positioning themselves better in the market and less on processes of internal renewal. Against this background it becomes clear why insurance companies are currently often acquiring competitors, merging with them or even cooperating with firms outside of the industry. Insurers are thereby making use of the opportunity to acquire fresh knowhow, adopt new IT structures and so set themselves apart from the competition.
Digitization opportunities in the market segments: These are the approaches
The way in which insurers take digitization forward is a strategic decision. Different approaches are possible in relation to core processes such as sales, underwriting, claims processing and policy management. How they go about it depends to no small extent on the customer segments they serve and their existing sales partnerships:
- An approach aimed at improving the underwriting result could seek to simplify and optimize decision-making processes and decision making by incorporating the services of special service providers. Risk selection here plays a central role in digitization endeavours.
- In relation to market access, the more a specific insurance product needs to be explained and the more comprehensive the risk coverage, the likelier new technologies are to seek to digitize existing sales partnerships and thereby to focus on structured data interchange between the partners. Should it prove impossible to simplify a complex underwriting model sufficiently, brokers will continue to play a leading role in the business model of the insurer in question. Their role is that of eliminating the information gap between the insured party and the insurer.
- Due to standardization and ease of access via digital channels price segments become attractive that could previously not be served profitably by means of individually drawn up coverage options. It is precisely in price-sensitive customer segments that this digital approach to sales of standardized products opens up new leeway for insurers.
- Conversely, providers of standardized commercial insurance products are able to make headway in market segments they were previously unable to serve profitably. They extend the product on offer by adding extra modules that are easy to choose and thereby adapt the product to more individual cover requirements.
Outlook: Commercial and industrial insurance marketplaces
Digitization has many aspects, as is demonstrated by the fact that the commercial market is suddenly adopting a striking trend from the B2C sector: aggregation on the sales side. This means the new marketplaces that are emerging in the commercial segment. A case in point is a platform like Finanzchef24 that offers centrally policies issued by several insurers. The platforms could become an important distribution channel for commercial insurers even though they are moving away from the classical sales channel of agents and brokers. For insurers they present an opportunity to sell more strongly standardized policies in large numbers and thereby diversifying their portfolios. They also enable them to address new target groups.
Aggregators as the sales channel of the future.
If this digital business model proves to be viable online marketplaces like Check24 could emerge in the medium term as a channel for commercial insurers to sell their policies. Customers will then benefit from maximum ease of use because all the steps they need in order to take out insurance cover can be taken in one place (keyword “one-point shopping”). It will certainly continue to be exciting to see what changes digital change brings about in the commercial and industrial insurance sector.
Digitization contributes toward making competition for market segments and market shares even livelier. Competition breaks down established structures and puts the existing roles of market participants to the test. There is no way to steer clear of this game. What, then, is decisive from the insurers’ viewpoint for the success of the chosen strategy? To occupy positions in the digital market that are of relevance for the customer segment served and thereby to gain market access, or to improve risk selection?
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