Digital portfolios promise reduced costs and faster processes by automating tasks and standardizing procedures. This is especially relevant for industrial insurer’s operations in the middle market. But what does a digital insurance product consist of? Where can it come into play? And is it really possible to model complex coverages, tariffs and clauses in a flexible way?
“It’s not possible”, has been one of the most common statements when it comes to the topic of digitization in the area of industrial insurance. For years, there has been a silent agreement for routinely playing down the issue, shrugging, and asserting oneself: “It’s fine. We’re not affected by it”. This mindset has changed dramatically. Industrial insurers have recognized that digitized portfolios are the key to remaining competitive in the long run.
“Most of insurance companies have been static for a long time. It is now time to change under the push of four factors: urbanization, technology, demographics, and globalization” (B. Nicoletti, Digital Insurance: Business Innovation in the Post-Crisis Era, 2015)
One reason for the change of direction is a stronger commitment in the middle market. It promises profitable growth but it also introduces administrative overhead which calls for standardized and automated processes. This is exactly the area where a digital product portfolio can shine. Another reason is the vague notion that even very large and individual risks won’t be unaffected by the digital evolution forever.
The nuts and bolts of digital products
What exactly is a digital product? Across the industry there are quite different views and different understandings of a digital product’s scope. What they have in common is that they strive for a meaningful segmentation of a product into its parts. There is a set of conditions and tariffs which specify a product’s core. Then there is the policy contract which is based on these predefined conditions but may include additional standardized terms and clauses – e.g. for specific industries. Moreover, a digital product has to include some kind of coverage model which enables underwriters to relate the clients’ individual risks to the products’ core conditions. In digital sales scenarios where risk assessment is done automatically, all questions which the underwriter would ask the client have to be digitized in forms. These questions can be called the underwriting model.
Dealing with variability is one of the main challenges of digitizing industrial insurance products. It is obvious that hardwired approaches are doomed to fail. Market segments and customer situations change. Digital insurance products have to reflect these changes. They have to be thought of more like construction kits than fixed entities. They should consist of modules which can be customized and combined in quite different ways. This is exactly what a model-based approach can accomplish. Predefined models for coverages, tariffs and sales contexts speed up the process of transferring products to the digital world. Capabilities for customizing existing models or creating new ones introduce the much-needed flexibility.
Digital Evolution: Just a matter of time
The main digitization efforts today are directed at standard risks in the middle market. That does not mean, however, that larger risks will be off the hook forever. Digitization is an evolutionary process and we are just at the brink of more profound changes. It is true that today most really large risks – the supreme discipline of industrial insurers – are still handled individually. There is simply no way of standardizing and automating the highly complex steps that are involved in assessing risk coverages and negotiating premiums for a large production facility for example.
But even today there are successful digitization projects with very large premium volumes. Take clinical trials or D&O policies in international contexts for example. Another trend that has to be considered is the constantly progressing digitization at the customer’s premises. Initiatives like “Industrie 4.0” in Germany sketch out scenarios where each and every parameter of production processes is measured and collected. This might introduce completely new possibilities and options for insurers.