Insurance 4.0

Benefits and Challenges of Digital Transformation

Bernardo Nicoletti

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030584269
• Topic: Negocios y empresa
• Subtopic: Ingeniería financiera

Industry 4.0 has spread globally since its inception in 2011, now encompassing many sectors, including its diffusion in the field of financial services. By combining information technology and automation, it is now canvassing the insurance sector, which is in dire need of digital transformation.

This book presents a business model of Insurance 4.0 by detailing its implementation in processes, platforms, persons, and partnerships of the insurance companies alongside looking at future developments. Filled with business cases in insurance companies and financial services, this book will be of interest to those academics and researchers of insurance, financial technology, and digital transformation, alongside executives and managers of insurance companies.

© The Author(s) 2021

B. NicolettiInsurance 4.0Palgrave Studies in Financial Services Technologyhttps://doi.org/10.1007/978-3-030-58426-9_1

Begin Abstract

1. Introduction

Bernardo Nicoletti¹

(1)

Temple University, Rome, Rome, Italy

End Abstract

The global recession and the pandemic hit hard. It has impacted all organizations and functions. Figure 1.1 summarizes some of these challenges. Insurance has almost remained outside of the trend of digital transformations until now.¹ After the pandemic crisis, it is vital to develop and manage innovative strategies also in insurance.

Fig. 1.1

Impact of transformation on insurance

Insurance companies have begun to innovate, create new business models, invest in emerging technologies, and partner with insurtech organizations, either financing or acquiring them.² Most of these innovations did not center on the concept of customer-centricity. Companies need to design and offer customers products and services relevant to new and old customers.

Unlike the new insurtech organizations, traditional companies have millions of customers and must build engagement and loyalty to retain and grow their customers. In Italy, in the past, only 14 percent of customers have bought policies online. The use of services such as micro-insurance or mobile claims management is only 2 percent.³ The pandemic will bring a cultural transition to the customers. It is necessary to improve the proposals of insurance services also with the support of digital solutions.

Above all, it is critical to understand who are the insurance customers, and what their needs are, expressed or implicit.⁴ Consultants Deloitte developed a survey called: “A demanding future - The four trends that define insurance in 2020.” Through interviews with over 200 C-suite insurance managers, Deloitte identified and found some main trends throughout the EMEA area. They are the critical points for the future of insurance industry, or at least, for those companies that aim to continue growing.⁵

Deloitte says that the growth of the business for an insurance company will come from a change of approach. This approach must be transformed from merely protective to preventive and protective, with a range of new services and products, new business models, and more considerable attention to prevention on respect to claim management. Customer needs, knowledge, and expectations have expanded exponentially over the past decade. Companies need to adapt to their customers’ needs. In an age of immediacy, continuous changes, and overwhelming choices in which loyalty is no longer a certainty, the sector must extend beyond its main products and services if it wants to maintain its customer base. It must substantially innovate and change its approach.

In a highly competitive environment, current companies can no longer rely on organic growth or internal innovation. As a result, mergers and acquisitions, equity partnerships, and collaborations are essential. The winners are the companies able to launch and grow an ecosystem, also with alliances with innovative startups, teaming up with insurtech organizations, and consolidating with their competitors. Merger & Acquisitions (M&A) activity will focus on key markets and products. Access and use technologies that allow improvements within the sector will come, also through acquisitions or partnerships. These potential opportunities require a holistic view of innovation. It would include distribution, new products, underwriting capacity, or improvements in the claim settlement process. The ability to integrate the assets acquired will be fundamental to determine the success of this strategy.

The winners should invest in innovative platforms. They should rethink and revise their business model. A rapidly changing market and evolving industry will require an unprecedented ability to do business. Technological changes are essential. They are not enough. Knowing these changes and using them in the best way are very different things. Companies should use solutions such as analytics, blockchain, artificial intelligence, internet of things, and cloud computing to their benefit. Insurance companies must be able to use the right technology for the right purpose and in the right combination with a revision of their entire business model, and mainly of their processes.

Insurance companies are pure service providers that are highly data-founded. Digitization can influence companies.⁶ Already, large parts of the insurance industry are robustly affected by digitization. In particular, the distribution is becoming heavily digitized. Digitization will also strengthen other parts of the value network of the insurance industry. The digital change in various areas of the insurance value network should be systematically applied, taking into account several theses.⁷ The three main business areas to grow in the post-pandemic area seem to be: liability insurance, vehicle insurance , and private health insurance.

A broader “fourth industrial revolution” based on technologies, such as cloud computing, telematics, the internet of things (IoT), mobile phones, blockchain solution, artificial intelligence/cognitive computing, and predictive modeling, affects the entire insurance business model. These new solutions enable new ways of communicating, information sharing, and ensuring.⁸ It is crucial to understand how new digital solutions can help overcome the so-called information asymmetry.⁹ So far, as a rule, the policyholder can better assess his/her risks than the respective insurance companies. Thanks to automatic detection features (e.g., motion profiles for health insurance or the driving behavior in motor insurance), insurance companies can evaluate the individual risks and take them into account in pricing insurance. The information asymmetry could potentially reverse in favor of insurance companies. As a result, there would be more customized rates: Good risks could be cheaper. Bad risks will get more expensive or simply not insured.

Digitization will change the profit and loss account of the companies in two ways:

• lower costs;
• additional revenues through new business models.

Digitization can impact on pricing and competition. The real question is whether the digitization-driven changes in distribution channels, competition, and so on, maybe allowed under new regulations. The compliance framework should not restrict competition. Instead, the customer and data protection should be at the center of considerations.

There is a need for a new vision of insurance. This vision is called insurance 4.0 in this book. New solutions have generated researchers’ interest in very different fields: computer and management science, organization theory, law, and economics. An integrated vision is missing. This book shows why and how insurance 4.0 can change in an integrated way the insurance industry. Insurance 4.0 is potentially the engine and starting point of the changes the customers increasingly want and ask for digital services and solution models.

According to Deloitte, companies are too optimistic about the insurance industry’s progress in adopting and using technologies. As a matter of fact, I, insurance companies are lagging behind many other sectors. Companies are not fully aware of the large-scale technological disruption that is about to fall upon them. This disruption might be generated by technology giants who are already entering other highly regulated spaces, such as banking. They have an unprecedented capacity for analyzing customer data and information. This capacity allows them to create easy-to-understand, flexible, and customer-centric insurance models.

Insurance 4.0 requires a change in the relationship with the customers. The insurance company uses digital solutions to automate processes and offer services via various channels to reduce costs and prices of services and meet the changing needs of customers. It is critical to transforming insurance companies through process improvement and automation management. To analyze how to do this, a vital entry point is insurance 4.0. Insurance 4.0 is not only a component of the initiative industry 4.0.¹⁰ It is much more. It is a new original vision of insurance that makes it more agile, integrated, responsive to the customers, while adding a value to the organization. Insurance 4.0 represents the set of solutions that can support managers at all stages of the insurance processes. Insurance 4.0 refers to an organization that uses the fundamental principles of adaptive systems and complexity science to achieve success.

This book ex...