I. The slow wheels of change in the insurance industry
Insurance companies have played a key role in economic and social life for centuries. By spreading risks over a collective body of policyholders and over time, insurance companies helped laying the foundation for the then-fledgling concept of world trade, for industrialization and, in the modern age, for prosperity, social security and economic growth.
Despite this crucial role, insurance is an industry in which the wheels of change and innovation tend to turn very slowly. Electricity or, later on the information technology forced other sectors to completely reinvent themselves. To the contrary, the insurance industry – while more than willing to insure the new risks associated with these nascent industries – has never made any major changes to its basic model.
This applies to the business with corporate and retail customers alike. From a customer’s perspective, insurance cover has often been perceived as a necessary evil. In addition, agents and brokers were the ones responsible for the main customer interface function. Complex policies, low service- orientation and an experienced lack of empathy were redeemed by the close personal relationships customers enjoyed with their intermediaries. This created a certain degree of distance between customers and their insurers. Last but not least, regulations (that were not repealed in Germany until 1994) led to standardization of insurance products and prices.
However, the landscape we have been familiar with to date is currently undergoing a radical transformation – creating a considerable need for change.
II. Change in customer behavior
This transformation is not so much affecting the fundamental model of risk equalization, but rather changing the customer´s interaction with their insurer, including the research for information on insurance, taking out policies and claim reporting. Digitalization is now shaping our day-to-day lives to such an extent that things have become a matter of course in the digital world. Simplicity, customizability, availability and service quality have become the gold standard for all industries with customer interaction- including insurance. Anyone who uses Spotify to compile a customized music collection, checks Holidaycheck for information on holiday destinations, consults various book reviews on Amazon or buys an underground train ticket at the touch of a button has distinct expectations of what his/her insurer should offer in terms of sales and service.
As a consequence, the sector must react to these changing demands – not only to secure its existing business but also to exploit new growth potential. Are the upcoming (expected) changes comparable to the situation around fifteen years ago, when the first direct insurers entered the market?
I do not think so. In most markets – including in Germany, Austria and Switzerland- direct insurers still have limited clout. In contrast, digitalization already has significant impact. All sections of society have embraced and are using constantly the internet and, in particular, mobile devices, which offer the highest level of performance and have become so affordable. The following examples illustrate this: More than 100,000 visitors view our Allianz Deutschland website every day. More than 75% of policies are taken out by customers, who sought information online before making their decision.
III. Implications for the insurance industry
The most common response to this challenge among insurers has been, and indeed still is, to offer policies that can be taken out and managed directly online. The question is, whether this will be enough. The successful business models in the digital world tend to go much further than simply shifting products and services from the offline to the online world.
If we look at customer behavior in the digital world as a whole and strive to fully understand the expectations that other sectors have raised, then there is no doubt that we will have to change a lot more if we want to secure growth and profits for the future, too. I believe that there are four key areas for action: 1. Customer centricity, 2. Product customization, 3. Adaptive product ranges, 4. Change in culture.
1. Customer centricity as the cornerstone
As I have already mentioned, insurance companies focused in the past on their main purpose, namely the assumption of risk. The complexity inherent in the business model, running through policies, terms and conditions and forms, created even more distance between companies and their customers. There was always an unspoken rule that agents and brokers were the ones responsible for ensuring satisfied customers.
Customer centricity must become a focal point of each and every activity. Minimum requirements for products are transparency and simplicity. The same applies to forms and documents, which should ideally also highlight the customers and risks that the product is designed for. Processes have to be defined in such a way that customer queries can be resolved quickly and finally. This includes telephone availability – especially during evenings and weekends. There are now economic arguments to back up investments in customer centricity as well: our own experience has shown that satisfied customers take out more policies, remain more loyal to their insurer and are more likely to recommend the products to others.
2. Product customization
Based on their experience in different sectors, customers are now accustomed to assemble individual products to create a customized package. The customers experience products and services that are tailored to meet specific needs, as well as pay-per-use contracts (customers only pay if they actually use the service in question).
The number of sectors in which conventional “one size fits all” solutions still do the job is dwindling. Insurers react by offering modular products allowing customers to choose certain components to reflect their personal risks. The rapid growth in modular auto or P&C insurance policies at Allianz Deutschland proves the success of these products.
The next step involves the development of variable products, e.g. allowing that cover is switched on and off or providing different terms of amount (e.g. somebody, who only takes to the slopes once a year, is not willing to take out an annual ski policy).
This creates major challenges for insurers, because it is more difficult to spread such risks over the collective body of policyholders.
3. Adaptive product ranges
The insurance industry used to make, and implement, plans over long cycles. This approach certainly makes sense in a line of business in which contractual relationships tend to last decades. However, it is essential to ensure that long-term thinking does not impede a company’s ability to react promptly to changes in customer behavior.
The aim has to be to follow the example set by other industries, as well as learn from our customers, so that we can align products and processes. This requires an in-depth understanding of the customer needs, flexible product architecture and a front-end IT environment that can be tweaked at short notice to meet new demands. At the same time, however, insurers have to ensure that earlier rate generations can be efficiently managed in the back-end systems.
4. Change in culture
To meet the requirements set out above, we need to make our decision-making and implementation processes much faster. This calls for a completely different form of collaboration. It is difficult to achieve customer centricity, customization and adaptive product ranges in an organization governed by hierarchy, in which instructions are passed from the top to the bottom. So our industry, which has traditionally been a very hierarchical one, faces the challenge to create a more cross-divisional, interactive and agile culture.
This sort of culture can only be “imposed” on the organization to a certain degree. Change management strategies have to be used to support the process. In particular, our leaders at the top need to act as role models.
Partnerships with companies from more customer-oriented sectors or with founders from the digital world will act as a crucial lever in this process of cultural change – these collaboration initiatives will not only promote the development of new skills or access to new customers, but will also set examples of a more dynamic approach that employees in the insurance sector can learn from.
Economic history is peppered with countless examples of companies who failed to react quickly enough to changes in the overall environment and ultimately – after a slow demise – shared the fate of the dinosaurs. This can only be avoided by taking resolute action. I am looking forward to seeing just how far traditional insurers go in making the necessary changes and, in doing so, ensuring that they can rise to this challenge.