Platforms for Growth - Home | State Street Corporation · iv ABOUT THE RESEARCH v EXECUTIVE SUMMARY...

Platforms for GrowthTechnology Innovations in the Insurance Industry

Technology platforms supportchanges to investment strategy

83%

Senior leaders prioritizetechnology initiatives

70%

Risk management data isenterprise-wide and actionable

53%WHAT ARE THE QUALITIES OF TECHNOLOGY

LEADERS IN THE INSURANCE INDUSTRY?

iv ABOUT THE RESEARCH

v EXECUTIVE SUMMARY

1 ALIGNING BUSINESS AND TECHNOLOGY PRIORITIES

5 Drivers of Change

8 The Battle to Come

10 Key Insights

11 TECHNOLOGY IN ACTION

15 Delivering on Data

17 For Asset Managers, the 360-degree View

19 Generating Genuine Customer Insight

21 Tapping Social Media

22 Key Insights

23 SCALING THE BARRIERS

25 Legacy Systems

28 Data Silos

30 Bridging the Cultural Divide

31 Talent Wars

32 Key Insights

33 CONCLUSION: ACHIEVING TECHNOLOGY LEADERSHIP

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Contents

PLATFORMS FOR GROWTH: TECHNOLOGY INNOVATIONS IN THE INSURANCE INDUSTRY • ii

List of Illustrations

4 Figure 1 What is your overall outlook for your firm’s profitability over the next year and over the next three years?

6 Figure 2 Over the next three years, to what extent do you expect the following factors will drive technology investment for your business?

7 Figure 3 Share of respondents who think their firm’s current technology strategy is aligned to support the top business priority:

10 Figure 4 Survey participants responding to selected questions in the following way:

15 Figure 5 How would you characterize the overall pace of innovation at your firm, as well as across the insurance industry at large?

16 Figure 6 What emerging technologies are you most likely to prioritize for investment in the next three years? Select all that apply.

17 Figure 7 Over the next year, is your firm planning to invest in any of the following areas for the first time, or change its existing investment?

26 Figure 8 Please indicate the extent to which you agree or disagree with this statement: “We spend little or no time addressing legacy IT issues.”

28 Figure 9 Overall, how effective is your business today at turning multiple data sources into actionable insight?

30 Figure 10 Share of respondents who “strongly agree” with the following statements:

32 Figure 11 Does your organization experience difficulty in hiring knowledgeable, qualified staff in any of the following areas? Select all that apply. (Asset management respondents only)

“Platforms for Growth: Technology Innovations in the Insurance Industry” looks at the

challenges and opportunities facing insurers as they deal with new technologies in their

business. It is based on a survey, conducted by The Economist Intelligence Unit (EIU) on behalf

of State Street, in June and July 2014 of 321 insurance executives. Respondents represented

both sides of the business — asset management (18 percent) and non-asset management

(39 percent), as well as those whose role spans across the business (42 percent). Respondents

were primarily diversified insurers (72 percent), with 13 percent from the life business and the

remainder from health, property and casualty, and reinsurance. Fifty percent of respondents

were C-level executives and we had global representation, with 36 percent from Europe, Middle

East and Africa (EMEA); 34 percent from the Americas; and 30 percent from Asia Pacific. We

supplemented the EIU survey data with internal and external interviews of industry participants

to write this report.

About the Research

PLATFORMS FOR GROWTH: TECHNOLOGY INNOVATIONS IN THE INSURANCE INDUSTRY • iviii • VISION 2014

Following half a decade of regulatory change, retrenchment and restructuring, insurers are

again turning their attention to growth. They’re looking to target new customer segments, as

well as to deepen relationships with existing customers and expand their horizons globally.

Yet achieving these objectives will not be easy, as success demands fresh insight into

customer behavior. This will require significant investment in technology — to overcome

historical data silos and integrate legacy systems, and to introduce the new data and analytics

tools that will give insurers a competitive edge.

In fact, our research reveals an industry poised for a new wave of growth, but sometimes

struggling to build the technology foundations necessary to make that a reality.

Just 28 percent of respondents say that their firm’s current technology strategy is completely aligned with

their business priorities. The business and the IT function may not speak the same language.

They may have different views about what is needed to provide innovative, new solutions to

customers, which creates a significant problem. To achieve the objectives of unlocking new

customer segments and increasing margins across their business, insurers need a strong

underlying data and technology infrastructure to provide valuable insight.

Executive Summary

Insurers are investing across a wide range of technologies, including improved customer relationship

management systems (a focus for 59 percent of respondents), social media tools (57 percent) and

technology to capture new customer insights (50 percent). Customer needs are evolving rapidly and

insurers must keep up with the pace. These investments are becoming essential because the

market for insurance products is undergoing such rapid, disruptive change.

Just 39 percent of insurers say they are very effective at collecting and aggregating data, and turning it

into actionable insight. Delivering on data to generate actionable insight is now the top technology

challenge for insurers. This is perhaps the most pressing of a number of deep-rooted

technology problems facing the sector, which also include legacy IT issues and the growing

volume, velocity and variety of data.

Only 36 percent of asset management respondents state with certainty that all departments share

relevant data with one another. Changes in investment strategy demand upgrades in the asset

management arm of insurance companies. As asset managers expand their investment into

newer asset classes, such as alternatives and emerging market equities, risk management and

performance measurement will become even more important. Within this context there is also a

need to break down data silos.

Our research also identifies a set of companies — “technology leaders” — that have made the

most progress on addressing technology shortcomings and aligning their data and IT strategies

with their top business priorities. For the industry as whole to meet its growth expectations,

more companies will need to step up their technology game and learn from these leaders.

In particular, members of this group:

• Are more likely to agree that the pace of innovation in their firm is rapid

• Have strong alignment between their technology strategy and business objectives

• Have technology managers who are proactive in proposing new, innovative solutions to the

business, and who are flexible in responding to their needs

• Readily take advantage of new technologies

• Regularly mine data to extract relevant information that informs operations and strategy

• Have risk management data that is holistic, enterprise-wide and actionable

59% 50%57%Improvedcustomerrelationshipmanagementsystems

Technology tocapture new customer insights (e.g. telematics)

Social mediatools to build strongerengagement

Insurers are investing in technologies that deepen theirunderstanding of new customersegments

% who are prioritizing investment

PLATFORMS FOR GROWTH: TECHNOLOGY INNOVATIONS IN THE INSURANCE INDUSTRY • viv • VISION 2014

Where “Technology Leaders” Stand Out

Within our global survey sample, a sub-set emerged of highly confident, self-described “technology leaders” within their peer

group (17 percent of the sample). We reference this group throughout the report. The most striking differences compared with the

rest of the respondents appear in the following areas:

Source: State Street 2014 Insurance Survey, conducted by the Economist Intelligence Unit

82%

53%

83%

35%

70%

23%

67%

43%

69%

22%

50%

31%

53%

17%

100%

80%

60%

40%

20%

0%

■ “Technology leaders”■ Total sample

Innovation is at a rapid pace at their firm

Technology strategy is aligned with the business objectives

Technology managers are proactive in proposing new, innovative solutions

Regularly mine data to extract relevant information that informs operations and stategy

Risk management data is holistic, enterprise-wide and actionable

Business managers readily take advantage of new technologies

Technology managers are flexible in responding to changing business needs

vii • VISION 2014

Aligning Business and Technology Priorities

“Insurance is not a high-growth industry. It will

likely remain flat or even potentially begin to

decline as we get more effective at prevention.

Insurers will be forced to re-invent their core

business because this industry, which hasn’t

fundamentally changed for generations, is going

to come under pressure and force a natural

level of innovation. There are insurers who are

beginning to embrace that at a greater rate

than you might have seen 5 or 10 years ago.”

Joe Reifel

Partner, Americas, AT Kearney

At a time of accelerating change, insurance industry leaders are a confident group. Worldwide, the industry is emerging from the recession, flat market growth and regulatory activism. Now, insurers’ overriding business concern is to identify new ways to grow, rather than coping with regulation.

Executives are certainly upbeat about their business prospects. Asked to give their outlook

for profitability, 38 percent of respondents are “very optimistic” about the next year, and

60 percent say the same when looking ahead three years. Executives based in the

Americas show particularly high levels of confidence in comparison with their European and

Asia-Pacific counterparts.

PLATFORMS FOR GROWTH: TECHNOLOGY INNOVATIONS IN THE INSURANCE INDUSTRY • 32 • VISION 2014

Aligning Business and Technology Priorities

Figure 1: What is your overall outlook for your firm’s profitability...

over the next year

Of course, not all markets are the same. Alexander Bockelmann, head of Group IT at UNIQA,

an Austria-based insurer, points out that most Western European markets are saturated. “When

you’re talking about growth, the game is more about profitability and competition between the

established players. [In Eastern Europe], by contrast, the average premium is about 10 percent

of saturated Western European markets. If you position yourself there, you will grow just by

virtue of swimming with the tide.” The same may be said of Asia Pacific’s emerging and under-

insured markets.

Drivers of Change

If insurers are optimistic about profitability, what will drive the performance they expect,

especially in the mature markets of Western Europe and North America? The inexorable

pursuit of greater cost efficiency is part of the answer, but even more critical will be realizing

more revenue from their existing markets. Indeed, insurers resoundingly cite their number

one strategic priority as identifying and penetrating new, high-potential customer segments in

existing markets. This is the dominant business objective for 39 percent of the overall survey

sample — a figure that rises to 51 percent of Americas-based executives. This goal is well

ahead of other priorities, such as enhancing product offerings, strengthening the distribution

model and tapping new geographic markets.

The strategic priority of penetrating new customer segments appears to be driving insurers’

technology decisions. Almost 8 in 10 survey respondents — 78 percent of the sample — state

that changing customer demands are a major determinant of technology investment for their

firm, more than business expansion, new regulation or competitors’ actions.

Very optimistic38%

50%

Over the next year

34%30%

Somewhat optimistic40%

41%41%

39%

Neutral18%

10%24%

22%

Somewhat pessimistic3%

0%1%

7%

Very pessimistic1%

0%0%

3%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Global■ Americas

■ APAC■ EMEA

0%

Very optimistic60%

82%

Over the next three years

51%47%

Somewhat optimistic27%

14%35%

33%

Neutral10%

4%14%

13%

Somewhat pessimistic2%

0%1%

4%

Very pessimistic1%

0%0%

3%

over the next three years

78%say changing customerdemands are a major driver of technology investment for their business



Figure 2: Over the next three years, to what extent do you expect the following factors will drive technology investment for your business?


COMPLIANCE ISSUES STILL LOOM LARGE

Regulation, to be sure, remains a major focus of attention, and a significant driver of new

spending on technology (according to 64 percent of those surveyed). “There’s no doubt that

compliance is dictating technology investments to some extent today among insurers,” says

Richard Fogarty, head of State Street’s Insurance Sector Solutions in Asia Pacific, “whether it’s

pure regulatory compliance or complying with insurers’ own requirements.”

Insurers will certainly keep close watch on the implementation of several pieces of legislation,

including Solvency II and Own Risk and Solvency Assessment (ORSA), and the impact of

the pending US Federal Insurance Office report on “modernizing” insurance regulation. But

insurers appear to be managing the impact of regulatory activism better than they did in

the past. According to Hege Hodnesdal, senior vice president, Insurance, at Storebrand, a

Norwegian financial services provider: “Before, regulation — especially regulatory changes —

determined a great deal of the development budget, but this has changed in the past few years.

The impact of regulation is still felt, but it is smaller than it used to be, and the changes [in our

technology] are mostly driven by customer needs.”

NOT FULLY IN SYNC

With both their main strategic and technology priorities involving the need to penetrate new

customer segments, it seems that insurers’ objectives are in alignment. This is not the complete

story, however. Full cohesion between technology and business objectives appears to elude most

companies in our survey, especially when it comes to the customer-facing operations. While

a majority of insurance executives report some degree of alignment between their technology

strategy and their main business objective, only 28 percent say there is complete alignment.

A closer examination points to stark differences between different functional areas of the

business. Complete alignment of technology and business objectives is reported by an even

smaller percentage of respondents who support the customer-facing operations. It’s a different

story in asset management, where more than 40 percent of respondents strongly agree that

technology strategy is aligned with their top business objective. There’s a strong level of

confidence that existing technology platforms can support a strategy shift toward emerging

markets and alternatives. However, as we show later, there are doubts about their data

capabilities in relation to these non-traditional asset types.

Figure 3: Share of respondents who think their firm’s current technology strategy is aligned to support the top business priority:


New regulation64%

29%7%

Actions of competitors64%

29%8%

Changing customer demands78%

23%

19%3%

Growth in business volume75%

3%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Major driver of change■ Minor driver of change■ Not a driver of change

0%

Asset management unit52%

Non-asset management unit33%

Global35%

10% 20% 30% 40% 50% 60% 70% 100%90%80%0%

39%say their top strategicpriority is targeting new customer segmentsin existing markets


This is partly a reflection of the fact that at most large insurers — at least in developed markets

— technology operations for the investment business or portfolio are managed quite separately

from the other, customer-facing parts of the business. “[Asset managers] operate under a very

different model,” confirms Gary Plotkin, principal, CIO Advisory with KPMG. “Their systems

are completely separate from those of the rest of the company, being more about compliance,

order management, portfolio management and reporting, for example.”

Richard Fogarty of State Street also believes there is broad alignment on the asset management

side, but with a caveat. “On the investment side of most insurance companies, I don’t think

there’s necessarily a misalignment between IT and the business, but there are often issues of

how quickly the IT department can react to changes in investment strategy,” he says. “Unless

you’re lucky, you’re probably going to find that the front office is more nimble than the back

office, and the latter often has to scramble with work-arounds to facilitate the needs of the front

office. This can cause friction.”

The Battle to Come

Failure to fully align IT and the business will weaken carriers’ ability to counter threats from

tech-savvy and data-driven entrants to their markets. Aggregators and comparison sites, for

example, have already transformed how consumers shop for and purchase auto, home, health

and other types of insurance products. In the future, this competition will only intensify. Google

now offers the ability to source quotes from several carriers through DirectLife, and Amazon is

believed to be launching its own life insurance operation. According to a recent report, almost

one-quarter of consumers would consider buying insurance from online providers, such as

Google or Amazon.1

1 Anthony R. O’Donnell, “Consumers Happy to Make Amazon, Google their Insurance Company — Accenture Survey,” Insurance Innovation Reporter, February 6, 2014.

The threat from the digital giants is top of mind in the insurance industry. Dr. Munib Karavdic,

director of Design and Innovation at Australian insurer AMP, says the concern is that “non-

traditional companies like Amazon, Google and Facebook could enter the market and start

redefining how we operate — they can make breakthroughs in the types of products and

services that we provide, as some smaller start-ups are already doing it.”

Worlds of Difference

The overall survey results mask several differences in perspective between insurers in different parts

of the world. Generally speaking, they indicate a greater sense of buoyancy on the part of insurers

based in the Americas (where the vast majority of respondents to this survey come from the US and

Canada) about their ability to meet the technology challenges lying ahead. The more noteworthy

divergences include:

• Executives based in the Americas are significantly more optimistic about profitability than their peers

from Europe, Middle East and Africa (EMEA) and Asia Pacific.

• Americas executives are much more emphatic in citing the targeting of new customer segments as

their firms’ overriding strategic objective.

• Americas respondents see their firms as much further ahead of the insurance industry when it comes

to the pace of innovation.

• On the other hand, those in the Americas profess somewhat less alignment between their technology

and business objectives than peers in EMEA and Asia Pacific.

There are a number of factors that may help explain some of these regional disparities. One is the

relatively early start American insurance firms have had in integrating the web into their distribution

strategies, and the greater pressure they have felt from online players — and how this competition has

affected their margins. In less-developed markets, such as those in much of Asia Pacific, insurers are

focused on the vast potential for customer growth. Gordon Perchthold, a director of PwC, notes that

excluding Japan, there’s been much less attention paid by insurers to using technology to improve

cost efficiency or to use the Internet as a marketing or sales tool. “In most of Asia there’s just so much

revenue opportunity that there is little imperative to fix the back office.”

“Most insurance companies are struggling with what the retail sector has already recognized, which is that smart new entrants with great new data and great relationship tools are going to be nibbling away at their client base.”

– Ian Cohen, Group Chief Information Officer, Jardine Lloyd Thompson


Figure 4: Survey participants responding to selected questions in the following way:


Key Insights:

• Insurers are today moving beyond a focus on regulation to identify and pursue new avenues

of growth by targeting new customers in existing markets.

• A highly disruptive market environment and changing customer needs are now a major

determinant of technology investment for these companies.

• Insurers’ technology and business objectives are often poorly aligned.

Technology in ActionSelecting “targeting new client segments within existing markets” as their top strategic priority

51%33%

34%

Describing the overall pace of innovation at their firm as rapid59%

55%47%

Describing the overall pace of innovation in the industry as rapid18%

43%

42%33%

“Strongly agreeing” that technology strategy is aligned with the business objectives25%

37%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Americas■ APAC■ EMEA

0%

10 • VISION 2014

Can insurers meet the challenge of adapting to a world in which digital transformation is paramount? When it comes to innovation, there is reason for concern. The industry has the reputation of being slow to embrace digital technologies. In a 2012 report, Accenture pointed out that industry examples of digital innovation exist only in pockets, and these tend to involve little more than tinkering around the edges, such as bolt-on e-commerce systems.2

There are numerous examples, however, of where insurers are putting technology to work to

grow the revenue base. Product development and distribution have been the focus of much

innovation in recent years, and technology has been at the heart of it. Examples include:

• Usage-based auto insurance, using GPS and mobile technology to transmit mileage data

• Interactive online needs-analysis tools used by agents and customers

2 Accenture, “The Digital Insurer: Change Now to Get Ahead”, 2012.


Technology in Action

• Mobile apps enabling users to easily inventory personal property, document policy

information and submit claims

• Mobile imaging to capture vehicle identification numbers and driver’s licenses to fast-track

the purchase of new policies

There have been some fairly innovative products over the years in the insurance industry, and

product design has probably been the area of greatest innovation. Generally speaking, however,

most of the web-based innovation in the industry has been focused in personal lines, such as

auto and home insurance. Commercial lines, brokering and reinsurance, among other parts of

operations, have yet to embrace the web.

Paul Hately, global head of Protection Partners at Swiss Re — a unit within Life and Health

that’s dedicated to facilitating step changes in modernizing the life insurance industry and

making it more consumer focused — believes the reputation of comparatively slow innovation

is deserved. “Recognizing the need to address consumers in a different way [from earlier

generations] has only recently caught on,” he says. “The fact that a lot of people would want to

buy insurance online still seems to be surprising to a lot of people in the industry.”

More than half of insurers in our survey agree, deeming the pace of innovation in the industry

to be moderate or sluggish — only 31 percent term it as “rapid.” Curiously, however, a larger

number describe the pace of innovation at their own firm as rapid. This rosy self-assessment

may not be as much of a stretch as it seems, although innovation varies widely across markets.

In the traditional commercial insurance space, innovation has been relatively slow. Meanwhile,

it has been gathering pace in the specialty arenas and direct-to-consumer space.

Figure 5: How would you characterize the overall pace of innovation at your firm, as well as across the insurance industry at large?


If digital leadership in the industry has revolved until now around distribution, product design

and compliance, however, our research makes clear that the focus is shifting.

Delivering on Data

Data is the next battlefield. The ability to collect, mine and analyze data is the key to unlocking

new customer segments, understanding their behaviors, and designing and delivering the

tailored products and services that match those needs. Advanced data capabilities will also

provide an edge in other core operations: managing risk and optimizing investment returns

across complex and evolving portfolios, and complying with new regulatory requirements.

Insurers’ priorities for investing in new technologies reflect the importance they accord to

data in generating better customer insight. Top of their list is improved customer relationship

management systems, followed closely by social media tools “to build closer engagement” and

technologies to capture new customer insights.

Rapid31%

53%

Moderate46%

43%

Sluggish7%

1%

3%

Don’t know16%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Across the insurance industry■ At your firm

0%


Figure 6: What emerging technologies are you most likely to prioritize for investment in the next three years? Select all that apply.


Delivering on data to generate actionable insight is now the top technology challenge for

insurers. This applies to both the asset management and customer-facing sides of the business.

“The primary technology driver of change in the industry is leveraging data for information

purposes,” says KPMG’s Gary Plotkin. “Insurance companies have been storing data for

probably 50 or 60 years, but their inability to leverage it has seriously hindered their ability to

understand their customer: to up-sell, to cross-sell, to look at risk in a more holistic manner,

and frankly to make it easier to work with them.”

For Asset Managers, the 360-degree View

Insurers’ asset allocation strategies are changing. When asked how investment strategies may

change over the next year, 53 percent of asset management respondents say they would

expand their existing investment in emerging market assets, and another 5 percent will invest

in them for the first time. Around one in five say that they will increase their investment in

exchange traded funds and alternatives.

Figure 7: Over the next year, is your firm planning to invest in any of the following areas for the first time, or change its existing investment?


Social media tools to build stronger engagement with customers57%

50%

Tools to strengthen risk management38%

48%

Technology to capture new customer insights (e.g., from telematics)50%

41%

48%

Digital distribution and customer servicing channels, including mobile27%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Global■ “Technology leaders”

0%

39%

Improved customer relationship management system(s)59%

24%

Tools to improve investment decision making21%

22%

Technology to improve pricing and underwriting decisions21%

4%

Don’t know4%

0%

Other, please specify2%

“Data is changing the insurance industry and if you don’t get your act together around the collection of data in the

organization and the analytics around that data, you are probably going to miss out — certainly in the next three to five years.”

– Kevin Murray, Chief Operating Officer and Chief Information Officer, AXA UK

Will increase existing investment21%

20%53%

No action planned74%

75%37%

Will decrease existing investment2%

2%

3%5%

Will invest for the first time2%

5%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ ETFs■ Alternatives■ Emerging markets

0%


The ability to obtain and visualize a cross-portfolio view of different asset types is arguably the

top data imperative in the asset management part of the business. New investment strategies

will demand better and more timely data. Portfolios are becoming increasingly complex, with

larger allocations to emerging markets, alternatives and exchange traded funds. For these asset

classes, which may be less liquid and have less in the way of available performance data, it can

be more difficult to gather insights. Managing portfolios against insurers’ long-term objectives

will therefore require increased investment in advanced risk and performance analytics.

In our survey, one-quarter of asset management respondents highlight tools to improve

investment decision-making as a priority for investment. Most of all, asset managers need

performance data and the results of analysis available to them instantly. “Asset managers need

real, prime data on the composition of the portfolio — how much is in cash, how much is

settled and what the current portfolio looks like,” says Martha Whitman, head of State Street’s

Insurance Sector Solutions in EMEA. “They want tools that allow them to view or model different

scenarios and perform ‘what-if’ types of analysis. Most importantly, they want it online now, not

when a report is produced.”3

Visualizing asset performance data is another part of the challenge. “The technology should be

able to think the way the fund managers think,” says A.K. Sridhar, director and chief investment

officer of IndiaFirst Life Insurance. “Ideally, we need a sophisticated, user-friendly screen or

drag-and-pull tool to view and analyze the portfolio that enables us to make decisions. But that

is difficult to achieve.”

Risk management, of course, will remain a prominent focus of technology investment.

Just more than one-third (34 percent) of asset management respondents agree that risk

management tools are a key priority. Peter Thurmond, head of State Street’s Insurance Sector

Solutions in the Americas, explains that a significant proportion of insurers’ assets are divided

among different third-party asset managers. “This means that insurers probably don’t have as

much visibility into their overall risk profile as they would want,” he says. “Having better risk

tools is extremely important.”

3 In State Street research conducted in 2013, insurance asset managers cited order management and execution management systems as well as portfolio optimization tools as the most important areas of data and analytics investment. “Rethinking the Risk Business: Data and Analytics in the Insurance Industry”, 2013.

Generating Genuine Customer Insight

In the customer-facing parts of the business, the data challenge is to develop a deeper

understanding of customer behavior. This will help insurers to engage with customers more

effectively, develop more tailored products and price risk efficiently.

For example, applying data analytics tools can help insurers identify health behaviors of

consumers in different income brackets, age groups or occupational categories, and tailor

insurance products accordingly. Telematics have been generating data on the operation of cars

for many years, but insurers need to be able to crunch this data to analyze driver behavior and

price their products based on driver patterns that are actual, rather than modeled. Wearable

technologies may offer similar opportunities. Fitness trackers, for example, could offer health

insurers the ability to vary premiums according to an individual’s level of exercise, subject to

overcoming privacy concerns.

From Actuarial to Actual: Telematics and the Internet of Things

Automotive insurers have begun to use telematics in a number of different ways, from gauging the

roadworthiness of cars to pricing risk based on driver behavior. “Using telematics we can learn a lot

about who is driving the car,” says Andy Roberts, chief executive officer of Innovation Group. “We can

learn about their journeys, how many black spots they traverse in the morning, which day of the week

they are working from home, and so on. In short, we can gather a tremendous amount of data that can

help us to price risk more accurately.”

The next advances in this area will come with the development of the Internet of Things (IoT), the term

used to denote the ubiquitous, Internet-enabled communication of physical objects embedded with

sensors. In-car telematics are an early version of the IoT, but the latter will extend well beyond cars

to include, for example, objects in the home, medical devices and construction materials. Although

not top of the agenda for insurers today, tools to capitalize on the IoT are likely to become a focus of

investment in the longer term.

“Insurers will use the Internet of Things as a mechanism to move what was once actuarial into the

world of actual, because they’ll be able to assemble data and data models in real time,” says Ian

Cohen, group chief information officer of Jardine Lloyd Thompson. “Actuarial was a set of models in a

hypothesis around something you didn’t know. Now, insurers have the ability to assemble in real time

actual data that tells them exactly what’s happened and give them precision around how they make

a decision.”


But making the IoT a reality for insurers will depend on resolving two important issues. The first is the

ability of multiple industries to agree to data standards. This has eluded companies thus far, notes

Chris Dixon, head of Motor Division with UK-based Chaucer Insurance.

A more intractable issue may be data access and privacy. “‘Who will access the data?’ is a very

important question,” says Professor Peter Handel of Sweden’s Royal Institute of Technology KTH.

In Sweden, he notes, it is customary that the insurance telematics service provider administrates the

anonymized data about an individual’s driver behavior, while the insurer administrates the driver’s

personal data. The main thing, he says, is that “they should not be connected. For the actuarial work

of determining the policy, key information about the individual’s risk profile is sufficient.”

Better integration of data across channels will also help insurers create a more integrated view

of customer data. To date, however, few have managed to achieve this. “Insurance companies

typically have a bank assurance channel, an exclusive sales channel, a broker channel, and

now also online and digital channels,” explains Bockelmann. “You need to enable real-time

data exchange across all these channels to serve the hybrid customer.”

Better data capabilities will enable progress toward other strategic objectives. Generating better

insights, for example, should allow insurers to tailor products more closely to the new segments

they identify. Life insurers might, for instance, design short-term policies for young, financially

constrained customers. Health insurers can tailor policy benefits (and premiums) to customers

in different categories of fitness.

Risks can also be more accurately assessed and pricing can be tailored to the individual.

Emerging analytics tools will make this possible, but it is not happening yet, according to Adrian

Guttridge, executive director, Global Insurance Services at Xchanging. “If you look across the

insurance model, there is a lot of management information and reporting, but there still isn’t

much around predictive analytics — for example, predicting when a major catastrophe might

occur and pricing that into your model now. It still tends to be reactive.”

When it comes to predictive analytics, Rob Smale, claims director at Ageas, says that this is

still a nascent market, at least in claims. “We’ve become reasonably skillful at displaying and

distilling our own information, but we haven’t yet fully understood the challenges we’ll face in

utilizing the larger bodies of public information that might become available,” he says. “I think

we’re there in the underwriting arena, but in terms of claims we’re still figuring out the full range

of uses for predictive analytics.”

Westfield, a property and casualty insurer based in Ohio, has recently built a predictive model

for workers’ compensation claims. According to Robert Bowers, the firm’s National Claims

Strategy Leader, “the sooner we can understand the severity of claims in areas like workers’

comp, the sooner we can apply mitigating services or processes against those claims and the

sooner refer them to right adjuster.”

Tapping Social Media

Social media tools are an important customer engagement channel but are also integral to the

broader data and customer insight challenge. Insurance companies have so far used social

media primarily as a marketing tool. “Social media channels, such as LinkedIn, are great for

communicating with our B2B partners and brokers, as well for recruiting talent,” says Ian Hood,

global digital director of RSA. “We also put ads on YouTube to communicate with our direct

customers. We want to make sure that we’re playing where our customers want us to play.”

Insurers will soon start to sell through a range of new technologies from social media to lifestyle

apps. “Today’s 30-year-olds will seek to buy insurance in ways that are familiar to them from

other parts of their lives,” says Paul Hately of Swiss Re. “If they’re used to engaging in social

media or searching the Internet for good deals, then that’s what they’ll do with their insurance.

And the customer experience then needs to be engaging.” The future is also likely to see

insurers offer customers the ability to make claims via Facebook, for example, rather than using

the company’s website or voice channels.

The bigger prize, however, will come from mining publicly available data about policyholders

from social media sites. Much information can be gleaned from these sites about policyholder

preferences and behaviors. Insurers can use this both to refine the characteristics of specific

segments they have identified, and to price the risk presented by actual customers.

“If you identify a customer segment but can’t meet the price point based on the segment’s risk characteristics, then you price yourself out of the market. You’re either too cheap or too expensive. To identify that,

you need to have better analytics tools, to generate more price points on your pricing curve and to perform the micro-segmentation.”

– Alexander Bockelmann, Head of Group IT, UNIQA


Visual Analytics

Ian Cohen, group chief information officer of Jardine Lloyd Thompson, thinks that analytics should

be about more than powerful number crunching. The next generation of technology investment in

insurance, believes Cohen, will involve the visualization of content and data, and the use of those tools

and techniques to cement and deepen relationships.

“Most insurers already have 90 percent of the data they need,” he maintains. “But it’s buried away,

and therefore currently has no value to anyone. When they go and assemble it into enormously

complicated spreadsheets or reports, no one will derive a meaningful observation from it without going

back and asking a thousand other questions.”

Visualizing that data could be the key to unlocking its value. “How much more impactful would it

be if you could view actual, real-time client or market data while conversing with your clients or your

colleagues, and then move it around and manipulate it?” he asks. “Suddenly you’ve moved from an

interesting informational conversation to one that’s about tangible outcomes.”

Cohen is careful to point out that visualization is a complement to, not a substitute for, insightful

analysis. “It’s important for our industry to turn information into insight to make the data real. You

don’t lose the need for the analyst or the data scientist.” But, he says, the ability to take the most

valuable analytical insights and create a compelling picture with them can create new opportunities

that the analysis by itself perhaps cannot.

Key Insights:

• Insurers’ ability to deliver on data for actionable insight is not only critical for knowing their

customers — it’s their top technology challenge.

• As portfolios become more complex, these new investment strategies demand better and

timelier data, and advanced risk and performance analytics.

• A new generation of consumers will seek to buy insurance in ways that are familiar to them

from other parts of their lives — requiring insurers to create engaging channels across the

Internet and social media.

“Mobile is so pervasive across Asia, and it’s used for all man-ners of social interaction and networking. The whole ecosystem that exists around this points to an opportunity [for insurers] to develop a social engagement platform using social media.”

– Gordon Perchthold, Director, PwC

22 • VISION 2014

Scaling the Barriers

Should insurers make a reality of just some of the data opportunities described in the previous chapter, they stand a good chance of remaining competitive in what is becoming a more complex and crowded market. But the barriers to achieving this are daunting.

Legacy Systems

Foremost among them is the burden of legacy systems. Among the survey respondents in

technology roles, nearly half — 48 percent — indicate they spend a considerable amount of

time addressing legacy IT issues. Interestingly, our “technology leaders” struggle as much with

legacy systems as all other firms in the survey, suggesting this is a universal problem.

This is not surprising, as the technology history of the insurance industry is one of multiple,

decades-old platforms, applications and databases, each supporting a different part of the

operation. The situation is complicated by the complex array of bolt-on systems that insurers

have typically added to these legacy platforms over the years — often as a short-term fix.


Scaling the Barriers

Figure 8: Please indicate the extent to which you agree or disagree with this statement: “We spend little or no time addressing legacy IT issues.”


Consultants and practitioners have put forward legacy modernization as mission-critical

for insurers looking to survive in the digital era. For most, however, it has proven an almost

insurmountable task, due to the sheer costs and complexity involved, as well as the risk of

failure. “It’s a massive investment requiring probably hundreds of millions of dollars over several

years,” says Joe Reifel of AT Kearney. “Insurers can’t just shut down the business and stop

everything they are doing while they are putting technologies in place. That is a huge hurdle

to modernization.”

LEGACY ISSUES IN THE ASSET MANAGEMENT BUSINESS

Our research suggests that the asset management side of the business suffers less from legacy

technology issues. A.K. Sridhar of IndiaFirst Life points out that asset managers use the same

technology systems as asset managers in other parts of the financial industry. As a result, he

says, legacy systems here are much less of a headache than in the rest of the business.

This does not necessarily mean that IT managers on the asset management side of the

business are less occupied with legacy issues than their counterparts elsewhere. Nearly as

many asset management respondents as the entire survey sample say they spend considerable

time dealing with legacy IT issues. The difference, however, it that asset management systems

tend not to be unduly constrained by the complexity with which retail and other customer-

facing parts of the business must deal.

For one thing, asset management IT systems have often been wholly custom-built in-house.

As a result, there are typically far fewer systems to manage than in other parts of the business.

“On the retail side, there are upwards of 60 policy admin systems available in the US,”

says Plotkin. “In asset management, the available solutions are fewer and the data tends to

be standardized.”

LIVING WITH LEGACY

Legacy systems need not paralyze insurers. For example, some practitioners have found

ways of circumnavigating older systems, rather than trying to replace them wholesale. In this

philosophy, deploying small pilots, or a portfolio of smaller bets, will allow insurers to adapt

quickly and learn from failure without undue risks.

Cloud computing has been an important enabler of pursuing smaller initiatives to overcome

legacy issues. Plotkin sees the cloud as among the two or three biggest technology drivers of

change in the industry. “Instead of buying the flavor of the day and continually dealing with

upgrades and new technology platforms, leveraging someone else’s infrastructure makes it a

whole lot easier to deal with the hidden cost of all the legacy IT.”

Regulatory scrutiny of the security of customer data, however, could dampen enthusiasm

about the cloud. More than one executive interviewed for this report expects regulators to start

enacting rules governing insurer data stored in the public cloud. For this reason, insurers may

be better advised to pursue private, rather than public, cloud initiatives.

Strongly disagree41%

48%

Somewhat disagree18%

16%

Neutral26%

8%

26%

Somewhat agree11%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Global■ Technology roles

0%

3%

Strongly agree3%

38%are very effectiveat turning datainto insight

86%are affected bylegacy IT issues

9%are excellent at aggregatinginvestment data to gain a comprehensive portfolio view


Data Silos

Disparate data silos are an unfortunate by-product of disparate legacy platforms. The majority of

survey respondents (54 percent) say their companies are only “somewhat effective” at turning

multiple data sources into actionable insight; only 39 percent say they are “very effective.”

Here is one area where “technology leaders” stand apart from the rest. More than two-thirds

(67 percent) of this group strongly feel their firms are effective at bringing multiple data sources

together to generate insights.

Figure 9: Overall, how effective is your business today at turning multiple data sources into actionable insight?


Simon Copley, a partner of PwC, explains that at many insurers, a lack of investment in

technology modernization over the years combined with a raft of acquisitions of firms with

different data processing platforms means that data still resides in non-standardized form in

policy administration, accounting, actuarial and other systems across different locations. This

issue, he says, “hugely stifles companies’ ability to take advantage of the cloud, data analytics

and other technology developments.”

Data silos can also afflict the asset management business. While 41 percent of the overall

sample strongly agrees that all departments share relevant data with one another, only

36 percent of asset management respondents say the same. Ryujiro Miki, general manager,

Affiliated Business Management Department of Japan’s Dai-ichi Life, says that integrating

actuarial and investment information for the purposes of enterprise risk management can

take many weeks. “During the process, it’s also not easy to detect mistakes because all the

calculations are controlled by each individual actuarial, investment or risk management

department,” he says.

The fundamental problem, believes Cohen, has been a misplaced focus on integrating older

and newer systems. “Too many companies have fixated about integration and have forgotten

the virtues of interoperability,” he says. “In my view, you should only integrate where there is a

demonstrable business and financial value in doing so. Interoperability is much more possible

today. It’s easier and more cost-effective now to exchange information between, or extract

information from, disparate systems than to fix back-office legacy systems in the vain hope of

trying to integrate them with something else.”

Leveraging external data (for example, from social media and governments), adds Bockelmann,

and combining these with internal data, can also help insurers achieve the desired 360-degree

view of the customer. It is a challenge, he says, to consolidate both external and internal data,

but that innovative statistical modeling can overcome this.

Very effective38%

67%

Somewhat effective54%

31%

Not effective4%

2%

0%

Don’t know3%

10% 20% 30% 40% 50% 60% 70% 100%90%80%

■ Global■ “Technology leaders”

0%

“Step one [in addressing silos] is to organize what you have and choose data organization or master data management products that allow you to keep

virtual dynamic placeholders for that important unstructured data outside the organization. A lot of people are diving right into the data and analytics.

You can be successful in a one-off way but not long term, because you’ve got to do it all again the next time you go after that data.”

– Kevin Murray, Chief Operating Officer and Chief Information Officer, AXA UK

“Some of our clients have turned their attention toward the product management and manufacturing side of asset management, and have focused their systems, data and infrastructure on driving the effective performance of those products. At the same time, they have largely out-sourced the back-office and middle-office elements involved with the transactional side, from which they don’t really derive any value.”

– Martha Whitman, Head of State Street’s Insurance Sector Solutions in EMEA


Bridging the Cultural Divide

A broader problem may be structural disconnects in managing technology overall. At many

insurers, there appears to be a cultural divide separating the IT function from the rest of

the business.

Technology managers and business managers differ in their assessment of how effectively

the two interact. While half of those in technology roles strongly believe they are flexible in

responding to changing business needs, only 36 percent of non-technology managers say the

same. And where 25 percent of technology managers say that they are proactive in proposing

innovative new solutions, fewer of their business counterparts (22 percent) say the same.

Another area where they differ starkly is in their firms’ ability to generate actionable insights

from multiple sources of data. Some 43 percent of technology managers believe that their

firms are very effective at doing this, while only 34 percent of non-technology managers say the

same. There are other examples of differing perspectives in the survey, which support the view

given earlier that technology and business strategy are not in full alignment.

Figure 10: Share of respondents who “strongly agree” with the following statements:


The near total separation of technology management between the customer-facing and asset

management sides of the business may also come to be viewed as a disadvantage for some

insurers. Several chief information officers interviewed for this report admit they have limited

visibility into how technology is managed and used in asset management. Structural separation

of systems and platforms probably continues to make sense, given the very different nature of

their respective business operations and objectives, and the different sets of regulations with

which they must each comply. The same does not necessarily hold true at the level of overall

technology management, however.

As margins grow ever tighter there is pressure from boards and shareholders to ensure greater

business coordination between the different operations to enhance revenue-earning potential.

Against this backdrop, there is growing logic for much closer coordination of the technology

strategies being followed on both sides of the business. And, as data capabilities come

increasingly to influence insurers’ competitive advantage, the sharing of data experience and

skills may provide a vital competitive edge to both parties.

Talent Wars

The sharing of skills may be necessary to overcome yet another barrier to digital development

— the shortage of technology, and especially, data specialists. Data specialists, whether they

are termed “scientists,” “engineers” or something else, represent a new role that’s proven

difficult to find in any industry to date. Their defining characteristic is not so much the ability to

manipulate and analyze data, but to apply a business perspective to that analysis and pinpoint

the implications.

The customer-facing side of the business is not alone in suffering technology talent shortages

— asset management does as well. Only 40 percent of respondents from this part of operations

say they experience no difficulties in sourcing the talent they need. The rest have particular

difficulty in hiring specialists in risk management, IT and asset allocation.

■ Technology roles■ Non-technology roles

Our technology strategy is aligned with our business objectives

Our business managers readily take advantage of new technologies

Our technology managers are proactive in proposing new, innovative solutions

Our technology managers are flexible in responding to changing business needs

50%

40%

30%

20%

10%

0%

38%

31%26%

19%

25%

22%

51%

36%


Figure 11: Does your organization experience difficulty in hiring knowledgeable, qualified staff in any of the following areas? Select all that apply. (Asset management respondents only)


Insurers may be at a disadvantage to other industries in recruiting technology and data

specialists. “There is a war for talent out there,” observes Alexander Bockelmann, “and

insurance companies do not necessarily have the best reputation for tech-savvy professionals,

due to all the legacy technologies that weigh them down.” He believes, however, that insurers

need to look actively outside their own industry to recruit data specialists, not only to alleviate

shortages, but also to bring in fresh perspectives and ideas.

Key Insights:

• Modernizing legacy systems is insurmountable for many insurers. Interoperability, rather

than integration between systems, may be easier and more cost effective.

• Technologies such as the cloud allow insurers to leverage infrastructure from outside the

organization, making it a lot easier to deal with the hidden cost of legacy IT.

• Boards and shareholders want greater coordination between different operations to

enhance revenue-earning potential. There’s growing logic for much closer coordination

of the technology strategies being followed by asset managers and the traditional

insurance business.

Risk management51%

Technology35%

Asset allocation33%

Investment management24%

Investment accounting9%

Other, please specify1%

10% 20% 30% 40% 50% 60% 70% 100%90%80%0%

32 • VISION 2014

Conclusion: Achieving Technology Leadership

Our research has highlighted several areas where insurers are seeking to gain an edge on their industry rivals through the innovative use of technology, and where they’re devising creative ways of overcoming their technology constraints.

There are no guaranteed formulas for success, but some insurers will use the following

strategies to help achieve technology leadership:

• Recruiting CIOs and other senior technology managers from outside the insurance industry

(especially from previously “disrupted” sectors), to bring in new ideas and help to accelerate

cultural change.

• Hiring data specialists in from other industries, to provide new ways of analyzing insurance

data and generating insight.

• Prioritizing data visualization because, when it comes to analytics, visualization is almost

as important as the analysis itself.

• Striving for interoperability rather than integration of systems to ease legacy

modernization pains.

• Exploring the cloud and investment in new businesses as other means of innovating

outside of the core legacy systems.


Conclusion: Achieving Technology Leadership

• Leveraging external data to help to overcome data silos within the company.

• Increasing the coordination of technology strategy between the asset management and

customer-facing sides of the business.

Last, but certainly not least, astute insurers recognize that new, digitally savvy entrants are

certain — sooner or later — to use technology to disrupt established insurance markets.

Postponing digital transformation is not an option. Those insurers that are already setting the

standard for capitalizing on these opportunities and managing the risks will be well placed to

succeed for years to come.

Notes

36 • VISION 2014 PLATFORMS FOR GROWTH: TECHNOLOGY INNOVATIONS IN THE INSURANCE INDUSTRY • 37

38 • VISION 2014

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