Competing in today’s marketplace requires a holistic view of advancement, including a complete grasp of internal and external risks. There are so many details! To grow the business, you need speed to market for new products, the ability to quickly make rate and product changes, and a flexible platform to adapt channels and experiences.
At the same time, Operations needs to keep a steady eye on decreasing costs, improving productivity, and decreasing the total cost of technology ownership. Maintaining a culture of continuous innovation is crucial. Seamless and quick technology upgrades will keep the business at the leading edge. Most importantly, it requires rethinking your software partner and the risk involved in your partnership.
Traditional thinking will not keep pace with market, customer, risk, and technology changes. Traditional software companies bring their own risk into the insurance equation with their decisions about market and tech trends, development timelines, hiring and innovation. Technology partner assessment and choice can quickly ‘make or break’ a business.
This requires us to move beyond a legacy and internal mindset of “this is how insurance is done and how we pick our software partners,” to one that recognizes a dramatic shift that is redefining a modern era of insurance. Increasingly we recognize that today’s operational business models and technology foundation are falling out of synch and must be replaced to meet the challenges of a new era of insurance.
These challenges have the potential to crush insurers under a load of competing stressors, with increased operational costs, the fight for talent, rising customer expectations, profitability challenges, and intensifying risks. Technology partners can help lift many of these weights, but not all tech partners are changing fast enough and some insurers don’t have a complete understanding or vision for how much better they can be with the right partner in place. Misconceptions abound.
The risk-averse DNA of insurers and their focus on underwriting margins, profitability, and capital levels to align with regulatory requirements can impede and restrain change, including transformation, optimization, and innovation. We see most often in insurers with large books of traditional business — the slow elimination of legacy technology and decades-long 4% of DWP investment in technology that is struggling to keep pace. Rewiring this mindset requires rethinking end goals with an eye on the future.
Beware of the “Progress” of Incrementalism
Progress is good, right? Not always. Some types of incremental progress can mask the need for a much deeper and a more fundamental change. Some insurers continue to tweak the business, instead of stopping to consider how a leap forward may place them on a whole new competitive plane. Legacy technology debt and the need to optimize and innovate the business across the value chain continues to intensify, as we have experienced in the last 2-3 years of macroeconomic and market challenges.
Insurers realize they need to change the economics for loss ratios, expense ratios, risk selection, and risk prevention. But this requires rethinking the business operating model in order to leverage a wide array of amazing technologies, including Cloud, APIs, AI/ML, GenAI, and IoT to drive transformation and operational optimization and most importantly to establish a foundation for innovation that will meet the demands of a new era of insurance.
The Future Operational and Technology Foundation
The operational and technology foundation needed today is future-focused and based in the reality of the world today and the world unfolding for the future. It ignores incrementalism in favor of logically rethinking approaches that make sense based on what we know at this point in time. It represents smart investing, which can be defined as “that which will create value today and in the future.” It requires next-gen intelligent solutions.
These solutions recognize the strategic and operational value of data by providing access to all operational data that can be used by embedded intelligence in modern insurance business processes and workflows – the entire spectrum of analytics from BI to AI/ML models and GenAI. The result is optimized and more efficient insurance operations that can lower operational costs, which in turn can create value for customers with the potential of lowering insurance premiums and helping to close a growing protection gap.
By breaking away from the past and focusing on the future, leadership can grab the opportunity to challenge the old ways of doing business, rethink partner requirements, and embrace next-gen technology from leading insurance software companies. It requires expanding the rethink of partners beyond the business capabilities needed today to include a broader risk assessment of these software companies — one that aligns to where the market and technology is today and where it is evolving to in the future — because these decisions are 10+ year old decisions that will be impacted by a rapidly changing world.
Lack of considering these risk areas will highly impact and influence immediate and long-term business challenges and opportunities, business and operational metrics, competitive position, and long-term viability. Making these leaps requires a partner who has already made the leaps and can now act as guide, facilitator and innovator.
Technology Partner Risk
Insurance is in the risk business. It is a relationship business. It thrives on long-standing technology relationships. But the fast-paced technology and business change environment is challenging long-held technology partner relationships. The speed of business and technology change is challenging insurer’s ability to keep pace, to stay future-focused, and to adapt to essential operational changes to remain competitive and achieve essential operational business metrics.
As a result, the choice of a technology partner has never mattered more. For many business solutions today, the business capabilities and feature/functions have great parity. While there may be some nuanced differences such as lines of business support, increasingly emerging is the importance in the technology partner’s focus on keeping their solution at the leading edge of both market and technology change. Doing so, redefines how partnership risk must be evaluated and assessed in the selection process to avoid, reduce, or minimize insurer business risk.
There are four key risks to consider from a technology partnership that are crucial for initial selection, but even more important for the long-term as an insurer’s business viability is dependent on them.
Implementation Risk – It is estimated that over 50% of large-scale technology implementations fail to meet time, cost, and/or functional requirements, which is why this is often the initial top area of focus. The ability for the technology partner to implement effectively, quickly, and cost-efficiently is crucial to meeting business goals.
For software partners, this includes key areas such as software configuration breadth and out-of-the-box capabilities, implementation methodology, program management, partner expertise and experience, and their systems integrator network. For the insurers, this includes executive leadership, program management, change management, clear decision structures, business and IT alignment, and clear business requirements that align to the business strategy and direction — rather than recreating the past.
The partnership must be collaborative, transparent and provide guidance and recommendations on how to meet the business goals and requirements within the solution, avoiding customization, and learning to say no to continuing with past business processes that minimize the value of a new solution.
Financial Risk – No insurer would pursue a merger or acquisition without financial due diligence, yet a technology partnership (in some cases with greater impact) rarely receives equal scrutiny. Financial risk arises due to a partners’ inability to meet their fiscal obligations and performance requirements due to poor financial metrics including profitability, growth, access to capital for investments, operational costs, and talent acquisition and retention. This financial risk can negatively impact insurers’ revenue-producing activities, agent-relationships, operational costs, growth, profitability, and competitiveness.
What is required is a strong cash position, cash flow, profitability, and 3–5-year financials validating these key business metrics necessary to meet their fiscal obligations during strong and challenging economic conditions. Insurer business viability is dependent on them.
Operational Risk – With most software solutions now in the Cloud and managed by the technology partner, this represents a shift in the dependency of an insurer’s operations with a partner. The technology partner’s ability to perform daily operational activities, assess and manage submitted requests, support change requests and upgrades, and provide transparency to OKRs, is crucial for an insurer’s operational stability.
What is required is a well-established support operation that leverages tools to submit change or problem requests, provides real-time dashboards to monitor requests and performance based on defined OKRs relative to key business metrics, and provides a health-check to manage customization and longer-term costs. Insurance operations need to see continuous investment in the training and tools necessary to meet insurer demands.
Strategic Risk – One of the most important and often overlooked areas of risk with a technology partner is strategic risk. Is the partner viable in the long term – both in terms of financial / operational, but also regarding investment in the technology and business to keep pace with market and technology change? A healthy strategic tech partner must have exceptional profitability and access to capital to invest in the product, operations, people, and growth with a transparent, real-time roadmap that projects out more than a year and empowers input from customers.
Just consider the dramatic technology shifts the last five years, such as Cloud, APIs, digital, AI, and GenAI as well as market shifts, such as parametric and on-demand insurance, buyer demographics, emergence of new channels and changes to existing lines of business, that are needed to compete and succeed. Lack of strategic investment by a technology partner to keep customers at the leading edge of market and technology change can negatively impact operational results, but also market reputation and competitive position, putting their business and future at risk.
Aligning to a New World of Risk – Externally and Internally
We are in the midst of a business operating model and technology-driven industry change due to the realization that the decades-old operational models and technology foundations no longer meet the challenges and opportunities of a fast-changing world. We are in a race to prepare for a new future where insurance will be more relevant than ever.
The world has shifted. Customers have shifted. Risk has shifted. Insurance must shift.
With that, technology selection must shift. Insurers must choose next-gen solutions from operationally and strategically strong partners.
Insurers must re-align to a new era of risk internally for their insurance business, but also externally for a new era of technology partner selection.
Those that do will have a distinct advantage that will allow them to adapt to change more effectively, creating long-term business viability and success.
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