Whitepaper: Insurance system transformation? Keep it simple!

Risk is, in its essence, the insurance industry’s raw material.

In addition to the aspects inherent to the companies’ normal management – such as the risks associated with the design, development and management of the products commercialised or the risks associated with the maintenance of the necessary technical provisions to face the obligations assumed towards their clients – there are other risks caused by a scenario of accelerated change, in which the volatile economic conditions combined with the fall of interest rates, exposure to the stock market, increased longevity, terrorism, major natural disasters, increase of market competitiveness and cases of legal protection create the need for integrated risk management.

Europe has the oldest insurance market, as well as the largest world market share (35%), even ahead of North America (29)[1]. In reality, and in a much generalised manner, insurance companies find themselves in a context of great complexity and uncertainty. In the European market, nearly half of the major insurance companies have been facing stagnation or even a decrease in their activity in the last two or three years.

This scenario clearly shows the need for better adjustment of insurance companies to reality and to the current market context. This alignment is even more important considering the key role the insurance industry plays in our society and in the stability of the financial sector, namely with regard to the management and guarantee of the fulfilment of their responsibilities, protecting families and companies from incurred risks, financing and stabilising the financial system.

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There are five factors that currently have a strong impact in the insurance industry and will continue to in the near future, and which are already challenging one the most crucial values of the financial activity: trust.

1. Volatile regulatory environment. Over the past years, there have been successive changes in the fiscal laws applicable to insurance products, namely the regulations concerning the control of money laundering, the alignment of investments with the risk profile of the investor, the new rules concerning the banking collection process (SEPA) and the change in the regulatory culture – for instance, Solvency II is an example of this new regulatory culture, a directive which introduces more stringent criteria on the calculation of the insurance companies’ solvency ratios, with the aim of ensuring better adequacy of capital to the assumed risks, which may create more demanding capital requirements. This climate of regulatory change is expected to continue in the coming years.

2. Near zero interest rates. In the insurance field, unlike other activity sectors, a medium-term contract can reach ten years, and a long-term contract can easily extend over fifty years or longer. Thus, the impact in insurance companies of having to guarantee long-term liabilities in a context of great financial instability of disadvantageous assets portfolio is easily understood.

3. Ageing population. With the fall in the contributors/pensioners ratio, the public pension systems are under increasing pressure, and it is becoming increasingly evident that the private savings plans can play an important role in providing the right balance.

4. European public debt crisis. The difficulty in maintaining a budgetary balance has been forcing governments to take public expenditure reduction measures, thus causing extensive reforms in the public sector and consequently in its relationship with society, this way forcing insurance companies to assume an additional social protection role.

5. Changes in consumer behaviour. This behavioural change is strongly motivated by the global Go Digital trend, which affects all industries and creates a new relationship pattern.

The importance consumers attribute to consistent and high-quality interaction with any of the communication channels provided by the insurance companies has grown considerably. In turn, insurance companies are making a huge effort to change their operations’ perspective, shifting the business paradigm from product-oriented to client-oriented. On the other hand, it can be observed that insurance companies that are able to create services by looking at the world through the consumers’ eyes have better chances of finding opportunities, adding value and offering a customised experience.

The Customer Experience concept is becoming one of the main pillars of differentiation of the insurance companies, considering that the insurance products’ technical and functional features, as well as price, are something that are easily and quickly met by the competitors in the current competition context.

It is in technology that the financial institutions find the best arguments to establish themselves in the market. Therefore, technology is the greatest driving force that supports insurance companies’ operations. In reality, the insurance companies’ Information Technology departments have to support numerous business goals, from the digitisation of the company’s complete value chain (improving time-to-market and operating standards efficiency, and ensuring timely compliance with legal requirements) to the acquisition of new clients.

The temptation to respond to what is more visible and appealing drives attention and focus towards the response to issues such as Omni-channel, Go-digital or Social, without the necessary holistic perspective of the information systems’ infrastructure, thus leading insurance companies into a trap. Structural problems are addressed with palliative measures, this way avoiding facing the real problem and limiting the space for innovation. On the other hand, when it is necessary to launch a new product line, or even change an existing one, it takes several months.

The ability to move quickly in the market, offering innovative products and efficient service, is a key factor for insurance companies to establish themselves in an extremely competitive and adverse context. The need to restructure long-term liability products as a result of the current financial instability constitutes an example of the need for a rapid response.

As the main enabler for the achievement of these goals, technology must be used consistently and based on an integrated and structured vision. More than the enticing theme of modernisation, systems must be transformed in terms of how they interact with all consumers, internal or external (such as the increasingly demanding Web consumers, Web comparison systems, Analytics, portals, banks, agents, regulators, among others).

Nearly 75% of insurance companies[2] state that the technology used by legacy systems seriously compromises the necessary integration with the various consumers. A recent study by INESE in Spain, published by Atualidad Aseguradora magazine, states that, on average, insurance companies have two or more core systems to run their business – a scenario which is easily applicable to other European realities.

The functions an insurance company needs from a core system come down to eight aspects.

1. Service-oriented application available in a Web environment.

2. Ability to keep the system up-to-date, functionally and technologically.

3. Ability to respond to all business lines.

4. Autonomous, quick and integral configuration of products, with channel differentiation.

5. Dynamic implementation of business processes (BPM).

6. Effective integration capacity with other peripheral corporation systems.

7. Quality and reliability of business data and telematics data processing.

8. Batch and multi-thread processing.

Organisations still feel the impact of legacy systems, which limit the necessary flexibility and agility and cause heavy operating costs. On average, over 65% of the IT departments’ budget[3] is spent on keeping the business running – a clear misalignment with a hot topic currently in the agenda of most European insurance companies: cost efficiency.

If the whole business is run in the same system, it will be easier to standardise all business operations for all business lines, the training and rotation of human resources will be easier, the connection with external systems will be more efficient and, consequently, the legal and regulatory adjustments will be more agile and technological update will be easier to maintain.

In fact, many organisations talk about a Keep it Simple vision, but few put it into practice.

[1] Source: Swiss Re Sigma no4/2015: “World insurance in 2014”.

[2] E&Y - Global Survey

[3] Gartner – Group Life Insurance CIOs Must Align Their IT Strategies to the Nexus of Forces

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