Shining a light on digital immaturity and the need to accelerate change

Last week our CEO, Matt Connolly, had a particularly great breakfast. Whilst there wasn’t a smashed avocado in sight, it did involve a coffee with 8 senior insurance leaders to discuss how their businesses were approaching accelerating digital innovation in light of Covid-19.

Organized and hosted by our friends at Berwick Partners, he shared his experience and insights on how the market has responded to the recent pandemic and how organizations are addressing the issue of digital immaturity. He also got to hear first-hand from the group how they’re tackling this and the challenges they face in doing so.

Below are a few notes from that discussion.

The challenge 

The backdrop to this discussion is that much of the traditional insurance industry is commoditised, price-driven, and operating with increasing pressure on margins within an increasingly challenging regulatory environment. 

At the same time, consumer expectations are ever growing – arguably, accelerated now as digital channels become less ‘choice’ and more ‘necessity’ in both personal and professional contexts. Expectations are not set by insurer’s best efforts – they’re set by select online brands.

The triple-whammy is completed by the organisation itself – with the need to balance delivering a never-ending list of BAU with developing a clear innovation strategy and tangible (customer) value from it. 

By no means are these new challenges for the industry. However, when coupled with a new risk (such as Covid-19), reserves can be quickly drained – an issue compounded by falling interest rates and the resulting low investment yields. 

This added pressure also puts shortcomings in digital provision into sharp focus and highlights the need for and opportunities from accelerating digital innovation. 

How investors and the market are responding

Perhaps unsurprisingly, the early stages of the Covid-19 outbreak in the UK saw resources being focussed on near-term requirements. For insurers BCPs went into full swing, rapidly enabling workforce to function remotely. In terms of investments, we saw VC-funding reduce somewhat as they held back and focussed on current portfolio and on Covid-19-driven demand including telehealth, parametric and on-demand services.

There’s certainly a continuing sense of prudence with an appreciable drop in the number of new funding rounds in the past two months. That said, it hasn’t stopped entirely and we’ve seen renewed focus on the longer-term portfolios, the rise of investment tourism and greater consolidation including both M&A and partnership activity.

With this in mind, we recently surveyed 50 insurers to understand how they’re adapting to this shifting landscape. In fact, one participant from last week’s discussion went so far as to describe this as: “the biggest opportunity to reflect the changing customer behaviour, ever”. 

• All respondents were currently reviewing their strategy, with the large majority prioritising the near-term digitisation of their business

• There is currently no commitment to increase or decrease budgets, rather to target spend against particular parts of the operation.

• Each and every one of the respondents cited the same challenge: accelerating delivery of their digital transformation and innovation programmes.

So, if fundamentally everyone recognises the need to reduce time to value through digitisation, how do they go about it?

Accelerating digital innovation

We explore this topic in greater detail in our recent report but we see there being three options available to insurers when it comes to accelerating digital innovation: 

1. Buy – acquire a technology provider and integrate it into the business
2. Build – develop a bespoke system in-house 
3. Partner – identify an existing technology provider and form a strategic partnership

We recognise that, of these three options and for the short term, Partner has become the most attractive thanks to two key factors:

• Insurers struggle to innovate (build in-house) at pace
• Startups struggle to validate product market fit

On the face of it, there’s mutual benefit to both insurers and insurtechs – balancing the need for fit-for-purpose solutions without the development overhead and access to market expertise and distribution. So, whilst in simple-terms it seems to make sense, before we rush into conclusions, let’s just take a quick step back and explore the value and some challenges of partnership.

The value of external partnerships

The notion of value’s a tricky one as it can be defined in any number of ways. But from last week’s discussion and, handily in-line with our thinking, there were two really clear ways in which external partnership added value to digital change – enabling organisations to:  

1. Go faster
2. Inspire what the organisation of the future could be

Obviously, the subsequent benefits can be expressed in the usual ways including top-line revenue growth, consumer preference and bottom-line efficiencies. Interestingly, we also heard from the group the need to really interrogate what the focus of any innovation activity should be. 

This feels like a no-brainer, but we heard a tendency for ‘innovation’ to be synonymous with the ‘new and shiny’ front-end customer experience whereas greatest value for the business could be derived from innovation of the large-scale, high-volume processes and cost-centres underpinning operational delivery.

The challenges

If there’s clearly untapped value that can be realised from external partnerships, it does beg the question: “what’s stopping you?”. The answers to this can be varied and nuanced, but five common characteristics have emerged from our surveys, client chats and from last week’s discussions: 

1. Limited change capacity – there’s so much that could be done to transform an organisation, but time, money and expertise to deliver them is finite and often in competition with BAU
2. Limited capability – effective partnerships do require experience to identify, validate and onboard 
3. The (dreaded) traditional business case – how do you prove the value of a new way of doing something by looking at historical data?
4. An organisational model for success – does the business really provide fertile ground to be successful or do you need a dedicated area of the organisation where it can thrive?
5. Previous value from ‘innovation’ – obviously, if ‘innovation activity’ hasn’t generated tangible results in the past, it’s potentially less likely to be backed in future. 

Interestingly, we also heard from the group last week there’s also an overlooked factor in a partnership relationship – how insurers will actually integrate a chosen technology into the business. It was described as “like buying lego but without having any instructions.” It’s an interesting challenge but perhaps unsurprising with insurers’ complex tech architecture and Insurtech’s focus on the product. It does perhaps speak to the need for a different style of relationship in order to gain maximum value as rapidly as possible.  

Conclusion – 3 key considerations for effective partnerships

So, with these barriers in mind, we’ve defined 3 key considerations for any effective partnership: 

1. Being seen as an attractive and pro-active potential corporate partner is essential in a sector where the most promising startups are in high demand. The ability to position themselves appropriately is a challenge we often see for businesses with a ‘fast follower’ innovation strategy.  
2. Creating an effective process to identify external innovation and align it to customer and business needs becomes critical. Similarly, ensuring this activity sits within a repeatable framework to accelerate activity, prove value (quickly) and with reduced risk and resource is increasingly important. 
3. Collaboration is key. Any approach needs to create and maintain exec focus on the most valuable problems to solve and drive a culture that empowers teams to innovate. This does not need to happen in a silo-ed unit and can be decentralised – provided the culture and exec backing is in place. Communication and collaboration are the key to getting this right. 

We see that businesses that achieve all three elements are effective in identifying viable solutions more quickly, at lower cost and reduced time to value than those who do not.

So, there we have it. A whistle-stop tour of a complex but fascinating topic – particularly given its significance to both insurers and insurtechs in the current climate. We’d love to hear your views on this so please feel free to get in touch if you have any thoughts or opinions – contradictory or otherwise.