Digitisation has had a strong pull for the financial sector – particularly investment/commercial and retail banks – with leading players adopting cutting-edge technology frameworks to stimulate revenue growth and expansion of their client base through competitive differentiation.
Now, banking’s nearest cousin – the insurance sector – is looking to follow suit.
The banking example: procurement
For banks, the growth in technology ‘real estate’ entailed a complete re-engineering of processes and platforms managing all functions, from the front-office to the back-office.
This led to many projects creating client portals, trading platforms, cloud services and more. More recently, investments have focused on robotics, machine learning, artificial intelligence (AI) etc.
And initially it paid off via advances in areas including straight through-processing, automation, cost reduction and enhanced client journeys. However, over the last two decades, these benefits have been in decline, and we can learn a great deal from it.
Firstly, cost varies greatly between sourcing models. Two main models exist: IT departments led by strong in-house technologists tend to develop (or in-source development of) their own solution software from scratch, while others favour off-the-shelf vendor applications.
The first invariably led to massive increases in underlying costs, far outweighing the original investment. These involved not only skills such as design, coding, implementation and testing, but also support and maintenance throughout the shelf life of the solution.
By comparison, vendor solutions frequently cost only a fraction of in-house solutions and require far less lead time to business value. Clients are also in a much better position to tighten purse strings.
The lessons for insurers: democratic procurement
With the wealth of vendor solutions on offer, the importance of the IT organisation as technology provider has inevitably eroded.
Marketers in the insurance sector are within their rights to question in-house tech builds that don’t consider alternatives, and secondly, they should negotiate equal decision-making rights when adopting new technology. In the past, voting has been skewed in favour of the IT organisation just because they are ‘in technology”.
The banking example: Complexity and cost-consciousness
The digital evolution of banking has further created product processing silos that duplicated functions through a lack of standardisation. Adding costs, it has left the sector with legacy platforms and rapid obsolescence, requiring frequent replacements to remain competitive. By contrast, standard technologies integrate better with newer ones and enable smoother migration.
With escalating costs and a general decline in growth in the financial services sector, there is less and less vindication for spending on new technologies. Being held ransom to costs, organisations have had to forego procurement targeting growth through new products and clients.
The lessons for insurers: simplicity, strategy & sourcing
As the insurance sector expands its product base to enable growth by offering its clients more options, players should have a long-term strategic plan, focusing on a few key areas. The impact of plans on processing (front to back) should be thoroughly analysed, rather than shoe horning in ad-hoc solutions to point problems, which ultimately create technological chaos.
The case for system and process consolidation to streamline complex architectures is further mounting. There is even a good case to be made for wiping the slate clean by offloading processes to managed service providers (MSPs).
The role of FinTech collaboration
Even within back-to-front architecture considerations, gaps remain. Insurance firms should consider the benefits of smaller collaborative partnerships with FinTech companies, whose solutions can offer better client journeys and nimbler workflows and processes, allowing them to accelerate business value while reducing cost.
That being said, insurers should carry out the necessary risk profiling before taking the plunge with smaller vendors, as they could be exposing themselves to unnecessary credit risk.
Digital transformation is vital to stay ahead of the game, but the way banks have approached this has resulted in a huge lack of agility, resulting in an inability to implement strategically important technologies, such as predictive elements to take advantage of unexpected events.
To ensure their choices help to increase growth, reduce cost and create a sticky customer experience, insurers cannot allow themselves to fall into the same trap.
Avoid unnecessary costs of in-house developments and architectural complication, and keep your eyes on the three-fold prize – cost cutting, growth and new product enablement.
For more information you can email us at firstname.lastname@example.org or watch our webinar “Business and Technology Transformation: The role of a CIO and COO within Insurance“.