Taming automation in Commercial Insurance
Along with Artificial intelligence (AI), automation has the ability to transform insurance for Small & Medium-sized Enterprises (SMEs). Automation is already creating new business models in other commercial sectors, facilitating new services, saving employees’ time and increasing organisational profits. Banks can detect transactional fraud in microseconds. 3D printing in manufacturing reduces resource waste and shortens supply chains. And self-driving trucks will soon make logistics more efficient and improve road safety. Insurance is now beginning to take note. For instance, AXA recently introduced three new AI bots to support their staff with admin tasks which will allegedly save 18,000 man-hours per year.
Increasing efficiency through automation will result in certain basic roles becoming expendable. In retail and small commercial, claims processing and administration roles will be progressively automated. For example, determining the severity of damage in motor claims can be automated through image processing algorithms to provide quick and accurate categorisation. Subsequently, KPMG predicts that 20% of insurance jobs will be lost to automation and robots by 2024. Multiple insurance companies have already announced redundancies this year including Allianz and Aviva.
However, automation is not a zero-sum game. Whilst some administration intensive jobs are lost to automation, new roles which do not currently exist will be created. Those roles and functions will draw resources away from repetitive tasks and transfer employees into areas of business where they will produce more value. This might be engaging more actively with clients, creating new distribution channels or constructing new propositions.
The Impacts and Benefits of Automation
We know that automation improves efficiency, productivity and profits. Yet integrating automation is more than a cost-cutting exercise, it will allow business leaders to identify where the next area of value can be found and enhanced. In order to utilise automation fully, organisations must focus upon the work and not the job as a starting point. Integrating automation requires tasks to be separated into discrete functional elements to highlight where and how automation can eliminate, augment or create work in an organisation.
In the SME segment, the data about small businesses changes rapidly with their growth including office size, employees and turnover. However, much of SME data is currently siloed and under-utilised as policy information is often held in unstructured or semi-structured documents including PDF’s, excel files, scanned images and emails. It is difficult for account handlers to proactively track changes and for brokers and insurers to provide adequate covers when SME’s needs are constantly changing. By utilising automation, data entry could be eliminated, and data quality improved using an API or a productised version. Moreover, client management could be augmented as account handlers engage with customers more effectively. This also encourages the creation of new bespoke products and distribution channels.
Automating data collection can enable multiple parts of the value chain. Insurers and brokers could spend less time asking questions to ascertain premiums, reducing the customer pathway and increasing the likelihood a customer will purchase a product from them. Meanwhile, brokers could also spend more time advising clients on suitable policy for more complex risks. Equally, account handlers could efficiently sift through their book of current clients to determine at ease which clients they can up-sell current policies to or cross-sell new policies.
‘For SMEs with annual revenues less than €250 million, cyber ranked as the second most major business risk’ 2018 Allianz Risk Barometer
SME Cyber insurance as an area where policies are underdeveloped and undersold and, therefore automated processes can make a significant impact. The scope of cyber as an issue for businesses has become even more topical in recent weeks since British Airways and Marriot have been fined £183M and £99M respectively for large data breaches. Nevertheless, many businesses still underestimate their exposure and are not prepared for the variety of possible cyber incidents. In fact, as per a Global Data report, most UK SMEs did not have cyber insurance as of last year.
Even SME’s actively preparing for cyber incidents are still concerned with associated consequences such as reputational issues, government investigation and legal costs from lawsuits and corrective action plans which many current cyber policies neglect. Limits on choice and coverage remain issues in the segment and there is a large opportunity for insurance players able to plug that gap.
‘78% of brokers view cyber as an area of growth for them, especially given 38% of brokers in the survey have never even sold cyber’. Survey by Ecclesiastical
A recurring frustration was a lack of help from insurers to produce adequate cyber products. If insurers and brokers alike utilise automation efficiently, they may be able to focus more on cyber innovation and distribution and produce more value for their clients and companies.
Yet value from automation goes beyond improved broking, underwriting and claims. If companies take a strategic approach, business benefits will go far beyond the improvements in speed, quality and service. As employees produce more value for the company, they will be given greater compensation for their work, with the associated cost offset by the increase in productivity. Consequently, insurance businesses will be able to attract better talent, not only from the higher pay but due to the more engaging nature of the work. Employee retention will also increase. The benefits of introducing automation are then potentially multi-fold. These secondary and tertiary benefits are the considerations corporate leaders should have in mind when contemplating the necessity of automation to enhance their businesses.
Automation in Distribution
Distribution channels are changing with automation. SME customers are increasingly looking to purchase insurance through digital channels. As per PWC strategy report:
‘48% of small businesses who plan to switch insurance providers in the next five years want to do so online.’
Consequently, the importance of the broker in the value chain as a face to face agent will be reduced to some extent. Instead, a broker’s role as a risk advisor will increase in importance. This broker function will be important for customers navigating the market as insurance companies attempt to improve direct customer acquisition via new online platforms and in-house sales and marketing teams.
Direct online channels however currently remain insufficient. Placing products online is a first step but customer journeys are too long, and jargon needs simplification. Furthermore, business owners and finance managers reasoning goes beyond the ‘quickest and cheapest’ insurance options. Even businesses ready to buy online expect the service to include access to advice from brokers. In conjunction with price, advice from an expert during the process is the most important factor in the decision to purchase online. The sale of insurance remains the sale of a claims process which fundamentally is about providing adequate cover to customers. It is then important that direct channels have a breadth of policy options as well as access to advice from professionals to accommodate clients’ needs.
Even if direct channels become developed though, it is highly unlikely to produce a scenario where insurance is purchased solely through direct sources. Some insurance requirements will still struggle to fit into clearly defined product categories and clients will, where needed, require specialised knowledge and face to face discussions. Consequently, an omni-channel approach will remain for the foreseeable future as even in the micro SME segment, insurance cannot only be purchased by every consumer through a digital channel. Nevertheless, direct channels will become a burgeoning source of revenue in the next few years, and broker and insurers need to stake stock of this.
Insurance companies should be cautious about doing the right thing for too long. If they don’t build effective online channels and remain purely focused on current distribution methods, they will be left behind by competitors.
The key pillar points of automation strategy can be summarised in five core areas.
- A defined strategy
Brokers and insurers should consider how to adapt their products for an online digital channel and integrate new offerings with existing distribution channels. Given the heterogeneous nature of distribution in SME, the technology needs to be open and flexible enough to integrate with multiple distribution routes for each segment.
- Broker-Insurer collaboration
Carriers are providing agents with data analytics which can highlight customer churn likelihood and cross-sell opportunities. These tools are also able to identify and target higher value clients as well as improve retention rates. For example, AXA’s EB360 platform offers analytical tools for brokers to track applications and manage compensation and commissions.
There are a number of potential insurtech partners, who can help insurers and brokers get an edge over their competitors in SME distribution or risk selection. They are often more agile and can work around issues from legacy technology. Mixing partners’ innovation with insurance expertise is often a more effective and lower cost approach compared to internal innovation efforts.
- Phased adoptive approach
Companies should invest in technology gradually to find out what works for their needs in a more agile approach, avoiding putting all your eggs in one basket. This is important as the SME segment is a multi-niche market requiring customisation along the value chain from distribution models through to pricing and servicing.
- Adapting the operating model
Part of the strategy should be focused on adapting insurers’ current business models with new technology solutions, not simply appending them to existing ways of business. Whether that be integrating an API or adding a new software package, the business model must integrate the technology properly.
Automation is not a tool without limitation. Whilst there is potential future scope to introduce automation into larger commercial insurance, currently, it is limited to retail and small commercial with some scope in middle-market Insurance. The more complex a risk is, the less applicable automation becomes as insurance expertise and judgement is increasingly important to understand large and unique risks.
[Risk Exposure & Complexity V. Need for Automation]
Whilst the potential for automation in the SME market is exceptional, it should not be overestimated. Insurance employees’ expertise remains paramount. The outcomes of automation such as premium pricing or suggested policies should match up with the expectations of the end-users of the applications. As such, the expertise of insurance industry professionals should be confirmed by technology rather than produced by it. Such an approach will avoid the ‘Swiss cheese’ model of failure where scenarios line up in unforeseen ways to have adverse effects on the business. For instance, whilst automated tools can provide policy suggestions and actionable insights, these should be confirmed by professional judgement to avoid inadequate policy cover or overexposure. Automation, therefore, remains a tool, albeit a useful tool, for a company’s most valuable assets, its employees.