Insurers must join the digital transformation, but are struggling to prioritise the right actions. A problem, as the window of opportunity to make a meaningful shift is closing.

Every executive in the Dutch insurance industry knows their organisation needs to join the digital transformation. A change brought not least by the COVID-19 pandemic. Unfortunately, many are in the dark about the urgency to change, or are struggling to prioritise the most effective things. And as the industry is heading into a perfect storm of converging trends, insurer's window of opportunity to make a meaningful shift is rapidly closing.

Insurers everywhere have been confronted with a slowly changing reality that puts their business model under pressure in their mature, saturated markets. And while Dutch insurance executives are tremendous efforts to digitally transform their business, they struggle to focus the efforts. The question is whether they're moving fast enough, far enough and focusing on the right things.

For nearly two decades six market trends have slowly eroded the position of traditional insurers. Circa ten years ago these developments began to pick up pace, now reaching the point that their total impact is bigger than the sum of its six parts.

In response, insurers have begun to optimize their performance to stave off attacks from six sides:

1. Low interest rates put margins under pressure. In the non-life insurance space, premiums just about cover the cost of claims and running the business. Profit margins mostly consist of investment yields, which correlates with interest rates. In the life-insurance space, yields are required to meet future liabilities and create value.
2. Meeting regulatory demands (e.g. IFRS 17, GDPR, Solvency 2, etc.) requires resources and manpower that are then not available for other, more forward-looking change programmes
3. New entrants outcompete traditional insurers in various stages of their value chain. Fintech (and InsurTech firms, for instance, offer a fantastic user experience at the point of customer contact. Reinsurers outperform insurers at product value for money. Car manufacturers and online verticals like booking.com offer insurance as an add-on to their core product, reducing traditional insurers to administrators of commoditised products.
4. New or changing risks like extreme weather due to climate change, cyber risks or indeed the coronavirus outbreak are draining financial buffers.
5. Customer's expectations have started to change as many firms in other industries deliver outstanding, thoughtful and proactive customer service. Customers have got used to this, and have begun to expect the same level of service from all the companies they deal with. They expect their claim handling to be dealt with quickly, fairly and with the utmost empathy. They expect a simplified experience in product selection, process and obtaining a policy. And they expect to conduct at least the most common transactions online
6. Non-life products have become a commodity, while life products have become mostly irrelevant. In the non-life product space, price has become the main differentiator for health, fire and motor products. In many cases, these products hardly break even. At the same time bank savings products have significantly substituted the (individual) life insurance market, drying up the potential for new business for insurers.
   
   

As a result, insurers are turning to technology to reduce operational costs, to increase efficiency and increase the variability of costs. In short, they are fighting defence.

In practice we see that many efforts to transform don't deliver the anticipated results. This is often because they don't sufficiently start from the customer's (or intermediary's) needs and requirements and work outside-in. But there are other reasons why they fall flat. A lack a unifying approach (or focus), for instance. Or because different parts of the organisation have different agendas, or because the competencies within companies are silos. However, the reasons for failure are often also much more mundane. Executives are often confounded by the complexity of the issue, or simply don't know what a 'good' outcome looks like.

It's clear that playing defence is a losing strategy. It takes up all of a firms' resources, whereas what is needed is to invest in:

• a mindset that looks at products and delivery from the customer's perspective;
• technology that turns data into insights and creates engaging experiences throughout the customer lifecycle;
• a culture that is aligned to deliver on its purpose, brand promise and customer expectations.

Transforming their business will (or should) address multiple aspects of this perfect storm at once. It should increase efficiency, make firms live up to customers' expectations better, and improve employee experience. This means executives need to focus their efforts on breaking down silos to become a customer-centric, digitally enabled business truly engineered for profitable growth. It also means taking a close look at their firm's value chain. And they need to align their purpose, operating model, business model and free capital generation in order to become fit for the future.

For more information, please contact: Anouk Zevenbergen: +31 6 13 75 26 86 or Sander van der Meijs: +31 6 52 07 88 91.