Defining 'Digital Insurance' Beyond the Buzzword
The term "digital insurance" is often used in imprecise and widely varying contexts. Gartner's comprehensive yet precise definition of digital insurance will allow CIOs to cut through the confusion and create distinctive differentiators for their organizations.
- Digital insurance has become a catchphrase for a sprawling range of business and IT capabilities, resulting in widespread confusion about what it is and what its impact will be.
- Many CIOs from life and property and casualty (P&C) insurers are struggling to define purposeful IT strategies that can become catalysts for the digital transformation of their organizations.
- A common and well-defined understanding of what digital insurance is and how it will contribute to the future success of an insurer — when clearly communicated to business users — is crucial for a sustainable IT strategy.
- Collect all the definitions of digital insurance that are circulating in your organization, and work with all business stakeholders to develop a common definition for "digital insurance."
- Evaluate the maturity of your IT organization's change management capabilities, and designate change agents to promote the digital transformation.
- Establish support for digital insurance as a general principle of your long-term IT strategy, and define a set of IT key performance indicators for tracking the progress of your digital insurance strategy.
Many life and P&C insurers are planning or implementing digitalization initiatives, driven by competitive pressures, rapidly evolving customer requirements, and demand from agents, brokers and other third parties. Gartner's 2015 CIO Survey, which included senior insurance participants from around the world, showed that digitalization is the second most important technology priority for IT leaders this year.1 Digitalization encompasses digital transactions (to improve margins or optimize operations) and digital business (to generate new revenue or create new customer experience). In the long term, the digitalization of processes and business models also will change insurers' value propositions, operating models and competitive positions.
In this context, Gartner has seen a sharp increase in the use of the buzzword "digital insurance," which is used in imprecise and widely varying ways to describe products, services, operations or business models. The overall lack of clarity surrounding the term represents a significant challenge for insurance CIOs and IT leaders who are tasked with developing digital IT strategies. "Digital insurance" is used to describe everything from the simple elimination of paper-based processes to the creation and adoption of entirely new business models. There is a strong probability that IT strategies based on imprecise definitions will be neither holistic enough nor targeted enough to achieve the desired business outcomes. Also, they likely will not allow the insurance company to truly differentiate itself as a digital leader and reap the rewards of the digital transformation that is likely to have significant impacts on the industry.
Gartner first introduced a definition of digital insurance in 2014. However, we have decided that we need to further clarify the elements of that definition in order to help insurance CIOs work with their business peers to develop a common understanding of digital insurance, and to implement effective IT strategies based on that understanding. In contrast to other interpretations that are currently being used in the industry, we consider the term "digital insurance" to describe change and the result of that change. Digitalization, then, is focused on the process of becoming digital, while digital insurance includes not only the process and the efforts during the digital transformation, but also the outcome or end state of those efforts.
Gartner's definition of digital insurance is also significantly broader than some of the other definitions that are in current industry usage. For example, we do not limit our use of the term to operational improvements, such as paperless processing of insurance applications and the introduction of self-service portals for customers. We also believe that digital insurance will lead to new capabilities that extend beyond insurers' existing product and service portfolios, and that an effective, clearly defined digital insurance strategy will give insurers a distinct competitive advantage.
Digital insurance is the leveraging of information and technology to enable new capabilities across the insurance value chain for optimizing, transforming and creating new insurance products, services and revenue sources.
Gartner's definition of digital insurance has four basic components:
- The adoption of new or enhanced technologies and information management practices, in addition to the use of already-existing technologies: Digital insurance will require CIOs to leverage technologies and information management differently in order to achieve significant business process improvements (such as better customer service or more profitable underwriting). CIOs also will need to support new technologies that are not in use within their organizations, such as the interconnected devices of the Internet of Things, in order to address existing or future business objectives. Many of these technologies also will lead to a radical transformation of existing data paradigms and information management practices. Among the factors that CIOs will need to consider are additional device data (such as from telematics), new data sources (such as from social media or affiliate partners) and new types of advanced analytics that can deliver new value-added benefits (such as lifestyle segmentation and social data mining).
- A holistic approach that covers the entire insurance value chain, from product development and marketing through service and operational support: Digital insurance is not specific to a single department or process, but rather has applications throughout the entire organization and process chain. There are virtually no elements of the insurance value chain that are not affected by this transformation. Gartner's holistic definition of digital insurance explicitly includes the transformation and the enhancement of the insurance value chain. Digital insurers will not only do things differently, but also do different things.
- Optimization and transformation of existing capabilities, and the creation of new capabilities, across a very broad number of areas: This will allow insurance CIOs to determine their own pace and scope for digital insurance. Gartner research clearly shows that there is a sense of urgency about digital insurance, and that digital leaders are able to improve their competitive positions. However, we also know that the starting conditions for insurance IT leaders are very different. According to our 2015 IT Key Metrics, insurance CIOs (on average) spend 62% of their annual IT budgets on running the business, and they often lack the resources to fund a major digital transformation. Insurance CIOs may only be able to change their IT capabilities incrementally — but our definition of digital insurance also covers such an approach. Other insurers may decide to stay on safe ground by just improving an existing business process (for example, extending sales to a mobile device), while others may adopt a more aggressive digital insurance model by introducing new business models or capabilities that may increase the customer experience or loyalty.
- The introduction of new products, services and revenue streams: This is generally one of the key differentiators between digital laggards and digital leaders. It is also an aspect of digital insurance that has very broad implications. CIOs must be prepared to support completely new value propositions (such as usage-based insurance) and extended service capabilities for the existing product portfolio (such as more strategically leveraged social and Web technologies to improve the customer experience). Gartner's definition of digital insurance also covers cases where insurers are looking for entirely new revenue streams, or are reaching out to completely new customer segments via their digital insurance capabilities. One common pattern that we are already beginning to see in several markets is insurers collaborating with nonindustry players, such as technology or telecommunications providers. Digital insurance will, therefore, allow CIOs to not only support operational efficiency or improve profit margins, but also help their business peers explore new opportunities.
Acknowledging all these different aspects of Gartner's definition of digital insurance will ensure that CIOs will be building out new digital capabilities that expand beyond the optimization of existing processes. Optimization and incremental improvements are often the first steps for many insurance CIOs — especially those in conservative, risk-averse organizations — but this is insufficient. To realize the full benefits from digital insurance, CIOs must guide their organizations through business transformation and the adoption of new operational models. This will be challenging, and it requires a much higher degree of agility and change management. Only those organizations that can achieve this transformation will remain competitive in this new age of digital insurance.
1 The 2015 Gartner CIO Survey was conducted in 3Q14 and included 113 CIOs and senior IT leaders from life and P&C insurers around the world.
Source: Gartner RAS Research Note G00273104, Juergen Weiss, Kimberly Harris-Ferrante, 29 January 2015