Insurers are renowned for their risk management capabilities. Their core business proposition is to identify risks, assess them, create products around the risks and sell them to customers with a promise to financially compensate when the covered risk event occurs, in exchange for a premium. Despite their specialization, insurers have a paradoxical relationship with risk. When any risk is eradicated, insurers will have no business, and when a risk grows to uncontrollable proportions they will be out of business. Claims management, which is the last core business function in the insurance value chain is important both to customers and insurers. For customers, it is the ultimate moment of truth in the insurance business that is generally known for low-touch processes and serves as the testimony to the insurer-customer relationship. To insurers handling claims efficiently would not only help them win over customers but also improve the bottom-line by containing the losses. Due to these reasons, the focus of insurers is to contain claims wherever possible, arrest the leakages and settle them promptly. This article provides an overarching commentary regarding the changes that personal auto and home insurance claims organizations are currently going through, and how emerging technologies are helping insurers to redesign the value proposition.
Drivers of Change and Force Multipliers
Claims organizations are now beginning to gain more strategic and operational focus. Consequently, they are starting to command a larger share in the innovation and transformation investment budget. Several important drivers of change are simultaneously influencing this paradigm shift whereby claims functions are seen to be competing with procurement, which has been a traditional rallying pole for investments. While the pressure on operations to reduce the loss ratio, claim cycle time, and cost of settlement still remains as the traditional driver of change for claims organizations, several new forces have emerged.
- Demographic changes: With the boomer generation retiring in troves, insurers are facing the risk of a shortage of talent. Due to the challenges associated to recruiting and managing millennials and digital natives, insurers are now compelled to make the work environment attractive both in terms of work-culture and technology adoption. This is in turn driving companies towards reskilling older employees.
- Emergent technologies of convenience: The advent of the fourth industrial revolution (4IR) pioneered by technologies such as smartphones, big data, 4G,and cloud is redefining the contours of the art of possible in connectivity, access, demand, and usage. Further, the extensive progress in various streams of artificial intelligence is providing organizations with new capabilities that were not available earlier. Due to their proliferation and ubiquity, what initially started as technologies of convenience are now growing to become technologies of necessity.
- Customer Demand: Though the demand of customers for better claim experience is a primitive and long-held expectation, it is now turning intense. This change is fueled by two factors: experience-focused millennials becoming the most influential demographic cohort and the explosion in the technologies of convenience with which personalized service is much achievable.
- Evolving Risk: The growth of sharing and access economy is changing the concept of insurable interest. Consequently, the dimensions of liability risk are seen expanding. The technological confluence of physical, digital, and biological spaces is affecting the equation of risk by increasing the surface of risk and birthing highly complex cyber risks and new silent risks.
In addition to the above drivers of change, force multipliers such as the recent outbreak of COVID-19,exacerbated climate change, and simmering geopolitical tensions are disrupting the global risk dynamics and turning the drivers of change more potential. For instance, the past few months of fighting COVID-19threw a lot of operational challenges and in turn catapulted the digital drive of insurers forward by a minimum of five years.
The Unravelling of Future Claims Organizations
These change drivers and force multipliers are forcing insurers to design an overarching future-proof claims application landscape that is intelligent, agile, and scalable. The future claims systems will be enabled by several of the emergent technologies. To support the changing business models, risk landscape and technologies, the claims organizations are reinventing their operating models and the supporting application landscape. Insurers are embracing an API-first model while redesigning their applications and interfaces to architect a plug-and-play operating mechanism to enable claims as a service operating model.
The success of open banking is nudging insurance companies to inherit open insurance models. Open insurance facilitates newer customer engagement and improves operational metrics. Insurers are forging new partnerships with many other stakeholders to create various digital ecosystems for the safety, experience, and transformation of end-customers. They are consenting to share data among other ecosystem partners for providing additional services to customers. As these digital ecosystems mature, the insurance products are forecasted to transform into parametric and invisible contracts that facilitate event triggered claim settlements. Towards this destination, the claims organizations are shifting from paper-based, manually intensive, and company-focused traditional processes to digital, intelligent, automated, ecosystem-driven, and customer-centric processes. The emergence of 4IR technologies and the growing capacity to sense, generate, transmit, store, retrieve, and analyze data to predict and act is revolutionizing the way every business process is handled both internally and externally.
Re-organizing Claims Functions
The growth of connecting technologies such as internet-of-things (IOT), telematics, and 4G networks, in addition to geographical information systems and artificial intelligence, has significantly improved the risk prediction capability. This has become a key factor while redesigning the claims function. These technologies are upending the traditional methods in which risk has been perceived and managed by insurers. They are enabling insurers to leverage the streaming data deluge to continuously monitor the risk faced by the subject of insurance. Insurers who always depended on post-loss data and several correlative associations to ascertain how risk could manifest in the future, are now able to get access to the real-time causal associations. Hence, the risk management function is getting skewed to the front even before the risk manifests.
The pre-loss activity that includes proactively engaging with the customers to monitor, prevent, mitigate, and minimize leakage is branching out as a new function in the claims value chain. Insurers are establishing a strategic partnership with several other stakeholders to build a risk-prevention connected ecosystem that focuses on containing risks before they turn into a loss. The at-loss function which is oriented towards providing support and assistance after the occurrence of a risk event is not a new one. However, this function is taking a new shape due to the proliferation of technologies of convenience such as smartphones, cloud, video streaming, analytics, artificial intelligence. These technologies are empowering the customers with several ways to connect with the insurers and in turn the insurers to provide 24×7, real-time, contextual, and frictionless support to customers for intimating the loss and getting required assistance. In sum, the demand for the experience and how it is staged have both increased exponentially.
The post-loss remediation function that focuses on loss indemnifications the oldest and has always invited the attention of insurers from an inside-out perspective. This function is now going through several strategic changes. Driven by the shortage of adjusters, insurers are exploring options for outsourcing granular functions. Insurers who are in short of adjusters are starting to participate in crowdsourcing and on-demand platforms that handle claim investigation. Those who are having excess capacity are contemplating on uberizing it to monetize by offering claims adjuster as a service. For catering to the post-loss, insurers have traditionally created and operated an ecosystem. The ecosystems are now becoming extensively digital, API-driven, and cater to a whole gamut of services.
Emerging Technologies Reshaping Claims Functions
The growing technologies of convenience are enabling a paradigm outside-in shift in the way processes are being redesigned. A digitally intensive transformation of the claims processes is enacted to increase the customer touch points, interactions, participation, and experience. The most popular technologies that are exploited are IOT and telematics in addition to algorithm dominated technologies such as machine learning, predictive analytics, and natural language processing (NLP). These are leading the pack for being extensively leveraged across the business processes in the claims value chain. However, when it comes to the business processes, the maximum experiments and implementations are seen in loss reporting, workflow, investigation, prediction, estimation, and fraud detection.
A matrix depicting the emerging technologies and an indicative view of their experimentation or implementation in the claim value chain is given below. There are many ways in which a specific technology could be used to redesign the claims processes. How an individual technology or a mix of multiple technologies is leveraged is always determined by the business, operations, customer and technology philosophies of the insurer. This variance could be too complex for a technology like artificial intelligence that exhibits different capabilities and comprises several methods. Hence, there are many ways to design a business function and an insurer could instantiate it in a unique way.
Considering the application and adoption of the most popular technology of telematics by insurers. Most of the insurers are using telematics in underwriting and risk assessment to offer premium discounts, analyze driver behavior, offer usage-based pricing and proactively engage to shape the driving behavior. However, some insurers are extending the use of telematics data in claims functions to analyze the driving signature for identifying ex-ante moral hazards, trigger an automated loss reporting post-accident based on the impact data, and to use the data as corroborative evidence for simulating the accident scene for identifying the proximate cause and to ascertain if the accident could have been prevented.
An insurer could tweak a business process slightly with the help of a certain technology or completely overhaul it with the confluence of many. For example, considering loss intimation, which is the most popular use case that is being redesigned with emerging technologies, an insurer could partially or fully automate the processes from loss intimation to settlement based on factors such as frequency, complexity, and severity. The decision by the management on whether they want to build a human-out-of-the-loop, human-in-the-loop, or human-on-the-loop process will be a major factor in the redesign.
A complete reimagination of the customer claims journey digitally from loss intimation to settlement would involve the following technologies orchestrating a symphony. If an insurer chooses to provide additional value-adds such as offering roadside assistance, identifying the best repairer for each damage, providing upfront settlement options for simple losses, or providing in-kind settlement options for improvising customer experience, they will have to invoke several other technologies in the process. In addition to core claims processes, insurers are also trying to experiment technologies in functions such as workflow management, document management, and reporting. A dominant design regarding where and how in the claims value chain the technologies are leveraged, and how a business function is reimagined with a confluence of these technologies is yet to emerge. As the clarity emerges, regulations, standards and governance models will need to be formulated to prevent the occurrence of bad-faith claims.
The Present State and the Challenges
Despite the widespread experiments and implementations, the adoption of these technologies is yet to cross the basic threshold. They are continuing to face ground-zero challenges such as the following:
- Still Emerging: Many of these technologies are still evolving and yet to mature. This leaves more options for pilot experiments and less for actual implementations. Due to this many of these experiments have not progressed beyond the pilot purgatories
- Friction to adopt: Technologies such as virtual reality faces friction for adoption due to device dependency. IOT devices for instance face challenges such as incompatibility issues with devices from other manufactures or other technologies, and shorter planned obsolescence periods
- Fear of discrimination: Customers fear monopolistic surveillance and loss of privacy due to technologies like IOT and telematics. There is also a fear of inexplicable algorithmic discriminatory judgments and litigations
- Still unregulated: For technologies such as AI, drones, and blockchain, the regulations are fluid and still evolving. This is prompting insurers to adopt a cautious approach
- Lack of killer use cases: For a technology like 5G network, killer use cases that are curated and instantiated for the insurance industry and especially in claims is yet to be identified. While the global roll out of 5G is yet to happen, the insurance industry is yet to start debating about its fitment
- Shortage of talent: Companies are facing an internal shortage of the requisite skill set for new technologies. While collaborating with startups benefits them, it also creates a problem of another kind whereby the value chain innovation becomes a black box on which insurers cease to have any intellectual control
- Investment risk: Many of these technologies pose investment risks to insurers. As multiple ways existing for the implementation of these technologies, it is not yet clear to insurers regarding the return-on-investment that could be extracted
On a realistic note, the challenges cited above are commonly observed during the early stages of any industrial revolution, when several new technologies evolve simultaneously, risks are unknown, and the businesses will have to repurpose them to suit their processes.
Preparing for the Future
The changing risk scenario indicates the simultaneous evolution of both extremes – the eradication of some risks and the explosion of some. While technologies like IOT, telematics, and autonomous vehicles, are increasing the prediction and prevention of certain types of risks, force multipliers like climate change are seen to drastically increase the frequency and severity of certain types of risks. In addition to these, the 4IR ushers a future that is excessively digitized, connected, data-driven, algorithmic and autonomous environment. Looking from today’s perspective, it is difficult to see how the new risks will look like and where they will arise from. While we can say generally that due to the increasing risk surface cyber risk will be a major risk, the intensity and severity that it could cause in an ecosystem where physical, digital and biological systems are blended is unfathomable.
Considering this predicament, insurers will have to accelerate the adoption of digital ecosystems and operating models to strengthen the risk prevention function for all the risk where it is possible and offer it as a separate or bundled product. For risks that are increasing, they will have to start looking at leveraging the technologies in new ways, recalibrating the risk models, introducing a new breed of parametric products, and building resilience models in partnership with customers and other stakeholders. Insurers will have to experiment and gain experience in these technologies to efficiently maneuver through the changing dynamics of risk, as those that refrain face the risk of being left behind.
