White Paper Digital Disruption of the Insurance Industry1

Digital Disruption of the Insurance Industry New technologies have the potential to destroy some companies — and propel others to new levels of success

WHITE PAPER

White Paper Digital Disruption of the Insurance Industry2

Digital Disruption of the Insurance IndustryEyes on the Horizon: Insurers Prepare for Disruption

With modest premium growth predicted for the near term,

insurance companies have every reason to keep their costs as

low as possible — yet Celent estimates that, globally, insurance

IT spending will grow to US$184.9 billion in 2016, with continued

growth to US$208.1 in 2018 — a CAGR of 6.1%.”.1 Why are

insurance companies spending more money on IT infrastructure

when they could be increasing their profitability instead?

Deep in the DNA of every insurance company is the habit of

keeping an eye on the horizon, preparing for coming storms. The

digitizing of the industry is well underway and promises to bring

fresh waves of disruption. Already, digitization has transformed

customer expectations. It’s lowering the bar for new players to enter

the market and undercutting pricing models of more established

businesses that carry bricks-and-mortar overhead. And more change

is coming: competitors are launching new products and services,

and InsurTech could upend traditional business models.

Insurers recognize that in order to turn disruption into

transformation, they must invest in technology to digitize

processes, meet consumer-centric demands, and manage

and understand data. The investment is simply overdue: many

insurance entities are running on 40-year old technology,

according to a recent TrustMarque report.2

These legacy systems can’t support the 24/7 service, user-

friendly mobile experiences, electronic bill-pay, and seamless

and efficient claims processing that today’s customers expect.

Instead, these siloed systems and disconnected processes

frustrate clients and agents, who are trying to keep customers

happy, win a larger share of customers’ business, and bring in

new customers.

Disruption brings a huge potential upside for insurers: an

opportunity to use new technologies to modernize, innovate,

differentiate, and become more competitive. According to Harvard

Business Review (HBR), “a thoughtful digitization program can

deliver up to 65 percent in cost reduction, a 90 percent reduction

in turnaround time on key insurance processes, and improve

conversion rates by more than 20 percent.”3

Deloitte is equally enthusiastic. In a recent report, it cites

“opportunities for nimble companies to develop products for

such emerging markets as usage-based insurance for vehicles,

homes, and business coverages while expanding cyber

insurance sales and cyber risk management services….insurers

can leverage telematics and IoT technology to make their life

products more relevant to buyers with healthy living incentives,

investment tips, and dynamic pricing.”4

“ Carriers will need to constantly innovate and experiment as they adapt to the accelerating evolution of technology and consumer expectations, reinventing their products, systems, and business models accordingly…. insurers may not have much time in many cases to transform their operations, policies, and personnel in response to an emerging strategic threat or opportunity.”1

White Paper Digital Disruption of the Insurance Industry3

The HBR article goes on to explain that these benefits come

from three types of initiatives:

• Mining the digital data consumers leave behind on the

internet and on driving apps and wearables, which helps

carriers target customers and price policies more accurately

• Boosting efficiency and margins by digitizing existing

insurance processes (allowing straight through processing,

for example, and rapid product configuration)

• Increasing digital marketing to better connect with and

retain existing customers, as well as to upsell and cross sell

to bring in new revenue.5

To achieve these results carriers must embrace digitization/

omni-channel support, real-time analytics and Big Data, and the

Internet of Things. They’ve got to ensure security every step of

the way. And, they also need cost-effective IT solutions so they

can respond rapidly to the market. For all these reasons, they’re

considering hybrid IT for its cost-effectiveness and flexibility.

Boost Efficiency with Digitization and Omni-Channel Support

Digitization and support of multiple channels drives productivity gains and creates new opportunities to improve sales and service.

EfficiencyMany insurers are still using processes that require several

paper-based steps, which cost more and take longer than digital

processing. However, the industry as a whole recognizes the

value of “straight through processing” (STP), in which companies

capture data and documents electronically at the start and then

use those same electronic files throughout the process, as the

policy passes from broker to insurer, insurer to reinsurance

broker, then from reinsurance broker to reinsurer.

According to Celent, STP continues to be a significant driver of IT

spending, especially for new business. “Automated underwriting

tools along with electronic applications, electronic signatures,

and electronic policy delivery are seeing upticks in adoption in

both property/casualty and life,” says the report. “Concerns over

risk and business model changes that kept many carriers on the

sidelines are not gone, but the understanding is that STP, when

used appropriately, has benefits that more than offset the risks.”6

Sales and ServiceCompanies that have launched direct online sales models have

found them to be more cost effective than more conventional

sales efforts. Even when companies offer a discount for policies

that originate online, they can undercut the cost of traditional

agent-based sales. But to make online sales possible, insurers

need a seamless service model across multiple technologies,

including web, mobile, point-of-sale devices, social media, chat,

agent portals, and call centers.

Once the sale is made, customers expect round-the-clock service

and a seamless view across all their policies. Most backend

systems don’t support a client-centered view; they were designed

just to help insurers manage policies. Digitization can support

increased levels of service by providing integration of backend

systems into a single user-friendly view of customer information.

“ Celent sees many insurers tackling their problems by investing in technology solutions that improve front end sales, distribution and customer service, and increased back end operational efficiency and expense management.”1

White Paper Digital Disruption of the Insurance Industry4

Mobile Channels and Multiple DevicesWith the lines blurring between phones, tablets, and computers,

customers and agents require access to insurance policies and

applications across their devices. This is particularly important for

sales and service: consumers use tablets and computers to research

their insurance options and also want to be able to file claims or

update policies from whatever device they’re using at the moment.

Mobile capabilities are convenient for customers and deliver

back-end productivity gains, too. The HBR report gives the

example of “apps that allow people who’ve been in an accident

to file claims via their phones directly from the scene of the

accident, often eliminating the need for an appraiser.”7

Gain Insight with Big Data and Analytics

According to Celent, North American insurers are increasingly

undertaking Big Data and analytics projects, such as predictive

analytics and fraud detection systems. Insurers now have

access to a wealth of data from the marketplace and from their

own systems, and with analytics tools, this can disrupt the way

insurers have worked in the past, changing everything from the

segmentation and targeting of sales efforts, to the risk evaluation

and pricing of policies, and the way insurers evaluate claims.

At the leading edge of digitization, insurers are already using data

from their customers’ interactions to gain insights into providing a

better customer experience. Some have also started mining data

from consumers’ social media and online searches to learn about

life events — job changes, moves, marriage, or babies — that might

create opportunities to sell new policies to existing policyholders.

For existing and new customers, digital data is helping insurers

to decide whom to target and how to price a policy more

accurately.8 Analytics capabilities are supporting a shift from

products based on actuarial tables to ones that use behavioral

models to segment customers' categories, price policies, and

manage risks. Insurers can parse real-time data from sensors

and telematic streams to analyze behavior and calculate driving

scores, so they can better predict risks and therefore enter

new markets and offer more price competitive policies without

increasing their risk. For example, with usage-based insurance

(UBI), insurers no longer price auto policies based on the number

of miles a driver logs per year, but instead use continuous driver

monitoring and analysis to price coverage based on how safely

they drive. Driving sensors can also embed loss prevention

incentives, education and early warning support — and can

provide data that flags fraudulent claims9. Other examples of

using behavior to price policies include reducing life insurance

premiums based on lifestyle and health monitors.

Sophisticated risk assessments enable insurers to offer policies

that are customized to the individual, so they can profitably serve

more markets and manage a more complex set of policy sales

and liabilities. But before investing in analytics capabilities, firms

must establish a strong underlying data structure, with excellent

data governance to ensure the quality and accessibility of their

data assets. In addition, insurers need the computing power to

manipulate the data in real time. Once they’ve built a foundation

for data capture, storage and processing, firms can focus on

creating the analytical abilities — software tools and machine

learning algorithms — that they need to turn those vast amounts

of data into useful information.

White Paper Digital Disruption of the Insurance Industry5

Tap in to New Sources of Information with the Internet of Things (IoT)

The vast amount of data flowing from the Internet of Things (IoT)

is augmenting internet data to create even greater data sets that

fuel insurers’ analytics, support their decision-making, and enable

entirely new, behavior-based policy types and even “self-healing”

claims filing.

Real-time sensors, for example, offer granular data that can be

transformed into highly accurate risk assessments. For example,

a few insurers are already using data from fitness monitors

to offer favorable rates to customers who exercise regularly10.

Insurers could also gain insight into risks and damage from

sensors that measure water levels, detect contents spoilage in

cargo transport, and identify building foundation cracks.

Soon insurers might be able to offer “self-healing” claims — for

example, the first notice of loss could be from a sensor in the car

bumper, followed by an auto-generated repair estimate and a digital

payout. Drones, robots, and autonomous vehicles could reduce

the need for on-site adjusters and investigators, while improving

underwriting and pricing accuracy and lowering claims frequency.

While data from the IoT has a lot of promise, it also brings

significant challenges. In order to analyze the data accurately,

securely, and rapidly, companies need a comprehensive IT

solution to collect, aggregate, normalize, integrate, store,

manipulate, and analyze these huge and ever-growing data sets.

But it’s not going to be easy to build a global scalable network

along with a big data architecture, large amounts of storage, and

compute resources. According to IDC, with 21 billion devices

gathering and sending data, carriers will need IT partners to

manage their portion of the estimated 50 trillion gigabytes that

will be produced by IoT in 2020 (IDC Research Firm).

Dare to Connect: First, Ensure Excellent Security

New levels of connectedness are possible, but while greater

connectedness brings new capabilities, it also creates new

vulnerabilities.

This isn’t just a problem due to vulnerabilities of some IOT

devices. The challenge is bigger than that: mobile devices and

third-party points of access have expanded the overall threat

surface. Every point of connectivity to agents, the internet,

distribution partners, and the firm’s global backbone may be

vulnerable. And many firms have several network providers,

which makes it harder to manage security and quality of service.

In this heavily regulated industry, insurers are rightly concerned

about the security of their data and processes. They must protect

the customer, credit rating, transactional history, and policy

details. Insurers can’t afford to be hacked and lose crucial policy,

pricing, or private client data. When integrating new technologies

with legacy environments, insurers need to safeguard PCI

compliance and use certified resources, which can be hard to

find. Many companies don’t have in-house the highly specialized

skills they now need.

Transform your Entire Organization with Help from Hybrid IT

To leverage the Big Data and machine learning technologies that

enable dramatic improvements in risk analysis, fraud detection,

client segmentation, and behavior-based product innovation,

insurers will need to increase their compute, storage, network,

and specialist resources. Most can’t afford to build a huge and

expensive IT infrastructure inhouse.

A hybrid IT infrastructure is a cost-effective option, a model

that supports the new capabilities insurers want, while still

supporting their existing systems and investments to “keep the

lights on.” Insurers need to make sure that these sometimes-

fragile older systems continue to run efficiently, to deliver

maximum value over the life of the investment and avoid the

disruption of a complete cut-over to new systems. A hybrid IT

solution should encompass:

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1 Celent, IT Spending in Insurance: a Global Perspective, 20162 Insly, 2 Technology Trends for the Insurance Industry in 2017, www.insly.com/en/blog/3-technology-trends-for-the-insurance-industry-in-2017/3 Harvard Business Review, Insurance Companies’ Untapped Digital Opportunity, 2014, https://hbr.org/2014/03/insurance-companies-untapped-digital-opportunity4 Deloitte, Insurance Outlook 2017, https://www2.deloitte.com/us/en/pages/financial-services/articles/insurance-industry-outlook.html5 HBR6 Celent7 HBR8 HBR9 HBR10 Celent

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is a global leader in data and voice networks, cloud infrastructure

and hosted IT solutions for enterprise business customers.

• Access to cloud-based resources to support the compute-

intensive variable loads involved in Big Data analysis

• A strong underlying data structure, with data governance

processes and real-time access to big data sets

• An agile and secure enterprise network fabric that spans

both physical and virtual instances

• A flexible, scalable IT platform across the organization

• Both in-house and outsourced staff: the first for managing

legacy systems and strategizing; the second for supporting

cloud-based applications, storage, and processes, as well

as offering specialist expertise in areas such as the IoT,

analytics, and security.

Profit from Disruption — with Help from CenturyLink

To take full advantage of the digital disruption that is sweeping through the insurance industry, companies need to align their IT

resources to support their transformation into highly automated, data science-driven businesses. This is new territory for many, and

insurance companies will benefit from engaging with experienced IT partners to use a hybrid IT approach, combining virtual and physical

resources to support the legacy business, run day-to-day operations, and evolve toward a modern data science-driven infrastructure.

CenturyLink’s broad portfolio of IT services make it easier for insurers to transform their businesses, helping to shift resources

toward emerging areas while optimizing cost efficiencies with legacy and day-to-day operations. CenturyLink helps insurers to create

their own unique hybrid IT solution with deep expertise across data, networks, infrastructure, and security, including:

• Deep data science and big data expertise with Cognilytics

• Day-to-day cost efficiencies with the automation of IT

services, ‘government grade’ cyber-security programs and a

broad global network

• Infrastructure-as-a-Service platform to move seamlessly

across co-located, hosted, and cloud environments

• Enterprise-dedicated professional services group.

“ Insurance organizations that are flexible, agile and

can offer advanced technology to create the kind

of business processes that today’s clients demand

are the ones that pose a threat to the traditional,

perhaps even larger insurance organizations.”1