“Digitalisation is delivering tangible benefits across the insurance value chain”
Jean-Jacques Henchoz, CEO of Hannover Re, discusses what digitalisation means for the insurance industry
Why is digitalisation important for the insurance industry?
Digitalisation is a must for all industries. The benefits are both clear and compelling, and companies that fail to digitalise their processes and service offerings will no longer be competitive. For insurers, web-based and mobile technologies mean huge gains in speed and efficiency, which boosts profitability, while consumers now expect products and services to be on-demand and personalised. They want insurance solutions that reflect their needs and lifestyles and are immediately available through computers and smartphones. If insurers don’t respond to market needs, they risk losing business to digitally-powered new entrants and competitors who are successfully embracing and promoting change.
So, would you say that consumer expectations are a driver of digitalisation?
Not just a driver – they are the key driver of digitalisation. Today, everyone sees the potential and advantages of digital technology. For example, both young and old now use digital banking. To me, that suggests we’ll quickly adapt to – and expect – digital insurance offerings.
Insurtechs are also a powerful agent of change, as they facilitate the easy and efficient adoption of new technologies. They offer a pathway for insurers to automate their businesses and increase efficiency and profitability. Insurers who fail to automate will become irrelevant in today’s digital world and will be replaced by providers with better technology-based and consumer-focused models. Big data, analytics, the internet of things, artificial intelligence, machine learning, cloud computing: these are no longer risky bleeding-edge technologies – they’re enablers that must be harnessed without delay.
As a global reinsurer, Hannover Re is well positioned to support insurers as they digitalise their businesses. For decades, innovation has been fundamental to our role and we are eager to support our clients’ innovation and digital ambitions. I want us to be an innovation catalyst for our business partners around the globe. In fact, that is already an important strand in our corporate strategy. Our aim is to be one of the leading reinsurance companies for digital insurance business, and because we have a flat and decentralised structure, and we value individual initiatives, it encourages innovation.
What benefits does digitalisation offer insurers?
Digitalisation is already delivering tangible benefits across the insurance value chain. For example, technology brings precision and detailed knowledge of risk factors, because insurers can gather richer and more meaningful data. This includes data on emerging risks and macro risks such as cyber and climate change. Digital technologies increase the speed and efficiency of distribution, underwriting, policy administration and claims handling, enabling insurers to become far more consumer-focused.
The combination of better data and powerful analytics results in more accurate pricing, including for risks that are difficult to insure. It also extends insurance to more niche areas, helping those who would otherwise be excluded or underinsured, and supports alternative business models. An example is parametric insurance, where technology is used to determine cover based on real-time reporting and precise risk data. Risks include natural disasters, such as floods and drought, for which Hannover Re is involved in structuring placements. Without these technology-enabled parametric solutions, many risks cannot be insured, which may lead to substantial financial loss.
Why has the insurance industry not adapted as fast as other industries?
Insurance is an industry with long-established practices and traditions. That also meant that insurers took more time to embrace digital change. And for good reason: insurance involves sensitive personal data, which some people feel is better protected if handled in the traditional paper-based way, while regulation and compliance can make it more difficult to implement change as quickly as in other industries.
Insurance is also a very market-specific business, with products, rules and sales channels that vary widely from one country to the next. In addition, legacy IT systems and structural obstacles such as independent legal entities can make it more difficult to innovate. This is compounded by industry consolidation, which makes it challenging to integrate infrastructures when companies join forces.
Another point is that consumers don’t engage with their insurance policies as frequently as they do with other financial products and services, meaning there are fewer opportunities to introduce digital change. The duration of a life insurance policy, for example, can easily be 20 years.
Why is collaboration the way forward for digitalisation?
Not all insurers have the in-house resources to fully harness the potential of digitalising their businesses. That’s why – besides the support that reinsurance companies can offer – collaboration with insurtechs is one way to fill the gaps and add value. In one example of collaboration, Hannover Re is working in a joint venture with government bodies and Global Parametrics, whose advanced risk hazard platform uses big data to provide cover for climate risks. We could have developed these capabilities in-house, but, as with many successful partnerships, we made better progress by teaming up with a company that has complementary capabilities.
What does it take to drive digitalisation successfully?
Insurers are at different stages of digital transformation. While some are already adapting very well, others are still in the early stages of their journeys. For many insurers, digitalisation involves a big cultural shift, and that can only be achieved by having the courage to evolve and by following the example of digitally advanced industries and insurance peers. Success requires a clear strategy and top-down commitment. It’s critical that senior executives champion digitalisation projects, as this is a powerful factor for successful and continuing change.
It’s also important for everyone in a company to feel involved and engaged. At Hannover Re, we created an innovation programme encouraging employees to submit new ideas that could drive business growth and improve efficiency. I’m a firm believer in the creative energy of employees, and it can only be harnessed if we create corporate cultures that encourage and value new ideas.
Furthermore, the industry as a whole must share ideas and explore the best routes and options for digitalisation. Hannover Re has several digital assets with which to support our clients’ innovation and digital objectives. And where we ourselves don’t have a solution, our customers can discover digital innovations via hr | equarium, our free platform for clients.
In what ways can insurtech advance the role of insurance?
Insurtech is helping to widen the role of insurance from being primarily concerned with loss indemnification to embracing advisory services. For example, new and emerging technologies enable real-time monitoring and visualisation, where policyholders allow insurers to track their habits or remotely monitor vehicles or buildings. This provides an early warning of a risk materialising and can significantly change the relationship that an insurer has with the insured. Another development is on-demand insurance, where cover can be taken out only when needed, typically via a smartphone, giving customers immediacy and flexibility. This is an example of how insurtech is creating more personalisation and customer focus.
What effect does regulation have on the progress of digitalisation?
Regulation is necessary in every industry. Technological change must always be accompanied by a control framework that protects consumers – but without stifling innovation. Because consumer personalisation requires richer and more granular data, insurers must be careful to observe data protection rules, like the EU’s GDPR, and ensure that progress doesn’t mean increased risk or financial exclusion. Artificial intelligence and other advanced technologies can improve security and help to meet regulatory requirements, for example by enhancing decision-making and audit trails.
Regulation and digital innovation often go hand in hand. We have seen this in the payment services industry with the introduction of the second payment services directive, PSD2, which strengthened security while ushering in open banking and encouraging fintech innovations. Fintech companies are successfully carving out profitable niches in the banking industry, demonstrating that a heavily regulated sector is not always a high barrier to entry. So I strongly believe that digitalisation and regulation could also be mutually reinforcing for our industry.
To what extent is Hannover Re an insurance innovator, and how close is it to the start-up scene?
For decades, we have been at the forefront of innovation in the traditional reinsurance space, as well as in structured reinsurance and alternative risk transfer. We’re now also increasing our focus on digital solutions to support our clients’ innovation and digital ambitions. Our digital solutions in the life and health sector include hr | ReFlex and hr | QUIRC, our automated underwriting systems. Both are live with start-ups and established insurers, helping to build their digital businesses. We’ve recently created five accelerators to deliver local innovation worldwide, including accelerators for life & health, property & casualty, and parametric insurance solutions based on indices that use weather-data, such as rainfall, temperature or wind speed.
Reinsurance has a vital role to play in finding new ways to cover risks that are not fully understood or explored, and in opening up new business models and avenues for insurance. Think only of cyber risks and climate change; two challenges that are now on everyone’s agenda. Across all our activities we are committed to collaborations that foster digital innovation and help to manage emerging risks more effectively. We work closely with insurtech start-ups and other third parties to maximise the value of digitalisation, and we collaborate with industry leaders, clients, and intermediaries to develop new business opportunities. This is very much in line with our Group’s purpose: “Beyond risk sharing – we team up to create opportunities”.
Digitalisation and digitisation are often used interchangeably to describe the same thing, but they are different. Digitisation is the process of converting information from a physical format into a digital one (e.g., turning paper documents into digital documents). Digitisation enables digitalisation, which is the overall transformation of a business through multiple digital initiatives.
Gartner defines it like this: ‘Digitalisation is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business.’
This is where insurtechs serve as agents of digitalisation, collaborating with insurers to create new business models and new ways of engaging with existing and prospective customers.