The 2018 KPMG Global Chief Executive Outlook, which surveyed 1300 chief executives, including 50 New Zealand chief executives, found that eight-in-ten insurance chief executives believe they are now meeting (or even exceeding  their customers’ expectations for a personalised experience. 

For an industry where connection to customer hasn’t always come easily, this dedication is clearly paying off. 

In a recent KPMG International survey of nearly 55,000 customers across 14 countries,  insurance brands were ranked first for customer experience across all sectors in four of the 14 countries. 

Clearly with the right support and direction from their C-suite, it is possible for insurers to differentiate themselves based on customer experience. 

Firstly, what do customers want? 

What chief executives are telling us is that it takes more than just good customer service and fast claim processes to deliver a truly differentiating customer experience in the insurance industry. 

Rather, it requires insurers to radically sharpen their value proposition in a way that responds to their target customers’ expectations. 

That won’t always be easy; it will require insurers to meet customer expectations from beginning to end. So what does this mean? 

In part, it means becoming better connected to their policy-holders and insured risks. The emergence of smart home technologies, autonomous cars and the shift towards the sharing economy are already changing the dynamics in the non-life sectors. 

The introduction of wearable technologies and the adoption of health and fitness apps may lead to similar changes in the life sector. It also means becoming a more connected enterprise – from a data, IT and systems perspective, as well as from a vision, culture and objectives perspective. The reality is that customer expectations are not easily met when organisations operate in silos; those that are able to connect and align their organisation behind their customer agenda stand to gain the greatest traction with their target customers.

Digital transformation – digital wins 

The survey shows that something has changed for New Zealand chief executives around digital transformation, and it’s a step backwards. 

Compared to their global cohort, and their own responses from a year ago, New Zealand chief executives have lost confidence in their organisations to deliver digital transformation. 

If digital transformation is focused on enhancing customer experience, developing new products and services, or re-inventing internal processes, the survey data tells a concerning story for New Zealand organisations. 

In the 2017 survey, 88% of chief executives surveyed were confident they were disrupting their sector rather than waiting to be disrupted. In 2018, that has dropped to 28% - a major change in sentiment. A little more than half of New Zealand chief executives (58%) are “personally prepared to lead their organisation through a radical transformation of its operating model to maintain competitiveness” compared to a global metric of 71%. Perhaps more concerning is that only 26% of New Zealand chief executives are “confident that existing leadership is fully equipped to oversee the transformation” compared to a global response of 44%.

Yet, the data suggests that New Zealand chief executives understand the challenge, with nearly all (98%) viewing digital transformation as an opportunity rather than a threat. 

However, the majority (64%) acknowledge that their organisation is struggling to keep pace with technology innovation (versus the global response of 36%). 

There will be a number of factors behind these survey results but I wonder how much impact legacy systems have on our confidence to execute digital transformation? 

Transforming the legacy platforms 

Legacy insurance platforms are built on sustainable and scalable mainframe technologies suited to processing a large volume of transactions. 

However, as a result of historical mergers and acquisitions, pressure to launch new products under time constraint and the need to fulfil specific distribution channel requirements, most legacy systems have added peripheral features, become siloed across lines of business and bound by inflexible integrations.

As insurers embrace the new digital future, change to the organisation’s technology infrastructure becomes increasingly critical not only for current performance but also long-term viability and competitive differentiation.

So where to from here? Organisations looking to evolve their tech stack to keep pace with current innovation are recommended to:

Take a holistic, top-down view 

Legacy platforms such as policy administration systems touch upon many areas of insurance value chain and affect multiple operating layers: not only technology but also customer segment, channels, process, people and organisation. 

To capture all possible options of transformation, organisations should look at the issue from the perspective of optimising the overall operating model rather than treating this as a system upgrade or replacement endeavour. 

Clarify the objective and opportunities 

Each insurer has unique motives for legacy transformation. Some may plan to divest non-core lines of business or the legacy book of business in a future timeframe, while others are looking to launch new products targeting new customer segments via new channels. 

These parameters will determine the archetype of legacy transformation, such as the two-speed model where legacy portfolio is ring-fenced from the strategic growth platform, as well as the sequence of migration. 

Leverage emerging API technologies 

As an alternative to full system replacement, organisations should look to use open APIs to repurpose and modernise existing legacy systems. Open APIs can help downsize legacy functionalities, integrate InsurTechs’ advanced innovations, and minimise disruption during the transformation process.

Promote business accountability

To better respond to evolving customer and market needs, the business needs to be involved in key aspects of solution delivery. 

It has been some time since we heard ‘agile’ among insurers, and organisations have been trying to find the right agile model for their businesses. 

While it works well with front-end applications, a pure agile approach often poses a challenge for the back-end core insurance platform. 

Organisations should consider alternative ways to promote business accountability in core insurance applications, delivering a clear direction for the legacy transformation blueprint based on true market needs. 

Create a structure that supports innovation across the organisation 

While leadership is critical for any innovation or transformation process, sometimes the top-down approach can create disconnects at the local level. 

Information and feedback from local businesses needs to be fed into the larger innovation process to ensure that the strategy is relevant to the on-the-ground needs of the local office. 

When approaching the transformation process, organisations should consider a satellite model for innovation where a centralised R&D team works in coordination with the business to develop the innovation strategy. 

Responding to evolving customer expectations and shifting market pressures requires insurers solve legacy platform challenges and create a nimble, sustainable and connected platform. 

Whether investing in customer-facing digital apps, intelligent automation to streamline processes, smart contracts for claims, or more, it is critical that insurers take the optimal approach to transform legacy and accelerate the delivery of exemplary service in pursuit of the corporate vision

Culture and workforce transformation – shifting sands 

Clearly, it is possible for insurers to differentiate themselves based on customer experience. What is also clear is that differentiation will not be achieved through a single “silver-bullet” solution. 

It will require far broader transformation – transformation of all aspects of the business. Whilst 58% of New Zealand chief executives are personally prepared to lead a radical transformation of their business to maintain its competitiveness, more than 70% of global chief executives are making transformation a personal priority. 

But it’s hard. Our chief executives highlight the importance of acting with agility, linking growth strategies to societal purpose, and improving how market disruption is monitored. 

Almost all New Zealand chief executives are finding the lead times to achieve progress with transformation projects “overwhelming”, and technology is not the only source of disruption. 

And although only 8% of New Zealand chief executives view talent as one of their top three risks, a third don’t believe they have the right leadership team to oversee transformation, and over three quarters think their board’s expectations of return on investment from transformation is “unreasonable”. 

Chief executives need to ask if their culture, strategies and business models are facilitating growth or inhibiting it. And they need to ensure efforts to improve supply chains, embed smart technology and go digital are not just internal projects but are responsive to the needs of their customers – and executed fast enough to ensure their customers don’t become their competitors’ customers!

Transforming an insurance company takes more than new technologies and new business processes. 

It also takes an entirely new approach to workforce planning and development. It’s one thing to acknowledge that processes and capability requirements are changing – are you ready to start making major changes to your workforce today? 

The bots are coming, AI is a slower burn

For years, experts have forecast that robots would invade the workplace, and now, the fact that automation will soon be embedded in processes across the insurance organisation is undeniable. While the basic automation referred to as bots is more prevalent, it is clear that artificial intelligence (AI) is starting a slow steady move into the world of insurance. 

Our Global Chief Executive Outlook Survey indicates that 12% of insurers have already started to implement AI in some of their processes and another 51% have started limited implementations around the organisation. 

More than half also say they expect to start seeing significant returns on their investments into AI within the next three years. 

One would expect this massive rate of automation to have some very significant impacts on the workforce. For one, new skills and capabilities will be required. The chief executives in our survey were quick to note they would need more data scientists, more cyber security specialists and more digital transformation managers in particular. 

Yet, at the same time, exactly half of our respondents admitted they probably wouldn’t start thinking about hiring these new skills until they start to achieve certain growth targets. 

My concern here is two-fold: first is that they will not have the skills required to help them achieve their transformation goals; the second is that they may join the war for talent too late to score any significant wins.

Looking at the leaders 

In the end, the answer for most insurers will likely be a combination of multiple strategies. 

Automation will be applied everywhere; employees will be retrained where possible; contingent workers and partnerships will be used to fill gaps; new roles and ways of working will be developed. Based on our work in the industry, here are five things that many of the leading insurers are getting right as they start to think about creating the optimal insurance workforce of the future: 

•     They are breaking down the silos. The leading insurers recognise that their workforce needs to be aligned around the customer, not the business function. And that means finding ways to remove the traditional functional barriers and silos. 

•     They are integrating their workforce plan into their transformation journey. Leading insurers develop their workforce plan alongside their transformation strategy, ensuring they have access to the right skills and capabilities at the right time in their transformation journey. 

•     They are finding the right balance between growth and cost/disruption. They are carefully and deliberately adjusting their workforce and their capabilities to grow in line with the demands of the business (reflecting the growth/cost balance). 

•     They are thinking about the workplace dynamics. Recognising that the workplace of the future will also change, the leading insurers are now thinking about how they engage and motivate employees that may not work in an office or may not even be human.

 •    They are encouraging a culture of innovation. The leading insurers are proactively addressing employees’ resistance to change and fears about automation by encouraging innovation and transformation across the enterprise 

Too little, but not too late 

Many insurers are making transformational changes. But in our experience, few are doing it at the scale required to achieve true enterprise-wide impact. 

When we talk to insurance chief executives, they are often quick to share their innovative pilot projects and capabilities. But there is often a struggle with how to leverage these new technologies and capabilities across the enterprise. 

Insurance leaders recognise the challenge; 47% of the chief executives in our global survey told us that most of their technology investment is tactical - focused on solving today’s business challenges - rather than strategic and focused on a long-term plan. 

And in a separate survey of insurance CIOs conducted by KPMG International and Harvey Nash, just 28% said they had a clear enterprise-wide digital business vision and strategy.

 It all starts with balance 

Fundamentally, this comes down to the age-old challenge of balancing cost against growth and risk against opportunity. Insurers know they need to transform in order to grow in the future, but they hesitate to disrupt their current books of business or business models.

They seem to want to implement new technologies across the enterprise, but aren’t yet willing to tear out their legacy systems and rethink their IT estate. 

They also seem keen to capture new capabilities and skills, but are slow to hire until they see positive growth. Every insurer struggles to find the right balance. 

Yet, in our view, finding that balance will be the defining challenge facing insurance chief executives over the coming decade. And it will permeate almost every decision they make as they work to execute (and, where necessary, pivot) their transformation journeys. 

Data transformation – data versus intuition 

The explosion of “big data” and the increase of computing power has allowed us to make advances in machine learning, AI and automation. 

These analytical techniques can be applied to everything from predicting which valuable customer might leave, to anticipating the next best product. 

With this increasingly data-driven and rational approach, it’s easy to wonder if there will still be a place for intuition in the future of business. There clearly is. Nearly three quarters (74%) of New Zealand chief executives have overlooked insights provided by data analysis or computer-driven modelling because they were contrary to their own experience or intuition. 

One way to approach this is to think of intuition as a starting point and input to decision making.

For example, a hypothesis is an intuition about what is going on in your business, where the risks, issues, and opportunities may be, which products to develop, or which future direction to take. You can test these hypotheses by performing experiments, gathering and analysing the data. The combination of intuition and information remains powerful. 

As analytical tools and approaches become more intuitive, through the rise of “augmented analytics”, increasingly we will see that the combination of humans and machines working in unison gives rise to the greatest success. 

Integrating risk, finance and actuarial for data transformation 

Leading insurers are talking about integrating risk, finance and actuarial operations with the aim of securing a single, consistent, and multidimensional view of their business. 

Until relatively recently, insurers have regarded data management activities as primarily operational rather than a potentially value-generative asset. 

In this context, individual functions have been allowed to remain entrenched in their own siloes, building data structures that work for them but not for the enterprise as a whole. 

There are many benefits of risk, finance and actuarial joining forces to add value to the business and help make better and faster decisions: 

•     Risk, finance and actuarial integration can deliver a much more consistent and standardised view of the risk-adjusted returns insurers are achieving throughout their business; 

•     Data transformation provides crucial insight into customer behaviours, enabling the development of better products; 

•     Exploiting these gains will make it possible to allocate capital much more efficiently; 

•     Integrated ways of working and a common infrastructure will not only improve control but will undoubtedly lead to elimination of duplication and efficiencies. 

The case for integration is further strengthened by the increasing regulatory demands for transparency. Insurers must not only meet more demanding reporting requirements but also build understanding of the implications of their reporting throughout the business. 

This will ensure business leaders have a much clearer understanding of the impact on capital of their decisions. 

As the reporting regimes of risk, finance and actuarial continue to converge, maintaining separate reporting structures is not sustainable. 

Envisioning a new model for integrated risk, finance and actuarial 

Few insurers have set out a vision of an integrated risk, finance and actuarial function, let alone begun to move decisively towards it. 

However, it is possible to draw on the learnings of those organisations that have already embarked on the transformation journey to think about what an integrated function might look like. This will be a significant exercise, carving out resources from each function – and augmenting those resources with new talent – in order to create an independent new function. 

This function will have operational responsibilities to risk, finance and actuarial but will not reporting directly to either. The aim should be to create a shared service that is capable of providing data quality and data management services as well as integrated reporting and advanced analytics functionally to every other part of the organisation; not only risk and finance. 

The newly integrated function will be the insurer’s data management “Centre of Excellence” with a single underlying structure. 

Staffing the new function will require the relocation of key personnel from risk, finance and actuarial. But these individuals will need to have both the right skillset for their roles and the adaptability to ensure a good cultural fit. 

Insurers will also seek to recruit new talent, securing new skills in areas such as data science and advanced analytics. 

Therefore, it will be crucial to ensure such a function is widely regarded as an attractive place to work, both to persuade existing staff to consider transferring and to attract new talent.

 This imperative underlines the need to shift the narrative around data in insurance. The insurers support for – and incentivisation of – staff employed in this data Centre of Excellence will represent proof for its claims that data really is now seen as an asset where value is created. 

Meanwhile, separate risk, finance and actuarial functions will remain in place. 

These functions will be smaller and leaner than in their previous incarnations but also more specialised. 

Empowered by the improved quality and granularity of data insights available from the new function, risk, finance and actuarial will have opportunities to create additional value of their own. For the organisation as a whole, this will be a profound transformation. 

The opportunity is to create an enterprise-wide asset that delivers greater actionable insight than existing functions could hope to create individually. Its activities will go to the core of the insurers operations and strategy, including management of capital – far beyond work that could comfortably be procured from third party providers or advisers.

Making the transition

There will inevitably be challenges to face in the move towards integration – both organisational and technical – but these can be overcome if clarity of vision and purpose is in place from the beginning. Above all, this is a transformation project that will require leadership buy-in and support right from day one. 

Not only is this an enterprise-wide decision that must come right from the top of the business – the C-suite, including both CFO and CRO – but it will require strong leadership to keep the transformation process on track. The entrenched interests in existing structures and silos may be powerful; to prevail leaders will need to invest considerable energies in convincing the organisation that transformation is required

Significantly more than half (64%) of New Zealand chief executives perceive that growth over the next three years will be harder earned than ever before, more than double the global average. The challenge of moving toward an agile business model and linking the growth strategy to wider societal purpose were two themes which underpinned the responses to this question. 

New Zealand’s chief executives are conscious of the need to respond to change by fostering innovation and building agility but are equally conscious that the ability to achieve growth at scale in the domestic market is limited. 

Accordingly the combination of the domestic and global outlook means New Zealand’s chief executives are now looking for “realistic growth”. Given that New Zealand has come through a period of robust growth, a little tempering of confidence is both realistic and expected. It’s also an opportunity for us to refocus our collective attention on what’s needed – and relentless focus on the customer and using technology to deliver an outstanding customer experience are certainly fundamental principles for us to focus on.

Nicholas Moss is a director at KPMG New Zealand, and a senior leader in their insurance practice.  This article has been republished from the latest KPMG General Insurance Update.

March 2019

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