Insurers warned – digitalise or fail

European insurers will need to transform to a digital way of working if they are to prosper according to new analysis.

Ratings firm Fitch has said a digitally enabled operating model will be a prerequisite for success in the European insurance market in the coming years. However, it warned the move will require a significant increase in investment in infrastructure and innovative technologies.

“Customers are increasingly requiring their insurance products to have online availability, clarity in pricing, ease of use and an ability to adapt automatically to their changing needs,” according to the report ‘The Next Phase: Digital Transformation Is Key for European Insurers’ Future Success’. “This means that the product landscape will become more individualised. We believe this trend will be supported by big data and artificial intelligence.”

Fitch added it expected digitalisation to be accelerated as a result of the coronavirus pandemic.

“We regard insurers’ digital transformation at the point of sale as the most progressed, driven by the need to provide virtual product distribution during the pandemic,” the report explained. “The transformation has been accelerated by the pandemic because insurers have had to provide solutions for virtual product distribution, ideally including digital signatures. Working from home has become more or less standard practice for the industry in Europe.

“So-called agile working has increased to 50% or more during the pandemic, with some companies hitting almost 100% during lockdowns. Most insurers have reported strong efficiency and high commitment, often exceeding management expectations.”

Established insurers will need to adapt to an increasingly digital world if they are to avoid the risk of new market participants, such as insurtechs, taking leading positions in the long term due to the pricing advantages of their technology platforms.

“As the digital transformation gathers pace, insurers’ need for artificial intelligence and big data will also grow,” it added. “Insurers will increasingly rely on big data to provide highly individualised tariffs, allowing for a far more granular assessment of underwriting risk. Similarly, artificial intelligence will be harnessed to increase the adaptability of product offerings and also to help assist claims prevention.”

The report warned regulation, or the lack of it, may also have an impact.

“We expect that regulators will take time to make decisions relating to digital transformation projects,” it said. “The issues that need to be covered include data protection, big data, artificial intelligence and new product design.

“In our view, this will hinder insurers’ digital transformation. Global insurers may wait until all important regulators have come to their conclusions prior to implementing, for example, a worldwide single IT platform.

“In some instances, this may allow local insurers to start earlier with the transformation, which may help offset their disadvantages in size. It is questionable when or whether regulators will start discussing highly individualised product design. Once risk granularity gets extremely high, the worst risks cannot be insured at a reasonable price because the impact of risk pooling is reduced and the required premium becomes too high.”