RESEARCH PAPER

INSURANCE INDUSTRY

DIGITAL TRANSFORMATION & IMPACT ON HISTORICAL

PLAYERS

Matthias de Ferrieres

matthias@stark-grp.com

www.stark-grp.com

Singapore

December 21, 2016

 The insurance industry is driven as a commodity rather than a

service1. Providing a low price is critical, optimizing risk assessment is an

obsession and processing customer efficiently is a key focus 2 . As a

consequence the digital transformation unlike in other industry remains a

low priority3. Meanwhile with the venue of the digital and the all online,

retail consumer wants not only to access anything, everywhere at any time,

but also reaches everything anywhere every time. The customer wishes to

acquire customized products & personalized services promoted through

mobile, tablet or computer. The Digital world, a new far west for

consumerists, opens a new era where every business must learn how to cope

in order not to disappear. It includes the insurance4. Yet, to embark into the

digital journey an industry that is heavily regulated and historically

formatted – like the insurance - is not an easy task. Stringent compliance,

complex legal requirement and systematic governance do not help

innovation. Digital requires redefining the traditional methods and open

doors to reinvent itself. Insurers are aware that they may end up like the

legendary Kodak Company that failed to endorse the new customer

paradigm5 if they don't change.

Yet, what would be the impact of digital customer appetite on the

insurance industry transformation? Will the industry faces something similar

than in other industries – hospitality, transport…- where historical

companies needed to adjust fast to face innovation from small new and

aggressive entrants? Or will they be more prepared and accept new entrants

as partners to change the industry?

The context of the insurance industry is difficult and needs to be clarified in

order to foresee a future trend. Its environment is driven by a conjuncture of

constant yet endless progress (social, politic and economic). Such

conjuncture could be opposed to industry structure that is more complex and

heavily regulated. Such a situation has an impact to the equilibrium of the

simple supply and demand theory. Such impact can be direct or indirect to

the industry environment evolution. They will be direct when they or could

affect the industry and its capacity to exercise its competence. The capital

requirement to serve the solvency margin regulation is extremely important 6.

It has direct and negative impact on the industry innovation and research and

development investment capability 7 . On the other hand, the growing

population opens direct doors for a wider customer target. Similarly, the

higher level of education of the population in the world indirectly yet

positively impact the insurance industry. Well educated people tends to

purchase more and better insurance to cover they love ones8.

 Overall, such context creates higher and smarter demand while the

offer remains flat and poor. The demand is not properly fulfilled because of

the gap created between the willingness to purchase and value perception of

the product.

INSURANCE ENVIRONMENT CONTEXT

CONJUNCTURE INDUSTRY STRUCTURE

• Growing popula on • Capital requirement

DIRECT • Growing wealth • IT Management
IMPACT • Government laws • Regula on
• Tradi onal way of working

• Culture maturity • Industry Governance

INDIRECT • Educa on • Industry A rac vity
IMPACT • Digital Accessibility • BAU Processing focus
• Digital Capabili es • Produc vity focus
• Data revolu on

INSURANCE MARKET CONSEQUENCE

Growth & Smarter

Poor & Sta c offer
Demand

Comprehensive requirement Low value percep on

CUSTOMER WILLINGNESS
TO BUY TO PAY
+++ ----

The digital empowerment changes completely the purchasing behavior of

the customer. The insurance industry realizes that this change will also

happen and it must act fast. For the past three years, the insurers have

evaluated the opportunity to transform themselves. The digital era becomes

an opportunity. Budgets have increased, organizations have changed,

priorities have evolved 9 . Meanwhile, the regulators have realized the

importance to ease the industry from the legal processes and support them to

enter into the new paradigm of innovation. Yet the change is not fast
enough. It opens opportunities for new entrants. They are smaller, more

agile and are more customer centric. Worse for the traditional industry they

fall into different category of regulatory requirement10. The barriers to entry

are broken and new start-ups are popping up. They will have a serious

impact on the industry, threatening the current market leaders.

CUSTOMER Buy PAY

Willingness to ----
+++

Stagnant Sale

INDUSTRY STATUS
Dynamic for change & transforma on

INDUSTRY TENTATIVE RESPONSE

Macro organiza onal change Micro organiza on change

GOVERNMENT HR
• Regula on review • Training, Mindset,
• Sand box crea on • reverse coaching,
• Tax relief • simplifica on of hierarchy,
• subsidies • scope of job

INDUSTRY DIGITAL
• Collabora on in industry • Integrate Digital and transforma on structure
• Monitor, copy other industries at transversal level
• R&D budget
CROSS GOVERNANCE
• Transversal innova on (Telco & insurance) • Department Empowerment – test & learn, try
& error

New entrants

Agile, Flexible, No Constrains, In line with the digital world, supported by investor

While most industries focus on embracing the digital world and innovate,

the financial industry was tremendously impacted by the 2008 crisis. New

financial regulations popped up. At each and every level of the insurance

supply chain, more stringent control surfaced. The process and design of the
insurance business were affected. While other industry could priorities their

investment and strategy on customer, the insurance industry had to protect

its position and focus on redefining its procedures11.

Since the launch of new and heavier requirement the opportunity to

endorse the digital revolution has been jeopardized. The regulator affected

so much the insurance business that it defeated the initial purpose of

protecting the consumer12. Pirotte (2016)13 describes the negative impact of

overzealous regulation on the insurance growth and innovation. It includes,

the type of licenses to market, advise, sale and promote insurance products

and the data management such as data storage, data flow, data ownership

and access. Overall, since 2008 and in most countries the regulation as done

more harm than good at both macro and micro levels. Instead of investing in

new capabilities that includes IT system, digital, resources, products and

distribution, a lot of money has been spent to respond to the new

regulation 14 . New department created and empowered have surfaced or

strengthen such as compliance, procurement and other internal audits

department. Key departments and divisions such as marketing, underwriting

and actuarial have weakened when it comes to influencing the strategy and

the vision of the firm 15. Yet, some government endorses faster than other the

necessity to redesigned the regulation in line with the digital world. German
population was under insured due to heavy purchasing process, consequence

of over regulatory requirement. The government deregulated and simplified

the purchasing procedures, legal jargon and other administrative

misalignment. All of these boost the sales and the take up rates16.

While the insurance supply remains flat, unattractive consequence of over

regulation, the demand for insurance and protection has been growing

regularly and significantly across the globe thanks to a favorable conjecture

(increasing population, greater education, better affordability, need to protect

assets) 17 . Bernard and Yang (2015) 18 give a macro overview and a

comparison from year to year of the evolution of the supply and demand of

the insurance industry in France. It shows that while the number of players

may vary slightly, the premium collected increase year on year. The

premium collected came from new generation of consumer. They are

educated and require a smarter purchasing experience 19. Their purchasing

experience and perceived value are significant predictors of customer

loyalty. In addition brand credibility, trust in the product, confidence of

being well advised have a significant impact on purchase and retention.

Finally, the engagement and empathy of the company is more important than

the product complexity. Ioncica and Petrescu (2012) 20 explained the

complexity of the insurance purchasing behavior. The influence of different

endogenous and exogenous factors tends to justify the decision making

process of a prospect. The insurance is not a tangible asset, the customer has

a different thinking process when it comes to look and shop for insurance.

PwC and Startupbootcamp InsurTech’s report (2016) 21 said o that in

insurance more than the offer or price, the priority is trust and service. The

value creation will come from the increase of willingness to pay from

customer through effective and real services. Chen, Weng, and Huang

(2013) 22 focuses on the Taiwan market and concludes that the customer

engagement and the notion of service in the insurance industry are strongly

correlated. The priority is the improvement of services, the empathy for

relationships, interactions and interactivity are keys for customer conversion.

While Insurers focus on cutting cost in order to reduce price, the consumer is

searching for the opposite: appropriate product and services. Devlin (2013)23

highlighted the opportunity to increase true value (ROI, net income) of a

financial service provider by enhancing the financial offers. Proper benefits

combined with an appropriate service are critical enablers for both better

understanding and better willingness to pay. Such service includes the

distribution scope such as Staff training, company communication and

overall employee engagement. On the product side, Braun, Schmeiser, and

Schreiber (2016)24 used a purchasing behavior based study that focuses on

product features. They did a “choice-based conjoint (CBC) analysis on a

German sample. They evaluated the arbitrage that a consumer will do

according to the insurance content and the design (how to engage on

benefits). The research concludes that not only critical insurance

expectations such as clear dollars and cents coverage are a must but also and

foremost the way to package such coverage will trigger the purchase or not.

It also mentions that digital helps to achieve such choice faster and better.

With such diagnostic, we could expect the industry to put its energy into

these findings. Yet no new and innovative approaches have clearly affected

positively the industry. Reddy (2014)25 points out that the insurance industry

reached a peak of maturity on the traditional way of doing things. They are

well positioned to focus on deploying new innovative and disruptive ideas.

They will have to turn the page of current conservatism and traditional

approach in doing business. Selling insurance online is not selling insurance

offline. Organization will have to adapt to this new preference. Comanac,

Tanzi, and Ancarani (2016)26 combined the necessity of transformation and

changes with the era of digital. Consumers are demanding and have high

expectations online not only on product display but also on services.

Customer journey and customer experience will have to be revisited 27 to

adapt to the online requirement. From services to product, from processing

to underwriting, from claims to finance, all has to be changed with no

exception. Similarly Hirt and Willmott (2014)28 made digital the top priority

when it comes to the new customer insurance paradigm. Two critical

decision insurance organizations should consider to endorse the rule of

digital competition. Firstly there is the necessity to transact better,

differently and digitally with third party providers (customer, suppliers,

employees). Secondly, there is the importance of improving and fasting the

management decision. It includes accepting and enabling new way of doing

business (minimize conservatism). New trends, new set of governance, new

organization, reshuffling of the industry is all coming through 29. Insurers

understand the urgency of transformation but remain clueless on how to

proceed30. As such digital onboarding is a painful changing process. New

trends, new set of governance, new organization, reshuffling of the industry

is all coming through very fast. It creates new opportunity for new entrants31.

The changes are back up by strong investor that believes in the industry. Yet

they are not going through historical insurers. Such investment flow targets

smaller companies or start ups that try new approaches. As a consequence

the insurance industry is moving from big heavy company to small start-ups

that launch ecommerce platform, active social networks and sophisticated

big data system. They take different risk with a test and learn approach.
Insurers are missing the necessary set of expertise to embrace the digital.

Insurers keep focusing on what they know: underwriting, pricing while

digital companies gives a new way of sales. Hsu, H. H. (2016)32 believes

that it will create cross industry alliances to give birth to an insurance

revolution. The disaggregation of the insurance with multiple way of

insuring the world is coming through. No more traditional products but

rather hyper connected devices and robot insurance services. Ohlsson,

Händel, Han, and Welch (2015)33 talk also about this hyper connectivity.

They name it as Usage base Insurance (UBI). Telematiks and geolocation

will be the new way to track and assess quickly and accurately true behavior

of customer. Tselentis, Yannis, and Vlahogianni (2017)34 illustrate that such

approaches are the best to respond to the need of innovation. Telematics or

UBI can respond to the crisis of the insurance obsolescence and in addition

give be in a better position to assess and respond to the risk. It implies a new

business. It implies also that insurer will have to adapt to this new model to

ensure that they monetize such new risk assessment. As a consequence, they

also expect the industry to change faster. Desyllas, and Sako (2013) 35

confirmed that it is a new paradigm to reinvent. Insurers must be ready to

transform their organization, governance and business model, but also their

Intellectual property protection.

Fruchard (2016) 36 insists on the survival syndrome. The digital insurance

transformation that mirror small start-ups must start now. It is a matter of

survival in a world that is affected at all level by the uberisation of the

economy. The danger for the industry would be to endorse innovation as

defensive versus offensive strategy. Plsek and Wood (2015)37 believes that

those that will take the topic of innovation as complicated rather than

complex will fail. Insurance companies should rather choose to be reactive

rather than protective or defensive. The industry should adopt a yes but

approach rather than a no because mentality.

It is extremely difficult to gather data from the field that could be

interpreted without having a huge error factor. To demonstrate such

evolution and the impact of innovation into the industry, I will opt for a

more exploratory approach with objective observation coming from the

insurance industry itself.

There are numerous surveys done by consulting firm that evaluates what is

the appetite and interest of the industry38. They use study as a barometer that

could forecast the expected investment, change in organization, and

development of new expertise within the industry. An interesting pol is a

survey on the evolution of the mentality from the Insurance top Executive
vis a vis the digital transformation. Regular Studies has been done on the

feeling and opinion from respective insurers and their plan to transform and

change the way they organize their company. We compare from one to

another and see how the opinion, feelings and expectation or priorities of

such leaders have evolved. Such survey mentions about how they wish to

invest in program, resources and external parties. It is a good barometer on

how much and well they perceive the necessity to change and respond to

digital evolution. With such data and observation, we can confront the

different findings and show the gaps between the two parties - those that

hold the industry since the beginning vs the new insurers (start-ups,

aggregators…).

We will be able to forecast and confron the expected investment, change in

organization, and development of new expertise within the industry. An

interesting poll is a survey on the evolution of the mentality from the

insurance top executive vis a vis the digital transformation. Regular studies

have been done on the feeling and opinion from respective insurers and their

plan to transform and change the way they organize their company. We

compare from one to another and see how the opinion, feelings and

expectation or priorities of such leaders evolve. A good survey mentions

about how they wish to invest in program, resources and external parties. It
will show how much and how well they perceive the necessity to change and

respond to digital evolution. The survey must be well segmented in order to

help us confront the different findings and show the gaps between the two

parties as suggested by Mc Quitty in his essay on structural equation to

39
succeed a business research . We will interrogate those that hold the

industry since the beginning versus new insurers such as start-ups and

aggregators

A good survey should be built through 3 steps targeting the 2 segments:

1. A primary paper with qualitative insights from top executives of the

legacy industry and new founders of start-ups. It must be done via

discussion, and interviews of a selected panel. We must get the

sentiment of the company they represent as well as their personal

feelings as per the first method defined by Fowler Jr40.

2. A series of broader interviews to the peripherals of the insurance

industry such as big data, IT, Media, Distribution specifics (Banks,

Brokers, Agents…), Consulting firms, Regulator. Once more, the

idea is to evaluate if there is a match or a gap between what the

industry says and the third party providers.

 3. A quantitative survey to customers on their experiences with their

current insurers. We will consolidate the findings of the first 2

qualitative studies to validate the overall sentiment of effective

transformation of the industry.

Looking at the specifics, we could follow what PWC41 does on yearly basis

in different countries. The consulting firm set a series of interviews that

contains 32 questions addressed to top executives and focus on the growth

agenda and outlook for growth, risk and regulation in the industry and lastly

in the technology as an opportunity and a risk. We could go further and set a

survey that would engage these actors of the industry into an in-depth

SWOT discussion:

1. Macro economy such as the political, economical, financial and

regulatory situation

2. Risk of the industry such as the claims context, profitability and

insurance requirement

3. Talent management such as the organization, recruitment, turn over,

education and cost of the resources

4. Transformation such as the capability to change and adapt to respond

to the first 3 points.

 5. Digitalization and innovation that includes the capability and capacity

of the industry or the company to consider digitalization as a threat or

an opportunity

For each of the point mentioned above, we would split the themes into

different parts in order to move from generalization to more specific. The

objective will be to try to figure out what do these executives really think. It

could go through that journey:

a. Overview and sentiment of the point discussed (Opportunity,

threat, strength and weakness)

b. How does it affect the industry in general and the company in

particular

c. What is it plan to face or to respond to such situation

d. Do they position themselves as well a prepared organization to

face such situation. It could include having the appropriate

knowledge, expertise, governance and management.

e. Any Investment plan to embrace or fight against the situation -

what could they be, through which timeline, through which

priorities and what achievement.

 f. How do they think their customers, partners, management and

staffs think compare to them.

This preliminary set of interviews will give a good view of the situation and

how this situation is perceived by and through the industry. We will then

move to a more quantitative survey with closed questions that we would

spread to the industry and its peripheral. We set a minimum number of

questionnaires and follow a strict protocol to validate the findings following

Suresh and the ideal sample size estimation42 to accept a fair margin error of

5%. We will target again the same segments and for each will target the

minimum number. We will opt for close questions rather than open one to

have immediate validation of the question. We follow indeed the approach

of Zaller and Feldman where gathering a preference rather than get a new

type of answer43 helps validate faster initial findings. Response to provide

will be a rank – Disagree, Somewhat Disagree, Somewhat Agree, Agree.

We will ask not more than 30 questions to optimize the accuracy and the

focus of the person surveyed as per the suggestion from Fink44. The series of

question will contain the most important themes that will have been revealed

by the qualitative survey.

Once the sample cleared and survey realized, we will be able to validate or

invalidate the trends raised through the interview:

1. Does the insurance industry is truly changing and embracing

positively the digital era?

2. Is the innovation coming from the peripheral insurance industry

considered as a threat or an opportunity for the insurers

3. Will the insurance industry survive the digital tsunami?

The objective of the research is to evaluate how much the resources embrace

such transformation and participate into the evolution of the industry.

The business research will be done through a series of interview address to

both the industry and its peripheral. From the legacy industry, we will

include top executives that have been here for a long time – lead by

experience – and the newly appointed heads – driven by their expertise. On

the peripheral side, we will engage discussion with the regulator top

representatives, IT companies, Consulting firm with strong specialty in the

insurance side. Lastly, we will speak with the new comers that try to disrupt

the industry. It includes the founder of start-ups and the investors in

insurance innovation.
For the first profiles (Insurance industry top management), it is difficult to

find executives that both play an instrumental role and yet is ready to share

his view on the performance of the industry. In an effort to make the

interview as fruitful as possible like Lederman45 highlights in his research of

setting up the most efficient interviews, we will select the most motivated

persons that are open to explain honestly what do they perceive. On the

contrary, with regards to the second set of profiles (resource that works for

the Industry peripheral), identifying executives willing to share their feeling

and views on their clients or partners evolve will be easier. Finally, the last

segment (Founders today or Founder to be, Insurance disruptors), will be

probably the most relevant to bring some area for thoughts and future

validation. As insurance entrepreneurs and innovators, they have found an

opportunity or a gap that is worth trying to transform the industry. It would

make sense to interview in parallel the different segments. As we evolve in

the set of interviews, we might be tempted to try or challenge the reasoning

of one or another. While one segment (the legacy) might find all the excuses

or the reasons of a slow transformation, another other (Entrepreneurs) will

see and justify a priority or opportunity for venture. Once the set of

interviews mature enough, we could suggest some closed debates in order to

confront two ideas or conception of the industry from different profiles.

From the industry we would invite and suggest the following interview with:

 Doina Palici, CEO of AXA Singapore – She has over 35 years of

insurance background across the world. She has made the

digitalization of her company a priority. She wishes to lead the first

innovative insurance firm in Singapore by 2017.

 Johann Simon, Chief Technical Officer of AXA Assistance Group.

After 15 years in Europe and 15 years in Asia, Johann has been

appointed to a Global role to change the Assistance side of AXA

Group. The assistance is the service side of any insurance companies.

He has a view on where the industry stands and why it takes so long

to evolve.

 Paul de Bruijn, CEO of APA Insurance Laos. Former Chief Digital

and Program Officer, he is based in Laos to open the door of digital of

the insurance industry in Laos. He knows the bottlenecks and how to

go around it.

 Other personality from the insurance industry would be: Richard

Luquain -Head of digital transformation at AIG Asia, Fabian Ng –

Head of bancassurance of DBS, Dennis Ng, Head of transformation at

Prudential.

From the peripheral, we suggest to interview:

  William Gaillard from SGS, a company that focuses on assisting

insurance company with different services (garage, Claims review,

audit…). William is a Business development manager and have

appropriate experience to share his view on how the industry is

willing to adopt innovation and collaborate for changes.

 Beng Du Maniar, Director and head of the Insurance division of the

MAS (the Monetary Authority of Singapore). He is dealing on daily

basis with the industry. His experience on the rules and regulation

evolution will be very critical.

 Tom Mouhsian, Principal Advisor of KPMG. He specializes in

embarking the insurance industry into transformation.

 We will include, Doctor Woody, CEO of the successful IT company

Ebao,

 Noora Pesonen from AON broker and Frederic Guillet from

AudienceValue, another IT company.

The last segment includes the founders and entrepreneurs. We will select a

group of executives that have launched successfully their application or

system:
 Val Yap that launched PolicyPal – an app that focus on insurance

distribution - early this year. She is 25 years old and has decided to

develop her own app without any experience in the industry.

 Anthony Sar, founder of Finnovasia, a start up that focuses on

bringing the most innovative people together for discussion and

debates. His sentiment on the transformation momentum of the

industry will be crucial for the barometer we try to design.

 Gregoire Rastoul, the Founder and CEO of UEX. He has more than

10 years of experience in the insurance industry in Europe. He

decided to leave the industry as an employee to set up his own

company. UEX is a start up that focuses on health underwriting and

distribution in August this year.

 Other entrepreneurs could be Regine Lai, recruited recently as the

director of my-Insurer. She has seen and ceased the opportunity to

join the industry without prior knowledge. Asking her why will

provide great insight. Some new experts, entrepreneurs, consultant

will come to mind as the journey of interviews will go. I will have to

be prepared to identify and invite for discussion other experts if

necessary.
The insurance industry is going through a dramatic change. Drastic and

aggressive, the necessary mutation affects the historical companies and their

management. The revolution of Internet has affected all industries so far and

it is only a matter of time to come into the insurance one. Yet the

conservatism and defensive approach that insurers took in order to protect

their businesses have made things worse. The objective of the research is to

evaluate how much the actors of the industry embrace or plan such mutation

and participate into the evolution of the insurance business. The industry has

delayed the transformation that opened doors to new entrants. Smaller, faster

and in line with customer expectation, these start-ups may do some harm to

the traditional insurers. They still have the opportunity to take the bullet

train. It is not too late. It has to be now for survival or else it is a matter of

time for the insurance to be absorbed by the digital big bang and be

replaced46.

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