It's pretty obvious that digital innovation is imperative for businesses in pursuit of maximizing efficiency. But it is important to understand the distinction between the effects of digitization and digitalization.
While digitization represents the application of new data and technologies to existing business processes to reduce costs or improve effectiveness, digitalization, on the other hand, takes an outside-in — or customer-centric — view of the organization, and uses innovative strategies, products, processes and experiences to create revenue. It offers enhanced efficiency, but is mainly concerned with seeking new opportunities for generating customer value, often outside the confines of the traditional business model and industry norms. Furthermore, it often differentiates the brand from its competitors, but it may also cause disruption to the traditional way of conducting business.
The difference between digitization and digitalization is reflected in a clear divide between carriers that regard digital as a tool for incrementally improving their existing business activities and those whose aims are much more ambitious, according to a recent Accenture survey.
The survey calls these ambitious carriers "Digital Transformers," who strive for growth through customer-centricity and the development of new business models, rather than relying on traditional or conventional practices. They know how to use digital technologies to add value.
And while the digitization group — the "Digital Followers" — also believe that digital is likely to have a large impact on the insurance industry, they are often impeded from taking advantage of the digital integration by a multitude of constraints.
According to survey results, some of these carriers view digital as an approach that can complement their business strategy, whereas Digital Transformers see it as the integral driver of strategy. Furthermore, some of these carriers also maintain a traditional business mindset — often captive to a legacy mindset — that can make it difficult to focus on the customer's perspective and develop solutions that range beyond the traditional. Others have not been able to progress further than the exploratory stage of digital innovation.
But Accenture also claims that digital transformation is imperative for the insurance industry. Just as manufacturers in the Victorian era had to convert from steam energy to electricity to stay relevant, so too will insurers need to embark on a digital transformation to remain competitive.
Accenture also asserts that the gap between digital transformers, digital followers, and the rest of the industry is likely to widen as the Transformers begin to reap the benefits of their investments.
The Accenture Digital Innovation Survey provides perspective regarding insurers' position within this process of change, outlining priorities. The research consists of the survey results of 141 insurers in Europe, the Americas, South Africa and Japan. Most interviewees were C-level executives responsible for driving their companies' digital strategy.
From the survey results, Accenture deduced six important conclusions regarding the transformation of the insurance industry related to digital innovation. But only half of the survey respondents feel that digital technologies are creating more opportunities than challenges. While change might be necessary moving forward, it is not always welcomed.
As a whole, the data reveals that a digital transformation is underway, and insurers expect to see the benefits linked to their strategic investments.
The survey's key findings reveal:
1. Insurers expect digital transformation to be a top priority for the next five years.
According to the research, a majority of insurers believe digital technologies are transforming the fundamentals of the industry. The survey's implications reveal that digital transformation occupies an important place on most carriers' agendas, seen in a variety of areas.
From customer behavior to new channels and technologies, to the value chain, few (if any) elements of the business are expected to be unaffected by digital innovation within the coming years.
2. Digital initiatives are expected to generate additional growth
There's also a link between digital initiatives and digital growth. P&C insurers, for example, expect revenue income to grow by 5 percent as a result of digital initiatives, while life insurers anticipate growth to exceed 7 percent.
But several other growth levelers will come into play in the process of digital transformation:
- Respondents see innovation as a key driver of growth. One in three respondents expect innovation to increase the innovator's market share by as much as 10 percentage points. But interestingly, respondents also believe existing insurers stand to gain more from innovation than new entrants. Established industry carriers have an advantage to those entering the market, survey results reveal. However, these incumbents need to use their advantage effectively.
- Relatedly, 29 percent of respondents expect the main driver of premium growth to be the expansion of their customer bases through the use of digital channels.
- One-third of respondents expect usage-based insurance to account for more than 6 percent of total auto insurance premiums by 2017, demonstrating the relationship between innovation and growth. However, these results represent a more conservative forecast than that of the National Association of Insurance Commissioner's, which predicts that up to 20 percent of all vehicle insurance in the United States will incorporate some form of usage-based insurance within the next five years.
3. Radical extension of the insurance value chain is key to success
Insurers understand that they need to expand traditional value chains, or even create new ones, in order to weather disruption. Creating new partnerships, investing in innovative companies or broadening their offerings to include non-insurance products are just some of the ways companies can prepare and initiate change.
The survey reveals that those who have made changes have also had the most progress in distribution. 72 percent are planning to form new distribution partnerships in the future, or have already done so. Targets for future partnerships often include banks (69 percent), internet players including Google, Apple and Facebook (44 percent) and aggregators (44 percent).
At the same time, however, many insurers are taking an approach with a much broader reach. Sixty-one percent are planning to offer non-insurance products and services, or have already begun doing so. This expansion and mutation of the risk landscape, Accenture claims, correlates with findings in Accenture's Consumer-Driven Innovation Survey, stating that customers want insurers to adopt a broader role by, among other things, helping them to manage risk, while also insuring it. According to the Digital Innovation Survey, insurers are looking for non-insurance products and services to expand their role.
Additionally, 43 percent of respondents plan on completing (or have already completed) the acquisition of a start-up or innovative competitor to help them extend their value chains and better position themselves for digital innovation. Most carriers expect their industry peers to make acquisitions over the next three years (82 percent). New insurance start-ups are expected to make up 59 percent of these acquisitions, followed by companies specializing in telematics (47 percent), aggregators (43 percent) and analytics companies (38 percent).
As insurers enhance their understanding of customer intimacy in the current business environment, Accenture also expects to see a growing number of industry initiatives to provide a greater range of value-added services to clients.
