Swiss Reinsurance’s recent survey of Asian insurance companies finds their digitalization efforts focused on claims.
This is helping insurers improve their use of capital and their hold of risk, but it is also work of the low-hanging-fruit variety.
Other areas such as loss adjustment, underwriting, marketing and distribution are not being addressed systematically.
John Zhu, chief economist for Asia Pacific at Swiss Re in Hong Kong, says the survey shows insurers are focused on cost reduction. They are not being pressed to adopt many bigger changes because they are not under pressure from technology alone to do so.
“Insurers in Asia are focusing their digitalization on claims because this area has been very manual and cumbersome. You can get bang for your buck here.”
Sticking to claims
He adds that achieving straight-through-processing of claims does not require difficult technology. Optical character recognition (OCR), by which computers can read unstructured text, is now commonplace.
The reinsurer’s survey found that often insurance companies did begin digitalization pilots by looking at the customer-facing side or distribution-related processes. This was particularly true of early investments in, or partnerships with, insurtech companies.
“But now it’s about claims and the back end, because they can improve efficiency,” he said.
Real cost savings
According to Swiss Re, insurers are notching measurable successes with digitalization programs, even if many are still in pilot phases. The reinsurer says on average insurers in Asia have seen improvements in loss ratios of 3 percent to 8 percent (the loss ratio is the claim and related expenses divided by the premiums earned), and overall savings on costs of 10 percent to 20 percent.
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Swiss Re calculates that 70 percent of savings due to enhanced digital capabilities come from claims. Another 10 percent comes from loss adjustment. About 8 percent of savings come from marketing and distribution, while the remaining 12 percent comes from digitizing pricing, underwriting, and general administration.
These gains are being countered, however, by a commensurate rise in cybersecurity risks.
Digitalization programs vary across the region.
In general, insurance companies in developed markets such as South Korea are taking greater advantage of technology. The digital infrastructure in these places is very good, freeing insurers to focus on a broader range of tech programs. Their partners and customers are likewise more likely to be online and open to technological solutions.
Swiss Re found South Korea is both a regional and a global leader when it comes to the digital sophistication of its insurance industry. Some of Korea’s strengths include high internet usage, high broadband connectivity, and innovation.
Emerging markets pose more basic challenges: their populations are not as well connected, especially beyond the major cities. For example, China, despite the prowess of its payment apps, has a middling position in Swiss Re’s rankings. India is ranked last among the 29 global markets that Swiss Re surveyed.
These macro factors are not destiny: China for example has some cutting-edge digital insurance companies, from Ping An to Zhong An. But go beyond its industry leaders, and most companies are still heavily paper-based.
Therefore insurance companies in emerging markets need to focus more of their digitalization programs on compensating for gaps in national digital infrastructure. Companies in developed markets have the luxury to focus more on internal innovation.
Whatever the market, however, cyber-related risks are rising. Insurers face increased regulatory scrutiny over data protection, privacy, and safety. They are also encountering new dependency risks, such as the availability of only two or three cloud service providers. Insurance is a capital-intensive industry, and its digitalization projects can be that way too.
But the combination of risk, regulation and capital cost also means the insurance industry can buy the time it needs to digitalize gradually.
“The insurance industry won’t have a Kodak moment,” said Zhu, referring to the venerable camera company that went bankrupt with the advent of smartphones. He means there won’t be an insurtech that disrupts the incumbent players. Rather, insurers with weak capital bases will struggle to keep up with their peers.