Building On Lessons Learned In Banking…July 29, 2019
by Michael Gorman
Thoughts for the insurance industry
One day-to-day benefit that my job in regulation brings is hearing about the practical challenges and trends financial services face – as opposed to the horoscope-like predictions we sometimes see in industry literature. Don’t get me wrong: high-level trend papers and predictions serve a purpose in framing the industry conversation and, so, have value. The insights, however, come from seeing how those general statements become specific challenges that ‘keep clients up at night’ (to borrow from an earlier FD blog) observing and how the industry solves them.
The same holds true for insurance companies. In fact, since beginning our work with insurance companies, I have been struck by similarities between the insurance industry’s challenges and those of wider financial services. During a recent conversation with an insurance industry veteran, we spoke about digital transformation and the need for incumbent insurers to evolve, moving away from silos (technical and operational) into unified, connected businesses. It’s a path well-trodden by our investment and commercial banking clients, so it occurred to me: why don’t insurance companies borrow some lessons learned from banks, finding the clear paths and avoiding the common pitfalls?
This seems self-evident, but not so. Our experience is that insurance and banking too often concentrate on the differences in business models, rather than viewing challenges or opportunities from the proper level of abstraction. Instead of going it alone, insurance companies should borrow some lessons learned from banks.
To prove the point, let me offer a few lessons banks have already learned and how they could prove beneficial for the trends we’re see-ing within the insurance markets.
2. DIGITAL TRANSFORMATION
Like their banking cousins, insurance companies recognise the need to evolve to thrive. Digitally-born disruptors have started to challenge incumbents; customer preference and buying decisions are changing (where experience and convenience loom larger in the purchasing decision)and the regulatory environment has grown more complex and time-consuming. Insurance companies see these trends and actively look to fashion a digital response. This means an IT estate that can enable quicker product launches, satisfy customer needs better and marshal data into actionable insight. And, this means updating your core systems during normal business hours. Easy, right? Hardly.
Banking has been consumed by the goal of ‘digital transformation’ for over 3 decades. Even with arguably the largest, IT spend of any industry (around 15-25% of annual budgetary allocations), banking has struggled with digital transformation programs. All recognise the urgent need to change and become more technologically nimble. All put sizeable resources into these projects. Yet, according to many who have worked these projects, they fail if there is: (1) a lack of accountability for results, (2) less-than-agile development, or (3) tepid buy-in from the cross-functional leadership supervising the projects. When it comes to digital transformation, it doesn’t matter whether you sell current accounts or car insurance, these elements are crucial for success.
So, we advise insurance companies to heed the lesson:
As scary as many CTOs and CIOs find it, responsibility for digital transformation needs to be allocated clearly before starting. Metering specific, concrete lines of accountability that correspond fairly and reasonably to the project objectives is cumulative and, when added up, improves transformation success. A lack of accountability, as many firms can testify, proves fatal for project success.
It’s often easier to describe agile than to practice it. Whatever the pain, true agile development will become critical to success for digital transformation projects because it forces collaboration and retrospection. Our most successful clients have been able to incorporate changes that inevitably arise in a fast-moving industry like financial services. Considering that any transformation will be measured in years, not months, this is critical. As one client explained: ‘The market conditions when we started no longer exist now. They changed, and so did we’.
Because these projects touch on every area within a firm, buy-in from each unit is critical, starting with the unit leadership. To be successful, firms cannot just tinker with one or two components. They must transform the entire value chain from front- to back-office, from risk to compliance. One cannot impose this. Rather, one must present the case compellingly enough for each unit head to recognise the benefit for themselves and the whole enterprise. If that happens, you’ll find a solid base to enable success.
FinTech, RegTech and InsurTech innovations are showing real promise for catapulting financials services toward experience-led customer relationships. To thrive in this new world, firms must create not just products, but new, customer-centric experiences, and they will focus not merely on transactions but on life touchpoints (like buying a house, setting up a pension, and having a child) and customer behavior (like social media, using wearables, and buying renewable products). Analytics, AI and machine learning will make this possible, but only if they’re fed huge amounts of data.
This then leads to considerations on where, and how, one collects the data (e.g., health data flowing from wearables) to highlight a practical problem for insurance companies: how do you capture, store, and control a high volume of data?
BCBS239 serves as a good example to insurance companies. For back-ground, BCBS239 aims to improve risk management data in banks by man-dating a principle-led approach to aggregation and reporting. Its function is not our focus. Rather, it is how it was implemented and some of the best practices it produced that are useful for insurance companies to consider in their data strategies. The ECB released a thematic review in May 2018  that provides ‘areas of concern’ and ‘best practices’ for each of the 14 principles in BCBS239. Having a read of the ECB’s report would benefit anyone with responsibility for data management and governance—regardless of industry.
With the proper perspective, one realises that many challenges facing the insurance industry are neither new nor unique. Whether it’s digital transformation or data or revitalisation of supporting systems the industry can learn from banking’s experiences and, through lever-aging, those lessons learned, respond faster and more effectively to the new market landscape. For larger, incumbent organisations, this will be critical to survival. But, as I said earlier, the insurance industry doesn’t have to go it alone. Hopefully, the few examples here demonstrate that.
 ECB, Report on the Thematic Review on effective risk data aggregation and risk reporting, pp. 1-2, available at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.BCBS_239_report_201805.pdf (last visited 25 July 2019).