The real value of Digital in the Insurance Industry

Digitalization poses a major threat to the traditional business models of insurance companies. New entrants with superior capabilities have already entered the market and are eroding the profit margins of existing players in this industry. What makes it more challenging is that these new entrants often take up very little equity investment, while traditional players need to dilute their shares or raise funds through debt. In fact, Digital organizations rely on what is known as "capital light" business models, which are far more capital efficient than traditional players.

Most insurance companies in the high growth economies have already launched their digital ventures. A recent study by Boston Consulting Group (BCG) finds that digital entrants will account for 18% of the overall insurance industry's revenue by 2021. Further, it estimates that the "insurance pure players", as they are known, will account for 50% of the overall industry's growth in the next 5 years.

Digitalization is also expected to increase the global market share of Indian Insurance Industry from 4% to 6%. Current scenario and future implications of digitalization on India's insurance industry are discussed in detail below.

The global insurance market is expected to grow at a CAGR of 4% over the period 2016-2020 to reach US$4.6 Trillion by 2020. The Indian insurance sector, which was valued at US$ 80 Billion in 2015, is forecast to grow by 14% to Rs. 5,858 billion by 2020 from US$ 1.3 trillion in 2015, at a much faster pace than the global average growth rate of 4%. Key factors driving growth in India's insurance market include increase in customer awareness and an emerging preference for online sales as well as digital services. In addition, the need for higher penetration in rural areas to address India's huge unmet insurance needs will also drive growth. PwC in its recent report predicts that digital channels including mobile and banking are expected to account for 57% of new sales by 2035.

The development of the digital ecosystem is creating tremendous opportunities for innovative players operating at different levels within the value chain. While large insurance companies are expected to focus on creating digital capabilities, a new generation of "insurance pure players" is also emerging in the business. Insurtech start-ups have already attracted significant investor interest with investments worth US$ 6 Bn (Rs 45,000 Cr) being made over 2015-16 alone. In contrast, the insurance industry itself, which is at least 4-5 times larger than the entire Insurtech sector, has received investment of just US$ 500 million. This clearly illustrates that Insurtech start-ups will account for nearly 50% of the overall insurance industry's growth in the next 5 years.

The increasing use of digital technologies is likely to disrupt the existing business models of traditional insurance companies in several ways.

(i) Direct Distribution

Insurance companies have traditionally used intermediaries (such as local agents and brokers) to sell their products primarily on account of long-established distribution channels. The adoption of digital technologies would however enable insurers to directly communicate with customers and thus boost sales through direct distribution. This would significantly reduce the costs of distribution and may also help increase penetration and enhance efficiency as well as customer satisfaction through better engagement.

(ii) Personalization

Digital technologies enable insurers to provide personalized services to customers across all channels, thereby improving user experience. Digital platforms can also be used by customers to compare insurance products offered by multiple players and get instant quotes without having to visit an agent. Such capabilities could enable new-age insurers to offer customers a broader range of tailor-made products that could go a long way in increasing customer stickiness.

(iii) Innovation

The ability to rapidly create, test and implement digital solutions through technologies such as mobile, IoT, Cloud etc will enable insurers to innovate at a much faster pace. This may help them in developing new-age products such as micro insurance, which can be offered directly by the insurer on a mobile platform at extremely competitive prices.(iv) Customer Data

The increasing penetration of digital infrastructure has enabled the creation of an increasingly sophisticated database system that could provide insurers with a wide range of valuable consumer insights. Insurers would however need to be careful in how they use and manage such customer data.

(v) Digital Marketing

Digital marketing enables a much more cost-effective means of advertising products and services while also providing the ability to test, validate and improve upon them. Start-ups could thus innovate new ways for insurers to reach their target customers.

However, digital technologies also come with certain challenges for the insurance industry. For instance, the ability of Insurtech companies to design product offerings and delivery models that mitigate risks appropriately in new-age products such as micro insurance could prove to be a challenge for traditional players.

(i) Regulatory Challenges

While the insurance industry has been able to react relatively quickly to the regulations of capital and other key areas, a host of new regulatory challenges is likely to emerge with increasing use of digital technologies.

(ii) Stakeholder Challenges

The insurance industry would need to ensure that the expectations of customers, employees and partners are met while adopting digital technologies. For instance, insurers would need to find new ways of managing the increasing number of intermediaries (such as agents and brokers) in the digital era.

(iii) Data Security Risks

The use of multiple digital platforms by customers could increase digital security risks for insurers. Insurers may also not be able prevent customer data from getting compromised, especially in case they are required to share such information with governments and law enforcement agencies.

(iv) Business Model Risks

When implemented without traditional intermediaries, digital technologies could potentially result in a significant deterioration of margin for insurers. Insurers would thus need to adopt new business models that mitigate such risks.

(v) Competition with Insurtech Start-ups

While the adoption of digital technologies by insurers could provide them with a competitive advantage over their peers, newer entrants such as Insurtech start-ups may also be able to make use of these technologies in developing innovative solutions for customers. Hence, even established players would need to carefully assess the evolving competitive landscape and work towards strengthening their competitive positions.(vi) Regulation of Insurtech Start-ups