15/05/15

Insurance in the USA – How Insurance Carriers Are Embracing Digital Transformation

Ernst Renner of [NEOS]By Ernst Renner. Managing Partner

Introduction

Never before has the insurance industry seen a time of such dramatic change. For decades, the insurance industry has continued along a consistent path of underwriting, pricing, receiving and reserving, paying claims, and administering policies. At its core, insurance will likely always be this way; however, now insurers must respond to the demands of a changing population who expect carriers to support retail-style processing. For property and casualty insurers, and life and annuity companies, this will be a tectonic shift in their sales models, operational processes, and the underlying technology.

Some of the most visible technologies to consumers are payment methods.American flag representing insurance in the USA As product designs trend toward simplicity and customization, carriers must think of innovative ways to provide payment options, even as their sales channels evolve. This article will provide a view of emerging trends from carriers and the key decision points influencing direction to embrace the digital economy. We will look primarily at personal insurance and life/wealth management insurance products.

Customers Expect a Seamless Experience

A fundamental paradigm of the current and future customer-base is the expectation of a seamless experience, from insurance product research, to enrollment and purchase. Established as the norm by retail industries, this expectation has now flowed through to insurance.

Customers expect to conduct their own research, query their personal networks and make a purchasing decision without having to engage with a third party until the very end of the buying process, if at all. For insurance, this puts the agent in a new role with new expectations. When in need of more complex or wealth management products, customers conduct their own research prior to engaging an agent for quotes and enrollment. They expect to move from research to quote and then to enrollment without indeterminate wait times or extra hurdles and hoops.

As a natural extension of this seamless “retail insurance” engagement model, customers will expect payment options beyond writing a check or scheduling a monthly withdrawal from their checking account. They demand security, flexibility and choice of payment options to accompany their insurance purchase.

Personal & Commercial Insurance

Personal insurance is probably best suited for modern payment options given the relative simplicity of the products and the underwriting process. These insurance carriers have been switching their sales models to direct-consumer in the hopes of making the purchase of auto, home, and property products faster and simpler (and also more profitable by dropping out commissions). Progressive and Geico have set the standard when it comes to direct-to-customer sale strategy. Traditional insurers have been playing catch-up.

Payment Options

Personal insurers are somewhat more flexible in regard to payment collection. All carriers support traditional payment which is the plain old paper check or automated clearing house (ACH) payments. Most accept debit or credit transactions and a few innovative companies, such as Esurance and Progressive, have ventured forward to accept PayPal. Since personal insurance options are considered “retail products,” carriers must find ways to accept digital forms of payment.

The future for personal insurance payments lies in secure digital wallet transactions. Personal lines carriers will begin to add in on-the-fly or per-use insurance, which will create a more transactional environment that will need speed and security. Digital wallet transactions will become necessary.

The small business segment for commercial insurance is also emerging as a formidable group of customers with demands similar to individual insurance consumers. With a diverse set of needs, but perhaps clearer internal financial processes, small businesses are looking for integration, simplicity, and security. Currently, options are mostly limited to ACH and checks.

Options such as Intuit, which integrates with internal accounting software, should be strongly considered. Other payment options that integrate with accounting packages will be attractive to small business customers.

Life and Investment Products

For the more complex products like life insurance, annuities, and retirement plans, it’s more difficult for consumers to operate independently. From suitability requirements, to fund selections, these products do not easily lend themselves to online research and selection by the average person, making the direct sales approach a challenge for the carriers in this business. In other words, the need for a middleman (the agent) is still there, although we see signs of disruption emerging, with life insurance products specifically.

So, what to do? Insurers are developing simplified issue insurance products and looking for ways of bundling products with life events, such as lifestyle activities. For example, John Hancock has become the first US insurer to offer discounts to its customers who wear Internet-enabled fitness trackers.

Payment Options

The actual payment of policies varies, with almost all large and middle market insurers offering at least EFT (electronic fund transfer), credit, or debit card payment options. Certainly, plain old checks are still largely used.

Payment dramatically changes in the life insurance industry where investment and long term growth and protection are the primary concerns. Products like universal and whole life will likely always be sold through a party with the advice and guidance of a financial planner, but these are generally targeted to a subset of the overall customer base. The payment options for life and annuity products will likely max out at EFT, ACH and, perhaps, debit card transactions. Credit card processing fees are too prohibitive for use with higher-end life insurance or annuity products.

Direct sales of simpler types of products will demand a wide range of easy payments. Insurers in these markets must accommodate a wide range of options including PayPal, peer to peer, payment sites, electronic check, credit card, debit card, and others. Since these channels tend to be less price sensitive, however, insurers can price the product to absorb the cost of these various payment options for lower premium amounts.

What about the cashless society?

Online wallets like PayPal, Google Checkout and Amazon Payments may have the largest potential for impact in the insurance industry, offering a level of separation from the customer’s personal accounts to the actual transaction. This form of payment option from Google and Amazon is another aspect of worry for insurers who have been traditionally burdened with commission-based sales, high overhead and antiquated backend systems and processes. Amazon and Google have already figured it out and would be able to blend payment processing seamlessly with the more serious challenge of underwriting and enrollment approval.
Other major constraints to payment innovation in the US insurance market are regulatory mandates such as anti-money laundering, securities issues, state sales practices, and ERISA for retirement products. The constraints imposed will make it a challenge for future digital currency (e.g. Bitcoin), private crowd funding, or similar innovations to take hold.

For the most part, the decision to buy any form of insurance is rarely a snap decision that requires immediate purchasing satisfaction. Direct Carrier Billing or “DCB”, where you purchase items through your mobile phone carrier, carry huge finance charges (40% – 60%) passed along to the carrier. That is simply a non-starter in the insurance industry. With the exception of per-use personal insurance products in the future, the need for immediate insurance purchase and payment will remain low.

Call to action: digital transformation is a must-have for insurers

In closing, payment option trends will continue to “go digital,” requiring insurance companies to modernize and transform their businesses. In order to embrace digital transformation, carriers must supply their staff with intelligent “smart data” applications that maximizes insight and understanding to properly measure risk for their customers. Collection of data from wearables, property, and social media via the Internet of Things will further inform both insurance customers and carriers. User experience and processes must be adjusted to accommodate for an ever-growing digital community that expects a seamless issuance process, flexible payment options, and security.