Technology: The Insurance Industry’s Pivot Point

Harnessing social networking, telematics and SOA to meet industry challenges

The insurance industry is wrestling with how to interact with and retain customers in an effort to drive growth and profitability. A recent A.T. Kearney study finds that three innovative technolo­gies—social networking, telematics and SOA—are essential to companies that want to be industry leaders. Not to be left behind, chief information officers (CIOs) are faced with the challenge of becoming innovation leaders and effectively harnessing technology to overcome persistent insurance industry challenges.

Across the insurance industry, compa­nies are adopting similar and consistent business strategies as they seek new ways to grow and prosper. Many of the strategies seek to improve the richness and effectiveness of interactions with customers, which today increasingly have a technology component. Social networking, telematics and service-oriented architectures (SOA) are all in the mix and driving this trans­formation. Facebook, Twitter and YouTube—to name three—offer the ability to improve customer inter­actions, communicate product infor­mation and generate more sales. Telematics may be larger still, as it introduces entirely new business models that blend insurance, technology and mobility. SOA is becoming key to managing the complexity of integrat­ing legacy and new applications.

Figure 1: Technology trends can spur innovation breakthroughs, build capabilities and streamline costs

A.T. Kearney recently completed a study of emerging technologies to isolate opportunities for capturing strategic advantage. These trends in insurance are part of a broader land­scape in which innovative technologies are significantly driving change across a wide range of functions and indus­tries. Figure 1 highlights the main trends in five areas: consumer and employee experience (leading to innovation breakthroughs), applications and telecommunications (leading to growth and profits), and information management (leading to improved operations).

The study included interviews with more than 150 leading technol­ogy executives worldwide. The find­ings suggest that social networking, telematics and SOA are essential to growth and competitive advantage. The following discusses each in more detail, including how each technology could play a role in transforming the insurance industry.

Social Networking

Figure 2: Social networks and media strategies are used at key points in the value chain

Social networking sites and technolo­gies have enjoyed significant growth in recent years, attracting more people across a wide range of interests. Facebook has more than 500 million users and its 30-and-older demographic is growing at double-digits. Twitter has six million active users, while Flickr hosts more than five billion photos. People of all ages, ethnicities, income levels and political views use social networks.

Such sites have changed consumer expectations, as people now generally expect the organizations with which they do business to interact online—answering questions, solving problems, and providing feedback on products and services. Figure 2 illustrates the potential impact of social networking on the major areas of the insurance industry value chain: product develop­ment, marketing and communications, sales, underwriting, customer support and claims.

More insurance companies are using social networks. Allstate and Travelers, for example, are using their Facebook sites to build awareness and engage with consumers who are in the process of assessing and choosing an insurance provider. State Farm uses its Facebook pages both to connect with customers and to improve customer service, which are major components of its ongoing customer strategy.

Allstate is using its online Idea Portal as a way to capture ideas. Its Good HandsSM Community page is where customers, partners and affili­ates can submit product and sales ideas, and search information, allow­ing direct interactions with Allstate. Social media is also a means for con­necting insurance agents and brokers to carriers, creating communities with the power to impact product development, sales and marketing. Progressive's Facebook pages (featuring Flo) are arguably among the most popular in the industry and illustrate why com­bining social media with a popular ad campaign is a good way to communi­cate product information.

Some in the insurance industry are moving to the next step in social media —engaging their followers in "challenges." Much like Frito-Lay uses Facebook and YouTube every year to challenge users to create a new Doritos commercial to air during the Super Bowl, insurer Aflac's "10-Second Chal­lenge" commercial competition gener­ated more than 180 video submissions, which were watched more than 250,000 times on Facebook and on aflac.com.

Social networking also provides cost savings opportunities. In under­writing, for example, some insurance providers offer lower premiums to banks that use social networks to iden­tify borrower risk; the banks use soft­ware from SAS, among others, to determine applicants' associations with known criminals and isolate patterns that suggest the potential for fraud. In the claims process, State Farm uses social networks and media to address and counteract negative statements. "...for someone who is upset with your brand, there is no greater treasure for them than honest outreach and an open mind from people within the company who care," explains Kelly Thul, director of communications for State Farm, in her presentation "The Social Media Balancing Act."

As social networking technology becomes more mainstream, we believe insurance companies can capitalize on the opportunity. Although the financial value to businesses is still not completely clear, the potential for improving prod­ucts and services, and influencing target consumers, is perfectly clear.

Telematics

Already well established, telematics leverages the integration of mobile communications, vehicle monitoring systems and location technology to capture real-time data. Progressive's Snapshot^SM is a third-generation tech­nology that links insurance premiums to driving behavior and usage informa­tion gathered by an in-car "telematics" device. In the past five years, Progres­sive has expanded use of this product from 15,000 to more than 150,000 customers and plans to use Snapshot to increase safety and improve driving behavior.

Telematics refers to installing or embedding telecommunications devices into cars to transmit real-time driving data, which insurers use to measure the quality and risks of individual drivers. The instruments for such changes are readily available. Vehicle tracking and global positioning satellite system (GPS) technologies are becoming commonplace, as are the telecommu­nications devices that allow us to be connected from almost anywhere.

It is not difficult to imagine how this could weave into the future world of auto insurance. The possibilities seem endless. Drivers could receive quotes for and buy auto insurance in real time by tapping on an in-vehicle navigation screen. Seconds after get­ting into a car accident, emergency and road services could be automatically activated, vehicle damage assessed, and the nearest repair shop contacted. Indeed, the customer experience is being transformed well beyond tradi­tional insurance coverage—to real­time navigation, concierge service, safe driving tips, video-on-demand for the kids in the backseat, in-car or online feedback, and real-time vehicle diagnostics.

Telematics offers new, lucrative revenue streams, and far more accurate and profitable pricing models—bottom- and top-line benefits that would create a huge advantage for insurers. The advance of telematics in specific markets demonstrates some paths forward. Commercial fleets that monitor employees' driving behavior via telematics can improve asset utili­zation, reduce fuel consumption and improve safety.

Other wider trends may create a tail wind for telematics. With state and local governments striving to improve fuel consumption, emissions and highway safety, many see telemat­ics as part of the solution. California, for example, recently issued pay-as-you-drive (PAYD) regulations, which allows insurers to offer drivers insur­ance rates based on actual versus esti­mated miles driven. It's a financial incentive to drive less.

And, as with most popular tech­nologies, the next-generation of tele­matics technology is expected to be even better and less expensive. Among the latest technologies: An accelerome-ter allows insurers to assess drivers' style and behavior, thus expanding the risk factors tracked from the current 40 or so to more than 100. As demand for accelerometers has increased, auto-makers and device manufacturers have been able to push down the unit cost.

Figure 3: Telematics technology connects consumers with their environments

The need for increased connectiv­ity and access (spurred on by the "always-connected" consumer) will spawn additional product offerings for insurers with the foresight to capitalize on them (see figure 3). Indeed, most technologies in the telematics ecosys­tem are not unique to auto insurance. Social listening, neighborhood protec­tion portals and home monitoring could have an impact on how home and property insurance risks are assessed. Already, monitoring systems are available to adjust home tempera­ture controls or automatically dispatch service providers should there be a water, heat or air-conditioning issue in a home.

Telematics technologies are being developed for healthcare and senior living products, including location-based alerts, health-monitoring, and family-tracking services that could affect how individual risk is assessed. For example, at Carnegie Mellon Uni­versity, robotics teams recently devel­oped "Nursebot," a robotic nurse's aid designed to remind the elderly about routine activities, also guides them through their homes and calls for help in case of emergencies. These sorts of applications should continue to evolve as technology becomes more reliable and cost effective and as the need for such solutions increases in the elderly and home-care sectors.

As people become more trusting and willingly divulge more personal information—as has already hap­pened in the banking and cell phone industries—and insurers improve their offerings, we believe it is only a matter of time before consumers fully embrace telematics.

Service-Oriented Architecture (SOA)

Figure 4: SOA can help resolve growth barriers identified in A.T. Kearney's IT Innovation study

Service-oriented architectures, or SOAs, are considered among the most prom­ising of today's "hidden" technologies. SOAs, by definition, allow companies to make their applications and com­puting resources (such as customer databases and supplier catalogs) avail­able on an as-needed basis, either via an intranet or the Internet. Essentially, it is the ability to provide Amazon- and eBay-like services internally to employees. Based on a plug-and-play con­cept, SOA provides reusable software components across multiple technol­ogy platforms. It offers a new approach to software deployment while also tackling serious problems head-on, such as complexity and ineffective data integration (see figure 4).

This approach provides a consis­tent service and makes it easier to access data and to integrate both new and old content. Information and services are centralized and reusable, shortening development times and reducing maintenance costs. When a software service is needed (such as retrieving customer information) the user or system sends a request to a directory, which determines the proper service name, location and required format, and then sends back the desired output (in this case, customer information). Users and even other applications do not need to know the internal work­ings of the service—it's the "what" that's important, not the "how." Nor do organizations need to own and maintain software; they just access the published business service over the Internet or network.

Not surprisingly, SOA is gaining traction in the insurance industry, primarily as a way to integrate large, dependable legacy systems and to use those systems in new ways, such as e-commerce. One insurer is using SOA to share customer information across business units, while also cut­ting costs by developing new software applications to capitalize on these services. Another is using SOA to integrate its legacy and new applica­tions. Both companies understand that success in insurance (or in any busi­ness, for that matter) requires delivering updated functionality while using existing infrastructure as much as possible.

Helvetia Insurance provides an excellent example of SOAs' advan­tages. The Swiss company was strug­gling as recent acquisitions left it with incompatible computer systems and the inability to achieve its growth-through-acquisitions strategy. Today, its growth strategy is back in gear thanks to an SOA implementation that integrated the company's legacy and new apps; SOA now serves as a platform for the insurer to launch new business applications and open new sales channels.

We expect SOAs to become more popular as more insurance companies consider their IT architectures as stra­tegic assets.¹

Conclusion

Technology innovations, including social networking, telematics, SOA and beyond, will play a major role in determining success or failure in the insurance industry. Firms that effectively harness technologies and the opportunities they offer are destined to be among the industry winners, lead­ing the way toward growth and pros­perity. Companies that fail to keep up with the latest technologies—those mentioned in this paper and the last­ing "next-gen" innovations that arrive on the scene—risk falling further behind and relinquishing their leader­ship positions. Make no mistake, the insurance industry is at a pivot point as future success is likely to rest on today's technology decisions and strategies.

Contact

Christian Hagen is a partner in the strategic information technology practice. He is based in the Chicago office.

Mike Hales is a partner in the operations practice. He is based in the Chicago office.

Joe Reifel is a partner in the financial services practice. He is based in the Chicago office.

Alyssa Pei is a principal in the financial services practice. She is based in the Chicago office.

Jason Miller is a consultant based in the Chicago office.

¹See "Service-Oriented Transformation" (July 2009).

Copyright 2011, A.T. Kearney, Inc. All rights reserved.