As consultant EY puts it in its European insurance outlook: "The need to deal with the advent of Solvency II in a low interest rate operating environment has understandably dominated the agenda of boards of late, but there can be little doubt that over the next couple of years the digital opportunities will be an even more pressing agenda item for insurance executives."
There are worrying signs the insurance industry is falling behind. A technology gap is developing, with insurer's systems unable to meet consumer expectations or business requirements.
There are a number of reasons for this.
Changing Needs; Inflexible Systems
One is simply the pace of change as digital technology overhauls entire industries. In 1958, businesses in the S&P 500 remained there an average of 61 years; even in 1980 the average was a quarter of a century. Today, three quarters of the S&P look likely to last little more than a decade, with disruptive technologies driving new business models and changing the competitor landscape. The struggle to meet rapidly evolving consumer expectations and prevent being "Uber-ed", meanwhile, presents other challenges, such as the growing importance of cyber security as connectivity grows and interactions move online.
Insurers are also, more than most, hamstrung by stringent and changing regulatory requirements. Regulatory change challenges boards to introduce new requirements for the way insurers interact with customers, monitor staff and report to regulators. Each necessitates time-consuming and expensive reprogramming of IT systems.
And, finally, insurers are challenged to accommodate the changing demands of regulators and consumers due to inflexible legacy systems. Indeed, another impact of Solvency II, in as much as it promotes consolidation in the industry, will be to leave the remaining companies with even more complex technology environments, as they bring the disparate, unconnected systems of old competitors within their group.
Time to Build IT Expertise
All these, however, only explain why there is a technological challenge facing insurers, not why they are failing to meet it. The reason there is a technology gap is perhaps more fundamental: expertise.
Insurers today need more technology expertise than ever – and not just on the delivery line, implementing front and back-office initiatives. They need it at the very top of the organisation, setting the vision and strategy, and identifying the risks and opportunities from emerging technology and changing consumer behaviour.
Many don't have it, and the technology gap is at least partly the result of a knowledge gap.
This is not unique to the insurance industry. A recent review of 1,925 executive and non-executive directors at more than 100 of the largest banks showed only 6% of board members and 3% of CEOs had professional backgrounds in technology. More than four in ten (43%) had no technology experience on their board at all. This knowledge gap is a common challenge across financial services.
Nevertheless, it is one insurers need to start addressing. They should do so not only because digital transformation is probably the biggest issue that they face, but also because it's key to addressing so many of the other challenges on the boardroom agenda.