Impact of Digitalization on the Insurance Sector
Digitalization continues to break stereotypes in the business world and bring new experiences. As in every field, it has become important for the insurance industry to offer its products and services to its customers with digital tools. It is obvious that the insurance industry is undergoing a rapid digital transformation with the competitive conditions in the business world. This study covers the technological developments and digitalization processes in the insurance sector. In this study, the development and emergence process of digital insurance is explained in a simple way. Moreover, the applications used in digital insurance are detailed and digital insurance and traditional insurance were compared. This study tries to explain digital insurance in all its aspects in an efficient way.
FUNCTION OF DIGITAL INSURANCE
The clarification of digitalization is transferring whole processes to the digital environment, it offers an advanced and technology-based life. Digitalization is increasing its impact on our lives day by day, so the increasing acceleration of digital technologies in daily life has started to show its results in the insurance sector as well. Digital insurance means providing insurance services through digital solutions. Within the scope of digital insurance solutions, there are some functions such as generating insurance data, issuing policy applications, purchasing insurance services, and fulfilling and analyzing claims for damage and compensation. Digital insurance aims to respond to changing and diversifying customer expectations with the help of information technologies and online tools.
THE EMERGENCE AND IMPROVING PROCESS OF DIGITAL INSURANCE
Until the past few years, it was thought that the digitalization of the insurance sector was not easy. It was very difficult and costly to develop these technologies. There were also concerns about the return of investments in digitalization. However, technological developments and digitalization continue to break the rules in the insurance world. With the latest financial technologies, digital insurance has come a long way in the past few years. The services offered by insurance companies were more complex in the past than today, but digital insurance has managed to gather these services under one frame thanks to digitalization. In brief, the insurance sector has also changed over time and has started to follow digital developments. Insurance companies understand customers’ expectations by developing digital solutions. Insurance companies have started this transformation in order to carry their business into the future, adapt to new age trends and grow their companies. As the reason for this development process, we can say that the use of the internet and digital services is increasing rapidly and people are purchasing products and services through online tools. The insurance industry developed its traditional and classical methods and started to harmonize it with the digital. Insurance companies familiar with digital operations have been more successful in this process and have begun to respond to consumer requests.
APPLICATIONS OF DIGITALIZATION TO INSURANCE
Digitalization has been an innovative approach to the insurance industry since the time it emerged. It is reshaping the fundamentals of the industry in an unorthodox way. In order to adapt this unorthodox revolution, insurance companies have made attempts to be a part of this new 3 digital world order as quickly as possible. Insurance companies acquired the necessary digital technology and all its benefits in order to provide the best quality to their customers. Besides they realized that by doing these, they started to gain more profit. The others which didn’t see the potential of the impact of digitalization in the insurance industry were eliminated. Today, there are lots of applications of digitalization in the insurance industry that we can observe. These applications are provided via AI technologies, big data, IoT(Internet of Things), blockchain, mobile devices with apps, social networks and websites. Developing intelligent insurance is not that easy and according to research 40% of the insurance companies still have not invested in AI technologies. However, the companies that invested in AI technologies have the benefit of valuable applications that AI provides. AI ensures both customers and insurers a more qualified and efficient experience. Currently, the adoption of AI simplifies sudden disaster caused damage analysis, risk calculation and prevention, transaction analysis for banks and financial organizations, consistent optimization of customer investments and insurance coverage and selection of better investments. AI takes smarter and faster decisions with lack of emotion and mistakes that a human can make.
With the help of AI, the insurance companies can transform the insurance underwriting process. AI enables insurance advisors to design solutions to meet unique client requirements. Innovations like Chatbots can interact with the customers and help them to solve commonly faced problems. These bots are able to complete common processes like policy application filing claims and many others. Japanese insurance company Fukoku Mutual Life uses IBM’s Watson for automatic payment calculation. On the other hand, famous risk assessment company Lapetus Solutions can estimate the relevant data from a term life policy by analyzing a picture of the insured. Also, recently drones have started to be used in risk assessment and calculation. Surveying factories, farms and places which are 4 difficult to reach by humans.
According to research, the use of drones have saved insurers a lot of money associated with assessing the risk factors of a business. The term Internet of Things(IoT) came up in 1999 and since that day we describe the term as basically any tool that we can use to connect to the Internet in order to send/receive data. These tools can be smartphones, computers, smart TVs, smart homes, smart cars and even though sensors like heart rate sensor, GPS location sensor, web cam etc. Through these tools we can access the data which was inaccessible before. Sensor based devices help insurance companies to provide developed services to reduce risks. IoT provides more reliable and accurate algorithms, formulas and other fundamental analytical tools. Thus, it reduces the risk of making mistakes and wrong decisions of insurance companies. The United States based car insurance company Progressive is using telematics program, which is called usage-based-insurance, in order to trace how its customers drive their cars. By using a telematics program, the insurers price more precisely because the company says that its prices are based on “how you actually drive, rather than just on traditional factors like where you live and what kind of car you have.” At the same time, by using this approach they also reward the customers who are safer drivers with reduced premiums.
On the other example, Liberty Mutual has a partnership with Google’s Nest in order to establish connected smoke alarms in home. This enables customers to minimize the risk of fire because Nest gives alerts to the customers on their phone while the sensor looks for fires around. Blockchain technology has brought lots of benefits to different sectors but it had a fundamental importance for the insurance industry because it was aiming to provide solutions to the most important problems that insurers faced with such as the risk of losing the data, misinterpreted policies, difficulty of making decisions. The most important benefit of acquiring blockchain 5 technology for insurance companies is providing a cryptographically shared record keeping. It helps to facilitate by integrating and optimizing the highly complex processes of the insurance industry. Also, data integrity and management of cross-company data sharing are the topic that are governed by blockchain in the insurance industry. For instance, smart contracts are generally used in travel insurances. Smart contract that was developed on the blockchain can automatically refund the people if their train or flight was delayed. What is more, people can examine the smart contract and get an idea of its content and conditions. The trust to insurance companies is guaranteed by the smart contract, therefore, people won’t have any suspicion towards the company because it is easier to trust to an objective data. Managing payments in cryptocurrencies is way more easy and quicker than traditional methods. Therefore, most of the companies prefer managing payments on the blockchain system. Also, blockchain enables the existence of cryptocurrencies. Bitcoin was the first example of cryptocurrency and today there are more than 5500 cryptocurrency in the world.
Cryptocurrency is a form of electronic cash which verifies the transfer of funds and controls the creation of monetary units by using encryption techniques. Bitcoin simplified the currency transactions and eliminated third-parties. By doing this it also eliminated the fees that third-parties charging in exchange for the transaction service. By the developing technology, mobile apps have started to take up a big place in our lives. Mobile apps have been a very effective and relatively inexpensive way of serving to customers for insurance companies. Mobile apps are innovative and customers can reach them in seconds when needed. By using mobile apps, insurance companies gained loyalty and reached customer satisfaction from their customers by being together with them on their smartphones anytime needed. One of these apps is Moflix Interaction Platform aims to provide the opportunity to 6 collect payments, process the bills and take orders etc. Customers can make payments through such apps and also access and manage their accounts. Some apps are used for allegations reporting, such as Debeka and Allianz. On the other hand, some apps are used for providing customer services and contract administration such as Allstate. Some insurance companies only use applications for their insurance products because it is faster and it makes customers feel like they have their own private assistant on their phone because of the instant and quick feedback to their questions. Social media is also one of the most efficient tools of the digitized insurance industry. It is very difficult to gain a reputation as a company in social media because it is a tough environment. Social network tools like Facebook, Twitter, Instagram, WhatsApp etc. are often used by insurance companies. Recently, some insurance companies started to operate their business through these social network tools. For instance, Ergo uses WhatsApp in order to provide customer services to its customers. Lots of insurance companies have their own websites and customers can reach and interact with them through these internet tools. Companies make surveys and get feedbacks of their customers for their services on internet forums or their own websites. Thus, their customers can establish contact with insurers via these websites. Social media also has a distinguished effect on building sustainable relationships and loyalty among insurance companies and their customers. French insurance company AXA uses Facebook not only for sharing new policies and informative insurance content but also to answer customer’s questions. Their average response time is 12 minutes. On the other hand, the brand Allstate has an account on Twitter which only aims to provide customer service. An American based insurance company Country Financial has a really interactive social media account. The brand 7 responds to its customers on a 1:1 basis on Twitter. These are the applications of digitalization on the insurance industry.
COMPARISON OF DIGITAL INSURANCE AND TRADITIONAL INSURANCE
Cost: The primary difference is in terms of the cost. Traditional insurance costs more money and time for both insurers and insured since the operation takes place on an offline basis. However, digital insurance costs less and provides a faster process due to online facilities.
Communication: The second difference comes with communication. Understanding traditional insurance can be challenging for the customer due to the heavy use of complex terms, jargon, and non-simple explanations. Digital insurance makes the understanding easier with more simple information and the help of infographics, images, etc. Also, it is more accessible through mediums such as websites, phone applications, e-mails, and such.
The Process of Buying: Another distinction is within the buying process. In traditional insurance, the buying process consists of many steps and is complicated as well as lengthy. The presence of the middle-mans, agents, and brokers made the process more intricate, expensive, and time-consuming. In digital insurance, the process is simpler and easier. The customer can easily purchase an online insurance plan online, where there is the facility to compare various offers, have customized plans, and the energy of dealing with middle-men.
Others: One of the other differences is in the paperwork. Traditional insurance requires much paperwork through various transactions such as buying, raising claims, renewing, etc. Meanwhile, digital insurance does not, since the processes take place in digital platforms. In that 8 way, digital insurance is also more eco-friendly. Also, while traditional insurance uses old methods, digital insurance has access to many streams of data. It can apply many different technologies such as machine learning for new experiences to increase the quality of products.
ADVANTAGES AND DISADVANTAGES OF DIGITAL INSURANCE
Advantages: While comparing traditional insurance and digital insurance, many mentioned features of the digital one can be considered as advantages. Those advantages can be listed as low operational cost, better communication, better understanding, simpler and safer buying process, access to more data, and being eco-friendly. Another crucial advantage of digital insurance is that it is safer, and it prevents fraud. All over the world, insurance fraud costs companies billions of money every year. Digital insurance prevents fraud, primarily from distributors and agents. Digital signature technology and data analytics play a big role in reducing the number of false insurance account activations and, as a result, fraud.
Disadvantages: Even though communication can be considered a big advantage, the opposite can occur too. In digital insurance, it can be harder to reach an expert if there is a problem to solve. Similarly, even though the language used is mostly simpler in digital insurance, sometimes people can misunderstand and buy the wrong products. Also, technical problems with the websites can occur. Lastly, people can accidentally buy from scam websites and get scammed.
COVID-19 AND DIGITAL INSURANCE
The Covid-19 pandemic has affected the insurance business, as it has in every area of our lives. Due to the epidemic, insurance companies have had to work remotely more than ever before. But what impact will this have on the global insurance industry? In recent years, the share of digital sales has been increasing in insurance, as in almost all sectors. There is no doubt that the pandemic has a great effect on this process. Especially with the pandemic, changing shopping habits and consumer demands created an important opportunity for companies operating in this field. As the increasing interest caused new players to enter the market, insurance companies and large agencies started to create digital sales channels. A universal change has occurred during the pandemic.
COVID-19 has become a much-needed digital catalyst for insurers. A recent global survey of Insurance CEOs conducted by KPMG International confirms this situation. According to this survey, eighty-five percent of insurance CEOs say that COVID-19 has accelerated the digitization of their operations and the creation of next-generation operating models. Also, seventy eight percent of insurance CEOs say that it has turbo-charged progress on the creation of a seamless digital customer experience. A similar number (79 percent) says that it has brought new urgency to the creation of new business models and revenue streams. It can be easily said that digitalization would be even more effective in the future of insurance, but with the pandemic, many innovations were adapted to the sector much earlier. Eyüp Yusuf Altunbıçak who is the director of Şansa Bırakma which is an insurance company in Turkey states that crisis moments like a pandemic create new needs that you can solve, lead to innovation, 10 change the rules. Altunbıçak emphasized that the pandemic also caused the insurance rules to change. Altunbıçak said, “We took the 5-year digitalization path in 5 months.” The variety of products sold on digital platforms has been increasing day by day.
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For example, while only traffic and automobile insurance products were sold in the past, products such as compulsory earthquake insurance, home insurance, health insurance and personal accident insurance have been added to these branches today. It can easily be said that the pandemic has facilitated and accelerated the transition to digital insurance. With the pandemic, many radical changes have occurred in the insurance business. Especially in the last two years, companies that are successful in digital adaptation have stand out in the sector. Agencies, whose digital sales channels are quite weak, are forced to keep up with digital with the pandemic. It is an inevitable fact that those who still resist digitalization will disappear in a short time.
FUTURE OF DIGITALIZATION ON INSURANCE
In the future, it is inevitable to do business without taking advantages of digitalization, which is beneficial because technology’s blessings usually make businesses safe, cheap, easy. Insurance sector experienced the digitalization during the pandemic, in practice, it’s proved that it’s easier to reach consumer’s demands by online. It can be seen in the future, people will not face tons of whitepapers, documents in order to insure their houses, cars and even lives etc. Instead of these old-fashioned systems to meet clients’ demands, people will be using their phones to insure their properties thanks to FinTech, InsurTech and Blockchain. 11 To begin with, FinTech (Financial Technology) and InsurTech are important terms for the digitalization on Insurance. The former is researching the technology to develop financial practices in digital, the latter is trying to improve innovation systems that make risks lower and consumers’ lives easier. Insurtech has practices. For example, AXA, which is one of the most well-known insurance company in the world created a mobile phone called “Trov”. What is the difference of the Trov than the others is it can provide an insurance on technological devices such as cameras and computers. Trov can follow these insured devices every second. When the computer starts, at that time trov is starting to process of insuring it. It means that, in the future –not a long term- insurance companies can be with consumers, doesn’t matter where ever they are or when they’re demanding the service, thanks to digitalization systems.
On the other hand, it can be said that blockchain technology is kind of insurance because it ensures the safety of informations more than any system. Therefore, insurance companies have been started to using the blockchain to provide consumers safe and fast service with lower budget. While insurtech usage is increasing, blockchain technology will be affected positively. Blockchain aims to make users meet with brokers. Blockchains is a database that provides users to make their transactions without depending on any establishment in a safe way. Therefore, by the time the blockchain system will be more popular in the world and it will be a milestone for insurance companies because it’s inevitable that consumers will demand easy, cheap and most importantly the safe way. The insurance companies who have not started to improve themselves about InsurTech, Fintech and Blokchain will suffer from that can’t be able to supply the demands of clients.
CONCLUSION
To conclude, digitalization has many effects on the insurance sector that cannot be disregarded. It is an innovation that makes the insurance system works safer, cheaper and faster. Thanks to IoT, it changed the strategy of insurance rapidly. Dıgital world became significant for the sector after its implementations because it provides what conventional ways can not. During the pandemic , insurance companies going through the digitalization and results are seen positive for using technology’s benefits for the sector of insurance. Therefore, the future of digitalization seems bright and also Blockchain technology might be the milestone for the Insurance system in next years. It is obvious that customers will start to carry out their insurance process over digital channels over time and this sector will grow.
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