Introduction

Prevailing opinion nowadays cannot manage without the proposition that, in a time of profound change, companies will only be able to adopt a sustainable business model if they are agile in every respect. Agility has become one of the keywords of the digital debate. The claim is that only agile companies are in a position to find an appropriate response to the disruption of their business models. There is a general belief that insurance undertakings face particularly high hurdles, especially as they do not exactly have a reputation for taking the lead when it comes to change. That is not entirely fair. And it is why I would like now to take a closer look at the engine room of change.
Although this will start with a look at the bigger picture: if there was any symbol for the dynamic change in business models and markets in the recent past, then it is the name “Cebit”. The concept behind the Cebit trade fair was unable to withstand the dynamic growth of digitalisation. Cebit is now history – and a cautionary example of what happens if you underestimate the pace of change.¹

The signs of the times must be recognised and analysed quickly, action items must be defined and the necessary – and sometimes unpleasant – measures must be implemented with agility and above all with courage. One example of this is the race for domination in the field of Artificial Intelligence (AI). Many people today consider AI to be the most important technology since the steam engine.² Even though research into AI and the necessary algorithms has been ongoing for 70 years now, it is only today that the computing power of modern computer systems allows the full potential of the technology to be leveraged – looking to the future, quantum computing should be mentioned here. The Member States of the European Union (EU) have mobilised billions of euros to avoid being left behind in the global market of the future. The European Commission’s plan sets out actions in four key areas: “increasing investment, making more data available, fostering talent and ensuring trust.”³

The federal government had already published its own AI strategy in November 2018. This will create 100 new chairs of AI and make available around three billion euros by 2025. However, research is not the be all and end all, because the results must also be translated – in a competitive international environment – into viable and possibly fundamentally new, and hence disruptive, business models and new solutions for business and society. And AI is just one of many digital trends that could increasingly turn the economy inside out, turn old markets upside down and create entirely new ones – and of course the insurance industry is no exception here.

Seven megatrends – entailing both opportunities and risks – are identifiable at present that could potentially transform the business of insurers in the long term:

• The battle for customer contact
• New technologies: Artificial Intelligence, cloud and blockchain
• Creative destruction, new business models and products
• The process revolution
• New competitors, greater diversity of providers
• Competition for talent
• Agile supervision

The battle for customer contact

Consumers are heterogeneous

The financial and sovereign debt crisis that emerged in 2008 was a key lever for a fundamental overhaul of the image of the consumer⁴; consumer protection has never had such a high profile as it does today. Insurers have accepted this challenge and understand digitalisation to be an excellent opportunity: they are adapting the updated, differentiated consumer model and are endeavouring to better meet the diverse needs of their customers. Digitalisation is bringing new opportunities for our industry to communicate differently, individually and more intensively with customers than ever before.

The web is increasing competition – but not necessarily transparency

The web is inundating customers with data, and at the same time vacuums data up from them. Media reports are dominated by news about digital tools such as language assistants, chatbots, robo-advisers and apps. Some customers even trust these tools more than they do people. The fact is that a growing number of consumers are seeking out information and comparison platforms. And the insurers also go where the customers are. This explains why the number of cross-sectoral partnerships to distribute insurance cover is set to grow. Predictive analytics, i.e. the generation of predictions based on data, will also eventually play a role in the distribution of financial services. Compared with traditional intermediaries, it can often identify customer need for insurance cover faster or create it more selectively, as well as service it more conveniently. This will increase competitive pressure – but not necessarily transparency in the market, because altruism is also the exception in the world wide web. Comparison portals, for example, mainly give the impression that they are neutral, but they are not exactly disinterested. They pursue a clear business interest and do not normally cover the whole market. Everybody who uses these portals needs to be aware of this, so that is why it should also be clear for all to see.

Linking digital communication and personal advice

Many customers buy insurance cover on the internet. By contrast, others make personal contact with an intermediary they trust after obtaining information online. Still others obtain information offline and then buy online. The customer journey is individual, situational and above all flexible.⁵ The preference for digital is no longer a question of a customer’s age. The efficient integration of digital communication and personal advice is a must for everyone in distribution and a great opportunity to stand out from the rest in the battle for customers, because personal advice is still indispensable for many people and in many areas. This is a situation in which personal relationships with customers count, as well as qualifications and a professional approach. Empathy, accessibility, convenience, process speed and networking belong together. An efficient data flow is vital. From the customer’s perspective, this blurs the traditional boundaries between distribution, operations, claims and benefits.

Paper will last and last... and it’s here to stay

To leverage the pace of change as effectively as possible, it must be possible to model all processes in the company electronically – from applications for cover through to claims settlement. However, it is difficult to get away from paper. The EU Insurance Distribution Directive (IDD) stipulates that documents must be sent on paper as the standard case, and that departures from this principle are possible only under certain circumstances. But insurers often meet with a total lack of understanding if they send letters to their customers – not least because of the delay involved (although to be fair, it should also be mentioned that many customers still think it is important to hold a piece of paper in their hands).

A level playing field

There must be a level playing field in the race to attract customers. This applies to both established providers in our industry and new ones. A new rulebook for insurance distribution (the IDD mentioned above) has been in place since February 2018. This EU directive has been transposed into German law, and all market participants must now comply with these rules. That is because not everything that is digital in origin actually benefits customers. At any rate, the European Commission is proposing to issue a regulation on promoting fairness and transparency for business users of online intermediation services. This also means introducing greater transparency regarding the parameters used to rank the results of online searches. It is designed to prevent arbitrariness in lists of providers. The Federal Cartel Office has also addressed comparison platforms in a sectoral investigation.⁶

Consumers should have freedom of choice

Consumers in Germany have a choice between different routes for accessing insurance cover. They can take out a policy directly with the insurer. However – and most people do this – they can also use an insurance intermediary who receives a commission. Or they choose an insurance consultant who works on a fee basis. The coexistence of these options is an important asset and no remuneration system should be discriminated against.

Digitalisation is accompanied by a new diversity. That is the actual business challenge because, on the one hand, there is a recognisable trend towards standardisation. At the same time, however, there is also an evident trend towards increasingly bespoke solutions. Digitalisation makes both of these possible and makes them both ever better. It appears to be paradoxical in this respect, but it is and is likely to remain reality: particularly in this world of diversity, direct customer contact will play an important role, both when insurance contracts are entered into and when good relationships with customers are being developed and, above all, maintained.

New technologies: Artificial Intelligence, cloud and blockchain

Technological advances open up opportunities for the insurance industry

The focus now will be above all on the opportunities: technical progress offers a wide variety of possibilities for improving the provision of insurance products. This affects all parts of the value chain. The potential rewards are substantial; additional data sources are available; there are new analysis methods for risk assessment and rate setting; the automation of business processes is in full swing; young talent and its start-up culture are shaping innovative marketing and distribution strategies. All this is fuelling a fiercely competitive innovation climate that aims to provide efficient, cost-effective processes, improved product solutions and services, and customer access that is as optimised as possible.

Key areas of AI are process automation, risk analysis and customer contact

The insurance industry is particularly suitable for deploying AI because it processes large volumes of data and the processes are characterised, in part, by both repetitions and specific semantic features. AI is expected to play an important role in three key areas: first, AI will help automate insurance processes. Second, AI will make a valuable contribution in the area of risk analysis. And third, AI will make customer contact more efficient.

AI is already helping today: customers can now receive their insurance benefits not within days, but within hours. Robo-advice and language assistants provide customers with high-quality advice around the clock.⁷ Losses can be reduced or even prevented, for example by sending severe weather alert data to customers in good time. Insurers can use data linkage to better inform their customers in new life situations, such as marriage and birth, about duplicate policies or gaps in their insurance cover. Address changes or archiving processed insurance claims can be handled in the background by intelligent systems, cutting administrative expenses and hence also saving customers money.

As well as optimising the insurance process and claims settlement, AI will also improve data processing and analytics – in light of the data volumes becoming available from the Internet of Things (IoT), for example, this represents tremendous progress. The outcome will be an increase in customers’ understanding of risk, with insurers being able to offer innovative, bespoke services more quickly.

Cloud computing gaining ground in the insurance industry
Cloud computing continues to make tremendous advances, producing attractive opportunities for optimisation and cost reduction programmes. Cloud service providers offer various service models: one service level is “Infrastructure as a Service” (IaaS), meaning that virtualised computer hardware such as computers, storage devices and networks are used in an external data centre. Another is “Platform as a Service” (PaaS), denoting the cloud as a development environment. Users can use PaaS to develop their own software applications or test them in an environment provided by the cloud provider. In the case of “Software as a Service” (SaaS), the application itself is delivered from the cloud. All three variants and any subcategories must be accessible to companies in regular business operations and protected by a high level of security – if the companies are to survive in the competitive international environment.

Blockchain offers enormous potential in the field of e-government

Interest in blockchain technology is continuing unabated, albeit from a different perspective. After the initial market hype, triggered in particular by the rise of the bitcoin cryptocurrency, attention is now focused increasingly on concrete applications and the need to adapt the legal framework. This is because blockchain is the technology and bitcoin only one of many possible applications.

Distributed ledger technology (DLT) has considerable potential, particularly for the insurance industry – this is always the case when a series of partners has a legitimate interest in the end-to-end, authoritative history of a thing or person at different times over a longer period of time and can demonstrate this. Examples of this include the structural condition of a house and building insurance, or the mileage of a car and motor insurance, or also a pension insurance contract that may run for several decades, such as the German “Riester” pension. Especially in e-government, blockchain offers an opportunity to network private and state agencies such as land registries, vehicle registration offices and pension benefits agencies cost-effectively, reliably and securely. Intelligently designed blockchain solutions would allow the contract and inventory systems of all partners involved to be smarter and the process chains to be simpler.

A state-of-the-art legal framework for applying new technologies in a global competitive environment

There is a need for a state-of-the-art regulatory and supervisory framework to allow opportunities offered by digital technologies to be leveraged. Regulation must be innovation-friendly. This means that it must be technology-neutral, principle- and risk-based, and stripped of excessive requirements.

That is why there are repeated calls for an “algorithm TÜV”, i.e. a standards-based inspection and validation of algorithms. A criticism voiced by consumer protection experts is that the decisions, for example by a simple AI engine, are not understandable or transparent, basically taking place in a black box. Already today, customers are able to find out about the criteria and require a manual review if there is a negative or unfavourable decision by a fully automated system. The calls for an “algorithm TÜV” may come as a surprise because the use of algorithms in the insurance industry is basically nothing new. What is innovative today is the use of partially and fully automated process chains that also use AI. These can manage address changes or archiving processes centrally via intelligent systems, for example.

Despite all the euphoria, there is a need for responsible handling of AI technology. It is important in this respect for all players to subscribe to a broad social dialogue about the use of AI. It must be ensured that the interests of both the affected consumers and the companies are adequately reflected. Nevertheless, the use of new technologies cannot be allowed to be inhibited by premature calls for regulation. Additionally, regulation that is limited to the national level could lead to disadvantages for German companies facing international competition.

Blockchain: The need for government involvement

In an exploratory study, insurers – under the umbrella of the German Insurance Association (GDV) – identified and analysed suitable deployment scenarios for blockchain. One key outcome: for blockchain to gain acceptance, government has to get involved, because it is still not clear how the potential blockchain applications can be reconciled with the existing legal framework. The “right to be forgotten” that is enshrined in the General Data Protection Regulation (GPDR), which was incorporated into European law with so much effort, is diametrically opposed to the underlying technical design of blockchain. In addition, there must be no legal uncertainty in blockchain solutions in the area of insurance regarding the recognition of transactions and identities.

Creative destruction: new business models and products

The revolution in mobility is a prime example of the upheavals that lie ahead in technology, society and also, of course, in politics and the economy. The insurance industry is addressing this issue in great detail, not least because, of course, it is also directly affected by it economically (motor vehicle insurance). In November 2018, the association discussed reality and vision intensively at a congress in Berlin. The foundation for the use of automated driving systems was laid by the federal government with its reform of the German Road Traffic Act in 2017. During the congress, a representative of the federal government emphasised that the country where the car was invented should also strive to be at the forefront of autonomous driving.

Digital transformation in road traffic

In fact, almost all the car manufacturers are working intensely on solutions that can handle driving tasks without any driver intervention. Looking ahead to the future of assisted, automated and – in the final stage of its evolution – autonomous driving, one might come to the conclusion that many insurance policies will become superfluous one day: for example if error-free technology delivers the dream of accident-free road transportation. So “Vision Zero” – no fatalities and serious injuries involving road traffic – would become reality. Really?

This is the background to an interdisciplinary project group consisting of engineers, mathematicians, insurance experts and accident researchers established by the GDV. Its mission was to carry out a realistic, well-founded assessment of the expected impact of assisted and automated driving. The in-depth analysis by the experts and the consequent prediction of the impact on claims trends up to 2035 show that:

State-of-the-art driver assistance systems and automated driving functions

• make driving safer, but prevent significantly fewer claims in practice than in theory,
• are only catching on with a strong time lag and are therefore only slowly reducing claims,
• lead to higher repair costs in the event of a claim, and
• have a greater impact on motor vehicle third-party liability claims than on claims under partially and fully comprehensive cover.

The GDV study proves that, by 2035, the new systems will only reduce compensation payments by motor insurers by between seven and a maximum of 15 per cent.⁸ The new technology, which is far from perfect, makes repairs more expensive, prevents fewer claims in practice than expected and reaches its limits in the case of damage caused by stones and rocks, hail or rodent bites. Even in a digital era, insurance protection will therefore remain indispensable.

The intelligent house itself becomes a risk

The same applies to smart homes and the increasing use of intelligent household appliances: if you believe the promises of the manufacturers, damage will be a thing of the past in intelligent homes, burglars won’t stand a chance and the refrigerator will replenish itself. None of this is even remotely close to reality, at least today.

A look at the bigger picture will help to show where we actually are: before the supposedly new technology found its way into our homes, practically all of its components were already being used in industrial/commercial applications. Examples: building surveillance using cameras and motion sensors, electronic locks, fire alarms and leakage sensors. They have helped to keep a check on the claims burden even though the value of assets keeps rising. But they have not succeeded in completely freeing the world from insurance claims, although these components were designed for a challenging working environment and are therefore expensive to buy and maintain across their life cycle. So is insurance superfluous? Hard to believe.

And that is not all: unfortunately, today’s technology all too often serves as a gateway for additional dangers. This is because the cybersecurity offered by many products for private users is already highly dubious. Short device life cycles, a lack of updates, backdoor access – the list of problematic components could be continued indefinitely.

This has implications for anybody who buys unsafe products and for third parties. 21st century burglars no longer have to hide behind the bushes and scout out a house; now all they have to do is access the hacked surveillance camera, which has also conveniently recorded the PIN code of the smart door lock. And while you are happy with the convenience of the intelligent shutter control, it attacks your employer unnoticed as part of a botnet.⁹ At the latest the example of the Mirai botnet should make clear to everybody how easy it is to use Internet of Things (IoT) devices as an attack route – for example for distributed denial of service (DDoS) attacks¹⁰.

Identifying and containing risks

Combining intelligent, secure home technology with residential building and household contents insurance concepts can, of course, also offer tremendous opportunities. Damage such as leaking tap water can be detected and contained earlier, for example by automatically shutting off the main water supply. Corresponding product developments by the insurers are being vigorously driven forward. The problem here is that it is not clear at present, either to consumers or to insurers, which devices are worth recommending when it comes to security and support. Nobody has an overview about which devices deliver benefits in the sense of a security gain and which do not.

For this reason, the insurance industry published specific requirements for the Smart Home and Internet of Things device category as far back as 2017.¹¹ If the risks associated with these devices are to be tolerable in the long term, there must be a radical change in the manufacturers’ product and support philosophy. If not, the exponential growth of intelligent and networked devices means that we are heading for an unparalleled security worst case scenario. In the next two years alone, the number of these devices will double – to around 20 billion worldwide (see Figure 1).

Figure 1: The Internet of Things – more than 20bn units installed in 2020

Gartner Inc. 2017, „Gartner Says 8.4 Billion Connected "Things" Will Be in Use in 2017, Up 31 Percent From 2016”, https://www.gartner.com/en/newsroom/press-releases/2017-02-07-gartner-says-8-billion-connected-things-will-be-in-use-in-2017-up-31-percent-from-2016# (retrieved on 5 December 2018)

The insurance industry therefore expressly welcomes the publication of the “Secure Broadband Router” Technical Guideline (TR-03148)¹² by the Federal Office for Information Security (BSI), as broadband routers are the central security hub in all private households. If the router is compromised, the smart home and data of the owner are exposed to the cybercriminal. A key goal of the Technical Guideline is to make the security features transparent for all users – and hence also insurers. Manufacturers can support this by labelling the device appropriately. The Technical Guideline is therefore an important step in the direction of an IT security label, as intended by the federal government in its 2016 Cyber Security Strategy and in the coalition agreement. The insurance industry supports the BSI’s plans to also develop minimum requirements for IT security for other devices associated with the Internet of Things and the Smart Home.

New products and business models

Digitalisation not only transforms individual market segments, it even creates entirely new ones: the GDV has developed non-binding model terms and conditions for cyber insurance policies that can specifically protect small and medium-sized enterprises.¹³ They are addressed to medical practices or law firms as well as craft businesses and industrial suppliers. The insurance not only covers data theft and business interruptions, but also costs for IT forensic specialists or crisis communication.

The information to be provided by customers so that the cyber risk can be determined is different from the information needed to take out a conventional operating liability or building insurance policy. The GDV has also developed non-binding risk questions so that insurers can better assess a customer’s individual risk of becoming a victim of a cyber attack before entering into a contract, and so that the company to be insured can more easily identify possible vulnerabilities in its IT security. The number and content of the questions depend on the company’s risk category and business fields, and whether, for example, it handles sensitive data, manufactures in a network or operates e-commerce.

If necessary, new types of risk coverage are also possible: short-term insurance, for example, that can be taken out based on the on-demand principle depending on the particular circumstances. Examples are adding drivers to a motor vehicle insurance policy on a day-by-day basis or an accident insurance specifically for skiing holidays.

At the same time, many innovative approaches for extending the business model can be seen at insurers: in addition to cash benefits for an insured event, customers are being increasingly supported in dealing with risks or are receiving direct assistance. This includes information about improving driving behaviour and swift assistance in the event of an accident in motor vehicle insurance, or help with managing chronic illnesses in health insurance. This will make insurers even more of a risk management partner than before. Insurers will generate quotes that reward low-risk behaviour with particularly low-cost rates. To do this, they are already collecting data on a voluntary basis, for example on an insured’s driving behaviour and how much physical exercise they get. Insurers reward careful driving and active exercise – as a key contribution to modern loss prevention.¹⁴

Perhaps one of the most far-reaching innovations made possible by digital technologies is the “sharing economy” – direct, peer-to-peer transactions between private individuals via Internet portals, which act solely as intermediaries. In some areas, such portals have already achieved a high level of market penetration, for example for short-term rentals of homes and rooms. Peer-to-peer platforms are also becoming more important in the area of credit intermediation.

In insurance, on the other hand, peer-to-peer platforms are still in their early days. There are concepts for some property/casualty insurance classes in the German market, for example, that cover small claims within small groups of insureds. If there are no claims, the customers receive a premium refund. Larger losses continue to be covered by insurers as risk carriers.

However, there are no indications to date that peer-to-peer cover is being extended to higher risks in the retail insurance business – and certainly not in the commercial insurance business. In the course of the further race to innovate, however, it is possible that new product offerings that integrate peer-to-peer elements could be launched in the German insurance market.

One possible competitive advantage of these products could be that a sense of community arises in the small group that engenders a significantly lower tendency to commit fraud and can therefore have a positive effect on claims trends. Nevertheless, it is unlikely that more or even all insurance risks will be assumed on a peer-to-peer basis. This runs counter to the characteristics of the insurance business, which include a high loss potential, for example in liability insurance. Moreover, the long-term nature of many personal insurance contracts in particular should be remembered. This is linked to the necessary guarantee of the promised benefits, including in the event of unfavourable developments, so that the insurance fulfils its purpose for the individual (“potential commitment to provide additional funds”). Correspondingly, the peer-to-peer concept also raises a number of legal questions.

To be able to leverage the potential of the concepts described above productively, insurers must have the freedom to innovate as well as legal certainty. For example, they must be permitted to agree that risk-relevant data from networked devices can be used, at the customer’s discretion, for insurance and service offerings. The data sovereignty of policyholders, for example in the case of automated driving, is a prerequisite for effective competition for the best solutions.

Plea for a new risk culture

A fundamental plea on the issue of internet security: society needs nothing less than a new risk culture for cyberspace: firstly, and most fundamentally, the willingness of industry to take these risks seriously and act accordingly; secondly, a common understanding of a level of IT security that reliably protects a company but does not overstretch it financially; and thirdly, of course, insurance policies that cover the remaining risk and provide companies not only with money, but also with expertise, in a crisis. It is to be hoped that the publication by the GDV of the non-binding model terms and conditions for these new products will help this young market see rapid growth. Every company must take the first step itself, however – identifying the risk and taking it seriously – if it does not want to become a victim of the current criminal gold rush on the world wide web.

Consequently, providing cover for risks will remain a core business model for the insurers, although digitalisation will help make insurance policies more personal and more customised. New data and analysis techniques will allow a more precise risk assessment and extended insurance coverage.

The process revolution

High level of automation in the insurance industry

Standardised and automated processes are a core pillar of the digitalisation of the insurance business. If insurance customers expect personalised, smart responses from their insurer within seconds, insurance undertakings can only achieve this by systematically and continuously automating and accelerating their processes. This applies to all the undertakings’ lines of business, departments and business processes.

Programs generate records automatically, convert scanned letters into machine-readable text, verify invoices or trigger payments autonomously.¹⁵ Whereas only just on one customer issue in eight was processed fully automatically from start to finish in non-life insurance in 2013, today it is already one in four. The proportion of fully automated processing also rose in life insurance, from four to eleven per cent (see Figure 2). The industry invested a total of 4.45 billion euros in information technology in 2017.

Figure 2: Fully automated processing by divisions

© GDV

Even Capgemini’s World Insurance Report 2018 attests that German insurers are setting an example in using digital technologies for automation.¹⁶ This is particularly evident in the area of robotic process automation (RPA) across all three insurance classes (property and casualty, life and health insurance). The vast majority of German insurers (89 per cent) have at least piloted RPA systems (36 per cent) or have already fully deployed them (53 per cent). Capgemini also believes that German insurers are among the pioneers compared with their international peers when it comes to implementing other automation technologies (including Artificial Intelligence, machine learning/deep learning and blockchain).¹⁷

AI as a driver of the process revolution

AI solutions offer tremendous potential for improving business processes and are therefore essential tools in the business process revolution. However, AI systems are only ever as good as the data and information they are fed with and trained on. Powerful AI solutions should therefore be capable of being supplied with all the information that an insurer has collected to date. And of course with all the other facts, for example about the products the undertaking offers. This input management ultimately decides how good the results will be that AI can deliver when used in an insurance context. In the end, both consumers and undertakings stand to gain from the fair and responsible use of these processes, such as those used in chatbots.¹⁸ The new GDV pension calculator is another example: like a game, and with mathematical accuracy, the tool calculates possible benefit gaps inside one minute.¹⁹

The example of character recognition and analysis using AI shows that this is certainly a time-consuming process: it requires paper and digital documents such as emails, signed paper contracts, web forms, faxes or PDFs, for example for claims settlement, to be fed into the AI system. Before AI can generate information and knowledge from such a data mix, all the facts must be processed into a machine-accessible format using Natural Language Processing (NLP). In the next step, the system has to learn the meanings and contexts of the technical terms in order to be able to associate and interpret them correctly in the future.

The system can only understand the context, interpret texts correctly and derive options for action from them through this conceptual enrichment of the facts and the definition of the rules for the processing algorithms. The AI system can then read the information from the unstructured and distributed texts. This training phase is decisive for the quality of the information when the system is subsequently used. The learning phase must be didactically designed and rationally structured by humans, because the system will only autonomously become more intelligent and, by applying its knowledge, itself derive and apply patterns and rules if this learning phase is well organised.

State-of-the-art payment service providers as partners in the process revolution

In the same way as for e-commerce, the processes involved in payments and payouts are critical success factors for digitalisation in the insurance industry. Customers expect the highest possible ease of payment for their premiums and for payouts of benefits, ideally paired with comprehensive flexibility and maximum security. However, the industry is still cautious about offering alternative payment methods. This is due not least to the fact that payment service providers active on the market – be they traditional credit institutions or newly arrived payment service providers – have primarily geared their offerings so far to the needs of e-commerce. But the insurance industry and its product range are not readily comparable with other industries. For example, paying for an e-commerce item ordered online is different from paying for recurring premiums under an insurance contract. In addition, insurers expect more than just payments processing from a state-of-the-art payment service provider. They also seek to combine of the payment process with additional process-related added value in order to support the digitalisation processes in the undertakings and to lift the level of automation (for example: secure customer identification/authentication, e-invoicing services with a linked payment function, issuing a legally watertight electronic direct debit mandate). This can help payment service providers to become strong partners in process automation and digitalisation at insurers.

The Second Payment Services Directive (PSD2) and its open banking approach laid the foundations for this development. Banks, savings banks and new payment service providers now have the same opportunity to become payment service providers in the true sense of the word. The resulting open API (application programming interface) ecosystems are enabling the creation of innovative value added offerings for everything to do with accounts and payments and the transformation into a digital banking platform. This trend towards digital payment ecosystems is being monitored closely and welcomed by the German insurance industry. It also offers insurers an opportunity to make their own payment and settlement processes more efficient, more digital and more customer-friendly.

Security and standards critical for interoperability and business success

Customer trust is the critical success factor: customers’ data is an essential resource in the core business. Its security and integrity are the top priority. Regardless of whether data and algorithms are processed internally or externally, for example through cloud computing, appropriate security measures must be adopted to safeguard IT security.

To safeguard the undertaking’s future ability to act, interoperability and security must be factored in right from the start and integrated into IT systems and business processes according to the motto “security by design”. This is because especially fully automated end-to-end processing still offers substantial potential for cost-efficiency in all classes of insurance. The optimisation measures already initiated must continue to be driven forward with a high level of commitment and, ideally, flanked by technology-neutral, modern legislation.

New competitors, greater diversity of providers

Market positions are shifting

In recent years, a large number of new competitors such as the insurtech start-ups have entered the German insurance market. The large majority of these new players are limited to parts of the value chain, such as distribution or IT services.²⁰ However, some insurtechs have now also received an insurance licence. There is speculation that large technology groups or other groups outside the industry could enter the market to a more significant extent. These potential new competitors are fuelling competition and innovation and increasing the pressure on traditional insurers to adapt.

The various types of provider – established insurers, insurtech start-ups and newcomers from other sectors such as tech companies – each have their own individual strengths. Insurtechs can fully tailor their offerings to the digital world without a legacy burden. The bigtechs are characterised by their expertise in handling new technologies and their extensive data pools. Traditional insurers, on the other hand, benefit from their mature customer relationships and their comprehensive insurance and regulatory expertise. However, they face the challenge of adapting their strategy and business activities to the new reality.

Market entries and exits will increase, and so will M&A transactions

A number of entirely different strategic options are now emerging for competitors to compete successfully in the market. It is evident that insurers are taking very different strategic routes, and this is further fragmenting the traditionally very diverse provider landscape in the German insurance market. It is being reinforced by the increasing importance of alliances – both between insurers and companies in other sectors and between multiple insurers. In this competitive process, considerable shifts in market positions are expected in the next few years. Not all insurers will be able to maintain their position in the market. Market entries and exits will increase, and so will M&A transactions.

Extreme changes in the provider landscape not realistic in the mid-term

In light of this, a GDV project group has examined how these far-reaching changes could transform the provider landscape in the German insurance market in the mid-term – i.e. up to around 2025.²¹

Based on the available information, five extreme scenarios can be identified as theoretically possible long-term trends for the provider landscape:

• Innovative insurers (insurtechs or the insurance subsidiaries of tech companies) oust the existing providers.
• Traditional insurers adapt successfully and maintain their dominant market position.
• Insurers become pure risk carriers and the customer interface is serviced by other companies – such as internet platforms.
• The new opportunities offered by digital networking will fragment the value chain.
• Insurers will be disintermediated as risk carriers, for example by peer-to-peer portals.

Although there is a lot of uncertainty about future trends and the potential different development paths, the conclusion of the GDV’s study is that none of the extreme scenarios is likely to occur. Instead, it can be expected that elements of all scenarios will be found in the future provider structure in the insurance market. In the mid-term, however, the various extreme scenarios are likely to have very different impacts (see Figure 3).

There is a lot of evidence suggesting that established insurers will preserve a strong market position in the next few years because they will adapt successfully to the new world. At the same time, however, it can also be expected that a number of innovative insurers will gain a foothold in the market. In light of the increasing importance of alliances and internet portals at the interface to the customer, insurers could assume the role of pure risk carriers more frequently in the future than at present. By contrast, there are likely to be tight constraints on disintermediation – the substitution of insurers in their role as risk carriers by other risk assumption models – for the foreseeable future. And in light of the economies of scale that exist in many areas, any heavy fragmentation of the value chain does not seem realistic either.

Figure 3: Range of realistic mid-term trends – Ranking of expected relevance of extreme scenarios

© GDV

As things stand today, there are very strong indications that the German insurance market will continue to be distinguished by a broad range of offerings and providers in the medium term. This is clear from both market entries and realignments within the group of established suppliers. However, the competitive process and continuous adaptation by the providers cannot by themselves guarantee high productivity in all segments of the insurance market under the conditions prevailing in the future. Government and supervisors will also be called on to act. An effective competition policy and an appropriate regulatory framework must safeguard fair competition between traditional and new business models and all groups of providers, including across industry boundaries. Monopolies must be prevented.

The core principles underlying the regulatory framework are ensuring a level playing field for all providers and the systematic application of the principle of proportionality in supervisory activities.²² Regulation must be efficient and effective and may not unnecessarily prejudice the ability to leverage opportunities available in the new world, for example through requirements that are no longer appropriate. Only then can competition in the insurance market act as a constant discovery process for the best solutions in the interests of customers and society, even in times of sweeping change.

Competition for talent

IT-savvy employees as a key to the digital company

Customers quite rightly expect insurers to leverage the opportunities offered by digitalisation and to continuously enhance their products and services: more user-friendly, simpler, more innovative, faster, cheaper. If the insurers do not do this, new competitors will – and they are more agile than ever before, including in the labour market.

It is not exactly news that employee skills are an important factor, especially in times of huge technological advances. Questions are therefore being increasingly asked about the negative impact of digitalisation on the number of jobs in the insurance industry. Traditional clerical work or customer service centres will probably be affected first. The effects of process optimisation or the use of robotics, Artificial Intelligence and blockchain are already being seen here. But digitalisation also triggers opposite effects, and there is already a need for new employees with new skills. For insurance undertakings to be able to recruit these digital natives, they must transform themselves into digital companies. It is likely to be less the will to embark on digitalisation as the availability of IT-savvy employees that will be a bottleneck in the insurance undertaking’s process of renewal.

The industry faces a major challenge in this respect. A current GDV study demonstrates that although the number of IT jobs is still on the rise, there is still a long way to go before the increased need for skilled internal IT staff can be met. In turn, this increases the pressure to systematically shut down old IT systems and replace them with new ones, which increases the value of the qualified digital natives needed to do this.

Digital companies need well-qualified people who can think outside the box and find the insurance industry inspiring. The digitalisation of insurers requires a balancing act in this respect: helping staff with experience into the new working environment and, at the same time, being attractive for new staff with new qualifications. Anyone who chooses this route into the future has to think in terms of multimedia; they must be at home in both social networks and the traditional insurance business; and above all they must want cultural change. And the speed of this cultural change is accelerating: more trial and error, co-working spaces, even an in-house basketball court – the new working environment also reflects an industry in the midst of a digital revolution.²³

Permitting and encouraging modern working environments

Working time models must reflect digitalisation and become even more flexible than they already are, because the more flexible the people in the industry are as far as location and time are concerned, the more they increase their job opportunities in the digitalised working environment. However, the German Working Time Act (Arbeitszeitgesetz) imposes tight limits on any future, more flexible working environment. National and European lawmakers must therefore ensure that both the German Working Time Act and the European Working Time Directive are fundamentally revised and adapted to meet the requirements of the current production conditions.

Collective agreements for the private insurance industry are very widespread. This is mainly because they give the partners to the agreements (companies and works councils) significant scope for agreeing individual options, including working time arrangements. However, not all aspects of flexible working time arrangements have been exhausted. In addition, the scope of the collective agreements is extremely broad and also includes salaried employees who are paid well above the collective pay scales but are not senior executives as defined by the law. It is now time for the industry’s collective bargaining partners to ensure more flexibility in this area. The aim must be to make work covered by collective agreements sufficiently flexible that in particular the new competitors in the market, such as insurtechs, view national and regional collective agreements as a sensible instrument for agreeing working conditions in the industry and seek to join them.

Agile supervisors

Regulatory objectives and supervisory practice are mainly technology-neutral, although they have been shaped by the analogue world for decades. Agile companies in highly regulated branches of industry need equally agile supervisors so they can keep up on the journey into the digital future – with customer expectations, with other industries and with their international competitors. Being agile means responding quickly to change.²⁴ Being agile means being flexible, having a distinct ability to adapt and being inherently nimble. Only a supervisor that is digitally on a level with the undertakings it supervises can enable them to transform their business processes and products as quickly as necessary without any negative effects on consumer protection standards or financial stability.

Openness to new technologies and systematic application of the principle of proportionality

So what do insurers expect from an agile, digital supervisory authority? Of course, being open to new technologies, not blindly and unconditionally, but always with an eye on the opportunities and not just focused on potential threats. We hope for the systematic avoidance of duplicate regulation and redundant reporting obligations, as well as the systematic application of the principle of proportionality.²⁵ Essentially, this means creating the freedom to individually adapt digital business and IT based on risk and business-related criteria.

It is therefore encouraging to see that the Federal Financial Supervisory Authority (BaFin) – both in its current form and those of its predecessors – did not act as systematically and quickly, even agilely, in any of the processes of change in the past 50 years as it is doing today with regard to the technological transformation. With its study “Big data meets artificial intelligence – Challenges and implications for the supervision and regulation of financial services”²⁶, BaFin has produced a thorough analysis of the challenges and implications for the supervision and regulation of financial services. BaFin has thus assumed a pioneering role not only nationally, but also at European and international levels.

BaFin’s digitalisation strategy – A step in the right direction

Just like the undertakings, BaFin is working agilely on its own digitalisation strategy. This is to be welcomed, as it facilitates communication between undertakings and the supervisor. In essence, from the perspective of the undertakings BaFin will have to ask itself four questions about its strategy:

• How does it approach market changes caused by technological advances in products and processes?
• What is BaFin’s position on the issue of “IT supervision and security”, in particular in light of the functions of the BSI?
• How is BaFin planning its journey into the digital world, its transformation into a digital supervisory authority?
• How can digitalisation make reporting by insurance undertakings to supervisors more efficient?

The establishment of the Financial Technology Innovation division and the IT Supervision/Payments/Cybersecurity directorate are certainly the right steps and signals at BaFin, as is the planned appointment of a Chief Digital Officer. Close dialogue between BaFin and the supervised undertakings is pivotal.

Summary

The seven game changers mentioned here are only some of the challenges linked to the digital revolution, because the digital agenda is global, it is all-encompassing and it affects all sectors of the economy. For the highly regulated insurance industry, this means, of course, that it also has to ensure that the right basic conditions are in place: for data protection and copyright, for digital infrastructure and technical standards. And, of course, it also needs fair, agile regulation – to name just a few of the crucial aspects.

But it is not just about the hard issues. If the industry wishes to be at the forefront of digitalisation, above all it needs a transformation that unleashes creative potential.

But this is primarily a question of corporate culture. A technocratic management approach that is first and foremost concerned with risk minimisation and process control will be unable to steer this change. On the contrary: digital transformation requires a search and learning process in which trial and error, planning and execution run more or less in parallel. There is therefore a need for a corporate culture that encourages personal initiative, self-organisation, creativity, teamwork and interdisciplinary work. The industry needs this not just because it will allow it to develop better solutions for the digital world, but above all as an employer who can win over the most innovative minds. To do this, the industry must make attractive offers and open up career opportunities that fit the new understanding of work, personal responsibility, dynamism and teams that embody diversity. The insurance industry needs a corporate culture that fosters free and new ways of thinking. That is certainly a culture that no money can buy. Rather, it has to be developed in a sometimes arduous process of change. And that is perhaps the biggest task facing the insurance industry today.

Footnotes