The Life Insurance Legacy Conundrum: Addressing Challenges to Digital Transformation
John Chandler T'86, Alumni Advisor & Executive Fellow On February 17th, 2017
The chief customer officer of an innovative and rapidly growing digital solution provider recently expressed to me her frustration with their lack of success in the life insurance industry. Despite making significant headway in several industries, they were making almost no progress with life insurers.
Her lament was familiar, and it’s one I’ve heard echoed not only by firms like hers, but also by many inside the industry who see little digital transformation taking place relative to other industries. In the absence of meaningful transformation, the very real risk is that the industry falls behind consumer expectations, loses relevance, and declines. In fact, this decline is already an issue per LIMRA, the industry’s research and sales data association.
After spending the last 10 years helping to drive digital and brand transformation as CMO of one of the most successful carriers in the industry, I’ve developed a deep appreciation for the challenges that established firms such as life insurers face when considering their path forward. I call it the legacy conundrum.
The legacy conundrum is not just rationalizing the cost and complexity of driving a digital transformation across an older business. It’s also confronting the reality that a business will not perform as effectively as it did in the past unless it fundamentally reinvents itself far beyond adding digital capabilities alone. The legacy conundrum is hardly unique to the life insurance industry, as I will highlight in future posts, but it provides a great example.
In life insurance, the legacy conundrum is driven by four legacy elements inherent in almost all successful carriers:
- A sales force of entrepreneurial, essentially independent insurance agents who generate nearly 100% of new policy sales. Life insurance is frequently said to be a category that is “sold, not bought” – a phrase that makes marketers wince! – but it has proven to be true for all but the most basic types of coverage. Despite many attempts at innovation and disruption via direct models, the industry has yet to develop a consumer demand model or a direct sales channel that produces even a fraction of the business that agents generate.
- A product purchase experience that usually involves long forms (whether paper or digital) and weeks of financial and medical underwriting. There has been only very limited progress toward offering a true, broadly applied algorithmic underwriting capability such as that commonly used in auto insurance underwriting today (“15 minutes….”)
- A huge installed base of IT infrastructure – much of it dating back decades – hosting the records, service information and policy calculations for multiple generations and types of polices. This outdated infrastructure poses a huge obstacle to digital transformation. The same person can own several policies hosted on multiple systems that do not integrate. Changing something as simple as an address can involve changing the same information multiple times. Porting data from these dated systems to a single customer experience such as an app or self-service portal requires integration, access and speed that is very difficult to deliver – especially to meet consumer expectations driven by more advanced industries.
- A financial model and finance culture that is deeply rooted in the above three legacy factors. For example: 100 percent of the product margin allocated to new sales acquisition is usually exhausted by the existing process for paying agent commissions and expenses – so no product margin exists to fund new channels or add additional acquisition capabilities such as lead generation; the financial risk of bad actuarial underwriting decisions is much higher than in auto insurance due to the vastly larger size of life insurance and annuity polices – so algorithmic underwriting faces far more scrutiny and hurdles before it can gain acceptance; the upgrade and conversion costs for all that legacy technology requires a huge capital outlay – with no proven ROI history to justify it.
See what I mean? It’s a conundrum!
The key to overcoming these issues is not strategy. It’s culture.
Legacy cultures fight disruptive change. They try typical approaches such as big, sweeping initiatives or structural reorganizations, with direction coming top-down from executive leaders guided by traditional consulting firms. The result? Nothing really changes.
Digital cultures tackle their issues very differently. They do small iterative test and learn projects, run A-B tests, and drive change via short sprints led by their front line employees. Digital leaders provide the goal, the resources and the runway, then stand back and protect and coach their teams as initiatives fail or change course on the path to success. Change happens constantly, and culture drives it rather than stifles it.
In the life insurance industry, disruption will not be about abandoning agents and going direct. It will be about investing in marketing to build demand for the category while evolving business technology, processes and economics to support both agent and direct sales channels side by side. This will allow firms to capture sales via the channel each customer prefers, while servicing all on one common digital platform. None of this will be easy, but it has to happen if the industry wants to remain relevant.
Cultural transformation is the key to digital transformation, and it’s an especially hard change to make in risk-averse, hierarchical industries like life insurance. Leaders must have the courage to embrace their own fears and lack of digital savvy. If you are not a confident digital user, how can you appreciate and serve today’s customers who are? They must accept that digital transformation means accepting more uncertainty and releasing more control to their people – people who will need to be retrained and sometimes replaced in order for bottom-ups transformation to happen.
This is really hard work, but the legacy conundrum demands a proactive response. The alternative is either that the industry continues to lose consumer relevance and decline, or that competitors – whether new or established – transition to the new model and slower firms lose out.
As someone who believes strongly in the social good that the life insurance industry provides, I urge today’s industry leaders not to let either one happen!
Thanks for listening.
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