Insurance industry conversations about digitalization have noticeably shifted. A growing number of carriers now see InsurTechs not as existential dangers to their business models, but rather as promising partners who can unlock new efficiencies, streamline internal processes and enhance customer engagements.

Fears about the shortcomings of legacy systems and the potential entry of tech giants into the market have many insurers stuck in what feels like perpetual “catch-up” mode, until they finally upgrade their core systems and create an innovation plan. The rating agency A.M. Best upped the ante earlier this year, announcing its intention to add “Scoring and Assessing Innovation” to its set of criteria. Notably, the agency will evaluate both the inputs of innovation—how well insurers are planning for and investing in digital transformation—and outputs—the actual outcome of those investments.

But amid stiff competition and mounting pressure to innovate, it’s all too easy for insurers to conflate innovation with shiny new toys and sleek buzzwords, without devoting sufficient thought to the most critical questions:

• What should the outcome of innovative initiatives be?
• How will new tools, technologies and processes integrate with the organization?
• How can insurers unlock maximal impact for their investments?
• How do insurers’ plans for innovation reflect the dynamic regulatory environment and customer needs?

The answers to these questions will vary by insurer, but they all point toward a common theme: innovation only works if insurers obtain tools and technologies that make sense for their organizations and reflect both the needs of consumers and the evolving regulatory landscape.

Getting Digital Transformation Right

Amid breakneck advances in artificial intelligence technology and data analytics, insurers are eager to capitalize on AI and big data’s promise to help bring greater efficiency and precision to policy underwriting, claims processing, customer service interactions (through features like intelligent chatbots) and risk prediction (via connected IoT devices that can monitor driver behavior, for instance). With a 2018 Accenture report calculating that AI and data analytics could unlock up to $20 billion in profits for U.S. insurers, it’s little surprise that 75 percent of insurers plan to deploy AI for automating tasks within three years. Cloud technologies will serve as a key enabler of these innovative tools. Insurance executives are optimistic about their organizations’ ability to leverage the cloud, with 82 percent of U.S. insurance CEOs saying in a KPMG survey that they’re more confident in their companies’ use of cloud technologies today than they were within the past three years.

Plenty of insurers are investing in cutting-edge technologies, but only those who approach those investments through a framework that takes account of how they’ll integrate with all aspects of the organization will see them truly pay off.

Minding the Regulators

The upshot of insurance technologies is that they have a demonstrated ability to make smarter, faster decisions, streamline operational processes, and provide customers with the tailored service they’ve come to expect in the digital age.

But insurance innovation isn’t happening in a vacuum. In light of mounting concerns about big data and privacy, insurers can expect regulators to step up their scrutiny of their data practices—from ensuring that the algorithms and models used to drive policy decisions aren’t riddled with biased data, to requiring rigorous measures designed to prevent potentially catastrophic breaches of highly sensitive customer data. A Deloitte 2017 survey of insurance regulators across the U.S. found that 86 percent were very concerned about the data privacy implications of insurance technologies. As insurers increase their technology investments, regulators are doing so as well, to keep pace and improve their oversight capabilities.

Digital innovation may increasingly be the name of the game for insurers but seeing innovation as an end in itself is only a recipe for poor strategic decisions and negative regulatory scrutiny. Mastering the art of innovation requires a more thoughtful approach—one grounded in a robust organization framework for change management and a keen grasp of the policy and regulatory issues implicated. In addition, an innovative policy administration/core system is key.

As more and more insurers acquire InsurTech startups or roll out ambitious new technologies, pay less attention to their grand pronouncements, and more attention to the systems and strategies undergirding them.