Guest Blog: Real Trees, Digital Forests - Part 1
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18 November 2013
To digitize something has generally referred to the process of transitioning an activity or thing from being handled in an analog manner to one that uses consistent, discreet measurement units. On the other hand, ‘analog’, being the base of the word analogy, refers to a way of measuring or dealing with a quantity or thing as it relates to something else. Think of the movement of a thermometer’s indicator across its dial as a metal spring tightens or unwinds based on the ambient temperature. In today’s business world, the term digitization has been usurped as another way to refer to the latest information technology (IT) trends such as social media, big data, and smart devices and their effect on pressing issues. While not immediately harmful, I do think this may be a case of arborists inspecting flora at the cost of not recognizing changes in the ecosphere (‘not seeing the forest for the trees’…). Digitization can also seem to be somewhat of an anachronism. It describes something that already has happened, a term used in more of an IT engineering sense than one that is found in the writings of analysts or among business leaders. The main point of this blog post is to take back control of the term while insurers can still make use of it by way of a new definition. The reason to re-define digitization for financial services, and for insurance especially, is to pave the way for where the industry should be heading after 60-plus years of computerized process automation. We are at a unique waypoint in the insurance journey where we can send scouts ahead to explore new business models based on a new generation of the very mechanisms that brought us to this point. Digitized insurance business models are the new destinations towards which our industry should be driven. Our reclaimeddefinition of digitization for insurance is the use all relevant IT mechanisms and techniques to create new business models that individually optimize the management of risks for consumers and businesses in a holistic manner. This new definition requires new thinking about the methods to achieve a familiar outcome. It does not mean simply applying the latest technology to old problems and business models in hopes of better, faster, or less expensive results. Features of these new business models use social media, pervasive sensor technology, interconnected vehicles, homes, and businesses among other mechanisms to gauge, aggregate, and indemnify risks in real time. To be clear, there will remain a need to continue the current manner of individual insurance contracts that rely on aggregated statistics amassed from prior experience or extrapolated via mathematical models. This is because the insurance business, the public, and our regulators are not ready for a wholesale shift to a new paradigm for insurance, especially one that would potentially remove much that is familiar in this space. When viewed in light of the new definition, it is clear that historically the insurance industry has used the power of information technology for the aforementioned task of the automation of its data intensive processes. This was a necessary step but one that seems to have been perpetuated recently due to an all too common foible: ‘…doing what we’ve always done’. Some insurance business professionals will struggle to see why any change except improvements on existing processes are needed. People in the IT trenches could reasonably argue that the industry has some distance to go in terms of fully exorcising what process automation demons remain in straight-thru-processing, on-line claims processing, and sales via the existing paradigm. However, the trajectory of such improvement in terms of speed or accuracy gained from the application of IT is quickly reaching the height of its ROI arc and will soon be heading towards the land of diminishing returns. The newer frontier lies in leveraging the amassed capabilities that business now has at its disposal, and not simply for the improvement of existing mechanisms. Let’s talk about a frontier where consumers and small businesses are truly treated as individuals. A destination where groups are aggregated only as needed for the statistical needs of risk management, not as a business, sales, or service approach or interaction. I am stating that we are at such a point along the insurance and IT timelines where we can technologically leverage a great deal more data, much closer to real time, and in ways that will fundamentally change the way risk is managed. And it all adds up to better services sold to much more eager and willing consumers and business. Stay tuned for my next Guest Posting, “Part 2: Transitioning from Big Brother to Mindful Mom.”