P&C insurers must break free from legacy thinking

While continued innovation drives transformation across almost every industry, there’s widespread agreement among leading insurers that their industry has lagged its peers for digital adoption. For too long, a challenging regulatory environment and the shackles of legacy technology have created the perfect storm for stagnation. However, pressure continues to mount as the advent of tools like generative artificial intelligence (GenAI) inspires a new S-curve of value creation. Insurers need to break free from their legacy thinking, embrace digital transformation, and rethink the ecosystem if they want to thrive in the new market.

To that end, HFS analyst Reetika Fleming connected with Arun Balakrishnan, CEO of Xceedance, to discuss how property and casualty (P&C) insurers can break free from legacy thinking, drive ecosystem improvements, and embrace digital transformation.

P&C insurers have traditionally focused on reducing operating expenses to boost profitability; however, new market dynamics are forcing change

P&C insurers operate in a competitive market with slim margins. Traditionally, carriers have prioritized optimizing their expense ratios to drive profitability. This optimization materializes in different forms, from streamlining operations to improving technology efficiency and even labor cost arbitrage. Conversations have typically revolved around improving operational productivity and writing more business.

However, recent market shifts, including inflation, rising interest rates, climate change, and supply chain disruptions, have increased claims costs, intensifying pressure on insurers’ margins. In response to these challenges, insurers must re-evaluate their hyperfocus on productivity and efficiency gains and increase focus on empowering underwriters to assess risk more thoroughly. This shift in focus from speed to accuracy aims to mitigate the likelihood of claims, thereby protecting insurers’ profitability in the long term.

Adopting an ecosystem mindset will drive industry-wide efficiencies

The insurance industry has battled process bottlenecks and silos for decades, owing to piecemeal transformation efforts and broken processes. Smart insurers are not only taking a holistic view of their processes but also shifting the needle to focus beyond their organization. For example, Arun highlighted the amount of duplicated work between carriers, brokers, and MGAs (managing general agents). He suggested that a single third party could complete some of the background work needed by stakeholders, saving time and effort and leaving carriers and brokers to pick up the underwriting and pricing processes, which must be done internally due to unique risk appetites.

Arun likened this to the fixed-income market, where bankers conduct initial analysis before passing it on to capital providers, driving market-wide efficiencies. This is by no means a quick fix for carriers, taking years to explore and implement, but it is one example of the mindset shift needed to thrive in the modern market.

The advent of GenAI will be another catalyst for change in P&C insurance

Arun discussed how technological advancements could drive new approaches to complement insurers’ mindset shift—and how they could disrupt the industry.

In terms of transforming carriers’ operations, GenAI holds a significant opportunity. For example, by leveraging large language models, AI, and machine learning, P&C insurers can improve data analysis capabilities, enhance fraud pattern recognition, and automate routine tasks, resulting in greater efficiency and improved risk assessments. For insurers, this means a reduction in operational and claims costs, which would drive profitability. That’s just one example.

Additionally, GenAI could enable the creation of a new category of products and coverages. For instance, Arun highlighted how GenAI could assist doctors in medical diagnoses and enable self-driving cars to communicate with passengers. All of these create new forms of liability, an entirely new risk category that must be insured, and, ultimately, new revenue opportunities for carriers.

GenAI could be a key enabler for straight-through processing

GenAI could also enable increased straight-through processing (STP) for insurers. STP is already a reality in certain insurance lines, typically frequently purchased lines with low premiums—not the most profitable lines for insurers. For example, insurers report effective STP for auto insurance, as it typically has clear parameters that lend themselves to automation. STP hasn’t yet become a reality for more complex products like commercial property insurance.

However, GenAI’s ability to enable automation and understand more complex scenarios could make it a key enabler of STP in these more complex cases. Going back to the example of commercial property lines, GenAI could digest the data necessary for understanding the different types of complex risk, such as location, construction, and occupancy, which would enable more automation opportunities, ultimately driving STP. For insurers, more STP means increased efficiency, reduced costs, and improved customer experiences.

Arun explained that, traditionally, an underwriter spends hours reading an extensive property survey report. However, with AI assistance, the underwriter could easily gather key highlights, ensure no critical information is overlooked, and rapidly produce the required reports.

The Bottom Line: Disruption is on the horizon for insurers. Those wanting to survive must break free from legacy thinking, seek ecosystem improvements, and embrace digital transformation.

Insurers widely acknowledge the industry has been slow moving for decades, and digital transformation adoption has been poor. However, as the pace of change accelerates and the macroeconomic environment threatens existing models, time is running out for P&C insurers to drop their legacy mindset and embrace change. The first step is to pursue third-party partners for support; they are waiting in the wings with the latest technologies to drive digital adoption and the domain expertise needed to guide ecosystem improvements.