Time for an Industrial Revolution in Insurance

by Juan de Castro, COO, Cytora

This is a short version of a podcast you can listen here: Making Risk Flow – Episode 1

The insurance industry is at the heart of a thriving economy. If insurance is manual and inefficient, insurers can only scale sensibly by adding more humans: more growth equals more expense. It deters insurers from taking on new kinds of risk. And then individuals and companies are left holding more risk. On the other side, if we can build an efficient industry, insurers will be able to take more risks and offer more affordable products.

When we look back we can learn so much from how other industries have evolved throughout history, and some analogies will make it easier to tackle the principles of digitisation in insurance.

Going back to the late 18th century, the Industrial Revolution was the transition to new manufacturing processes, instead of items being produced by hand, processes were invented that allowed items to be produced by machines.

Three key critical innovation breakthroughs enabled this revolution:

  • The first breakthrough was New Tools. New chemical manufacturing and iron production processes were invented. 
  • The second breakthrough was new forms of Fuel. The main acceleration of production was the use of steam power.
  • And the third breakthrough was Automation. Production methods evolved from hand production to machines, with the rise of the mechanized factory system

The impact of the Industrial Revolution was clear: it began in Great Britain, and by the end of the 18th century Britain was the world’s leading commercial nation. 

The second shift in manufacturing was the introduction of the Assembly Line. The assembly line was first patented in 1901 by Ransom Olds, a car manufacturer (later improved on by Ford). It allowed his company to increase their output by 500 percent in one year. The impact of the Assembly Line was also obvious to the customers. Previously, cars were considered a luxury item, but as production efficiency increased, they were able to drop prices so the vehicles were more affordable.

The third major shift was Lean Manufacturing, developed in 1948 by Toyota Motor Corporation. This process was developed in order to improve the flow of production by identifying and eliminating waste. The key concept of Lean manufacturing was to ensure that every single activity in the production line added value to the end customer. Everything else was removed to streamline the process.

There are two key characteristics in Lean Manufacturing worth mentioning:

  • The first one is the concept of “flow”. Flow is a Lean method that allows to move a single product through every step of a process instead of grouping work items into batches. This idea can also be applied to insurance, for example when trying to reduce the turnaround time to get back to the client or broker with a quote for a given risk. 
  • The second Lean Manufacturing concept is “removing waste”. This is, tweaking the production process to create quality products efficiently through the complete elimination of waste, inconsistencies, and unreasonable requirements on the production line. 

To summarise, there were three main evolutions in manufacturing:

  • The Industrial Revolution and how it was enabled by the three breakthroughs: new fuel, new tools and automation
  • The concept of an assembly line
  • And Lean Manufacturing’s concepts of flow and waste

Today in insurance we see similar dynamics to those seen in a factory before the Industrial Revolution: highly manual processes, items of work (risks) that need to be individually processed, a number of activities that do not drive value to the client, and high dependency on manual tools such as spreadsheets. 

We also see plenty of waste in insurance processes, similar to the 7 sources of waste in Lean Manufacturing. To pick a few, we can see excess processing when underwriters touch many renewals that do not need to be re-underwritten. We see unused talent when underwriters are spending hours a day copying & pasting data from different systems. These cumbersome operations are preventing insurers from setting up processes where risks flow without any waste. 

All this results in similar challenges to those early in the manufacturing days: inefficiencies, long lead times, repetitive work and frustration. And ultimately these challenges impact the ability of the insurance industry to serve their customers efficiently and timely. 

So why has insurance not progressed quicker? The difference in insurance is that the raw material is intangible. The item of work, “the risk”, is intangible. The tools to process risk, “the data”, is also intangible. 

To deliver a real transformation in insurance we need to design data flows that enable risks to flow through the industry. Just like the manufacturing industry did a century ago.

So what we call now “digitisation” is no more than driving an Industrial Revolution in an industry that is based on data rather than on tangible materials and physical manufacturing lines. This reliance on data has prevented the industry from evolving as the breakthroughs required were not present. 

Today we’ve got available these technology breakthroughs that are similar ingredients to the ones that drove the revolutions in manufacturing:

  • We have a new Fuel in the form of much richer data about risks. Today we have 10x more risk data available from external sources than what was available 5-10 years ago when all we had was a broker form. We have geospatial data for property risks. We have historical financial data about companies. We have data about how a company is perceived by their customers. Data is available at our fingertips, if we can make use of it. 
  • We also now have new Tools in the form of Artificial Intelligence, Machine Learning, or OCR. This is key to enable this evolution as the wealth of data is useless, unless it can be automatically processed by machines. With 10x more data about a risk we cannot expect humans to be able to absorb and identify relationships across the data. 
  • We also have new Automation capabilities in the form of large processing capacity. With the cloud our ability to immediately expand our processing power is unheard of. 

These three breakthroughs are at insurers disposal to reimagine the way they operate. But how do we start making real progress?

Making Risk Flow podcast we will dissect how these breakthroughs can be specifically leveraged to drive a more efficient, effective and trusted insurance industry. 

Listen on: Spotify and Apple

About the host:

Juan de Castro, Chief Operating Officer at Cytora, where he leads product, engineering and client relationships. He previously served as Chief Operating Officer at Hiscox UK and as a senior manager at McKinsey’s Silicon Valley office. Juan specialises in driving intelligent growth and operational efficiency through digital transformations and innovation.

About Making Risk Flow

Making Risk Flow is a podcast powered by Cytora. This podcast is designed to bring clarity, know-how and inspiration in driving digital transformation for commercial insurers, paying particular attention to the automation of risk processing. This podcast, led by industry veteran Juan de Castro as well as insurance changemakers, will showcase their learnings, challenges and solutions that have worked, or haven’t worked for them. If you are embarking on leading a transformational project in your company and want to make sense of it all – this podcast is for you.