Insurance Talks #5 – A Universal Definition of Digitalisation
For the Insurance FM podcast, Keylane interviewed Dr. Moritz Finkelnburg, member of the board of BGV Badische Versicherung, and Justus Lücke, Managing Director of Versicherungsforen Leipzig on the subject of a universal definition of digitalisation and the hygiene factor associated with digital insurance services.
The full interview and podcast can be found here (only available in German).
Michael Carl: We have an interesting combination of interviewees today. One of our guests is in the middle of the industry, active in the market, driving change and development. The other is concerned with the overview. Firstly, let us welcome Dr. Moritz Finkelnburg. Nice to have you here.
Dr. Moritz Finkelnburg: Thank you very much. It’s a great honour to be invited to Insurance FM.
Michael Carl: Dr. Finkelnburg, you’re an expert on insurance digitalisation and have been teaching it for a long time. You have built up an academy in Frankfurt and have thought ahead on the subject of digitalisation. I found it charming to read the press release on the occasion of your appointment to the Board of Directors at BGV, which very dutifully wrote: “Yes, appointed as Board Member for Private Sales and for Customer Service and Motor, but we are actually interested in the fact that he can digitise.” In this respect, let me ask you a question: is it even possible to “be able” to digitise?
Dr. Moritz Finkelnburg: I think you have to take a close look at digitisation in relation to the industry in which you are active, in our case the insurance industry, and you have to consider which facets belong to digitisation and which of these different facets, from process design to start-up life, are actually important and decisive for the company in which you are active. The process is not easy and, God knows, not everyone does it. Once you have made these considerations, then comes the exciting part, namely the implementation. What do I actually have to do for this in my respective company? And how do I have to do it to achieve the desired results?
Michael Carl: Both steps that you described sound like processes that you have to initiate and then actually keep running. We’ll pick that up again in a moment. First, let’s welcome Justus Lücke, Managing Director of Versicherungsforen Leipzig. Nice to have you here. Hello.
Justus Lücke: Hello Mr. Carl. It’s nice to be here.
I don’t think we need a long introduction to Versicherungsforen Leipzig. For me, I always sum it up like this: It is one of the central places for exchange, for knowledge, for networking in the insurance industry, and then there are all the satellites around it that deal with other industries. We have an exceptional situation because both Dr. Finkenburg and Mr. Lücke know each other. Fortunately, they also like each other. Let’s see if that is still the case in half an hour. This is an exceptional situation that we have never experienced at Insurance FM before. We have two guests every time and so far it has consistently been the case that the two did not know each other. Would it actually be wrong to say that it is quite typical in the insurance industry that board members and high-ranking managers from different companies do not know each other at all, do not even exchange information with each other, or would that be a mistake?
Justus Lücke: I would call it an aberration. It is impossible to know all the people in the industry due to its size. But I regularly say when I’m in contact with colleagues that the insurance world is a village. You often meet again in different places. Other sectors that are perhaps not in competition with each other, such as public utilities or something similar, have a somewhat closer network. But, we have noticed that, as you have correctly described, the will to network and to exchange and to learn together is very high.
Socially Responsible Insurance
Michael Carl: Before we get into topics of digitalisation and consequences and transformation of the industry, I would like to ask you a question. During our preliminary discussion you talked about your experiences having to drive around in torrential rain. We have all seen the recent pictures of cars floating down roads throughout Stuttgart. We see today – we are recording on 30 June 2021-, the third day of temperature records in Canada with almost 50 degrees Celsius. And temperature records being broken for three consecutive days is something we have never seen before in meteorology. We are suddenly noticing issues of elementary security. In connection with the climate crisis. Do you see this as a new kind of challenge for the insurance industry to deal with?
Justus Lücke: I think for the insurance sector it is one of the sectors for which it would be the least novel. Dealing with the issues of climate crisis and climate risks has been part of the insurance sector for long time. Natural disasters have not only been an issue since today. The insurance industry is close to these issues and has a pioneering role to play and a special interest in doing so, not only for regulatory reasons, but also for purely financial and moral or social reasons.
Michael Carl: During the last sentence about the role of insurance and the aspects beyond the financial, Mr. Finkelnburg nodded very vigorously. Let’s translate his gestures.
Dr. Moritz Finkelnburg: I think you got to the heart of what Justus said, that insurers not only primarily insure, but that we also have a social responsibility. Due to its financial strength, the insurance industry is of course one of the essential economic sectors that must also play a role. And it’s not just a question of getting away from coal energy in our investment structures. It’s about supporting the climate and international cooperation and international actions that are necessary for this, and also about making a massive political impact. The difficult thing is that this is complex, and the big, developed countries have to lead the way and get a strong grip on the emerging countries and developing countries so that they join in, and this is what is lacking at the moment. If you can use the financial power of the insurance industry to drive this, you have already done a great deal. From my point of view, that is the most important social task for the insurance industry.
Insurance as a Sustainability Driver
Michael Carl:If I look in the direction of BGV, they also work a lot with the public sector, where decisions are made about whether to build the city this way or that way. Do I build the city in such a way that it heats up or not? Do we also see these developments here, that insurance is moving away from financially compensating for damage towards proactively creating security?
Dr. Moritz Finkelnburg: Yes, exactly. Take the topic of business closure insurance. This is something where the gastronomy and hotel industry were of course left out in the cold. Conversely, we had not insured the risks. The problem is that we have to create a sustainable solution for the hotel and restaurant industry, or even the retail trade in part, so that such businesses have financial security. Our job is to take away existential risks, and we have not managed to do that in this situation. We didn’t even keep an eye on the situation because we didn’t have pandemics on our radar and neither did customers. And again, it’s nobody’s fault, but we still have to solve the problem. We must slip into the role of an advisor. For us as BGV, we have all the municipalities in Baden. I believe 439 are completely insured with us. And they are very grateful that we think with them about how they can actually build, how public buildings have to be structured sustainably, how the block power plants should actually be designed, how the dams in the Black Forest, which are all insured with us, should be designed, etc. This is an extremely exciting discussion, but we are also not fully trained. We still have to build up expertise in this area.
Michael Carl:That would have been my next question.
Dr. Moritz Finkelnburg: I would say look at how we actually deal with the energy industry of the future. What can we recommend to the municipalities in order to build structures that are sustainable and ecological in the long term? How can we, as an insurer, map this out?
Simon Dufour: So you can see that the expertise of the insurer is changing because customers’ expectations are changing. Mr Lücke, you play a very central role. What can do to develop in these new areas?
Justus Lücke: Yes. First of all, it is important to create this transfer from “climate change” to “climate change and insurance”, the topic of “quantum computers” and “quantum computers and insurance”. We don’t claim sole knowledge, but I believe that the topic of best practice, the topic of “how do I really approach all of this in normal everyday life” and discussing it together is extremely important. Ultimately, every company has to find its own solution. And, as I said, BGV has very different prerequisites and very different issues than a non-regional insurer. A non-municipally insured person has completely different risks and completely different issues. I think it is always about further development, but in itself the topic has always existed. I always like to draw a parallel with fire protection. At that time, fire extinguishing systems. The first initiatives around sprinkler systems etc. were inventions from laboratories. At that time, fire protection measures and insurance wanted to prevent fire damage. People are simply trying to develop and advance issues in order to save lives. Which is what was done at the time. This preventive role has always existed, but of course it has always had to be adapted to the framework conditions or the risks involved.
Michael Carl:I don’t think we need to talk about the fact that both roles have always existed in the DNA of insurance companies. But there is also this other side. Whoever takes out a term life insurance policy today never hears from their insurance company, because they are basically not interested in whether I live a healthy life or not. They just pay when I die. There we are at the other end of the spectrum compared to the sprinkler systems. Mr. Lücke, are you experiencing a growing demand for insurance forums on precisely these kinds of topics?
A Key to Success: Sharing Knowledge
Justus Lücke: We see increasing demand for certain topics. That is always the case, where topics are brought to us and we then naturally see ourselves in a role. Okay, when you see that we have an extraordinary amount of product management and claims management and legal protection insurance and so on, and when topics are discussed in different corners, then that is sometimes discussed in a very small circle, then that is already an indication: Okay, this is something that perhaps affects the industry itself more. On the other hand, the industry is certainly not necessarily the “first uber” when it comes to technologies or the use of technology, so it is very helpful and sensible to look outside and see what is state of the art with 5G, for example. What impact will this have on claims management later on? Autonomous driving, AI, etc., blockchain, there’s a lot of discussion about what the impact will be. So we can already see that there is a strong demand to exchange knowledge.
Digitalisation: A Differentiating Factor or a Hygiene Factor?
Michael Carl: I have an impression and I would like to formulate it as a thesis and make it available to both of you for comment. Through these requirements for a new role, through technological development, through the things you have just described, insurance companies are actually gaining the opportunity to distinguish themselves much more clearly from one another. Those who can or must redefine their role have the chance to realise their own signature. The chance to show, look, this is how we do it. I could imagine that being one of the keys to the digitalisation of insurance companies. Do you see it in a similar way?
Dr. Moritz Finkelnburg: I think digitalisation is not a differentiating factor, but a hygiene factor. The thing that the customer feels is whether the insurer is faster, error-free and more service-oriented. That’s if you do digitisation well, whether you’re a life insurer, a health insurer, a pet health insurer, etc,. The basic idea is the same. Digitalisation make the processes leaner, save costs and reduces errors, is service-oriented, customer-focused and overall faster. And that’s predominantly in the retail sector. In other words, in normal private customer insurance. This is not yet so noticeable in the commercial sector. In industrial insurance almost not at all. If I look at it that way, then in a few years it will actually be a must that you have contact with the insurer via different mediums. This can also be a sustainability issue. One insurer does something very special for the environment or for animals, for example. According to my philosophy and assessment, the only chance to prevail in this difficult market is to consistently go to certain target groups of customers.
Michael Carl: But you could position yourself as such.
Dr. Moritz Finkelnburg: Yes, and then suddenly I have something where I know I’m developing my own DNA. That is an opportunity that we have already seized. That we say, yes, we have not only insured all the Baden municipalities, but we are actually also the number one in Baden, the omnipresent large insurer. We are now deliberately targeting families. We have said that we insure young families. That is our DNA. I am convinced that this is the right step to take towards this target group. I can’t tell you how successful we are yet, but being the family insurer in Baden is an opportunity and a distinguishing feature. Apart from that, I don’t think we can talk about digitalisation itself. But Justus, I don’t know how you see it.
Justus Lücke: In the end, it’s not a question of “I’ll take the chance”, but it’s simply a question of “I have to do this”. I have to focus there with a “brand”, with a target group on a certain market with a bit of a product category and try to create a perception for it. Because let’s face it, Life before the mid-90s in the insurance industry was simply very nice. The market was big enough. The margins were big enough. There was almost no competition. Therefore, the products were very similar and USPs were not so necessary. The companies in general were very similar. Nowadays, we simply have the issue of extreme margin pressure due to the issue of digitalisation, due to the issue of comparability of products due to certain other drivers, which also nibble away at internal margins. That means I have to do my homework to still be able to offer adequate products. That includes digitalisation. I have to have my processes under control, I have to have my costs under control, otherwise I will have problems at some point because I will no longer be competitive. In other words, addressing certain target groups. That can also be a region. I once worked for the public insurance company for Saxony-Anhalt. That was a really great brand. It was simple. We are the only insurer in Saxony-Anhalt for Saxony-Anhalt and we know what moves you. The money is from the region for the region. We did something good, although we didn’t have the monopoly position we once had, and yet we still had a very respectable market share, also in terms of this positioning. And we could do that even before digitalisation. The pressure was simply not yet there to do this in terms of marketing, product technology, etc,. The topic of IT also helps in this regard. IT also helps to address such target groups precisely through performance marketing.
Market Segmentation: Pros & Cons
Simon Dufour: That is music to my ears, Mr Lücke. But one question. You both talk about segmentation, so regional segmentation. So I am very strong in one region or address very specific client groups. I used to work in the industry and one thing I have discovered is that somewhere you have to balance your risks as an insurer. Isn’t ultra-segmentation contrary to insurance theory in the sense of balancing risks?
Justus Lücke: Perhaps I can make the point in inverted commas. As long as you can assess a risk in a halfway sensible way, you can also deal with certain regional or other segments. So you can also have a balance between different, very homogeneous collectives. The collective must not become too small. If it is too small, then it makes no sense. But then I take the total portfolio of the insurer. That means I can still take a risk-adequate premium and still have a balance between the different risks. If you say, okay, if I’m also in micro pricing and therefore have a very single-risk approach, then this balancing collective doesn’t work.
Dr. Moritz Finkelnburg: Yes, I take a similar view. I think that you have to make sure that the size you have and the variety of products you have is sufficient. Then refinancing is there. We have a 400 million portfolio, which is mixed across the board from household contents to motorists to the protection of the power station or a hospital in one of our municipalities. That alone gives us the differentiation and diversification.
Separating Identity from Digitalisation
Michael Carl: Let’s take the path towards digitalisation. You have both positioned yourselves and said that we need to separate identity and digitisation as a means to an end from each other more mentally. Do you have the impression that there is anything at all like a uniform picture in the insurance industry as to what the challenge of digitalisation actually is in terms of implementation?
Justus Lücke: At the end of the day, I would say that there is no fixed definition of digitalisation, and everyone has to find their own priorities. You can say, well, digitalisation is everything that has something to do with IT. Then you could also say, well, what doesn’t have anything to do with IT these days? So that’s why it’s very difficult, and I have a hard time with the term digitalisation. It is somehow everything and nothing. I think there are a few focal points that are sometimes set in the industry, which are then summarised under this, be it the topic of artificial intelligence or blockchain. Perhaps things like performance marketing and online marketing would not be so original and would be subsumed under the topic of digitalisation, although it is becoming more and more important in times of online direct sales as a permissible channel. Therefore, in summary, no, there is no such thing. But that’s not a bad thing either, because every insurer and every company in the industry has different focuses with regard to digitalisation, different types of processes, and should therefore also adopt and work on different things from this big diffuse term digitalisation for themselves. That’s why, from my point of view, there is no compulsion to have a uniform definition.
Michael Carl: That means that everyone has to get to work on their own task book, fill it and then work through it. How do you experience this, Mr Finkelnburg?
Dr. Moritz Finkelnburg: I see it quite similarly. For one of my lectures 2-3 years ago, I tried to find a definition in Wikipedia and otherwise in Gabler Versicherungslexikon.
Michael Carl: It’s hopeless.
Digitalisation is not a Standard Definition
Dr. Moritz Finkelnburg: I even looked it up on your site, Justus. There is no such thing. There is no standard definition of digitalisation. When you write like this yourself, you start to rhyme a lot of sentences together that have something to do with the fact that you have to manage large amounts of data, that you have to exploit large amounts of data and that you have to exploit the effects of linking large amounts of data, and then we’re back to AI. But there are still many flanking aspects in there that make it incredibly difficult to really come up with an accurate definition. And the individual aspects and parts that you have just mentioned, such as AI, such as blockchain, the whole question of search engine management, the whole question of the start-up world, how do I invest, when and with whom? Coming back to your initial question, I believe that Mr Carl will not find a uniform picture in the insurance industry. There are three reasons for this. Firstly, this unclear definition. Secondly, the very heterogeneous world. We have over 500 insurance companies that are very different. From the absolute niche provider to the big all-inclusive tanker, like Allianz. From regional providers to statutory providers, to church pension funds. This means that the need for digitalisation is also very different. The speed of action is very different. One is brutally competitive. The other is not at all. They don’t know what competition is.
Michael Carl: That brings us back to the pension funds of the churches, doesn’t it?
Dr. Moritz Finkelnburg: I didn’t want to call it that now. But that means the aspects where digitalisation can help and how quickly I have to use it are very different. Even if you take the top 100 insurers who are still involved somewhere in the events that we are currently thinking about and dealing with, who are shaping this, even there the picture and also the speed of action is very different. The understanding of the boards alone is also very different. It ranges from a very complex image of “I have to do this, this and this” to an image of “yes, digitalisation is, I think, a turning point and a fad that will pass, similar to the interchangeable number plates a few years ago or perhaps telematics.
Simon Dufour: Then isn’t it smarter to talk about how to act entrepreneurially as an insurance company or as a company within an insurance company, in a world that now defines itself much more through data? Isn’t it the much more interesting question?
Dr. Moritz Finkelnburg: If you are in competition, then yes. If you are an agricultural insurer, without having a very specific one in mind, who basically goes to his farmers with a written application, who are used to it, who sign it, who don’t want to do anything on the computer because they are suspicious of it. And then I take these applications and put them on my clerk’s desk and he puts them into the machine and that’s a wonderful, profitable business model. What do I have to change about that?
Justus Lücke: This example describes quite well all these discussions about digitalisation. The current thinking is always very much from the solution side and not from the problem side. The insurer that you just described, Moritz, must always ask himself: do I have a problem somewhere? Do I have a problem that my application process costs are too high? Do I have a problem that I don’t win any more customers or that I lose customers? Do I have a problem that I no longer earn money? If I can answer all the answers with no, then I say okay, then I have a world that is beautiful and then I don’t really need to look for solutions? But if I have a problem, then I have to look for solutions and then potentially data-driven business models, process optimisation, digitalisation, are potentially a solution. But as I said, it’s just far too much these days “okay, I want to do something with ecosystems, I want to do something with blockchain, I want to do something with AI”, and then it’s like: solution seeks problem. I think that’s one of those things that we still see far too often in the industry. I hear a great word. I want to be agile now. I do everything agile now. I have a problem with the speed of my project and should therefore use agile methods. That is the case in many places, and I think there is further development, but in many places there is not and that is still a bit of a problem, as it has always been.
Future-Proofing with Digitalisation
Dr. Moritz Finkelnburg: But then you are indirectly back to the target group issue. If I am now with the agricultural insurer that we just had as an example, and he suddenly notices that a competitor is coming that is able to offer 20% cheaper via parametric coverage approaches, because he knows exactly which areas are traditionally hit and which are not and can make a better forecast and a better risk assessment, and who is aware of the trend of the development of agriculture from smaller farms to larger ones, of the change from grain to livestock provider and so on, and is thus a competitor to be taken seriously. At that moment, the old provider is forced to do something and think, and that is actually an exciting situation. But the altitude required for this is often the problem. You have to have this chance to step back, look at your business model and say, how will it develop in the next five to ten years, even if I retire somewhere? But what is in store for us, including the climate change issues we talked about earlier, and how would I have to set up certain structures for my company in order to continue to be competitive?
Justus Lücke: Exactly. But that’s the topic we had earlier with “time is just difficult”. Especially when I talk about smaller, medium-sized insurers. I don’t have a huge state department to say that I’m going to put someone in there every day to screen the market and all the future institutes and see what topics are there. And you have always done this very intensively, Mr. Carl, so I think you need an external impulse that says, okay, these are the topics that will basically develop in the next few years, and then you have to see which ones are relevant for you. For agricultural insurers, the issues are quite different from those of a legal protection insurer. It is always a question of the pressure of suffering. We have done many projects in different ways and we have found that the best projects were when the insurer recognised that he really had a problem or came from a not so comfortable situation. He says: “Okay, business is good. Margin is okay. I’ll take a look now and do it.” Then the pressure to suffer is not there and also the actual compulsion to implement things. Often it comes too late, because when you say: “Okay, the pressure to suffer is there”, then you have to deal with the issues and then I have to get them completely on board. That’s when it’s difficult. It’s really important to take the step back. I have to exchange ideas and then I can see what I might need. But yes, this is a very exciting situation and I think there are already a few insurers who urgently need to do this, and there will be more in the future.
Michael Carl: But you both say that it can be that the implementation of solutions with digital media and structures and processes are highly different afterwards. It may also be that there are companies that don’t have to do much at all because they are at home in niches where everything works wonderfully with conventional means. But to put oneself in a position to take a step aside, to look at one’s own business model, one’s own customers, one’s own product landscape and to ask oneself the question, is this one competitor coming around the corner>? This competency must actually be developed by everyone, irrespective of whether they are in competition or not, whether they are active in any specialist area or not, whether they are large or small. Correctly understood?
Dr. Moritz Finkelnburg: From my point of view, yes. The idea you have just formulated, that must be the first basic requirement. I have to be able to analyse my business model and recognise where I have to be digitally active. That would also be my expectations of any board member or any employee who has a leadership role somewhere; that they have the curiosity, that they acquire the basic knowledge, that they look at the market. and have a certain basic understanding. If not, you have to go to insurance forums and get it there. That’s the best way to do it and otherwise go to one or two major conferences. And then they will have an idea of what is happening in their individual areas. Step 2 actually has to be to provide the business model with the structures where the competitors do it. If I have a normal retail business with home contents, liability, buildings, accident, then I know what happens on the market. I know how claims settlement is being digitalised at the moment, how people are trying to upload photos of the damage via an app. And if it’s damage, I don’t know, from €0 to €200 or €0 to €500, which is probably not fraud, I also scan that in the background, then I pay it out immediately online over the phone. That is the ideal. That’s a digitalisation that you can’t get around, where you can’t really think about whether you want to do it differently. In the next 2-3 years it will be like that. The payment method. I can use Paypal or my credit card to pay for my insurance contract online, that’s absolutely standard. When I order something from Amazon or even from Medpex as an online pharmacy, that is completely normal. It is inconceivable to me that we, as insurers, do not offer this or, for the most part, have not yet set our sights on it. Or reminders. You can send smart reminders today. The Otto mail order company has demonstrated this and there are 2-3 providers in Germany who do it completely digitally. And today I can probably go down from 20 employees in accounting to 6 to 8 without having a deterioration in dunning and accounting.
The Importance of USPs Within Digital Ecosystems
Justus Lücke: I think that sums it up quite well. A board should always be there to analyse the business model and consider what role I can play in the market of the future, or what my USPs are, what are my characteristics with which I can differentiate myself. For which target group, for which regions, with which products, with which market approach, so to speak? And of course I should always try to play this, because it always gives me a competitive advantage. That is a bit of a strategic orientation. Who does BGV want to be? What does BGV want to be perceived as in the next 10, 15, 20 years and beyond? And then the rest is also a lot of homework and duty. I also see what does the customer expect in the insurance industry and/or from adjacent industries. Yes PayPal. Yes, to be able to conclude the contract via video call or things like that. That is simply a hygiene factor. This will not be a distinguishing feature in the future, because everyone will offer it. There we have the topic of Software as a Service again. The landscape will not differ that much, because it will happen very quickly. An insurer offers it. Plug-and-play, and I already have it in my processes. Nevertheless, this is still important work. It requires a lot of effort and also change in the staff to take it on board. Simply keeping this agility in mind. Digitalisation is a hygiene factor, but not an enthusiasm factor in the long term.
Michael Carl: So let me summarise. We can’t avoid doing our homework. We have to do it and you get in trouble if you haven’t done it. But if you’ve done it, then you’ve just reached normal zero again. The exciting thing is that we came from the question: can you actually be able to digitise, and I think we illuminated many aspects in our conversation that are aimed at the role and understanding of managers and board members in the insurance industry. With the question of where we actually stand, what do we want. We addressed identity issues. We addressed the assessment of our own business model, the change of framework conditions. And it is precisely these processes of reflection that seem to be a decisive lever. For me, this is a very noteworthy conclusion to this discussion. In this respect, I would like to thank you both subjectively for the hour you spent with us. Moritz Finkelnburg BGV Board of Directors, Justus Lücke Managing Director Versicherungsforen Leipzig, Simon Dufour and I say thank you very much and stay healthy.
Digitalisation as a hygiene factor
The insurance industry loves to talk about digitalisation, and it is a hot topic and will remain so for some time to come. But what does digitalisation really mean? Clearly, different things to different providers and different customers. There is no universally agreed meaning of the term, and each of us interprets its meaning differently and in respect to the needs of our business and our customers. In the short to mid-term, some niche insurers may well continue to thrive while ignoring the call to digitalisation, due in large part to their niche customers who may favour more analogue interactions like pen and paper and face-to-face contractual agreements over digital meetings, electronic payment methods and other online solutions. But, in the long term, even those niche providers are in danger of losing their foothold if more agile, digitally savvy competitors muscles in on their turf with more cost effective but comparably similar policies. For that reason, digitalisation will eventually be a major topic for all insurance providers.