In the light of the improvements resulting from digitization – costs are rising. Why?
The digitization of the insurance sector is accelerating, and the implementation of new technologies is becoming the norm for most companies on the market. This process promises to optimize operations, increase efficiency and better manage data and customer relationships. However, digitization also poses challenges – from the costs of implementing new solutions, through increasing regulatory requirements, to the need for data protection and cybersecurity. As a result, despite the automation of many processes, operating costs in the industry often increase, not decrease, which raises questions.
Digital technologies as the engine of change
About 70% of insurance companies use technologies such as AI (AI), automation, machine learning and robotics to optimize key operations and processes. Increase efficiency, improve customer service quality and reduce costs. However, in practice, these goals are not always fully achieved. Many solutions that were supposed to be simpler and cheaper turn out to be more and more expensive, complicated and requiring updating. Customers often ask why, in the light of so numerous digital improvements, operating costs are not falling, on the contrary – they are rising. In our work, we see two main factors influencing this state of affairs: growing regulatory requirements and progressive cyber threats related to the development of technology.
Legal regulations as key challenges.
One of the biggest challenges for the insurance industry is the constantly changing legal regulations, which often impose new obligations on companies. Our sector is under strong supervision, and the introduction of new regulations brings additional organizational and financial burdens. A good example is the online exam regulations that we have adapted to during the pandemic. In response to them, we have created a platform that allows you to remotely conduct licensing exams. The tool takes care of participants’ identification, independence during tests, tracks time and generates reports and certificates. Along with the new law, additional requirements appeared. While before one person could prepare and handle several examination processes, now there must be one for every 50 examined people. In addition, the application of exams, which previously took place in simple e-mail communication, must now be handled in a more formalized manner, often necessitating the need to create an additional job only to handle this process. It is also required, otherwise rightly now, an external security audit of platforms at least once a year.
These expenditures result not only from the need to adapt the system, but also from the need to increase the staff not only related to the service, but also the need to manage new processes and technologies. As a result, the demand for new key competences is increasing. These changes mean that despite digitization, operating costs increase, which in turn affects the prices of the services offered.
Another example of the impact of regulations on costs is the implementation of regulations related to IDD (Insurance Distribution Directive) training. These regulations are imprecise, which leads to various market interpretations. Often the changes are made during the year, when training and certifications are already carried out. Such a situation took place last year, when the requirement to include the PESEL number on certificates was introduced. The need to reorganize the process in effect generates additional costs and its participants feel chaos.
More and more regulations impose an obligation on insurance companies to comply with high standards in terms of data protection and cybersecurity. One example of such regulations is the AI Act – the European Parliament regulation on artificial intelligence, which introduces a legal definition of AI systems, distinguishing them from simpler software systems.
AI ACT classifies the systems used in risk assessment and the price of life and health insurance as high-risk systems. This means that these systems can have a direct impact on customer finances, and improperly designed algorithms can lead to discrimination or financial exclusion. The introduction of AI ACT forces insurance companies to implement more stringent control mechanisms and transparency in the operation of algorithms, which in turn generates additional costs.
Cybersecurity as a priority
The second, equally important aspect influencing the rising costs of servicing the insurance industry are the cyber threats resulting from the development of technology. New regulations, such as the DORA (Digital Operational Resilience Act), which are aimed at strengthening cybersecurity, require companies to cyclical security testing and regular reporting. These regulations assume not only a one-off adjustment of IT tools, but also the need to conduct regular pentests, test operational immunity or report incidents. In the case of platforms such as examination or training we support, such tests are necessary, which generates additional operating costs.
Technological progress opens up many opportunities for us, but also creates new threats. The more advanced digital systems become, the greater the risk of cyber attacks that can have disastrous financial and image impacts for insurance companies. To meet these challenges, companies must invest in advanced security systems, employee training and regular audits.
E-delivery is an important tool, which Poland is one of the first to introduce on such a large scale. This service ensures data integrity, identification of the sender and recipient as well as the certainty of the date and time of sending and receipt of documents. E-delivery is becoming a key element of everyday work in the industry, especially in the context of customer service and the performance of legal obligations.
For insurance companies that operate on large amounts of documents, e-delivery is a convenient and safe tool that allows you to quickly transfer documents, while meeting all legal requirements. Introducing e-deliveries into daily operational practice can significantly reduce customer service time and increase process transparency. This service minimizes the risk of human errors and delays in the implementation of insurance contracts, which is an important step towards full digitization of processes in the industry.
Outsourcing as a potential solution
Faced with the rising cost of regulation and cybersecurity, insurance companies are considering various cost optimization strategies. One such solution is the outsourcing of parts of the processes. In theory, outsourced some activities, such as platform administration or pentest administration, could reduce costs. However, in practice, this is often complicated. These processes are closely related to other operational stages, and breaking this sequence can lead to complications and, paradoxically, an increase in costs. Companies must therefore approach this type of decision very carefully, analyzing exactly which elements of the activity can be outsourced without risking the stability of the entire system. It will not be without significance to choose the right partner for cooperation, with system and personnel facilities.
Digitization in the insurance industry brings numerous benefits, but also serious challenges. Growing regulatory requirements and cyber threats are the two main factors influencing the cost increase. While digital tools and processes should theoretically contribute to lower operating costs, in practice the growing number of requirements and the need to ensure adequate safety standards make these costs rising. Insurance companies must therefore constantly adapt to changing conditions, which requires flexibility and openness to new solutions, but also a thorough cost and risk analysis associated with each subsequent step in the digitization process.
Agnieszka Jakuczek
Joanna Jastrzębska
The Management Board of EofWca.pl
