Innovating Insurance with Microservices – Part 2

In Part 1 of this blog series, we shared how a microservices architecture can bring value to a constantly changing business environment. In this segment, we will share our views on the benefits of a microservices architecture for the insurance industry.

The traditional insurance value chain and subsequently the customer experience over the last 20+ years has operated across a number of functional silos. Each of these silos has unique characteristics and are organized around their own KPIs. For example, underwriting / risk management is primarily focused on risk assessment, underwriting quality and booking of premium.  Claims is focused on claims management, fraud detection, leakage reduction and processing turnaround time. Typically, each of these functions operate independently with limited organizational integration.

This organizational design is several decades old and inspired by Henry Fords’ assembly line innovation that optimizes processing costs through specialization and automation. This design has served insurance well during the industrial and information age, leading to specialized functional IT systems targeting the business needs of the silo functions from underwriting to policy management, billing, claims and more.  We call them core system components and they are integrated as a suite. The components and suite serve well-defined functions that have had less dynamic integration needs.

This organizational model and IT system landscape has been effective for decades. But as we enter the digital age, the painful and expensive business and IT modernization projects over the last decade, coupled with portals and complex integrations to these core systems to improve agent and customer experience, does not align with new market needs. Today’s insurance landscape demands agility to adapt with ease, innovation to reimagine the possibilities and speed to capture the opportunities.  The digital age demands so much more to stay relevant and competitive.

Customer Experience is the Differentiator

Customer experience is front and center in differentiating insurers in the digital age. It is a key factor in driving higher customer acquisition and retention which, in turn, drives growth. Customer experience is much more than offering a better user interface.  It is about the customer journey that creates a unique, compelling and engaging experience that makes it “easy to do business” with insurers. To achieve this, customer journeys must cut through functional silos, which are currently optimized for internal operational efficiency. These silos, however, as customer journeys are changing, are now contributing to the degradation of the customer experience. To design and refine customer journeys in today’s digital age, insurers will need to collect siloed capabilities into a new virtual capability designed to optimize the customer journey. This new virtual capability will require hyper-integration and micro-granularities of system capabilities to achieve the desired result.

Insurance Value Chain Disrupted

As we highlight in our Future Trends 2018: Catalyzing the Shift to Digital Insurance 2.0 report, the insurance value chain is rapidly shifting to adapt to new business models, innovative products, expanded distribution channels, new competition with entrants from outside the industry, elevated customer expectations, and emerging technologies.

Digital transformation is redefining the value chains and each component. New products such as on-demand products, connected products and micro-insurance are reshaping business assumptions and fundamentals. We are seeing innovative product design that uses new sources of data, new risk assumptions, micro-segmentation, expanded services, new customer engagement approaches and new channels to reach customers. These designs leverage new technologies such as artificial intelligence (AI), cognitive, analytics and microservices. The result is the disruption of the insurance value chain.  With the value chain disrupted, the underlying systems must be disrupted, too.

Rise of Ecosystems and the Platform Economy

As we enter the digital age, the blurring of traditional industry boundaries is seeing the rise of ecosystems and the platform economy. Companies like Apple, Alibaba, Google, Amazon and Facebook are at the forefront of this shift. They are using an ecosystem with interconnected services from different parties to create a seamless customer experience.

An ecosystem is the DNA of the platform economy, enabling a business model to exchange and share value between its partners and customers. To meaningfully participate in the platform economy, insurers must embrace ecosystems and be prepared to partner with competitors, other industries and innovative technology-based service providers. ZhongAn, an online Chinese insurer, generated 70% of their 2017 car insurance premium in one month (January 2018) by using AI and big data with their ecosystem including carmakers, dealers, after-sales service providers and lenders that created market reach and a loyal customer base. The ecosystem approach eliminates traditional industry or organizational boundaries in designing products and creating a new customer journey.  However, it necessitates the need for a flexible and granular system comprised of different services running on different technology platforms that can easily integrate with any ecosystem.

A New System Paradigm for the Digital Age

A common theme is emerging that highlights the need for a new set of capabilities to support the paradigm shift. To succeed, let alone survive, insurers will need to proactively respond to the value chain disruption, elevated customer expectations and the rise of the ecosystem and platform economy by using granular (Single Responsibility Principle) API / Microservices to build an on-demand business solution with loosely coupled microservices and find-n-bind capabilities that can leverage any ecosystem.

A microservices architecture enables the building of new capabilities to meet these needs. The graphic below contrasts the anatomy of a traditional “pre-digital age” monolith insurance app and a “digital age” innovative microservices based insured app.

 

 

Today’s monolith insurance systems, although partially accessible through APIs, are built as a large deployable monolith unit. This architecture does not easily adapt to the rapid pace of change because the change is to a large system single codebase and specific localized API. A separate API layer exposed over the single monolith code base makes it difficult to integrate with ecosystem partners as well as making it extremely complex to orchestrate services across various systems or apps.

In contrast, a microservices architecture decomposes a large unit into fine-grained single purpose, self-contained and independently-deployable business services that enable the ability for rapid change and open up the possibility of multiple change deployments daily instead of waiting for the periodic release cycle. Using microservices across various apps, insurers can orchestrate a composite user interface that is a tailor-made customer journey. It can be enhanced quickly based on customer feedback.  The graphic below shows how a microservices architecture can assist in the design of a unique customer experience using a product offering and ecosystem.  Multiple customer journeys can be assembled by orchestrating functional microservices and ecosystem services available outside the insurer enterprise.

 

 

The times are changing.  And it is exciting!  The ability to leverage powerful microservices architecture to build a new foundation for the digital age of insurance is game-changing. It will enable new business models, new products, refined customer experiences and timely responses to new business needs (in hours and days instead of months and years) and it will help insurers remain relevant and competitive. While microservices is exciting and will accelerate the industry’s ability to innovate, it is not the Holy Grail. The smaller, focused services have many advantages, but also create complexity in the orchestration of those services. Employing best practices in designing microservices size and data model sizing is critical. Most importantly, determining the gradual transition to microservices rather than a big-bang approach will help insurers build a platform that can withstand the test of time and constant change to help insurers participate in the digital age and platform economy with agility, innovation and speed.

In Part 3, we look forward to covering our views on best practices in introducing and scaling microservices within the world of the monolith IT system environment. We encourage you to read our thought leadership, Cloud Business Platform: The Path to Digital Insurance 2.0, to gain a deeper insight on these topics. Please share your views on this exciting topic in the comments section. We would enjoy hearing your perspective.