PALGRAVE STUDIES IN FINANCIAL SERVICES TECHNOLOGY Insurance 4.0 Benefits and Challenges of Digital Transformation Bernardo Nicoletti Palgrave Studies in Financial Services Technology Series Editor Bernardo Nicoletti Rome, Italy ThePalgraveStudiesinFinancialServicesTechnologyseriesfeaturesorig- inal research from leading and emerging scholars on contemporary issues and developments in financial services technology. Falling into 4 broad categories: channels, payments, credit, and governance; topics covered includepayments,mobilepayments,tradingandforeigntransactions,big data,risk,compliance,andbusinessintelligencetosupportconsumerand commercial financial services. Covering all topics within the life cycle of financial services, from channels to risk management, from security to advancedapplications,frominformationsystemstoautomation,theseries alsocoversthefullrangeofsectors:retailbanking,privatebanking,corpo- rate banking, custody and brokerage, wholesale banking, and insurance companies.Titleswithintheserieswillbeofvaluetobothacademicsand those working in the management of financial services. More information about this series at http://www.palgrave.com/gp/series/14627 Bernardo Nicoletti Insurance 4.0 Benefits and Challenges of Digital Transformation Bernardo Nicoletti Temple University Rome, Italy ISSN 2662-5083 ISSN 2662-5091 (electronic) Palgrave Studies in Financial Services Technology ISBN 978-3-030-58425-2 ISBN 978-3-030-58426-9 (eBook) https://doi.org/10.1007/978-3-030-58426-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. 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Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respecttothematerialcontainedhereinorforanyerrorsoromissionsthatmayhavebeen made.Thepublisherremainsneutralwithregardtojurisdictionalclaimsinpublishedmaps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Foreword I have known Bernardo Nicoletti since a long time: we have been collab- orating in many challenges and countries around the world and from manypositions.Healreadywrotesomeyearsagoanotherinspiringbook: Digital Insurance, that I consider a prequel to this one, where he now tackles a new, yet connected, topic, “How to push and support digital transformation in insurance companies.” It was about time to have such a book. Indeed the revolution of industry 4.0 goes back to 2012, while in the meantime, many finan- cial institutions have almost continued unchanged, almost unaware of what was happening around them. New companies and business models have been started, and other have failed, sometimes in a dramatic way. The digital world has disrupted entire sectors, such as newspapers, media recording, commerce, manufacturing, and others. It is now impacting heavily also on financial services. Consequently,theconceptof“digitaltransformation”isontheagenda ofmanyCEOsandBoardrooms.Butapartfromthebuzzword,itisoften not clear what it really means; financial services have often interpreted “digital transformation” only as a way to provide access to some prod- uctsviadigitalchannels,onlineormobile.Digitaltransformationismuch more than that: it is a change in the business models of the company. It is essentially putting the customer at the center of attention and using digital platforms to build a new business and operating model around v vi FOREWORD that. Such a transformation involves all the dimensions of the business such as products, processes, people, partners, and platforms. In the last few years, prophets started to make statements such as: “banking is necessary, but banks are not.” This approach has spurred a certain number of studies to understand what digital transformation meant for banks. In the meantime, the other cornerstone of financial services, insurance has not changed much. The mantra for some was that insurancedoes not have many contact points with customers.Hence digital transformation was not that essential. Bernardo claims that there is a need for a Copernican revolution in insurance too. It is necessary to put at the center of attention the customersandtheirneeds.Thisapproachiswhatthisbookdescribesand its relevance is that not only it tells you what to do but also how to do it. Bernardo applies the Galileo method, which has three steps, intuition, demonstration, and experiment, and this is the method applied in this book. There are also certain exciting intuitions on how “insurance” should change, like the evolution from “products” to “services”, and the funda- mental importance of “platforms” and “ecosystem”. Simultaneously, the book goes into detail on what to do with the support of methodologies, old or new, which Bernardo describes in detail. Finally, the text is full of realbusinesscaseswherethedigitaltransformationhasbeenexperimented and implemented. I am happy to see that Bernardo has also considered the company I workforinsomeofthesebusinesscases.IndeedIbelievethatAllianzhas had the intuition to implement what another guru of financial services, ChrisSkinner,haswritteninhisbooks:companieslikeBanksneedintheir board and executives not only bankers but persons with deep experience of technologies, and this applies also to Insurances. Thebookstressesalsoanotherimportantaspect:theincreasingimpor- tance for insurance companies of data and their management. The crisis causedbyCOVID-19hasonlyunderscoredthispointandgivenusanew sense of urgency, but also shown us that we can re-engineer all function in a much more digital and agile way then we thought. To date, insurers must use all the tools to grow, protect themselves, and better plan the future. The most effective way to do this is through the strategic use of data. Data is essential to understand the customer andprotectthecompanyfromexposureandmitigatetheassociatedrisks. FOREWORD vii In times of crisis, the mutuality role of insurance increases in impor- tance. Unfortunately, in some cases also the probability of fraudulent transactions, dictated by despair, is higher. Analysis tools will play an essential role in this recovery, providing insurers with all the information they need to limit their exposure, promote new offers, and enrich their services. Itisfascinatingtogothroughthevariouschaptersofthisbookbecause the insurance companies that have started to implement the digital trans- formationstatethattheirworkisonlythebeginningofwhatisnecessary. There is a need for a continuous digital transformation. Because the question for insurance companies is not “if” to do it, it is “when” to do it; the time is now, and the success will be with the hard work pioneers. Munich, Germany Fabio De Ferrari Chief Operation Officer bei Allianz Deutschland AG Contents 1 Introduction 1 2 Industry 4.0 and Insurance 4.0 11 Introduction 11 Industry 4.0 13 Main Components 18 Soft 18 Hard 19 Significant Challenges 21 Insurance 4.0 22 Insurance World 23 First Industrial Revolution. Insurance 1.0 25 Second Industrial Revolution. Insurance 2.0 27 Third Industrial Revolution. Insurance 3.0 28 Fourth Industrial Revolution: Insurance 4.0 30 Insurance 4.0 Model 34 Cybernetics 34 Communication 35 Control 35 Cooperation 35 Connection 36 Cognition 37 ix x CONTENTS Coordination 38 Conclusions 40 3 Business Model Canvas and Insurance 4.0 41 Introduction 41 Business Model Literature 41 Business Model Canvas—Structure and Components 45 Value Propositions 48 Customer Proximity 48 Customer Partitions 52 Place or Channels 53 Platforms and Resources 53 Essential Processes and Activities 54 Partnerships and Collaboration 56 Pricing and Revenues 58 Payments for Costs and Investments 59 Business Models, Strategy, and Competitive Advantage 60 Application of the Model to the Insurance Industry 64 Competitive Advantages 67 Conclusions 68 4 Propositions of Value for the Customer in Insurance 4.0 69 Introduction 69 Insurance 4.0 and Value Network 71 Empowerment of Customers 73 Benefits and Challenges in Insurance 4.0 75 Loss Control 76 Behavioral Change 76 Risk Selection 76 Shared Economy 77 New Products to Add Value 79 New Insurance Products Developed Based on the Technologies Used 80 New Products Based on the Objectives 81 On-Demand Insurance 82 Usage-Based Insurance (UBI) 82 Peer-to-Peer Insurance 83