June 3, 2016

How digital advice is about to empower the insurance customer and why you should care

Magnus Bogren

Lead Consultant, Tieto Financial Services

Digitalization is making waves in the finance and insurance industries. Thanks to the rapid emergence of digital advice, in only a couple years we might see a radical re-structuring of the Swedish pension insurance market. But digital advice might have long lasting and foundation-shaking effects to the insurance and financial industries as a whole.

Robo-advice is the automated, digital advisory and portfolio management of investments. In recent times, the concept of robo-advice has gained a lot of attention in the financial and insurance industries—and for a very good reason. It has the potential to disrupt business models and revolutionize the paradigm of financial advisory altogether.

We can already see strong signs of the disrupting effect of digital and robo-advice. It is estimated that robo-advice as of today constitutes 75% of pension advice in the UK. In the US market robo-advisor Betterment received $70 million in funding from Kinnevik and a valuation of $700 million. Wealthfront, another robo-advisor in the US market, has received a valuation in the same ballpark.

The Swedish insurance pension market is founded on the principle of individual choice. Independent fund management companies are responsible for asset management of funded pensions. Accordingly, pension investment is on the agenda of every Swede, not only high-income individuals.

Times, they are a-changing

In Sweden there is an active public debate about the amount of money spent on pension fund management. Furthermore, pension companies have abandoned many pension savers; customers often do not feel engaged in the process of investing their retirement savings, and they also worry about getting sufficient results for their pension investments.

One big driver for change is enhanced regulations. MiFID 2 (Markets in Financial Instruments Directive) will restrict advisors from accepting monetary or non-monetary benefits from third party providers. The restrictions are to be put into operation by 2018. This has already and will furthermore impact the Swedish pensions business from a sales as well as an advisory perspective.

The second and perhaps more important driver is the increasing importance of the consumer perspective and customer experience. Digital and robo-advice is truly empowering customers by changing the concept of information as a service.

Many of us have been in this situation: in an advisory meeting, you as a client are in an underdog position; the advisor knows more and has more information available. In many cases, this information is communicated in piles of paper amounting to hundreds of pages. This can lead to a feeling of disengagement from the whole experience and create uncertainty in any decision-making. Perhaps you think something like, “Great meeting, but I don’t feel I am in a position to make a choice where I control the outcome and feel secure”. One big mistake is to confuse understanding with the need to assimilate a huge amount of information. It is, as we all know not about the quantity, it is about the quality of information.

And this is where digital advice comes into play—in shifting the power balance back to consumers and changing their perspectives on information. Robo-advisors can provide quality information to the customer in a compact, visual way. They can quickly provide clear recommendations and alternatives, making the whole investment process much more proactive. All this creates more transparency by presenting useful information that involves the customer and helping them feel engaged and in control. 

Whoever serves the customer best will survive

In the Swedish pension market, the rise of digital and robo-advising is a potential threat to existing pension companies. But as always, digitalization is a two-way street. From one perspective it creates possibilities for new and disruptive players to enter the market with modest capital requirements. The speed of expansion for these startups can be impressive. The already mentioned robo-advisers Betterment and Wealthfront manage around $4 and $3 billion in customer assets, respectively.

However, traditional insurance companies can still challenge their existing business and service models to offer their customers more transparent and effective digital insurance solutions. Current cost structures as well as legacy systems and processes might be obstacles for some traditional insurers. But waiting on the sideline for too long may give new competition a head start, forcing traditional players to play catch-up.

Even in financial and insurance markets, trust can be gained quickly through a strong service package. Customer loyalty is a myth if customers are not happy and engaged—when a service is not transparent, even existing trust will eventually start to crumble. The only way to survive is to invest in offering the best customer value and experience, and in the pension industry, digital advice can contribute immensely to this.

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