Building the Future of Insurance in Canada Through Innovation

Amid rapid technological advancements, evolving consumer expectations and escalating global risks, the status quo in the Canadian insurance industry is being challenged every day. Embracing technology has become essential for incumbent carriers to maintain relevance and prepare for the next decade of insurance.

The insurance sector is a significant contributor to the Canadian economy, generating $228 billion in premiums and paying $156 billion in claims and benefits in 2022¹. To provide context, the premiums represented 11% of Canada’s GDP for that year. The industry employs over a quarter of a million people and provides financial protection to more than 30 million Canadians. Ignoring technological advances is simply not an option for an industry with such influence. Yet, many operations within the industry still rely on outdated software, mainframe computers, manual data entry, phone calls, snail mail and even fax in some instances. 

This is, of course, not the case for all insurers. Some have made substantial efforts to modernize, transitioning their operations to cloud-native core systems. Some offer fully or near-fully digital purchase and claim experiences to consumers. Yet, the industry’s overall evolution has been slow.

In a world where we can personalize according to customer preferences, provide easy online check-out options and predict user behaviour, it does not have to be this way.

Laying the Foundation 

Insurers and distribution intermediaries, including MGAs and brokers, need to set the right technological foundations by adopting cloud-native core systems, such as Guidewire, that offer more flexibility, scalability and integration capabilities.  

According to Capgemini Research Institute’s 2023 World Cloud Report–Financial Services, 91% of banks and insurance companies globally have initiated their cloud journey. However, to date, the majority of cloud investments have been made in customer-facing, front-end applications, while over 50% of those surveyed have not yet migrated their core business applications to the cloud. The problem is that the core system often acts as the engine driving an insurer’s operations. Consequently, relying on an outdated core can significantly diminish the digital experience for customers on the front-end. It’s like building a house on top of an ancient and shaky foundation. 

Cloud transformation also gives insurers the opportunity to centralize their data, moving it out of silos and making it more accessible for running analytics and building AI models. A robust technological foundation enables swift adaptation to technological progress. This is obviously easier said than done and often involves major, multi-year transformation projects while still requiring the servicing of customers today. However, these upgrades are necessary to address the needs and challenges of the next few decades in insurance.   

Enhancing Customer Experience

Most major Canadian insurers currently provide some form of digital insurance purchasing experience. However, many have yet to leverage alternative data and embedded distribution, which could greatly enhance the purchasing experience for customers by enabling relevant products to be presented to customers at the right time and in the right way. Emerging distributors, built on scalable and flexible architectures, are more advanced in adopting such technologies. For instance, Foxquilt* enables general contractors to buy personalized general liability insurance before accepting a job on a home repair website by directly embedding it in the job acceptance flow. This strategy has proven to be both high-growth and cost-efficient for the company. 

An API-Driven Value Chain 

Application Programming Interfaces (APIs) allow software programs to communicate with each other. APIs can be used to streamline distribution through broker software and embedded partnership channels. They can be used to pull in third-party data to enhance underwriting and claims and expedite application form completions. Canadian insurers have been developing quoting APIs for third-party use, but progress has been slow. Most carrier APIs are incapable of handling either new application submissions or providing adjudication responses, making the digital distribution of insurance products much more challenging. Without such APIs, insurers risk missing out on significant revenue from lost distribution opportunities and efficiencies in underwriting and claims.

Leveraging AI 

The wealth of data owned by insurers provides the perfect opportunity to leverage AI technologies for better and faster adjudication and personalized product design. Although we are still in the early innings of AI adoption in the Canadian insurance industry, many insurers are testing or using AI to improve customer service and internal workflows, streamline sales, test new underwriting models and help adjust claims more efficiently. For instance, insurers are using ProNavigator*’s solution, which leverages generative AI to capture institutional knowledge from experienced staff within insurance companies and acts as an internal search engine to support sales, customer service, underwriting and claims, like a private Google Search instance. 

The growing use of AI is also introducing additional risks, such as creating new liabilities for businesses shifting their decision-making from humans to machines. In their whitepaper on this subject, Zurich and Microsoft refer to this as “algorithmic liability.” An example of this would be an insurer that relies on AI to quickly adjust claims. A faulty assessment by the AI model could result in a dispute with the policyholder. Algorithmic liability also affects an insurer’s clients. For instance, a lawyer who is exposed to professional liability may be using AI tools to facilitate the provision of legal advice to their clients. This introduces additional liability for the lawyer as they are relying on the software to be accurate. The question is, how does an insurer incorporate this into a traditional professional liability insurance product? Current insurance products will need to be redesigned with these new types of risks in mind. 

Innovating in Product Development

Many major insurance products have remained largely unchanged for decades in terms of underwriting methodologies. But the world around us is changing rapidly. Cars are smarter and becoming more autonomous. Prices of homes are soaring. Populations are aging while Gen Z is growing in the workforce. Global climate is changing and catastrophes are increasing in frequency and severity. The mental health crisis continues. Emerging technologies are introducing new risks, including cyber threats and, more recently, risks associated with using AI. 

These shifts mean that old underwriting models and insurance products will not fully meet future needs. We are going to need a giant leap forward in the way insurance products are designed and manufactured to ensure that coverages align with changing macro trends. According to Felix Deschatelets, CEO of Emma*, the company is seeing increasing interest from insurers in adopting their technology, which helps digitally distribute life insurance and co-develop new insurance products. Such partnerships can help insurers fast-track their new product development, launch a digital distribution channel and conduct market testing. 

Creating an Ecosystem

In the future, insurers will need to transform their customer relationships from purely transactional interactions to partnerships where consumers perceive them as allies. This includes offering preventative measures before a claim event and supporting them well afterwards. From a consumer perspective, the relationship with an insurer may start when they are shopping for a property on a listing website long before a policy purchase is actually made or when they are signing a lease for an apartment through their landlord. Insurance companies have the opportunity to create an ecosystem around their customers, fostering deeper relationships with them and potentially unlocking additional opportunities for upselling and cross-selling. 

Canadian insurers have the opportunity, the resources and the responsibility to help redefine what insurance means for the next generation, and that demands embracing creativity, innovation and trying new things as a guiding principle. In the end, it is about more than just adapting to change; it’s about leading it. By collaborating with innovative insurtechs, insurers can forge an ecosystem that not only responds to emerging risks with agility but does so in a way that delights the end customer. 

For additional insights, download the Canadian Insurtech Landscape and Future of Insurance report by Luge Capital, which delves deeper into the various innovations reshaping the industry, spotlighting both incumbents and insurtechs. 

This article reflects on the findings from our Canadian Insurtech Landscape and Future of Insurance report published in late 2023. The companies marked with an asterisk are part of Luge Capital’s investment portfolio.   

1.  Data from the 2023 Facts of the P&C Insurance Industry in Canada report and the Canadian Life & Health Insurance Facts 2023 report.