Scary Thought: What Happens When Start-up World and Insurer World Mix?

Accelerators, incubators, hackathons and labs, oh my! There have been an increasing number of partnerships between insurers and start-up technology companies in the past year. It is an exciting time, full of possibilities and I don’t mean to pour cold water on the enthusiasm, but…

What happens when fast-moving startups meet governance-heavy insurers? When faced with a joint decision, how will professionals who have spent a career avoiding risk reach agreement with their partners who seek out risk? To what degree should action plans be coordinated and how is that done if one group is using an agile development method while the other prefers waterfall?

Do these differences really matter, or will the incentive to deliver something really cool power through such differences?

It is time to ask this question, along with what is, and isn’t working, and what actions will improve results.

Celent is excited to partner with #SiliconValleyInnovationCenter to assess the current state of innovation partnerships in insurance. We value your views would like to invite you to participate in a survey. Leave your email and I will send you a summary report.

The goal of this survey is to accelerate insurance industry innovation / transformation by identifying effective partnering methodologies and processes. It specifically focuses on the relationship between incumbent insurers and start-up firms. It takes under 10 minutes to complete.

Hope you will add your views:

Click here to start

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The schizophrenic nature of innovation in insurance

I have attended various conferences on innovation over the past few years. In almost all of them futurologists of all kinds and innovation experts who are invited to present tend to use the same examples, such as Uber and AirBnB, to describe how new business models can disrupt an industry.

The message to insurers is strict and clear: one day the insurance industry will have its own Uber that comes in and disrupts the traditional insurance business model.

They present these models as forming part of social revolution where consumers come together to demand a new style of service, based upon social equity and reinforced by free-spirited democratic principles. In some respects, they’ve taken their lead from the Internet generation of superfirms that dominate our digital lives (such as Google, Amazon, eBay, and Facebook).

While I fully agree that insurers have to innovate, anticipate, and adapt to changes impacting our industry, I have to confess that I find the usual message too simplistic. What particularly strikes me is the lack of criticism towards these firms. Indeed companies have been embracing and advocating non-discriminatory values for decades in various guises (e.g., gender equality, ethnical diversity, etc.). The US has been proudly supporting these values in the global economy, and the Silicon Valley companies have been keen to promote this message.

Therefore I am surprised to observe that these companies have exported their business model but neglected its social impact in new territories. The recent developments around Uber in France are a good example of this. Taxi drivers have to pay a high license authorization to be able to do their job. Many of the taxi drivers have to invest their pension to get a steering wheel. This entry tax is compulsory and supports the community, like all taxes do in every country.

Don’t get me wrong, these innovative companies have brought to the market great products, services, and added value. I think they contribute to helping their industry change in a positive way. However, I think they are schizophrenic in a certain way, as they tend to forget their social egalitarian values when economic value is at stake.

I am maybe naïve enough to believe that the future of our industry is not only about innovation at all costs but also about responsibility of all economic agents, including companies as well as consumers. In a world where innovation experts place schizophrenic innovators as examples, I hope consumers’ responsibility and their sense of fairness will help our industry keep a critical mind on the future of innovation and innovators. Maybe there is an innovative business model to create out of this concept?

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Why the insurance industry needs more data scientists

Celent will soon be publishing an update to our 2013 report Perceptions and Misconceptions of Big Data in Insurance. In this report we looked at various elements in relation to the role and perception of data in insurance to understand where the industry was in terms of adoption of data-related technologies and more particularly Big Data.

To do so we used what we call our Big Data Maturity Model. This model uses seven dimensions to categorize the industry in terms of their maturity level when it comes to adopting Big Data:

 

We came across an interesting article recently in the Insurance Journal that said insurers needed to hire more Big Data professionals. While we agree with this statement, we have already noticed in the early results of our 2015 survey (still in progress) that insurers have now more data scientist experts as shown in the following figure:

Technology is not enough and insurers have understood that if they want to make the most of data-related technologies they need to hire highly skilled people with solid knowledge of machine learning, statistics and predictive analytics.

This is an interesting early finding and we look forward to provide our members with more on our seven model dimensions soon. Stay tuned!

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In the quest of making fintech a reality in Latin America

The fintech ecosystem has been evolving and maturing in Latin America for the last three years mainly due to the effort of some participants, including Celent, to connect all key players of the fintech ecosystem.

Unlike the USA where there are geographical pockets of Innovation, as Silicon Valley, that brings the actors together based on proximity, nothing like this exists in Latin America

Furthermore, the individual (country) market size is significantly smaller when compared to the USA. Fortunately technology allows business to be conceived global or at least regional and therefor provide the scale needed for a fintech start-up to be viable.

For these reasons, it is essential to work an ecosystem, a network of participants, regardless of their geographic location in Latin America. I do not foresee a sustained and increasing development of fintech start-ups and initiatives in the region without the existence of this ecosystem.

In this last three years we have seen many cases of “me too” fintech start-ups. While this is not bad, it doesn’t show creativity either. Happily we have also seen completely innovative ventures, especially around blockchain, but without this being the sole focus.

There are all kinds of fintech start-ups; in payments, leveraging the use of data and focusing on customer experience; in loans, traditional and new models such as crowdfunding and Peer-to-Peer (P2P); in insurance distribution and risk management leveraging the Internet of Things (IoT) just to mention a few.

How is this playing for the insurance industry? I believe that the insurance industry is at a tipping point in fintech although I see it more developed out of Latin America. I believe there is a great opportunity gathering and using data for underwriting, claims, and fraud detection; taking advantage of the IoT to develop new personalized products and working on claims prevention; in distribution enabling new channels and becoming more digital and technology reliant, and even using P2P models; engaging with customers in new and improved ways; and discovering how disruption in payments can be leveraged in insurance.

In insurance (P&C, life and health) we are seeing that traditional players start moving towards digital environments and interactions, experimenting with technologies such as telematics and with the opportunities arising of the IoT. In Latin America this is incipient, but we see that it improves every year.

According to our most recent research 41% of insurers in the region have a formal innovation program which has been running, as minimum, for 2 years and 35% indicated that it doesn’t have a formal program yet. The fact that only 8% of them are focusing on disruptive innovation allows us to think that change will be slow, mostly based on incremental innovation, unless some external factor can accelerate change.

The main insurance companies globally are either funding accelerators, have created their Innovation labs, or have established funds to invest in fintechs. However, innovation is often difficult for established players and initiatives of new players appear seeking mainly to innovate in product, distribution, customer experience and looking to benefit from the IoT for both underwriting and claims.

Ingenie, one of the pioneers in offering a pay-per-use model based on telematics alongside its strategy of risk prevention, is not really an insurer but a technology company that was forced to go direct as a consequence of the lack of interest from established insurers in adopting a pricing and underwriting model based on the use and individual behavior of the insured. This model is no longer a novelty and has been adopted by many insurers around the world; it is even being replicated in property, life and health insurance.

Recently John Hancock announced the launch of an incentive program based on the insured to share data related to its health, but it is not the only one; Discovery was one of the pioneers to launch it many years ago in South Africa. Oscar offers it for health, along with a digital-only user experience.

Friendsurance, in Germany, has adopted a model based on social networks and P2P insurance that although it is oriented to auto, it could be applied to other risks (including microinsurance).

In parametric insurance (aka index based insurance) using sensors and data, we have seen initiatives as Kilimo Salama aiming to market agriculture insurance massively, in segments that otherwise was not viable to serve. This is indeed an interesting case of extreme digital, with innovation applied in all the insurance life cycle.

An area that we still see relegated in Latin America is the widespread use of data, a historic deficit that in many cases can be represented by the difficulty of something as simple as not having a claims database at industry level. Blockhain, for its novelty, is another area where insurers haven’t yet stepped in.

Distribution, in the region, is mostly not under the control of the insurer; the direct channel is insignificant in volume when compared to the intermediated business, therefore innovation depends to a large extent of the capabilities of the distribution channels to adopt new technologies and rethink their own models. In this sense banks distributing insurance, where bancassurance is permitted, as well as the largest brokers seem to be in a privileged position to capitalize this opportunity, but suffer the same challenges that other large established players and the final word has not been said yet.

Could an external player, someone that understands digital, data and customer experience, change the market dynamics? They are certainly doing so in banking, especially around payments. Google has already entered the insurance industry, on the distribution side, in United Kingdom and the USA. The founders of Alibaba and Tencent Holdings Ltd acquired shares of Ping An Insurance Group Co of China Ltd in a deal valued at $4.7 billion of dollars in December 2014, in what I see as another major threat to the industry from the outside, but taking positions to be able to integrate the business, from distribution to assuming and managing risks.

I foresee that in personal lines insurance we will get used to buy from companies that offer the best digital shopping experience, being these insurers and intermediaries that were able to adapt by learning how to compete in a digital world, or new players coming from the digital retail sector. In commercial lines I don’t foresee a threat from the outside in the short or medium term regarding distribution, but a deeper use of technology by insurance companies to become more efficient in the marketing of insurance. The level of advisory and specialization required makes it difficult to envision it can be transformed into a digital experience of purchase and servicing in a short-medium time frame.

Nevertheless, in both cases, insurers will continue to be the one assuming risks, just as how banks fund and service credit lines. In this sense insurers must offer flexibility and agility in creating new products, but mainly with the ability to do it based on the use of data, the IoT, and easily integrating with its ecosystem.

We will be meeting this December 3rd in Bogotá – Colombia at Finnosummit to discuss the opportunities and challenges for the fintech ecosystem in Latin America. Fintech start-ups can participate of the Finnosummit Challenge, a great opportunity and very interesting prizes for winners. If you want to attend Finnosummit be sure to use Celent discount code: C3L3NT20%. See you there!

 

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Innovation is Magic….Or is It?

What magic does an insurer need to keep up with all the change occurring in our industry? Every firm we talk with is aware of the many challenges currently faced….telematics, digital, social networking, predictive modeling, etc. And yet, more changes are on the way. Our short list includes the Internet of Things, peer-to-peer risk pooling, extended lifespans (maybe never-ending), and artificial/machine intelligence. What should an organization do now to respond and to prepare? What magic is necessary to make it all happen?

Celent is pleased to announce our seminar designed to provide answers to how insurers move forward with innovation on practical terms. It will be in London, on 03 February, 2016. The venue, appropriately, will be The Magic Circle, Centre for the Magic Arts. Through a combination of presentation and hands-on workshops, the session will provide attendees with:

• a practical understanding of how the very basic assumptions underlying traditional insurance products are changing and what impacts this will have
• firsthand information of how insurers can respond, gained through a series of experiential, structured exercises
• networking opportunities with peers which allow for comparisons with like organizations

Our view is that innovation, like magic, requires significant work. Successful “tricks” are the result of the investment of time and resources in various techniques, finding what works, what doesn’t and making appropriate adjustments along the way. After a solution is worked out, practice perfects the approach. Eventually, just like magicians during a performance, implementation must be agile, flexible, and respond to changing conditions.

As the programme builds, we will post updates. For now, please save the date in your diary and register at this address:

http://ift.tt/1Zwdt1c

…oh, and bring your wand!

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A pivotal day for the insurance industry

There were a few key assumptions underlying Celent’s End of Auto insurance report:

1. Cars would crash less, requiring lower claims expenditure and lower premiums
2. Cars would drive themselves, liability would shift to manufacturers and ‘driver insurance’ would be a thing of the past

Today with Volvo’s announcement (also linked here) that they would accept all liability for the car in autonomous mode we see the first of three steps towards the end of auto insurance. This is a key moment in human history, a pivotal moment that will redefine how human beings travel albeit that may not be apparent today. Today, this looks like an inevitable check box on the route to autonomous cars. It is in fact both.

Now the other manufacturers must follow suit or relegate themselves to manufacturing cars with no autonomous ability. Immediately, Blockbuster and Kodak come to mind. Initially they may deal with this through captive insurers but this will change over time.

I mentioned this is the first of three steps. The next inevitable one will take place in the court of law, perhaps after the first death where the car was liable. Here the specifics will be tested and understood. This will be a different milestone in different jurisdictions.

The third step will be a few years from now, when the autonomous systems have had enough time to partially fail due to poor maintenance. I am assuming we still own the cars at that point we’re not just renting them by the hour. At this point clarity will be given to who is responsible for making sure an autonomous system is still fit to drive on the road. Governments and lawmakers will have to define a minimum capability that is required before one can turn on the system. In some countries it may happen sooner than others but one imagines this will be a reactive exercise as manufacturers challenge their liability due to customers meddling with or failing to maintain the equipment.

As interesting and drawn out as these second and third steps are, history will show they are insignificant compared to the point in time when the first manufacturer stood up and said they would accept full liability for their cars when in autonomous mode.

Update: Other manufacturers are already following suit. and the Volvo CEO is already calling on the US government to establish testing guidelines as part of the speech.

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The Solvency II Preparation Finish Line is Close

Solvency II – the European Union prudential capital regulation – will come in to effect in January 2016 after more than a decade of preparation. For many European insurers it means they are reaching the end of the long road of deep preparation but others have already turned their preoccupations in other directions. For instance the Solvency II regulation came in to effect already this year in Denmark and their level of preparation allowed Danish insurers to adapt to the new regulation.

But let’s recall what Solvency II is and why it is an important regulation for the European insurance industry. Solvency II is the set of regulatory requirements for insurance firms that operate in the European Union. The rationale is to facilitate the development of a single insurance market in Europe while securing an adequate level of consumer protection. It is based on three pillars:

• The first pillar defines capital requirements. It quantifies the minimum capital requirement (MCR) and the solvency capital requirement (SCR).
• The second pillar provides qualitative requirements in terms of supervision and review. Indeed, the European Commission wants to emphasize the need for insurance companies to implement efficient risk management systems.
• The third pillar introduces the market discipline concept. Insurance companies have to promote transparency and support risk-based supervision through market mechanisms.

What makes Solvency II a comprehensive regulation is the fact it includes all types of risks and is not restricted to purely insurance risk. With this it better captures the reality of what an insurer’s risk profile is. Key elements of this approach is of course the diversification effect and this is why we see consolidation among small insurance players who lack diversification in their business (notably small mutuals in France for instance). Going forward we expect other geographies to follow the same principles and we think it is important that multinational companies learn from their European preparation.

Of course Celent and Oliver Wyman have been working on Solvency II in the recent past. We have also published research providing our views and opinions on this topic. A recent report has been published by Oliver Wyman in collaboration with Morgan Stanley looking more particularly at various consequences and notably on cash for insurers. If you are interested to know more here is an abstract: European Insurance: Generating Cash in a Volatile Solvency II World.

For the insurance companies that are interested to better understand the vendor landscape we have published a report profiling vendors with a Solvency II offering a few years ago: Solvency II IT Vendor Spectrum: 2012 Edition.

 

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Innovation for dinner

In late August my colleagues Mike Fitzgerald, Fabio Sarrico and myself were in Sao Paulo, Brazil attending InsuranceTech 2015.

The objective was to spend a few days looking where the Latin American insurance industry is headed in terms of business and technology and what level of success have some insurers already achieved. As the agenda of the event suggests there were very interesting cases such as Wibe (BBVA’s digital platform for insurance) and Rimac’s transformation process among others.

Along with Mike and Mick Simonelli we hosted our innovation workshop for 3rd consecutive year and looked into the state of innovation in LATAM insurers (Report is now published). While there seems to be room for improvement, we are now discussing how to innovate and not just what innovations (or emerging tech/trends) insurers should be looking at, which was the focus for most of insurers when we first started these workshops. For me this is a huge improvement.

Mick’s experience as innovation practitioner at USAA and now collaborating with several leading financial institutions as innovation consultant resulted in many questions from audience. As for technologies and trends to watch we covered several, including IoT and machine learning.

Our research shows that despite much is being said about innovation there are still important barriers to overcome; noticeably “lack of top level leadership” stands out as #1.

 

 

Our research around digital also shows that most insurers are in a basic stage, but just to prove us wrong (or better said, the one example that shows it is possible to go beyond basic) BBVA Bancomer Seguros shared how they innovated by creating Wibe, their own digital brand and platform starting with auto insurance (even Uber coverage!). Wibe’s case is a good combination of digital, customer experience, execution, and leadership to bring all together in a short period of time and within an established insurer (and bank). Wibe already has +2.2 million visitors to their website, 61% using a mobile, and their youtube commercials were seen +1 million times each. This translated into +200,000 quotes and +3,000 vehicles insured since launching early this year.

Rimac’s transformation case was also a great example of leadership, vision, execution and persistence in a Tier 2 insurer. Their journey started in 2010 when they defined the strategic plan. Rimac wanted to become a customer centric insurer and for that they required to transform and simplify their IT platform, among other programs which basically touched everywhere in the company. A total of 65 sub-programs were identified just in IT.

Becoming more digital was one of the objectives, along with re-use: the idea to be able to create once and easily deploy in different channels.

Rimac’s transformation is still work in progress (does any transformation program ever end?), nevertheless they shared several indicators of success already. Digital enabled sales represent 1% of premium but they expect this to grow significantly in following years; at least the IT infrastructure is ready and available for the business to take advantage.

A common thread here seems to be execution and leadership; not time, not money (true that you need to be ready to invest; but how much will depend on the type of project). I also believe that execution and leadership are highly tied to culture; and as Mick usually notes: “Culture eats innovation for lunch”. By now I hope you figured out what I am trying to imply…

Changing culture is also an art and it can take time, as transformation programs do (5+ years?). So be ready, and start today. Or start tomorrow and get there one day late. Tic Tac, clock is ticking and the world keeps moving.

 

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