Where is the innovation in Individual life and annuity?

I had the pleasure of attending an amazing event last week in Las Vegas. The InsureTech Connect event drew over 1,500 people, from insurers to vendor to investors. Given the unprecedented size of an inaugural event, I was very impressed with how well the event worked. The sessions were good, but for me, the opportunity […]

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The Rise and Rise of Analytics in Insurance

As noted in our prior research insurance has always been an industry that relies on advanced analytics and has always sought to predict the future (as it pertains to risk) based on the past.

As observed in the last post here analytics, AI and automation has been a key focus of InsurTech firms but do not assume that the investment is limited to newbies and start-ups. I have for a few years now been attending and following the Strata+Hadoop conferences and others focused on advanced analytics and the broad range of tools and opportunities coming out of the big data organisations. This last week I attended a conference focused on the insurance industry and was surprised to see the two worlds have finally, genuinely overlapped – just take a look at the sponsors.

As Nicolas Michellod and I have noted in the past, insurers have already been investing in these technologies but only those that have made the effort to speak “insurance”. What the conversations at Insurance Analytics Europe (twitter feed) demonstrated was a new focus on core data science tools and capabilities. This continued the theme from DIA Barcelona (twitter) earlier in the year.

The event followed InsTech London’s meeting (Twitter) looking at data innovation and it’s opportunities for Lloyd’s, the London market and the TOM initiative. Here the focus was on InsurTech firms that would partner on analytics, would sell data or would enable non-data scientists to benefit from advances in machine learning, predictive analytics and other advanced analytics disciplines.

While this trend of democratising advanced analytics was discussed by analytics heads and CDO’s at the analytics conference the focus was much more on communicating value, surfacing existing capability and tools within the organisation and to put it bluntly, getting better at managing data.

In short – AI, Analytics, Machine Learning, Automation – these were all hot topics at InsurTech Connect and similar events but for the insurers out there – don’t assume these are purely the domain of InsurTech. Insurers are increasingly investing in these capabilities which in turn is attracting firms with a great deal to offer our industry. For those big data firms that ruled out insurance as a target market a couple of years ago – look again, the appetite is here.

As a techy and AI guy of old I am deeply enthused by this focus and excited to see what new offerings come out of the incumbent insurers and not just InsurTech.

Do have a look at the aware machine report too. We’re increasing our coverage in this area so if you have a solution focused on this space please reach out to Nicolas, Mike or myself so we can include you and for the insurers look out for a report shortly.

 

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“All that glitters is not gold”: Four concepts, four potential insurtech responses

As a few of us head to InsureTech Connect in Vegas this week to explore what the world has to offer in insurtech, I feel the need to keep my feet firmly on the ground and not to get too caught up in all of the glitz and glamour of both the location and the trendy start-up scene with its sea of beards.

“Bah, humbug!”, I hear you taunt in response.

Although I love the insurtech scene and welcome the fresh ideas, enthusiasm and willingness to be bold it brings (….and it’s way overdue and our industry needs a really good shake-up), I am mindful that history warns us that we should maintain an air of caution at this stage in any tech market’s development.  As the saying goes, “all that glitters is not gold” and there will undoubtedly be winners and losers (perhaps making Vegas all the more appropriate for the location).

Also, until wider market commentary around insurtech switches from the investment going in towards the value coming out of the start-ups (with real numbers on stealing market share, run-away customer demand, and incredible returns), we simply won’t know which way the market will move…if at all.

So, where will I be looking for the signs of a fresh gold seam and what might be an appropriate response for an insurer’s ‘insurtech strategy’?  From my perspective, there are four areas to focus upon:

• Distribution. Undoubtedly, this is the area under the greatest threat of change through mobile, embedded micro-transactions and a change in demographics.  If you’re a traditional agent or direct writer, watch-out. If you’re an insurer on the other hand, your biggest challenge is likely to be the “speed of pivot” between current traditional and new channels that emerge. As a primary insurer, market scanning, operational agility and partnerships are likely to be critical elements of your insurtech strategy.
   
• Automation, Analytics and AI. For decades, the industry has been running on robust (at least ‘robust’ for some of the time) transactional systems. For the bold, we’re now at a point where a substantial chunk of the operating model could arguably be replaced by not much more than an algorithm surrounded by a much smaller team of people to handle the customer touch-points. “Cloud native”, analytically driven micro-service architectures are the direction of travel. In markets exposed to aggregators, we have already seen some evidence of these characteristics being adopted by new entrants to the market.  As an incumbent, the challenge remains an age-old one of internal operational transformation and overcoming cultural inertia. Here, an insurtech strategy may be one of partnership in order to catalyse a change.
   
• New propositions.  New risks, new data sources and, with them, new services.  Whether cyber-risk, the sharing economy or IoT enabled services, there is a lot of ground to cover here.  Out of these, new risks and use of new data sources appear to show the greatest promise in the near-term, and within the normal remit of an everyday insurer’s strategy. The IoT requires a different response. Although very very hot, it is a slower burn than other proposition related areas, primarily due to differing rates of sensor adoption, sensor installation economics, the absence of standards, the “what’s in it for me?” end-user proposition and the number of parties to engage, each with different agenda and requiring co-ordination. That said, it’s inevitable that it will become ever more pervasive across the industry. The bigger question, however, is what will the insurance industry’s role be in shaping it? Any insurer interested in the IoT needs to have effective partnership strategy with adjacent industries at its core.
   
• New risk-bearing models. The word ‘disruption’ is overused in our industry, often without a solid understanding of what it truly means (for example, I’ve lost count of the number of times I’ve seen it used to describe a neat technology ‘widget’ that performs just one step in an end-to-end process).

Simply speaking, in order for an industry to be disrupted, one of two things needs to happen. Either new technology needs to open-up a significant jump in productivity (rendering the old ways of doing things as obsolete) or there emerges an effective substitution for the need being satisfied (with the consumer switching as a consequence).  Anything else could be argued as just normal competition and shpuld be expected.

As highlighted in my first point above, it’s evident that distribution is facing an increasingly turbulent time.  It is also clear that some technologies may enable a leap in productivity once implemented in the extreme (and not just for a single process step). However, for me, the court is still out for the substitution of the main risk-carrying entity itself.

However, one area that threatens this position is P2P (both at the front-end with insureds and the back-end with methods of alternative risk transfer). Even though it appeals to the more geeky and technical side of me, the barriers to adoption at scale just feel a little too high currently – whether market education related or regulatory (as, if executed poorly, a misselling scandal may result).

Furthermore, market efficiency is probably still better served through the current market structure than P2P owing to the ‘law of large numbers’, albeit implemented on better technology and with greater transparency. After all, there is a reason why mutual insurers have been merging or converting to public companies around the world.

That said, I’m willing to be proven wrong and will be looking eagerly for firms / evidence to demonstrate otherwise. In this area, although the brave will venture out regardless, an appropriate insurtech strategy for the more cautious feels like a classic ‘watch, learn, and be ready to pounce’ with a ‘Fast Second’ strategy.

For insurers reflecting on their engagement strategy for insurtech, the common thread across all but one of the areas above is the need for effective partnerships between insurers and start-ups. As Mike Fitzgerald observes in Insurer Start-up Partnerships: How Maximize the Value of Insurtech Investments:

“Both sides face challenges. Industry incumbents face the burden of their legacy systems, their aversion to failure, and a habit of extended decision cycles. Newcomers lack the capital to underwrite risk, do not understand the regulatory environment, and cannot scale easily." 

There is value (and hopefully gold) to be gained from both sides in engagement.

Finally, while interest in insurtech is high, any insurer ought to be maintaining a watch on activity, providing that a strong bias towards value being delivered is taken (as opposed to money going in).

So, in summary, that’s what I’ll be focused on over the next few days – the hunt for value around these four themes.

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Life Insurance Automated Underwriting – A 25 Year Journey

Automated underwriting has come a long way in the last 25 years. It may be surprising that there was automated underwriting 25 years ago. At that time, it was called ‘expert’ underwriting. The idea was right, but the timing was wrong. The underwriting engines were black box algorithms; there was no user interface; data was fed from a file to the system; programming was required to write rules; and specialized hardware was necessary to run the systems. Not surprisingly, this attempt at automating underwriting was dead on arrival.

The next major iteration occurred about ten years later. Automated underwriting systems included a user interface; rules were exposed (some programming was still required to change the rules); data interfaces were introduced to collect evidence from labs and the medical inquiry board; underwriting decisions could be overridden by the human underwriter; and workflow was provided. Some insurers chose to take a chance on this new technology, but it was not widely adopted. There were two strikes against it: cost and trust. The systems were expensive to purchase, and the time and costs involved in integrating and tailoring the systems to a specific company’s underwriting practice could not be outweighed by the benefits. The lack of benefits was partially because the underwriters did not trust the results. Many times this caused double work for the underwriters. The underwriters reviewed the automated underwriting results and then evaluated the case using manual procedures to ensure the automated risk class matched the manual results.

Moving ahead fifteen years to today, changes in the underwriting environment place greater demands on staff and management. Staff members are working from home, and contractors are floating in and out of the landscape, all while reinsurers are knocking on the insurer’s door. There are now state-of-the-art new business and underwriting (NBUW) systems that address the challenges associated with the new demands. The solutions do not just assess the risk but provide workflow, audit, and analytics capabilities that aid in the management process. Rules can be added and modified by the business users; evidence is provided as data so that the rules engine can evaluate the results and provide the exceptions for human review. Subjective manual random audits of hundreds of cases evolve into objective, data-driven perspectives from thousands of cases. Analytics provide insights on specific conditions and impairments over the spectrum of underwritten cases to provide a portfolio view of risk management. Underwriting inconsistencies become easy to find and specific training can be provided to improve quality.

.In our report, Underwriting Investments that Pay Off, Karen Monks and I found that the differences between insurers who are minimally automated and those that are moderately to highly automated are substantial.  For minimally automated insurers, the not in good order (NIGO) rates are four times higher, the cycle times are 30% longer, and the case manager to underwriter ratio is almost double compared to the metrics for the moderately to highly automated insurers. This outcome may not reflect your specific circumstances, but it is worth preparing a business case to understand the benefits. With the advances in the systems and the advantages provided for new business acquistion, there are few justifications for any company not to seek greater automation in their underwriting.  

To learn more about the adoption of current NBUW systems and the functionality offered in them, please read our new report, What’s Hot and What’s Not, Deal and Functionality Trends and Projections in the Life NBUW Market or join our webinar on this topic on Thursday, September 29.  You can sign up here.

 

 

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The Muslin is off the Lemon — Lemonade Launches

Today’s announcement by Lemonade provides an example of what actual disruption in insurance looks like. Disruption — the term is overused in the hype around innovation. In Celent’s research on innovation in insurance, we see that what is often tagged as disruptive is actually an improvement, not a displacement, of the existing business model.

The information released describes how Lemonade seeks to replace traditional insurance. Yes, they have built a digital insurance platform. Beyond that significant feat, they seek to replace the profit-seeking motive of their company with one based on charitable giving, acting as a Certified B-Corp (more info on B-Corps). They are also using the charitable motive as the guide to establish their risk sharing pools, thus creating the peer-to-peer dimension. Unlike other P2P efforts, Lemonade goes beyond broking the transaction and assumes the risk (reinsured by XL Catlin, Berkshire Hathaway and Lloyd’s of London, among others).

However, like other P2P models, such as Friendsurance, Lemonade faces a real challenge regarding customer education. The Celent report Friendsurance: Challenging the Business Model of a Social Insurance Startup — A Case Study details the journey of the German broker along a significant learning curve regarding just how much effort was required to teach consumers a new way to buy an old product.

The next few weeks will surface answers to they second-level questions about this new initiative such as:

• How/if their technical insurance products differ from standard home,renters, condo and co-op contracts;
• What happens to members of a risk sharing pool when the losses exceed funding;
• Will the bedrock assumption, that a commitment to charity will overcome self interest and result in expected levels of fraud reduction?

It is refreshing to see some disruption delivered in the midst of all the smoke around innovation. Celent toasts Lemonade and welcomes this challenge to business as usual!

 

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Vrooom: New Federal Guidance Should Accelerate Development of Autonomous Cars

September 20 was a good day for the development of autonomous cars. The Feds, as embodied by the Department of Transportation and the National Highway Traffic Safety Administration (NHTSA), have issued guidance and principles for the development of autonomous cars.

There are two key takeaways:

1. By issuing guidance, rather than regulation, the Feds are trying to facilitate, but not control, the technological developments that will lead to street-ready autonomous cars
2. The guidance makes some common sense delineations between what the federal government should do and what states should do

• The feds want one national standard for how manufacturers conduct driverless car R&D–following a 15 part safety assessment protocol (covering data recording, system safety, human:machine interface, etc.).
• The feds want the states to focus on vehicle licensing and registration, traffic laws, and motor vehicle insurance and liability

If actually followed (are you listening California?) the political and regulatory environment should speed the day when a consumer can walk into a dealer, and be driven out by a shiny, brand new autonomous car.

That day will be good for car buyers, for manufacturers, and for society as a whole.

However, for insurers that day will also hasten the decline of auto insurance—per the recent Celent report The End of Auto Insurance: A Scenario or a Prediction.

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Changing the Landscape of Customer Experience with Advanced Analytics

That timeless principle – “Know Your Customer” – has never been more relevant than today. Customer expectations are escalating rapidly. They want transparency in products and pricing; personalization of options and choices; and control throughout their interactions. For an insurance company, the path to success is to offer those products, choices, and interactions that are relevant to an individual at the time that they are needed. These offerings extend well beyond product needs and pricing options. Customers expect that easy, relevant experiences and interactions will be offered across multiple channels. After all, they get tailored recommendations from Amazon and Netflix – why not from their insurance company? Carriers have significant amounts of data necessary to know the customer deeply. It’s there in the public data showing the purchase of a new house or a marriage. It’s there on Facebook and LinkedIn as customers clearly talk about their life changes and new jobs. One of the newest trends is dynamic segmentation. Carriers are pulling in massive amounts of data from multiple sources creating finely grained segments and then using focused models to dynamically segment customers based on changing behaviors. This goes well beyond conventional predictive analytics. The new dimension to this is the dynamic nature of segmentation. A traditional segmentation model uses demographics to segment a customer into a broad tier and leaves them there. But with cognitive computing and machine learning an institution can create finely grained segments and can rapidly change that segmentation as customer behaviors change. To pull off this level of intervention at scale, a carrier needs technology that works simply and easily, pulling in data from a wide variety of sources – both structured and unstructured. The technology needs to be able to handle the scale of real-time analysis of that data and run the data through predictive and dynamic models. Models need to continuously learn and more accurately predict behaviors using cognitive computing. Doing this well allows an carrier to humanize a digital interaction and in a live channel, to augment the human so they can scale, allowing the human to focus on what they do best – build relationships with customers and exercise judgment around the relationship. Sophisticated carriers are using advanced analytics and machine learning as a powerful tool to find unexpected opportunities to improve sales, marketing and redefine the customer experience. These powerful tools are allowing carriers to go well beyond simple number crunching and reporting and improve their ability to listen and anticipate the needs of customers.

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The 2017 Model Insurer Nominations Start Now

It’s been five months since we awarded Zurich with our top distinguished award, Model Insurer of the Year, during our Innovation & Insight Day (I&I Day) on April 13. I&I Day has been growing and gaining recognition since its inception over 10 years ago. Over last two years, more than 200 financial services professionals joined us in New York City at Carnegie Hall in 2015 and at The Museum of American Finance in 2016 to celebrate the Model Insurer winners.

From September 15, we will be accepting Model Insurer nominations. The window for new entries will close on November 30. We are looking forward to receiving your best IT initiatives. You may be announced as a Model Insurer at our I&I Day in 2017. The Model Insurer award program recognizes projects that essentially answer the question: What would it look like for an insurance company to do everything right with today’s technology? It awards insurance companies which have successfully implemented a technology project in five categories:

• Data mastery and analytics.
• Digital and omnichannel technology.
• Innovation and emerging technologies.
• Legacy transformation.
• Operational excellence.

Some examples of initiatives that we awarded early this year are:

Model Insurer of the Year   

Zurich Insurance: Zurich developed Zurich Risk Panorama, an app that allows market-facing employees to navigate through Zurich’s large volumes of data, tools and capabilities in only a few clicks to offer customers a succinct overview of how to make their business more resilient. Zurich Risk Panorama provides dashboards that collate the knowledge, expertise and insights of Zurich experts via the data presented.

Data Mastery & Analytics

Asteron Life: Asteron Life created a new approach to underwriting audits called End-to-End Insights. It provides a portfolio level overview of risk management, creates the ability to identify trends, opportunities and pain points in real-time and identifies inefficiencies and inconsistencies in the underwriting process. 

Celina Insurance Group: Celina wanted to appoint agents in underdeveloped areas. To find areas with the highest potential for success, they created an analytics based agency prospecting tool. Using machine learning, multiple models were developed that scored over 4,000 zip codes to identify the best locations.

Farm Bureau Financial Services: FBFS decoupled its infrastructure by replacing point to point integration patterns with hub and spoke architecture. They utilized the ACORD Reference Architecture Data Model and developed near real time event-based messages.

Digital and Omnichannel

Sagicor Life Inc.: Sagicor designed and developed Accelewriting® , an eApp integrated with a rules engine; which uses analytic tools and databases to provide a final underwriting decision within one to two minutes on average for simplified issue products.

Gore Mutual Insurance Company: Gore created uBiz, the first complete ecommerce commercial insurance platform in Canada by leveraging a host of technology advancements to simplify the buying experience of small business customers.

Innovation and Emerging Technologies

Desjardins General Insurance Group: Ajusto, a smart phone mobile app for telematics auto insurance, was launched by Desjardins in March 2015. Driving is scored based on four criteria. The cumulative score can be converted into savings on the auto insurance premium at renewal.

John Hancock Financial Services: John Hancock developed the John Hancock Vitality solution. As part of the program, John Hancock Vitality members receive personalized health goals. The healthier their lifestyle, the more points they can accumulate to earn valuable rewards and discounts from leading retailers. Additionally, they can save as much as much as 15 percent off their annual premium.

Promutuel Assurance: Promutuel Insurance created a new change management strategy and built a global e-learning application, Campus, which uses a web-based approach that leverages self-service capabilities and gamificaton to make training easier, quicker, less costly and more convenient.

Legacy Transformation

GuideOne Insurance: GuideOne undertook a transformation project to reverse declines in its personal lines business. They launched new premier auto, standard auto, and non-standard auto products, as well as home, renter and umbrella products on a new policy administration system and a new agent portal.

Westchester, a Chubb Company: Chubb Solutions Fast Track™, a robust and flexible solution covering core business functionality, was built to support Chubb’s microbusiness unit’s core mission of establishing a “Producer First,” low-touch mindset through speed, accessibility, value, ease-of-use and relationships.

Teachers Life: Teachers Life has achieved a seamless, end-to-end online process for application, underwriting, policy issue and delivery for a variety of life products. Policyholders with a healthy lifestyle and basic financial needs can get coverage fast, in the privacy of their own homes, and pay premiums online in as little as 15 minutes.

Operational Excellence

Markerstudy Group: Markerstudy implemented the M-Powered IT Transformation Program which created an eco-system of best in class monitoring and infrastructure visualization tools to accelerate cross-functional collaboration and remove key-man dependencies.

Guarantee Insurance Company: In order to focus on their core competency of underwriting and managing a large book of workers compensation business, Guarantee Insurance outsourced its entire IT infrastructure.

Pacific Specialty Insurance Company: Complying with their vision is to become a virtual carrier, meaning all critical business applications will be housed in a cloud-based infrastructure, PSIC implemented their core systems in a cloud while upgrading infrastructure to accommodate growth in bandwidth demands.

If you have completed a project during the last two years that you feel is a role model for the industry, don’t hesitate to send us your initiative here. You may be the next Model Insurer of the year.

For more information about the Model Insurer program click here, leave a comment, or email me directly at lchipana@celent.com. I’d be more than happy to talk with you. The Celent team and I are looking forward to hearing from you and meeting you in person at the 2017 Innovation & Insight Day.

See you there!

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Using private consumer data in insurance: Mind the gap!

Insurance is no different to other industries when it comes to capturing valuable data to improve business decisions. At Celent we have already discussed how and where in their operations insurance companies can leverage private consumer data they can find on social networks, blogs and so on. For more information you can read a report I have published this year explaining Social Media Intelligence in insurance.

Actually there are various factors influencing insurers' decision to actively use private consumer data out there including among others regulation, resources adequacy, data access and storage. I think that an ethical dimension will play a more important role going forward. More precisely I wonder whether consumers and insurers' perceptions about the use of private consumer data are divergent or similar:

• What do consumers really think about insurance companies using their private data on social networks and other internet platforms?
• What about insurers; does it pose an issue for them?

In order to assess this ethical dimension, we have asked both insurers worldwide and also consumers (in the US, UK, France, Germany and Italy) what where their view on this topic. To insurers, we simply asked them what best described their opinion about using consumer data available on social networks (Facebook, Twitter, LinkedIn, etc.) and other data sources on the internet (blogs, forums, etc.). To consumers, we asked what were their opinions about insurers using these open data sources for tracking people potentially engaged in fraud or criminal activity.

The following chart shows the result and indicates that there is a big gap between the two sides:

Overall what is good for consumers is not necessarily good for insurers. In the same way, what insurers want is not always in line with what consumers expect from their insurers. Going forward the question for insurance companies will be the find the right balance between the perceived value of private consumer data and customers' satisfaction. In addition, it will be tough for them to figure out the impact (pros and cons) of all factors at play in the decision to invest in technologies allowing for the efficient use of private consumer data accessible on the Internet.

At Celent, we are trying to define a framework that can help them structure their reasoning and make an optimal decision. So more to come in the coming weeks on this topic…

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Predicting the Future – Illustration Systems to the Rescue

Life insurers continue to strive to increase growth and point of sale tools used by producers continue to evolve. Illustrations are becoming a key factor in keeping producers happy by improving the probability of the life insurance sale. Modern illustration systems provide the ability for agents to illustrate a variety of “what if” life events such as college education, retirement or purchasing a home to show how life insurance can be used to plan for the future events. Quality illustrations can move a “nice-to- have” to a “must-have” for a prospective client.

Functionality changes such as more emphasis on the illustration output, the use of mobile devices, user-level configuration, and full integration with other point of sale tools are just a few of the changes Celent has seen in vendor based illustrations solutions.

In Celent’s new report, Predicting the Future, 2016 North American Illustration Solution Spectrum, 11 vendors providing illustration systems to North American insurers are profiled.  The following trends in North American illustration systems were observed:

• Regulatory changes including NAIC model regulation and Department of Labor fiduciary rule driving increased transparency.
• Disconnected mode of operating with automatic synchronization upon reconnection.
• Increased security with role-based authentication and single sign-on capability.
• Ability to limit the products displayed to those that the agent is licensed to sell and the potential insured is eligible to purchase.
• Configuration has replaced coding for calculation engines but still requires IT involvement.
• Standardization of transactions for third party interfaces.
• Improved user experience with prefilled data, fewer forms, and conversational English-like labels for data entry. Output provides graphs and charts in addition to tabular data.
• Omnidevice support for phone, tablet, laptop, and desktop. An agent can start the quote or illustration on one device and complete it on another.

Today, an insurer can manage what used to be myriad of POS tools that included needs analysis, advanced sales support, suitability, illustrations, and e-applications, which were provided by a combination of vendors and in-house systems, through one interoperable, integrated vendor system.

Insurers also have the choice in the level of system development and maintenance in which they want to partake. Today’s vendor systems offer a spectrum from full vendor maintenance to user-level tools for the insurer to maintain its own systems.

Although homegrown illustration systems are still being developed and used, Celent believes that most carriers looking to invest in a new illustration system should consider vendor systems for core functionality and tools that can help them produce illustration systems more quickly and at a lower cost.

A companion report of 14 illustration vendors selling in EMEA, APAC and LATAM is coming soon!

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How the IoT caused the Internet of Upside Down

The architecture around the Internet of Things and the constraints it poses has fascinated me for a long time. The good news for insurers is integrating the Internet of Things into insurance processes has some fairly common patterns now as described in my recent report [http://ift.tt/2brz7UB]. For those with responsibility for the infrastructure of the Internet however, it is providing some interesting headaches. 

 

Upside down?

Why do I say upside down? In the early days of the Internet it was a collection of machines each with broadly the same importance connected together. As information services moved onto the Internet, followed by commerce and retail sites, banks and insurers and then streaming companies the Internet shifted more towards many machines seeking to consume from a (relatively) few machines. 

To support this demand architectures evolved to n-tier structures where data storage areas sat behind application servers, which sat behind web servers and then, not that long ago, caching servers and content delivery networks. 

The Internet has become a pyramid with a consumers machines at the bottom, hooked up to broadband geared towards downloading content quickly and increasingly powerful infrastructures delivering that content to be consumed. 

 

And then homes became data rich farms…

Suddenly homes are the sources of data everyone wants! Key information possibly of use to insurers even, now sits on devices at the bottom of the pyramid. In practice the Internet is shifting more towards the structure it had originally, but the infrastructure supporting todays services is not well suited to this new paradigm – or perhaps one that has re-emerged. 

 

In practice, most of this activity has moved from a pyramid to a less structured cloud already but software of the Internet is still catching up. 

 

So as you're looking at InsurTech firms or attending InsTech groups spare a thought for those poor architects and operations staff of the Internet and the headaches you're causing. 

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It’s Punch and Counter-Punch in the Insurance Technology Ring, as Guidewire Acquires FirstBest

Today’s announcement of Guidewire’s acquisition of the standalone underwriting solution FirstBest, can be partly understood in the context of Duck Creek’s just finalized acquisition of AgencyPort.

While there are many differences between the two recently acquired companies; the common thread is that each gives the acquiring firm a robust and mature set of front-end, new business capabilities – and of course an established client base.

It will be interesting to see how FirstBest’s Underwriting Management System, UMS, will work with the underwriting screens and workflows within Guidewire’s PolicyCenter.

Now Guidewire and Duck Creek will both be addressing the technology and client migration/integration challenges of their recent acquisitions.

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Guidewire Acquisition of FirstBest – A Wakeup Call for Core Suite Vendors?

The Guidewire acquisition of First Best should come as a wakeup call to other suite vendors in the marketplace.   Not to be a doomsayer, but the reality is the market for core system replacements is shrinking.  Many carriers are in the middle of a replacement or have already completed their replacement.  There are fewer and fewer deals to be had and more and more vendors in the marketplace chasing those deals.  

Let’s look at the numbers.   Donald Light’s recent PAS Deal Trends report shows that we’ve seen an average of around 85 deals a year over the last two years.  But there are more than 60 suite vendors out there.  Of those available deals, a very few key vendors – including Guidewire – will likely get half or more of them.   That leaves around 40 deals for the remaining 60’ish vendors.  That’s less than one each.  And that’s IF we assume the market will stay steady at 80-85 deals a year. This basic math shows that many core suite vendors will not get a single deal in 2017.  

So how can vendors satisfy their shareholders?  How can they generate growth and remain viable players?  The truth is some of them won’t.  But smart vendors are thinking about other options for growth.  And they have a few paths they can take. 

• Sell things other than suites.  This is the tactic that Guidewire is showing with their recent announcement of the FirstBest acquisition and is also illustrated by their prior acquisitions of Millbrook and Eagle Eye.  Duck Creek is doing the same as shown by their acquisition of Agencyport.  Providing other core applications that carriers need allows a vendor to continue to grow their existing relationships, and allows them to create new relationships with carriers – even if the carrier doesn’t need a new core system.  Some vendors will purchase these additional applications; others will build them.
• Sell to a different market – Insurity’s acquisition of Tropics lets them go down market to work with small WC carriers.  Their acquisition of Oceanwide gives them the ability to handle small specialty, or Greenfield projects.  While there are still plenty of deals to be done in the under $100M carrier market, most vendors can’t play in this space. Their price points won’t work for small carriers, and their implementation process won’t work. It’s too expensive and takes too many carrier resources.  The implementation process has to be drastically  different for a carrier with only 6 people in the IT department than it is for a larger carrier.   This strategy of going down market only works if a vendor can appropriately sell and deliver their solution to a small carrier while still making margin – and many vendors just can’t do that. 
• Enter a different territory – Vue announced today they’ve entered Asia with Aviva; Sapiens entered the US by purchasing MaxProcessing.  And we see other vendors including Guidewire, EIS, and Duck Creek moving outside the US.
• Sell services – many vendors provide cloud offerings – which provides a steadier stream of income.   Vendors such as CSC or The Innovation Group (prior to the split) had/have a large proportion of revenue coming from services.  Vendors like ISCS provide additional BPO services such as mail services and imaging.   

Any of these strategies are viable – but I predict we’ll see more vendors using them as the market for core system replacements shrinks.  Smart vendors are already thinking ahead, working on their long term strategy. 

Carriers who work with these vendors should be watching as well.  No one wants to work with a vendor that won't be here for the long term.  If you’re a carrier considering a new system –

• Make sure your vendor is showing momentum – new sales.
• Look to see what the signals are for their long term viability – will they be a survivor selling new suites?
• Do they have the resources to create or acquire new capabilities like portals, analytics or distribution management?
• Are they entering new markets, new territories or providing new service offerings?

If you don’t see these signals, you may want to start having a conversation with your vendors today. 

 

 

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Complexities, Capabilities and Budgets

I've just published a new report called Complexities, Capabilities, and Budgets.   Here's a quick overview – ping me if you'd like to chat in more detail aboaut it.

Insurance is being transformed by rapid changes in information technology, skyrocketing customer expectations, rapidly evolving distribution models, and radical changes in underwriting and claims. How are IT organizations changing to accommodate the new capabilities they’re delivering, and how are budgets shifting to accommodate this transformation?

In this environment, IT leaders have had to become very smart about how to run, grow, and transform the business with relatively stagnant budgets. The most effective IT leaders have assumed a strategic role in guiding their companies.  

A growing number of leaders have made understanding and maximizing the value of IT a critical part of their missions. Insurers that have moved toward an outcome-based measure of IT value are increasing, and CIOs using value-based metrics are increasingly seen as more strategic members of the teams.

Most carriers have not increased IT resources significantly to meet these challenges.  Insurer IT budgets have stayed fairly flat as a percentage of premium over the past 10 years, although the percentage spent on maintenance is shrinking as carriers invest more in new capabilities. 

Looking out for the next two to five years, Celent believes that carriers will continue to rapidly deploy new technologies. Measurements of IT value will continue to mature and shift toward value metrics (those looking at the outcomes of cost, time, and value improvements) to rate the performance of IT. This will enable a more informed debate over where to spend scarce IT dollars. 

For many insurers, the approach toward IT budget construction and the measurement of value remains rooted in a traditional approach of centrally planned budgets and top-down portfolio metrics which can mask where IT value is being delivered,  IT organizations that are seen as more strategic are more likely to measure the overall financial impact of technology delivered.

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The privacy bomb and cost of personal data debt

I often hear architects talk about technical debt but it strikes me that a different debt is waiting for insurers.

Imagine a world where the regulator says that a customer owns data about the customer, regardless of where it is stored. The key observation here is the decoupling of ownership and control with storage. Most regulators have gone nearly this far and made statements about consumer ownership of consumer data, so perhaps it's not out of step with reality. This is discussion so far but perhaps the technology hasn't caught up with the intent. If we ignore the limits of technology …

There are perhaps 3 models emerging:

• A. The data remains where it is and is controlled from there. Requires APIs…
• B. The data moves as customer moves. Requires data standards…
• C. Customer data is held in a shared environment. Requires APIs and data standards

Let's take a moment to really think that through for an insurer. If you hold data about a customer in your systems, that data is owned by another party. Ownership here is a complex word – it implies but is not limited to controlling access to the data, determining appropriate use of the data, revoking access to the data, determining how long that data is kept.

Scenario A
What if the storers are obliged to provide these controls to the owner of the data and actually – what if that obligation exists regardless of whether that owner is a customer?

Such a scenario may make it prohibitive for insurers to capture and store data directly. What would the world look like in such a scenario? Insurers would request access to customers data and have to disclose why they want the data, what they will do with it and perhaps the algorithms used  in order to offer products. Such a world might favour insurers with simpler pricing algorithms that are more expensive but customers understand what is being done with the data.

If we take it a step further, in theory there would be intermediaries emerge who help manage consumer data and help consumers simply share their data with trusted partners. I would suggest most people would not dig into the detail of who is sharing what so a service that says, "we've found these 15 services that only use the data in these ways and we've packaged that up for you" would be most welcome.

If however, we take existing businesses into this world then suddenly enterprises will be faced with the issue of how do they offer appropriate controls and management around the data already in place.

The standard already exists for sharing information in this way leveraging OAUTH as is used by Twitter, LinkedIn, Google and Facebook.

Scenario B
The cost for doing migration and conversion will lie with the party holding the data. A different type of debt.

This is the model the insurance industry is assuming will come to pass but it requires shared data standards which are harder to implement than API standards. There is also the issue of potentially lossy data migrations – I.e. The quality of the data is reduced in the migration – will this be 'OK' from a regulatory point of view?

Further this is more confusing for a consumer since the mechanism and means to manage access to the data will change each time there is a move. An approach intended to increase portability and movement could become an inhibitor as consumers grow concerned about retraining.

In theory though, this would allow insurers to differentiate on trust and service – a place where they already play.

Scenario C
The greatest challenge with a shared environment is who is the trusted party? Google, Twitter, Facebook and LinkedIn among others have made moves into authentication but they don't hold all the data and regulators in multiple countries are seeking to grasp control and this is a topic for Insurtech startups as well.

Some see Blockchain as a possible solution – the data in a shared open place, but secured and encrypted.

At this point this seems like the least likely solution, requiring the greatest cooperation and investment from the industry and governments. Regulators at this point seem to be supporting the other two.

Which will come to pass
There is a clear trend with private data becoming more valuable, but the cost of storing it is becoming more onerous. Regardless of which of the scenarios comes to pass or if some other scheme emerges – insurers must balance the cost of storing the data and the value it may bring now and in the future.

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Fintech is a Development Opportunity for High Potentials in Financial Services

What does the development of high-potential Financial Services employees have to do with Fintech? Possibly, quite a lot. 40-something executives climbing the corporate ladder, or anyone mentoring such a person, or anyone concerned with developing future leaders in financial services – this blog is for you. You have an opportunity to differentiate yourself if you act now.

There is significant energy and investment happening outside of the four walls of financial services companies. The question many incumbents are asking is, “How do we best engage with the new, external innovation ecosystem?” Catherine Stagg-Macey @Staggmacey and I just released a report that outlines a framework for leveraging this emerging business approach (Making the Most of the Innovation Ecosystem: Adapting to the New Insurtech World). The report includes insights from more than a dozen interviews with a range of players in the innovation system including internal company venture capital staff, independent venture capital employees, innovation service providers, system integrators, accelerator, and innovation lab leaders. A central conclusion is that the new innovation ecosystem will eventually mature into a form where financial services firms and startups coexist and regularly form partnerships to improve specific parts of the value chain. A few new entrants may find success as disruptors, but the predominant model will be a mix of joint ventures, partial ownership, and outright purchase of emerging technology firms by incumbents.   

This is very different from the traditional buyer-supplier relationship that financial services companies usually enter into with technology companies. The feedback we received from innovation participants is that differences in culture, process, the speed of decisions (or lack thereof), risk tolerance, and goals must be deliberately managed in order to get the most out of these partnerships.

Leadership experience on “both sides of the fence” – both in the startup and the financial services worlds – will be a differentiator. The candidate with a financial servcies background who can demonstrate an understanding of the challenges in bringing both of these very different worlds together will be very valuable. Those actively managing personal development plans in banks, insurance companies, and capital market firms are encouraged to:

• Mentor startups though a technology accelerator that is focused on financial services; StartupBootcamp @Sbootcamp, Global Insurance Accelerator @InsuranceAccel, and Plug and Play @PlugandPlayTC are examples
• Attend technology “meet ups” in your local area to learn about startups in your area and network your way into the community
• Offer your services as a sounding board for new tech companies, either informally as subject matter expert or more formally as a board member
• Communicate with your mentor and your H.R. career development resources about your goal to develop the necessary skills to effectively act as a “go-between”

The realization that such a role is valued is just beginning to emerge, so those acting now will be slightly ahead of the curve and well-positioned to step into critical leadership positions.

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The Great Pokemon Experiment

Nintendo's latest mobile phone (and mobile) game just keeps smashing records – it's already the biggest mobile game in the US and is looking set to become a worldwide phenomenon.

It's not relevant to insurance though is it? Well it is sort of introducing new risks with players being mugged and wandering into dangerous places including Downing Street in London apparently.

What's more interesting to me though is the mix of gamification, rewards for movement and the way it is making people meet up in novel locations.

Two opportunities sprang to mind for the industry:

• What's most interesting to me is that if we were to measure health app's impacts by how far they get people to walk Pokemon Go could be the biggest health app of 2016, despite only launching in July. I'm curious how the Vitality and similar propositions rewarding customers for healthy behaviour will respond to the sudden uptick in activity. 
• From an advertising point of view and ability to drive foot traffic to say, an agents office, Pokemon Go has huge potential – potential not missed on the developers as hidden code in the game already points to a hook up with McDonalds. For now though, if you have a Pokemon gym at your office location it might be a great time to do a little advertising or push that recruitment drive you've been thinking about.

As a technologist the photos springing up around the world of "Squirtle" being found in toilets (be careful where you point the camera) also goes to show how augmented reality has become mainstream as well, along with the threats AR and virtual reality could pose in at least distracted walking. I love that the digital and physical world are coming together and it's actually bringing families together too.

Whilst some will marvel at this latest craze, for those insurers with investments in the real world like agencies, offices, billboards – and for those that are agile enough – this surprise trend could serve as a great marketing route to catching all the customers, as well as all the Pokemon.

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The Great Insurance Experiment

There is a battle going on today for the future of the insurance industry. Like other industries there are those within the insurance industry and new entrants who are seeking to test whether alternate, digital models will prevail. As a participant in the industry and an observer the intriguing thing for me is no one has proven the existing model is actually broken or that there is a better proposition out there. It seems the telematics experiment I wrote about a few years ago is expanding in focus.

I'm sure taxi drivers said the same when faced with Uber, hotels with AirBnB, the print industry, the travel industry, etc. However let's look at the benefits of digital propositions to customers and see if they apply to insurance.

Transparency
One of the key benefits of digital propositions is transparency and low prices – something that telematics and IoT propositions endeavour to deliver for consumers. The peculiar thing about insurance is that transparency and too much data is at odds with what insurance tries to achieve. Put another way, insurance is designed to hedge the risks to a population across the whole population, so that individuals pay a reasonable price and those that suffer a significant loss are reimbursed disproportionally to what they put in. Absolute data and visibility – transparency in its purest form – will reveal the poor risks and in practice deprive them of the very service they need. Good for some who will not see a loss, but not good for all and not good for society as a whole.

Propositions in this area have moved towards education and rewarding behaviours that reduce risk – the win-win for insurer and client. Many have observed that this is arguably not insurance but rather risk advice, engineering and management. Others observe that claims prevention is absolutely part of insurance and has been all along, albeit the tools of old have been regulation, law and classical education rather than the digital variants.

Existing experiments reveal customers care do about not claiming, about limiting the impacts of a claim and about small rewards for good behaviour. Regulators have also shown they're keen that all parts of society have access to financial services and insurance at a reasonable cost. Use of transparency and data can go so far in insurance but there are limits to how far it can disrupt.

Control
Another key benefit of digital propositions is the just in time and just enough nature of them – the ability to finely control the product and as a result the costs. This is another area that is being tested in insurance with micro control over what is and isn't on cover available to customers via their phone.

The challenge here of course is that this again removes some of the hedging. By assigning a cost per item turning everything on will typically yield a higher price for insurance than a classic contents policy which offers blanket cover for items in a property or even while travelling.

The other benefit of the classic policy is that one doesn't have to engage with it. It's all well and good that one can turn cover for items off and on quickly but to really take advantage of this capability the insured has to care deeply about the level of cover or the cost.

There will be customers who want this level of control in their insurance and will actively seek it but for the mass market a good enough policy at a reasonable price will be just fine.

The long tail
Now here we could see some disruption, or at least shake up of the market. We're already seeing some splits in the market as people interested in health rewards take up the various incarnations of vitality insurance, young people take up telematics car insurance after being priced out of the classic policies. There will be customers interested in control over their policies, customers who give up human interaction in favour of digital cost control.

In this way we might see smaller, more agile companies with lower cost bases taking their share of the market by satisfying a niche.

Conclusion
In practice, the jury is still out and the experiment still continuing. Do todays consumers want the products they have always been offered or something new? What of tomorrows customers?

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Is State Farm Pre-positioning Itself for the End of Auto Insurance (and Maybe the End of Homeowners Insurance Too)?

Once in a while an insurance company asks me for advice—and occasionally even follows the advice which I provide.

I can say, however, that State Farm has never asked me for any advice about what they should do if the need for auto insurance disappears or substantially declines. Nor has State Farm ever asked me what they should do if the demand for homeowners insurance should take a similar dive.

Some readers may be wondering why would State Farm seek advice from your humble blogger about either topic?

Well, because I have been writing and talking about the end of auto insurance for four years. My just posted Celent Report, The End of Auto Insurance: A Scenario or a Prediction?  looks at how three technologies—telematics, onboard collision avoidance systems, and driverless cars—will depress auto insurance losses and premiums over the next 15 years.

I have also been writing and talking about the impact of the Internet of Things on the property/casualty industry for two years. Celent research subscribers can look at my reports: The Internet of Things and Property/Casualty Insurance: Can an Old Industry Learn New Tricks and Can a Fixed Cost Property/Casualty Industry Survive the Internet of Things?

So without even a word of advice from me, it looks like State Farm has pondered potential declines in auto and homeowners insurance; and decided to start some early positioning for itself and its agents if such things come to pass.

Proof Point: A new State Farm commercial called “Wrong/Right” shows a world without windstorms, traffic accidents, building fires, and emergencies. The commercial goes on to ask what about State Farm in such a world? The implied answer is that State Farm and its agents will be in the lending, wealth accumulation, and retirement income businesses. The tag line is “Here to help life go right.”

Which personal lines property/casualty insurer will jump in next?

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Re-inventing underwriting: New ingredients for the secret sauce

Innovation is exploding across all aspects of underwriting and product management. New technologies are transforming an old art. But if there is one lesson to be learned, it is that carriers whose systems are not already capable of handling these changes will be alarmingly disadvantaged.  I've just published a new report looking at innovation in underwriting. 

Underwriting is at the core of the insurance industry. It is the secret sauce of the insurance industry. For hundreds of years, this process was accomplished through the individual judgement of highly experienced underwriters. Insights were captured in manuals of procedures and carefully taught to succeeding generations. 

Over the last few years, carriers have been heavily engaged in replacing core policy admin systems enabling a fundamental transformation of the underwriting process.  Gone are the days of green eye shades and rating on a napkin.  Gone are the days of identical products across the industry.  Gone are the days of standard rating algorithms used by all carriers. 

Carriers are using their newly gained technology capabilities to create dramatically different products, develop innovative processes driving efficiency, improve decisions, and transform the customer experience.  This transformation of underwriting is enabled by the ability to use business rules to drive automated workflow, but even more importantly this is a story about the fundamental transformation of insurance through the application of data.

This report looks at underwriting and product management and describes some of the newest innovations in each area with specific examples provided where publicly available.

What you’ll see is that almost every aspect of the underwriting and product management functions are being fundamentally transformed as carriers find new ways of utilizing and applying data. Carriers are using their newly gained technology capabilities to create dramatically different products, develop innovative processes driving efficiency, improve decisions, and transform the customer experience.

Key findings:

• Carriers are using product innovation as a competitive differentiator and are experimenting with new types of insurance products that go well beyond basic indemnification in the event of loss.  Parametric products, behavior based products and products that embed services to prevent or mitigate a loss are becoming more common.
• Predictive analytics are being used to better assess risk quality and assure price adequacy, as well as to control costs by assessing which types of inspections are warranted, or when to send a physical premium auditor, or when to purchase third party data.
• Individual risk underwriting hasn’t gone away for commercial Ines, but the characteristics that are driving it are more quantified, requiring more data and more consistent data. 
• The role of the product manager is changing dramatically to one of managing the rules rather than managing individual transactions.  This requires new skills and new tools. It also will drive changes in how regulators monitor carriers underwriting practices. 

We expect to continue to see innovative technologies being deployed in underwriting and product management over the next 3-5 years – especially in the following areas:

• Carriers will continue to focus on product differentiation.  The Internet of Things will facilitate more behavior based products and more parametric products. Carriers will find new ways of embedding services within the product, or as part of the remediation after a claim. 
• The role of the product manager will change dramatically focusing on deep understanding of rules.  Vendors will need to provide tools to better analyze the usage rates, the impact, and the stacking of rules. 
• We’ll continue to see a massive eruption in the amount and types of data available.  Unstructured data such as in weather, car video, traffic cameras, telematics, weather data, or medical/health data from wearable devices will become even more available.  Carriers will invest in managing and analyzing both structured and unstructured data.  Implementation of reporting and analytic tools as well as supporting technologies – data models, ETL tools, and repositories – will continue to be major projects.
• New technologies will create new exposures, drive new products, and generate new services.   From wearables, to advanced robotics, from artificial intelligence to gamification and big data, carriers will be applying physical technologies as well as virtual technologies to drive product development and risk assessment.

The available technologies to support property casualty insurance are exploding. Shifting channels, new data elements and tools that can help to improve decisions, provide better customer service or reduce the cost of handling are of great interest to carriers.  Investments are being made across all aspects of underwriting and product management. Staying on top of these trends is going to continue to be a challenge as new technologies continue to proliferate.  But if there is one lesson to be learned, it is that carriers whose systems are not already capable of handling these changes will be alarmingly disadvantaged.

For carriers who are already moving down this path, this report will shine a light on some of the creative ways carriers are transforming the process of underwriting.  For carriers who have not begun this journey, this report may be a wakeup call. The pace of change is increasing and carriers who continue to rely purely on individual underwriting judgment will find themselves at a disadvantage to those who are finding new sources of insights and applying them in a systematic manner to improve profitability. Wherever you sit, this rapid pace of change is exciting, empowering and galvanizing the insurance industry.

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What does Brexit mean… ?

This is the question on everyone's lips. I had delayed writing this in the event that some clarity emerged but in day 5 of Brexit that clarity and certainty is proving elusive – indeed uncertainty seems to characterise the whole affair. This has been a discussion within the European team (thanks to Jamie and Nicolas) for some time and this post will briefly concentrate on the impact of the events so far on insurers with operations and interests in Europe. This will not discuss the UK governments response thus far.

The only certain thing about Brexit as it stands is uncertainty. Will Brexit really happen? When will the process start? Who is negotiating? What is the opening position? What we can say with some confidence there will be little regulatory and legal change in the short term and some unknown quantity of regulatory and legal change in the medium term.

The key unknown is the continuing participation in the single market and the other institutions in Europe, particularly the passporting. This more than Brexit itself, will define how strongly businesses with operations in the UK will respond.  Those with headquarters and staff in the UK to be present in the EU will need to reconsider this position if Britain leaves the single market as well as the EU – or indeed if any of the agreements reached put this position in jeopardy.

Uncertainty breeds volatility in the markets, a depressed investment environment and bond rates will hit the market further, particularly life insurers. This could well impact sales of investment products across the EU and UK until some certainty is restored. Existing products would not be safe either, with some investors looking to cash out.

The outlook for technology investment is trickier. If anything the pressures for reducing costs, agility and flexibility will be exacerbated. In the short term it is reasonable to assume reduced investment with alternate investments and clarity increases. It is plausible that this will affect the InsureTech market as well – particularly in London.

For UK insurers, It is likely that the FCA will engage with insurers and the ABI as the UK seeks to set out how it differentiate itself from the EU which will require agility and flexibility from the insurers to adapt to the new opportunities. A similar process may occur within the EU.

As is probably clear above, the one thing needed is clarity.

Do follow our Brexit posts from the wealth management team as well

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The Future May be Closer than you Think: Cat Bonds Traded on Blockchain

In June @JamieMacgregorC and I published a Celent report, Blockchain in Insurance: Use Cases which included a scenario we labeled “Alternative Marketplaces”. We described it as a blockchain that provided a:

shared environment for placing insurance risk, where brokers or the insured and the insurer capture the status of the risk, including exposure, risk share, and policy conditions. Smart contracts are then used to ensure collection and disbursement of premium amounts and the checking of coverage in the event of an incident. The distributed ledger acts as the record of risk placement, including layers and participants.

We didn’t expect that, in July, we would see an announcement that @Allianz and their partner, Nephila Capital, had completed a proof of concept around trading catastrophe bonds on a blockchain. http://ift.tt/1Ot0Fqi

In general, there are challenges with blockchain technology regarding handling large transaction volumes, managing complex rules, and delivering acceptable response time performance, but this announcement is an indication that the platform is moving forward.

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How can insurers better service their female clients?

Despite women’s rising workforce participation and escalating income, it appears that American women still have major gaps and unmet needs when it comes to achieving comfort and confidence with money. Whether by circumstance or by choice, women are finding themselves in roles where they must be responsible for long-term financial needs and security.

Female financial services clients are a substantial and overlooked segment of the market despite controlling a significant portion of the world’s wealth. A shift in demographics of women clients, including the significant wave of next-gen millennial clients, and the exponential growth in technological innovations across society and within the financial services industry present challenges and opportunities for insurers and the financial services industry. Surveys of affluent women show that they are dissatisfied with the services they receive from an advisor or the financial services industry as a whole.

In my report, Women, Money and  Realizing  Financial  Goals, I examine women’s attitudes  and aspirations for making  financial decisions.    Given the size and diversity of female clients across the generations in terms of behavioral characteristics, financial goals, technological aptitude, and product and service needs, insurers should increase their understanding of and investment in this particular section of the market, including thoughtful client segmentation, marketing efforts, and application of technology.

According to LIMRA, the number of women who are the sole or primary earner for their family with a child under the age of 18 continues to increase. However, their amount of life insurance coverage averages only 69% of men’s. Additionally, women with high personal incomes (more than $100,000) are less likely to have individual life insurance or group life insurance than men with similar personal incomes.

As insurance professionals, we should endeavor to better understand and better respond to the financial needs of women. The relationship between insurers and their female clients has improved, but there is more progress to be made in meeting women’s financial goals and needs. What plans do you have in place to better reach women insurance buyers?

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In Insurtech, Partnership Will Override Disruption

There is much discussion in the press and at conferences about insurance incumbents and the disruption that is coming their way. A close examination of what is actually going on reveals that what is being labelled disruption is actually partnership.

Complicating a meaningful discussion about what is happening is clarity around what is meant by the word “disruption”. The term is used so often that it now carries a range of meanings. On one hand, it refers to a specific market phenomenon defined by Clayton Christenson’s theory of Creative Disruption. On the other end of the scale it represents a recognition that technology is changing the industry.

In most articles and presentations the term is not explicitly defined. Many times disruption is used in the context that portends doom for insurers and that predicts that the revolutionary shifts will cause insurers to go the way of the photo film industry or pre-digital music firms. This is a compelling argument given the challenges incumbents face because of the burden of their legacy systems, their aversion to failure, and a habit of extended decision cycles.

However, there are several significant barriers for newcomers to address if they are to displace incumbents. Celent’s analysis of what has happened to date in Insurtech concludes that the need to overcome these challenges results in a model of cooperation rather than destruction.

First, capital considerations must be taken into account. This is not the capital required to build a technology solution. Agreed, it is no small feat to fund the activities required to build, test, pilot, launch, and sustain a technology solution. However, this pales in comparison to the amount of capital required to underwrite risk (pay claims and hold necessary reserves). To date, a few startups have overcome this challenge by securing relationships with primary insurers or reinsurers, but if this is the approach, it is cooperation, not disruption.

A second barrier is regulatory expertise. This is not only a knowledge of regulation, but the ability to account for regulatory requirements from the earliest stages of ideation, through design, to sustained maintenance.  For startups, detailed regulatory experience can be bought, but this is an additional capital expense. It also can be sourced from a partner, but obtaining this assistance is not likely if the startup is a “disruptor”.

Finally, there is the biggest barrier – customers. As examples of this challenge, startups in the P&C and Life space that have been around since 2010 to 2012 have failed to achieve significant scale. In insurance, attracting and retaining customers is much more expensive (there is that capital problem again) and more difficult than in consumer goods.

The inherent challenges faced by both “tribes” argue for a partnership, rather than a replacement, solution. Insurers can address their legacy technology, risk aversion, and decision challenges by working more closely with the new technology firms that actively seek risk and have a bias to action. Startups need risk and regulatory capital and expertise as well as a customer base to serve.

Partnerships between insurers and startups are a new business model. Unlike supplier-buyer relationships of the past, where a contract is negotiated through an extended procurement process, these partnerships must be governed by a common vision and controlled through active communication from both sides. Celent’s research into the best practice in these partnerships emphasizes the importance of adjustments on both “sides” of such relationships. (see report Accelerating Insurance Transformation: The Good, the Bad, and the Ugly of Innovation Relationships).

It will take time to work out the best ways to accomplish this new model, but the barriers faced by both sides will force each to adjust. Economics will drive transformation to occur in a collaborative manner. Success will come to those insurers and startups which are able to make the necessary adjustments to their own preferences, cultures, and working models to create meaningful partnerships.

The predominant Insurtech approach will be one in which startups coexist with, not replace, insurers.

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The UK’s First Personal Insurance Policy for ‘driverless cars’: Too early or just in time?

Yesterday, we received a press release announcing the launch of a new insurance proposition targeted at personal use for ‘driverless cars’ from Adrian Flux in the UK. This news arrives hot-on-the-heels of the Queen’s Speech last month that announced the UK Government’s intention to go beyond its current ‘driverless’ trials in selected cities and legislate for compulsory inclusion of liability coverage for cars operating in either fully or semi-autonomous mode.

As the press release suggests, this may be the world’s first policy making personal use of driverless cars explicit in its coverage (we haven’t been able to validate this yet). Certainly, up until now, I suspect that most trials have been insured either as part of a commercial scheme or, as Volvo indicated last year, by the auto manufacturer itself or trial owner. 

What I find particularly interesting about this announcement is that they have laid the foundation for coverage in their policy wording and, in doing so, been the first to set expectations paving the way for competition.

Key aspects of the coverage (straight from their site) include:

• Loss or damage to your car caused by hacking or attempted hacking of its operating system or other software
• Updates and patches to your car’s operating system, firewall, and mapping and navigation systems that have not been successfully installed within 24 hours of you being notified by the manufacturer
• Satellite failure or outages that affect your car’s navigation systems
• Failure of the manufacturer’s software or failure of any other authorised in-car software
• Loss or damage caused by failing when able to use manual override to avoid an accident in the event of a software or mechanical failure

Reflecting on this list, it would appear that coverage is geared more towards the coming of the connected car rather than purely being a product for autonomous driving. Given recent breaches in security of connected car features (the most recent being the Mitsubishi Outlander where the vehicle alarm could be turned off remotely), loss or damage resulting from cyber-crime is increasingly of concern to the public and the industry at large – clearly an important area of coverage.

Given the time taken to legislate, uncertainty over exactly what the new legislation will demand, and then for the general public to become comfortable with autonomous vehicles, I suspect that it may be quite a few years before a sizeable book of business grows.  Often, the insurance product innovation is the easy part – driving adoption up to a position where it becomes interesting and the economics work is much harder.

Maybe this launch is a little too early?  Or maybe it's just-in-time?  Regardless of which one it is, in my opinion, this is still a  significant step forward towards acceptance. I also suspect that some of these features will start to creep their way into our regular personal auto policies in the very near future. I wonder who will be next to move?

If you’re interested in learning more about the potential impact of autonomous vehicles on the insurance industry, why not register here for Donald Light’s webinar on the topic tomorrow.

 

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Apax Partners adds Agencyport to its growing property/casualty technology investment portfolio

Today’s announcement of Apax Partners’ acquisition of Agencyport makes sense. This deal is a further commitment by Apax to the property/casualty software sector—following shortly after Apax’s announcement of its equity investment in the soon to be independent Duck Creek.

Insurers want the internal and external users of their systems to have seamless mobile access to new business and other functionality. Agencyport has developed one of the leading solutions for agents, brokers, and policyholders find information and execute transactions with insurers’ core systems.

As is true for any technology acquisition, the soon to be combined management teams of Agencyport and Duck Creek will need to focus on communicating the benefits of their new relationship to current and prospective customers—sending a “good before, better now” message. Providing “vendor neutral” support to Agencyport customers who do not use Duck Creek solutions and Duck Creek customer who do not use AgencyPort solutions will also be crucial.

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How life insurers can make underwriting investments that pay off

There is much to automate in the new business process but where should automation dollars be spent to provide the best returns? The new Celent report, Making Life Insurance Underwriting Investments That Pay Off, provides a framework for answering this question. Celent’s analysis divides the new business and underwriting process into 22 logical components of work. Each component is subdivided into potential levels of automation ranging from minimal automation to highly automated. Through an online survey insurers graded themselves in each of the processes according to their level of automation.  The results were not surprising; however they highlighted how far behind the life insurance industry lags in this area.

Automated new business and underwriting processes carry the promise of improved results, but can come at a significant cost, including the hard costs of purchasing technology as well as the softer costs of implementing it and changing processes.  Celent’s analysis showed that automation does indeed improve key measures related to productivity, accuracy and time which can help offset the costs.

One of the keys to reaping the rewards of the investment is to define the strategic goals prior to the automation. Some life insurers have a strategy to be a low cost provider and may achieve low cost through significant investment in rules automation. Others want to provide a high level of service and may focus on the customer experience by automating the customer-facing processes. 

Key questions to ask when deciding where to automate:

• What is the strategic focus?
• What tasks are being done, and by whom? Does that actor have to do them?
• Where can automation create capacity to grow the book of business?
• Where can automation create a better decision?
• Where can automation create a better customer experience?
• Which level of automation will result in the best key metric results?

Are your investments paying off? Insurers can use Celent’s latest report to compare their level of automation to the underwriting capabilities framework and their peers to ascertain if they are making the most of their underwriting automation investments.

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Reporting from Celent’s Model Insurer Asia Summit

If 2015 was the year of FinTech, 2016 will surely be the year that InsurTech comes into its own. Celent has been presenting our views on InsurTech and emerging technologies at insurance conferences throughout Asia for some time now, so naturally we see this as a welcome—and inevitable—development.

We held our 7th Annual Model Insurer Asia Awards event in Singapore last month, with presentations focusing on InsurTech and digital financial services. Celent Research Director Karlyn Carnahan set the tone with a keynote presentation on the challenges facing insurers as customers are increasingly seeking real-time, digital interactions tailored to their personal needs and channel preferences. Karlyn outlined the steps to becoming a digital insurer and provided many insights on how insurers can embrace the digital paradigm. In the afternoon session, Karlyn also led a peer-to-peer discussion on how insurers in Asia are responding to these significant changes in the digital landscape.

We were delighted to have GoBear, one of the stars of Asia InsurTech, on the program. GoBear is an online financial services aggregator with a decidedly digital offering that is expanding at a remarkably fast pace throughout Southeast Asia. In his keynote presentation, GoBear’s CEO Andre Hesselink discussed how his firm developed their product with the goal of better serving consumers while at the same time satisfying the business needs of their suppliers, the insurance carriers. Quite the balancing act I am sure.

Celent Analyst KyongSun Kong presented the results of Celent’s annual Asia Insurance CIO survey, revealing that nearly 80% of insurers surveyed are engaged in digital transformation initiatives.

Finally, we came to the heart of the event: the Model Insurer Asia Awards themselves. This year we celebrated best-practice technology initiatives at 14 insurers, including ICICI Lombard General Insurance, Taikang Insurance, multinationals Aegon and MetLife, and online insurance innovator DirectAsia, among many others. All winning initiatives are profiled in our report Celent Model Insurer Asia 2016: Case Studies of Effective Technology Use in Insurance.

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Who has the best life insurance new business and underwriting system?

Celent has published a new report, North American LHA New Business and Underwriting Systems: 2016 ABCD Vendor View, in which Celent profiles fourteen providers of new business and underwriting systems. Each vendor responded to a request for information. Seven vendors met the criteria for inclusion as a potential Xcelent winner. The seven vendors eligible for the awards provided a demonstration and briefing of their billing solution.

Due to the ongoing economic conditions that continue to have an adverse impact on life insurance application volumes, insurers have strong interest in reducing the cost of acquisition, processing and issuing life insurance applications. Automating the new business and underwriting functions are critical components in reaching a level of straight-through processing (STP) for new business. Insurers hope that these systems will help reduce unit costs and improve margins. Celent believes that these initiatives are necessary to help the insurers address growth, service, and distribution mandates, in addition to reducing the cost per policy issued.

After years of development that started almost 30 years ago, automated underwriting systems have become highly flexible in allowing insurers to define and configure underwriting rules and workflow. Most systems include or integrate into eApplications. Data from the applications drive reflexive questioning and identify risk classes associated with application data. They offer high levels of automation when gathering third party medical requirements and flag risks when the third party data results are outside of the ranges set by the rules. They also can deliver decisions to the point of data entry or to an underwriter.

The interest in new business and underwriting systems is on the upswing. Deciding the best new business and underwriting system is unique to each insurer. The goal of the report is to provide detailed information so that an insurer will be able to make an informed decision on which systems may be the best for them.

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Regulators will hug their blockchains – takeaways from Consensus 2016

"Show of hands, how many people don't know insurance at all?"

I attended the blockchain (BC) conference Consensus2016 this week and came away with some very different perspectives about the technology and its market. The ability to immerse myself in the subject and hear multiple points of view and varied examples of projects was extremely valuable. Here are my highest level takeaways along with some general observations.

 

Specific take-aways:

Regulators will love their blockchains
The transparency and audit trail capabilities of BC will reduce frustration, lower costs, and increase the effectiveness of regulators. Delaware’s announcement to move selected regulatory processes to the BC is an early recognition of this potential.

Benefits beyond the technology
The power of BC to eliminate counterparty risk, stop reconciliation, increase efficiency were discussed repeatedly, but I also noted more subtle, nuanced, and powerful benefits related to the development process around BC. The most significant examples are the benefits that arise when multiple organizations partner to build a shared BC. Two specific areas are the joint development of the automation for contracts, and cross-organization agreement on data definitions. I am now looking at BC with one eye on what the tech delivers and one on what the process around it yields. I will blog in detail about this next week.

Nascent, but sufficient to test with
No doubt the platforms will continue to develop, but based on reported activity in capital markets, banks and insurers, the tech is ready for corporate testing. One insurer offered an intriguing insight based on their experience to date. They found as they started POCs, their use cases all dealt with processes which already have existing automation solutions in place, with the goal of efficiency/cost improvements. However, they found that they were not getting traction/attention from their senior executives that they expected and needed. They have since pivoted and are now focusing their BC testing on problems that do not currently have automation solutions in place. (by the way, this insurer is another example of a firm which is using its innovation infrastructure to execute their BC tests. They are being done in their innovation lab under the governance in place for experimentation projects — see my previous blog about a similar approach taken by John Hancock.

General observations:

Evangelism
There are strong emotions associated with this technology. The use cases that deliver financing and banking services to developing economies, or that improve health care, certainly warrant an emotional reaction. However, when I hear comments like “BC technology’s impact will be as significant as the railroad in the 1800s,” my hype goes off. I suppose I haven’t been indoctrinated yet, but neither have the majority of financial services executives.

Market transition
Suppliers are changing from geeks to suits, from startups to more established tech and consulting firms. In some comments during a number of presentations and occasional tweets and audience reactions, I detected a curious, and unhelpful, undercurrent of antagonism towards this shift. Because of the promised benefits, the economics of BC will inevitably move to the enterprise. In fact, its full promise cannot be realized without this change.

Kudos to the organizers Coindesk for developing a solid, varied program and for executing it well.

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How do insurance providers develop an agile IT infrastructure?

Insurers have always faced the challenge of taking products and solutions to market faster and doing so at lower cost. The sources of this challenge are not new – changing partner and customer expectations, increased and new competition and demanding regulators with perhaps the addition of the current financial climate.
Insurers have risen to each challenge, offering new ways to interact with their customers, offering new products and tracking their processes against new requirements. However, warning signs loom as insurers are increasingly finding that each of these solutions involve adding something new, encumbering their infrastructure with the latest systems, applications and integrations. Insurers already suffer from heterogeneous and complex IT landscapes and many are in the throes of large, costly programs designed to simplify and reduce costs.
The challenge today is a little more specific from those in the past: How can an insurer increase in agility, speed to market and flexibility while keeping the support and maintenance costs manageable?
Insurers are increasingly realising the benefits of a Software as a Service (SaaS) approach for some parts of their IT landscape. The promise of being up and running on an out of the box solution can be very appealing for activities that don’t differentiate the insurer or are well understood. While these solutions continue to be additive, they don’t increase the load on the IT infrastructure team beyond the due diligence exercise. However, many of the areas that need the greatest speed to market are differentiating and require customisation – how can insurers achieve that without increasing complexity?
Is Cloud the Answer? There has been much discussion about cloud and how this is changing the way start-ups and businesses deal with their IT infrastructure. Insurers exist in a heavily regulated environment and are rightly hesitant to jump on the latest technology fad to solve their problems. However, dismissing the developments in cloud and SaaS propositions altogether for their core operations may be throwing the baby out with the bath water, along with possibly the bath as well.
There is value in considering cloud-thinking or a cloud style approach to problem-solving when considering the insurer’s infrastructure. Central to enabling cloud is simplifying, standardising and above all automating activities with IT infrastructure. Once the common activities one needs to do are automated this frees up costly team members and time to look at other problems. Through automation one can keep adding new applications and solutions to the IT landscape with a lower impact on support and maintenance costs, enabling an insurer to remain flexible, agile and keep their costs manageable.
It is time for the IT department to look internally and apply the same automation and efficiency thinking of their business counterparts to their own operations. Regardless of an insurer’s position on cloud, there is value in applying cloud-thinking. Consider how automation and simplification can increase predictability, supportability and quality in IT Operations. If appropriate, take that learning and move some services to the cloud.
In practice this approach doesn’t simplify the IT landscape and move everything to one “cloud” way of doing things. Rather it accepts the insurance industries need for complexity, for flexibility in approach and seeks to enable a fast and cost efficient approach to deliver it.

 

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