Solving for Tomorrow
A handbook on what it takes to respond to the forces shaping the future of insurance.
Spending our lives working on behalf of insurance has put us in the dual position of both outside observer and front lines change agent. We’ve lived the movements of this industry as a partner to carriers large and small in their quest to modernize core systems. As a result, we’ve developed a unique point of view on what it takes to win in this ultra-competitive world.
This work is the first in a series that aims to capture and share our collective wisdom as an organization for the benefit of those working in our industry. The current rate of change is a given. However, the question remains: How do leaders and organizations need to respond?
If we were to view the world through a pessimist’s lens, we would say that insurers are in big trouble. (“Fat, complacent, and happy” were the words of one tech investor we interviewed.) Newer, leaner, and nimbler competitors are circling, finding ways to carve out a piece of the $1 trillion+ U.S. P&C Insurance pie. But warnings and provocations without meaningful follow-up or guidance have not been helpful. Neither is treating every passing fad as the next game-changing force by which carriers will live and die.
We’re here to help carriers find the signal through the noise. We will cover the topics that we believe will have a real impact on the future of this industry and filter out shiny objects that are more bluster than bite. Most importantly, we’ll make sense of what all of this means for your business, your people, and your platforms—getting as specific as needed to help you forge a genuine path to the future.
In Our World
Major forces shaping our industry
Over the course of countless conversations, layered on top of decades of industry experience, dozens of themes emerged for each of these categories. Our team assessed each topic by maturity of idea and magnitude of potential impact (e.g., the ideas that have matured beyond hypothetical concepts or isolated pilots). We used these lenses to narrow the world down to the formidable forces that carriers need to address in the near- and medium-term.
In short, we believe that the carrier who is able to successfully capture the opportunities in the Tailwinds, neutralize the dangers in the Headwinds, and solve for the inherent complexities in the Wildcards, is the carrier best able to build and sustain a true competitive advantage.
Jeopardize the Future
Forces that increase the size of the opportunity
Digital: Today’s buzzword, tomorrow’s opportunity
The word “digital” has evolved and morphed in meaning as quickly as the pace of technological change itself. As a result, the term has become an empty vessel at best and a meaningless buzzword at worst.
As it relates to insurance, the current focus is around emerging modes of interaction that give carriers access to a treasure trove of new information. If this data is used strategically and in the right combinations, it can lead to better products, new opportunities, and an altogether superior experience.
Two factors have been driving this recent conversation:
Meeting customers where they are
Even though digital-only carriers like Lemonade have become the darlings of this industry1, and policyholders are demanding omnichannel experiences, the solution isn’t to digitize everything. Instead, carriers need to consider how digital can co-exist with (and complement) in-person interaction. Understanding this equation will allow carriers to deliver products, services, and information effectively and efficiently across the appropriate channels.
As carriers’ relationships with policyholders deepen through digital interaction, so do the quality and quantity of information gathered. This is valuable fodder for carriers to hone their value proposition in the form of more tailored products (e.g., usage-based vs. fixed-price), a higher level of service, and a better way of working for employees and sales partners.
An evolving role and value
Continuous monitoring lets carriers notify policyholders of impending events, offer tips to prevent damage, and even pre-fill claims before the First Notice of Loss. This ability paves the way for a fundamental shift in the role and value of carriers—from the folks you call when something bad happens, to an active partner in keeping you and your possessions safe. (Note: this dynamic also holds true for the Commercial Lines side.)
More tailored offerings
Small businesses are a segment that lives between Personal and Commercial Lines in terms of needs and purchase behavior2. Here, carriers have the opportunity to provide a tailored (omnichannel) experience and offer value that caters more specifically to this historically underserved segment.
A more attractive partner
On the mid- to large-enterprise side, the ability for carriers to analyze and act on insights from a growing number of digital touchpoints allows them to build more profitable products, and offer more useful tools to the brokers who sell and manage these policies. This could be an important value-add to counter the Headwind of Changing Channels (covered in a later section).
Diversity of assets: What’s mine is yours?
A vacuum in coverage
Most policies that cover short-term or shared ownership relationships provide either incomplete or inflexible terms. Carriers are unclear about the level of service these policies require, or the correct way to gather the information needed during the claims process. At an even more fundamental level, carriers do not know how to capture the risk to be priced into rating models.
Systems not designed for paradigm shifts
For most insurers, even the addition of a new field of information represents months
of backend build-out. A large-scale change that takes into account multiple owners, durations, and data formats is close to impossible for many back-end platforms on which carriers are operating.
Changing nature of assets
The prevalent practice of companies leasing unused inventory has long created complications for underwriters. Today, even companies’ most important asset—their workforce—is no longer fixed, as freelancers and part-timers become more and more the norm. This has created pockets of opportunity for carriers to offer products and services catering to these short-term relationships. In the meantime, in the absence of appropriate coverage, employers/individuals bear the risk.
Changing nature of risk
Technology has changed the nature of risk pools. New payment methods have decreased transaction times and increased standards for security. Pre-collision sensors and driverless cars have the potential to minimize or even prevent man-made accidents altogether. At the same time, the implications of a loss event (like theft) are often misunderstood, and the magnitude of loss has grown exponentially. For example, cyber attacks, data breaches, and machine mis-learnings have emerged as new threats that can jeopardize companies’ very existences. These risks (and others like them) are not yet covered by traditional underwriting, opening up the market to first movers who can offer appropriate coverage.
3Top 25 Carriers: http://www.naic.org/documents/web_market_share_160301_2015_property_lob.pdf; researched individual companies by year founded from individual company pages
Forces that jeopardize the future
Adverse selection: Racing off the edge of a cliff
One of our interviewees described the dynamic of adverse selection as “A marathoner who’s able to get to the water table first, drink as much as he needs, then knock over the table so those behind him will be dehydrated for the rest of the race.” Needless to say, you don’t want to be behind that person in the race.
In today’s climate, two conditions have exacerbated the trend:
A harder act to follow
Price comparison/aggregator sites, coupled with the proliferation of digital disruptors (e.g., Lemonade, Besurance, and Haven) promising quotes within seconds, have put pressure on carriers to lower prices and reduce time to decision.
The downside of making it look easy
The jury is still out on whether these new players will maintain long-term profitability. Additionally, there is the question of how these easy/automated underwriting processes stand up against fraud. Insurers who sacrifice quality of underwriting for speed and price to compete recklessly with these newer carriers could be stepping into the trap of adverse selection.
Loss at a larger scale
Given the size of each individual commercial policy and the ever-increasing complexity of modern businesses, the impact of adverse selection is magnified. If rules and products are not able to account for the changing nature of risk in today’s climate, it could result in massive losses for carriers. While the pace of change has made it harder and harder to build profitable products through traditional means, the ability to do so has become that much more important. The carriers who are able to learn and to adapt their products and services will be the ones who can extract maximum value from the most attractive prospects and avoid losses down the line. The carriers who aren’t will be left with loss-making prospects and an uncertain future.
Changing channels: Biting the hand that feeds you
Who has the power
First, it’s the policyholders—who are now used to online comparison shopping and demanding a higher quality of service. Second, it’s carriers—as they build out the capabilities to be able to service needs and sell directly. In general, the move has been decisive—carriers are moving more of their sales online, going direct to the consumer and cutting out agents, both captive and independent.
How to respond to it
Carriers who, out of strategic preference, continue to rely on their agent channels, must reexamine and fortify the value their agents are able to provide. This has meant ensuring that agents have real-time access to information, a robust set of relationship-building tools and the permission they need to provide a layer of value that clients can’t get from a website.
Why they have it
This is partially due to carriers being under pressure to find new ways to cut costs. Sales commissions account for a double-digit cut out of the bottom line, and are seen as an obvious source of savings, especially as policyholders’ preferences and buying behaviors have changed. The relative simplicity of these products allows for an easier and more complete translation to a direct sales model.
Who has the power
Large Commercial brokers, who have a great deal of power, are demanding a higher quality of service, faster updates to products, and new ways to meet clients’ needs/specifications. Carriers who can’t respond quickly enough could be excluded from broker recommendations or shut out of the channel altogether.
How to respond to it
Carriers need to find ways to be truly responsive to broker expectations—not just at a superficial level, but in terms of fundamental changes to products and services. For Large Commercial, key underwriters need to be more relationship- rather than transaction-focused. Delivering product is no longer enough—being responsive and consultative have become key to maintaining broker/carrier relationships. For small and medium-sized enterprises (SMEs), insurers need to provide automated straight-through processing and collaboration between agents/brokers and underwriters.
Why they have it
The evolving needs of corporate clients, coupled with the complexity of the products in the commercial lines space, have led to a reliance on brokers, who clients count on to properly recommend and negotiate policies. Aggregator models and exchanges are poised to make things more complicated—giving agents/brokers access to a broader (and often cheaper) set of specialized products outside of their immediate carrier relationships.
Forces whose impact has yet to be defined
Regulation: The excitement (and anxiety) of more changes
The first manifestation of this new regulatory shift has been the rollback of consumer privacy protections. This essentially gives internet service providers the ability to sell browsing data to private companies5. This move could give insurance companies access to a rich new data source for their projections of individual risk. However, carriers also need to weigh the ethical and brand risk associated with this level of intrusion, even if such a practice is technically legal.
National Flood Insurance Program
This FEMA-run program, designed to provide government assistance in flood protection, is up for renewal in September. Currently, it is $23 billion in debt and the Trump administration has proposed cutting $190 million from the program, or even shutting it down altogether6. This move would open the flood insurance market to privatization, giving carriers the opportunity to build new products and services. However, flood protection is a notoriously unprofitable line of business, so carriers need to be extremely cautious (and accurate in their pricing model) to avoid dealing with the fallout of adverse selection.
Federal vs. State oversight
Another regulation in question is the Federal Insurance Office (FIO), which could disappear if the Dodd-Frank Act is rolled back. The FIO has oversight into risk-related matters of insurance companies, including the kind of asset classes into which carriers can invest, and the types of risk they can cover. Removing these barriers could have a huge impact on insurers’ investment strategies and open up alternative sources of revenue7. Meanwhile, states continue to move toward tighter regulation, particularly around pricing practices. For the moment, state regulators appear to be in the driver seat for determining the immediate future of regulation.
AI / Big Data: So close, yet still so far away
The downside risk of being first
This is an ironic position for today’s carriers to be in, as insurance companies tended to be relatively early adopters of IT/software. In the 1960’s, insurers and banks were on the cutting edge of IT—they were among the first to hire computer scientists and programmers to build their own solutions8. Unfortunately, by moving early and investing heavily in technology that used programming languages that quickly became outdated (who knew things would move as quickly as they did?), carriers have had to build out functionality in-house, leading to islands of automation/flexibility and function-rich silos separated from the rest of the organization. This fragmented system has inhibited carriers’ ability to capture, share and utilize data needed to drive prioritization, design, and innovation for their products and services.
Finding the needle in the haystack
Within this highly fragmented and patched-up world, building a full-fledged data/insights team is a huge task. It requires everything from hiring the right talent, to setting up parameters around data collection and sanitation, to making sure that information is shared across organizational silos. There is also the issue of finding meaning in the different sources of collected data. Adoption of new technology has been slow and case studies are few, meaning that there is no industry rubric or set of best practices to lean on as carriers seek to connect findings to profitability, efficiency, or retention.
The awkward “now what” moment
But let’s assume carriers are able to successfully stand up world-class analytics teams that can generate game-changing insights and promise to set new standards in product profitability and service delivery. Then the battle shifts to how to build these insights into actual rules and products. Here, once again, we run into the problem of legacy systems that force product code into silos, leading to products built from a code “stew,” devoid of thoughtful hierarchy, consistency, and definition. This, in turn, forces carriers to rewrite every line of code associated with a product for even minor updates. It also makes the ability to test new products with a limited audience and without disrupting existing operations a distant pipe dream.
Chicken or the egg
This inertia is driven by the fact that new technologies cost a great deal and have yet to be proven in terms of business value—because there is no easy way to build this case. Existing systems do not accommodate easy and quick builds—thus preventing testing and experimentation. By default, this makes all cases for product profitability and service efficiency strictly theoretical. When theoretical returns are presented to those who work in the business of putting tangible numbers to potential risk, it does not hold water.
PROVING BUSINESS VALUE
SaaS: The promise of flexibility made real?
Calling it what it is
Looking at the landscape of insurance technology vendors, many are promising a SaaS option that’s essentially a privately-hosted product that is altogether different from their on-premises solution. For example, a vendor may have a feature-rich option that has to be installed on premises and another option that can be accessed via the Cloud. But, their Cloud option can only handle about 30% of what the on-premises option can handle. In fact, looking more closely, it’s a different product altogether with a completely different code base.
In this scenario, carriers would have to decide how much functionality they’re willing to sacrifice for flexibility. If they want a Cloud-accessible version of the on-premises product, they’d have to host it themselves. Any subsequent updates will be costly as it still would have to be individually installed.
Marketing dollars and PR spin can stir up a lot of confusion, so it’s imperative that carriers know the difference between on premises, hosted, and SaaS, and the pros/cons of each delivery model.
In the Hosted (private Cloud) scenario, carriers have to communicate between their Cloud vendor (e.g., Microsoft Azure and AWS) and the technology partner whenever there is a glitch or an update, adding a layer of complexity. True SaaS works from a common code base, so updates (and glitches) are managed entirely by the Technology Partner.
In short, if you want to know if a product is true SaaS, ask your potential tech vendor how updates work—and what the total cost of ownership is to stay current.
A note on data security
It’s impossible to talk about SaaS without talking about security risks. The perception is that by moving critical processes (quote, bind, first notice) onto the Cloud, it somehow feels like the front door of your business has been opened to the entire internet. But as SaaS has started to become the standard in some industries, security technology has grown in sophistication and rigor. The day is quickly dawning that data is more secure (and more cost-effective to manage) on partner-maintained multi-tenant Clouds (with higher security compliance standards) than on private Clouds/data warehouses.
What to remember
The biggest upside of SaaS is that you’ll always be up to date with the latest features and functions. This removes the burden of maintenance and upgrade from carriers’ IT organizations, avoiding the scenario of upgrades becoming unaffordable (up to 75% of purchase price), and leading to orphaned releases and outdated systems.
SaaS allows carriers to focus on differentiating themselves in more important ways through marketing, brand, customer experience, and risk models—not their IT systems. Advantage is created from business strategy configured into products and services, rather than developers customizing code.
9Source: Internal Duck Creek documentation on competitive intelligence from customer/prospect interviews
Adds Up To
Implications for how carriers
need to respond
In the end, speed will characterize carriers’ survival in this new marketplace.
Speed in the ability to collect, analyze, and properly interpret data from a growing number of sources
Speed in the ability to update/change products and algorithms to reflect newly uncovered insight
Speed in the ability to launch into new channels and geographies at a moment’s notice
Berkshire Hathaway Speciality Insurance (Speciality Lines)
Speed to build an entire business without IT slowing things down
Created in 2013, Berkshire Hathaway Specialty Insurance (BHSI) began with no IT infrastructure and no IT staff—but it needed to implement core systems for policy and claims.
With the luxury of building from scratch, they sought a modern, nimble solution that could support current and future business—at IT costs that are the lowest in the industry.
The team set out an extremely aggressive launch schedule—more than 40 products over the course of 18 months. Launching even one product in that time frame is challenging for most P&C carriers.
Full suite launched within one year; two months for Claims go-live; and seven months for Policy go-live
BHSI is currently live with 60+ products over 5 lines of business in 50 states and across 6 countries.
Because the SaaS system is able to flex and scale as the company grows, back-end capacity down the road is accounted for, as is future functionality via regular updates to the system.
BHSI’s ability to hand off all technology issues to their SaaS vendor lets their workforce focus on business-related issues and value-added services.
Eastern Alliance (Commercial Lines)
Speed through smart automation to radically simplify a 20-step process
65% of new business submissions were emailed from agents, despite an agent-facing portal option.
Internal manual keying of data into the policy system was time- and labor-intensive, and vulnerable to errors and incompleteness.
Bounce-backs and follow-ups for additional data were common.
Overall intake process for emailed forms took more than 20 steps and required three people to keep up with an email inbox.
New Process: PDF forms attached to agent emails are sent to Turnstile; data from forms are converted to ACCORD XML and uploaded to AgencyPortal for underwriter validation; underwriter submits application to the policy system for completion.
The total number of manual steps has been reduced from 20 to 6—a 70% savings.
A single individual now handles all submissions and, in most cases, achieves a same-day quote turnaround to agents.
Underwriters have all the data they need up front, saving time and allowing for collection of geographical information on declined policies—data important for future risk assessment.
National Tier 1 Carrier (Personal Lines)
Speed to market through modern systems that talk to one another
All business was conducted across separate policy, billing, and claims platforms, with information needing to be translated across multiple systems.
This construct slowed the carrier’s ability to launch new products and provide service efficiently. It also limited distribution—particularly for complicated products that could only be sold through agents.
Most importantly, the environment constrained delivery of industry-leading levels of customer service. For a carrier that held Amazon as the gold standard for ease of doing business, this was unacceptable.
Use of out-of-the box functionality laid the groundwork for Policy and Billing to talk to one another and enable seamless data transfer—allowing teams to focus on value-added activities rather than system customization.
The new architecture is able to isolate their configuration, allowing the creation of a test-and-learn environment that gives teams freedom to focus on innovation instead of being locked into releases.
The streamlined core system is able to reduce information lags and, by extension, time to market. Now, even the most complicated products can be built, tested, and sold all on one platform.
Need To Do
Imperatives for how
to build for speed
This view of the future requires that Product, Sales, and Service talk to one another via a constant stream of data that is translated (by man or machine) into rich insights. It requires a nimble and insights-driven platform that is built for change—whether it be to ratings, to channels, or to scale.
There is also the issue of ROI. As we said in the Big Data section, existing systems make it difficult for carriers to test and predict the financial outcome to products and services. Therefore, large-scale, system-level changes are an even harder sell for carriers who do not want to be guinea pigs for an unproven way of working. This new system must be able to isolate changes so carriers are able to test and refine concepts in a safe environment before full launch.
Freedom within a common framework
Historically, products have been built from thousands of lines of heavily customized code. As carriers have grown and evolved, code has remained scattered across channels and platforms, the result of hundreds or thousands of changes being written into every instance of the product. With no single source of change, updates are a time- and capital-intensive process.
Carriers must have a strong framework to build from, where core products share common definitions across the business. This way, if there is a change to a product or a rate, it can be made quickly and updated across all instances and iterations of the product. A seamless level of consistency ensures new products are customized from a common set of definitions, giving businesses room to grow their portfolio in a manageable way.
A test-and-learn environment
There is no room to experiment as launches are typically a one-shot deal. Mistakes are hard to fix and their impact is difficult to track or measure, making them costly and semi-permanent in the short term. Furthermore, today’s rigid structure creates and reinforces a risk-averse environment.
Carriers need to be able to test products in a controlled environment so they can track results, make refinements, and perform “what-if” analyses before launching new products to a broader market. This ensures both the quality and impact of new offerings and fosters internal innovation, allowing new ideas to be developed in a lower-risk environment.
Shifting contracts and relationships
Policies tend to be inflexible in the way they are written and structured—typically available for fixed lengths of time or degrees of coverage. Terms tend to be focused on future damages instead of accounting for present day behavior or environments. This has set up carriers as reactive agents, called on to respond only after an event has occurred.
Pockets of the industry have started to move to a more flexible product hierarchy that allows for usage- and behavior-based contracts. Partially a response to emerging ownership and usage models (e.g., the sharing economy), these contracts essentially treat insurance like a utility. While the use of credits is old news, new data coming from a proliferating range of connected devices (e.g., IoT) have given carriers better ways to calculate risk and monitor conditions in real time. Carriers need to use these sources to build products and services that incentivize good (risk-preventative) behavior while decreasing the likelihood and magnitude of loss—a win-win all around.
A real-time window
Outdated platforms that do not talk to each other have made access to information inconsistent across teams and channels. Without connectivity internally, carriers can’t provide transparency externally. This has caused disruptions in agents’ ability to provide timely information to prospects. This has also blocked policyholders’ access to information related to their policies and claims.
In order to free up agents and service teams, and also ensure a high quality of delivery, policyholders and agents alike must be allowed to connect to the same set of data across touchpoints—whether it’s mobile, online, or in person. By empowering these groups to find information and resolve issues on their own, carriers and agents can focus on delivering more valuable advice and services.
Ease of doing business
A simple, one-way relationship—carriers make the product and agents/brokers sell that product for a commission. Information lags between carrier and agent are common. Input from brokers can take months to be reflected in carriers’ products or service delivery.
Carriers are expected to act like true partners. This means providing distribution partners with the tools to help them deliver a high level of service. This also requires greater transparency—giving agents/brokers immediate access to the information they need. More and more, this level of responsiveness is also expected at a deeper level—in the form of dynamic product and service updates that reflect policyholders’ evolving risk profiles, needs and behaviors.
Scaling up is a slow process that requires months of building and rebuilding systems to handle new volume across the entire product, sales/distribution and service cycle. Today, scale is inelastic. The high fixed costs required to build out systems that can accommodate peaks of traffic eat into profitability.
Internal processes, systems and people must be prepared to accommodate new launches, geographies, and policyholders (and their evolving requests). This means carriers either need to make heavy upfront investments to expand overall platform capability, or move into flexible, pay-as-you-use contract models (SaaS) with their technology partners.
Optimizing for Efficiency
There is enormous pressure on carriers to do something about the 12%/12%/12% (G&A/ Loss Adjustment/ Sales Channel) cost equation. This structure has grown in part from carriers operating from a patchwork of legacy platforms. Many of these outdated and/or internally built systems require scores of FTEs to support and maintain. Lack of functionality has created operational constraints that are often solved for by manual workarounds. This has led carriers to be overly reliant on human-to-human interaction.
We are a half-century into carriers modernizing their systems. This shift has driven leadership to be more creative in the use of technology, and thoughtful about how to use employees where they are most valuable. It also means that carriers’ employees need to rethink how they see their own role—from one of an operator/processor to one that’s more of a creator/innovator.
Meeting them where they are
Within the P&C industry, interactions are still mostly happening person-to-person. However, customer norms around experience and delivery have been shaped by outside players. Due to the disjointed, documentation-heavy, and adversarial nature of the claims process, long lags between information capture, processing, and payout are common. Of the carriers who do offer self-service, backend tie-in/functionality is limited. For example, customers can submit an FNOL on the front end, but carriers still need to print out and manually key in the information for the claim to be processed on the back end. Not surprisingly, customer satisfaction, particularly across the claims process, is low.
The ability of carriers to reach and service policyholders across all channels is an existing expectation that will quickly become the standard way of operating. The carrier who is able to get there first will not only create an efficiency, sales and experience advantage, but also an insights-related one. These digital interactions with policyholders and partners will give carriers a wealth of new data that can be used to create better products and deepen engagement.
10Source: Capgemini, Efma World Insurance Report 2015
Mining for Insight
There has been a proliferation of data created, driven by the increasingly omnichannel way in which customers interact with businesses. Most carriers have not been able to build processes and teams to fully capture, standardize and analyze that data. Without these internal processes and capabilities in place, it is difficult for teams to make use of the data in a meaningful way.
Finding the needle of insight in the data haystack should become second nature as systems are automated to collect, sanitize, and share out relevant information. When it does, human energy can be focused on solving larger strategic questions around building a smarter business, a more profitable product set, and a more useful set of services.
Single view of the customer
Data is scattered in various formats and levels of fidelity across the organization. Analysis tends to be reactive and tactically-focused, rather than future-facing. Market research (e.g., segmentation) tends to be at too high a level to be mapped back to existing databases of behavioral data. There is no true insights backed and agreed upon view of customer behaviors and needs.
Carriers need a robust and centralized view of how they are interacting with key policyholder groups. This single view of what’s important needs to be widely shared across silos so differing groups know what they are collectively working toward and how each group contributes to the overall experience. It should provide a roadmap that directs all product, sales and service initiatives. By extension, this single source of truth holds everyone in the organization accountable to a more customer-centric way of collaborating and problem solving.