The magic of statistical analysis in insurance (or the weather needs to be more predictable)

Tom Scales

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Sep 1st, 2015

My colleague and I were all set to go to West Palm Beach this week for the LOMA TECH conference. We were looking forward to participating in the inaugural event and were both speakers.

Then the weather intruded. Our friends at LOMA had a tough decision to make on Friday as Hurricane Erika was coming through the Caribbean. The storm had already done considerable damage and caused many deaths. Since the projected path covered the entire state of Florida, there was considerable concern. Once the governor of Florida declared a state of emergency for every county in Florida, LOMA made the only decision they could and postponed the event.

Why do I blog about this today? Because it is Tuesday, the day Erika should be decimating Florida, and I am sitting just outside Tampa enjoying a beautiful sunny day. Not a rain shower in sight.

My point? This is just one example of many of the challenges facing in the insurance industry. Our industry relies on an immense amount of data. We use historical data and averages and every kind of statistical analysis we can to ensure that our customers and the insurance companies are in a win-win situation (as much as they can be in the situation where they need their insurance).

This is a classic example of how all that analysis is wonderful, on average and over time, but can be completely inaccurate in a single event. Your mortality may suggest you will live well into your eighties, but you, as an individual, may not. My homeowners insurance, living in Florida, includes a significant cost associated with the storm that may never come. The county in which I live, Pinellas, which includes Clearwater and St. Petersburg, was last hit by a hurricane in 1921. Yet Tampa is number 4 on the National Oceanic and Atmospheric Administration (NOAA) list of cities most vulnerable for a hurricane. In fact, they state Tampa has an 11% chance for a hurricane every year.

That is the problem with probabilities. An 11% annual chance, but no hurricane for 94 years.

I find the entire process fascinating and continue to marvel at how well our industry does and how wonderfully they protect their customers. At heart, though, I still consider much of it to be magic.

An invite to London and nothing to wear

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Aug 28th, 2015

There are lots of cues and clues to differing cultures across the insurance industry and it’s IT neighbour – one of the most obvious is dress code or at least communal agreement on how one should dress. For a chap in London it should be relatively easy, as the character Harry Hart put it in the film Kingsman, “The suit is the modern gentleman’s armour.” However, recent changes and external influences in London have left me in something of a wardrobe quandary.

For example – the data scientist community and the digital community. I went to the first Strata event in London in my usual suit and tie and swiftly realised that I looked like I a fish very much out of water. Here jeans, t-shirts and the odd tattoo were the order of the day. My most recent visit to the conference I managed to correct my attire although didn’t acquire new tattoos just for the conference (perhaps next year). Oliver Werneyer’s observation at our event in February this year that one needs a good beard to fit in with the start up crowd is also well founded.

Also in London we have Lloyd’s of London with a strict dress code and a requirement for a tie to be worn at all times. More Kingsman territory, clearly one can’t dress for both communities on the same day.

In between we have an increasingly relaxed view of the suit attire or even simply trousers and shirt. Despite having a pretty good collection of ties these are now largely optional (although I still generally carry one around as wearing them varies by client and frankly I quite like wearing a tie to a meeting).

What I don’t have of course is a pocket square – something I rarely have seen adopted before this year (perhaps I wasn’t paying attention) but I’m increasingly seeing a square used to add a splash of colour in the absence of a tie. Thus, we have the title of this post – I have nothing to wear!

Fortunately, London is unlikely to see the weather required for hawaiian shirts and shorts to become the order of the day (albeit I may have something that might fit that bill should it come to pass).

Circling back to culture though, the need to blend these clearly different and shifting cultures together in one organisation is crucial in a modern insurer. Aviva has gone to the extent of creating a digital garage in Shoreditch – the heart of the jeans wearing community, if I may use such a broad brush – to draw in talent to the organisation. Hiscox too has been going to great pains to attract the right talent, along with many other insurers in London seeking to bridge these cultures.

Are you allowing for a varied culture in your organisation? How flexible are you in dress code and working practices across different communities? Have you ever set to preparing for a meeting and realised you simply have nothing to wear? Would love to hear your stories on changing insurance, if only so I know it’s not just me.

 

KPMG’s revealing survey about cybersecurity and what we can do about it

Tom Scales

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Aug 27th, 2015

Some of you may remember my post this spring about the breach of my family’s information by a major health insurer.

I think about that a lot, as I am sure many of you do as well. It feels like we read about another major hack on a daily basis. We now have major governments funding hacks. The perfect is example is the recent breach of the IRS.

This recent health IT survey by KPMG really caught my eye: 81% Of Healthcare Organizations Have Been Compromised By Cyber-Attacks In Past 2 Years.

81%! The survey covered both insurers and providers. I am stunned my mailbox does not overflow with notifications every day, but what concerns me is all of the breaches of which we are still blissfully unaware. It is particularly disconcerting because there are so many rules around patient privacy that we should be able to expect that our information is being managed securely.

It is not.

It would be easy to point fingers at those breached and blame it on their lack of preparation. And I suppose that is true in some cases. It would also be easy to point all the blame where it belongs, on the hackers. The big question for me, though, is what can I do about it?

In short, the answer is not much. I can’t imagine querying an ambulance driver about the information security processes of a hospital. Even if they knew, would you divert to a different hospital based on the answer? Of course not. In a similar fashion, one would be unlikely to change insurers based on information about data security.

But that doesn’t mean customers don’t care about it, and data security is something the audience of this blog can do something about. Regardless of your role in the company, ask some questions. Keep pounding the drum that our industry needs to stop being passive and needs to make the investment, even more investment, in security. We tend to think of the “big breach” as the area to invest, but there are so many more areas on which to focus.

The survey showed that 35% of the respondents had a data breach from their own employees. So when you’re beating the aforementioned drum, make sure to discuss your internal risks too.

As important, if you are in a position to do so, help ensure this is a topic discussed with the CEO of your company. They need to be aware, and be prepared, for the almost inevitable breach. Your company wants to handle it quickly, professionally, and competently. This would be in stark contrast to the insurer mentioned in my previous post, which took 3 ½ months to notify me, and started with my 4-year-old.

In the words of Sergeant Esterhaus in the incomparable ’80s classic Hill Street Blues, “Let’s be careful out there.”

Freud in a box – the Aware Machine

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Aug 11th, 2015

In the week since the release of the Celent report, Machine Intelligence in Insurance: Designing the Aware Machine, I have been involved in several fascinating discussions around a new level of personalization in insurance. An insurer called me to ask if there are any vendors providing intelligent machine services that can analyze social posts of a person and slot them into one of several pre-described personas. It was fascinating to contact some of the vendors involved in the report and find out just how far along they are in using intelligent machines to personalize down to the unit of the individual!

At the same time, my colleague, Zil Bareisis on the Celent Banking team, blogged about a new type of personality test, Personality Insights powered by IBM’s Watson. According to the description of the system, the test “uses linguistic analytics to extract a spectrum of cognitive and social characteristics from the text data that a person generates through blogs, tweets, forum posts, and more.” Interestingly, it claims to be able to reach conclusions just from a text of 100 words. (Zil’s blog is here: Don’t be surprised if your bank knows not just who but also what you are in the future.)
Following Zil’s lead, I copied an extract from the Aware Machine report into the system to find out what Personality Insights said about me. The results:

You are inner-directed, skeptical and can be perceived as insensitive.
You are imaginative you have a wild imagination. You are philosophical: you are open to and intrigued by new ideas and love to explore them. And you are independent.
You are relatively unconcerned with taking pleasure in life: you prefer activities with a purpose greater than just personal enjoyment. You consider achieving success to guide a large part of what you do: you seek out opportunities to improve yourself and demonstrate that you are a capable person.”

After I got over my initial reaction (which was to shout “No! That’s not me!”, especially about the “insensitive” part), my analyst instincts observed that my result contained a great deal of overlap with Zil’s profile. This indicates how broad the analysis is based on such a limited sample. The experience made me want to load a lot of additional data about myself into the system to see how personalized the results could get.

And this is the main take-away for me about these systems – that they are trying to reach areas for which we have not generally applied automation (understanding the personality of our selves/our customers) using unstructured data. More experimentation and refinement will increase the value of both the results and our understanding of how to use them.

The Aware Machine in insurance

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Jul 31st, 2015

The topics of artificial intelligence, machine learning, deep learning, and cognitive computing have made their way into the popular business press. An insurance professional trying to stay informed of emerging technology may struggle to see the application of these technologies to their industry. A Celent new report, Machine Intelligence in Insurance: Designing the Aware Machine provides an explanation of this space and its opportunities in insurance. It describes a model named “The Aware Machine”,  identifies the characteristics of high-value problems best suited for such platforms, and suggests specific use cases to serve as proof-of-concept experiments.

The use cases include:

  • Analysis of legal circulars for impact: Continuously identify which regulatory changes will have a material impact. Involves teaching a system insurance law and providing it with a continuous feed of changing regulations.
  • Medical case management: Optimize treatment plans to increase recovery, return to work rates
  • Identification of underwriting leakage: Analyze insurance contracts at the clause level and compare them with each other across lines of business to enforce consistency of intent. Continuously monitor new contracts to ensure that appropriate wording is used.

We invite readers of this blog to submit their own candidates in the comments section and check back for updates. Let’s crowdsource suggestions and get some proof of concept experiments underway!

 

How to grow your book of business

Karlyn Carnahan

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Jul 20th, 2015

Most carriers in North America work with independent agents. Although the majority of premium for personal lines is written direct, that is largely concentrated in a few large carriers. Carriers who use independent agents know that high production from agents is correlated with strong relationships. However, beyond encouraging a strong personal relationship with an underwriter, what else can a carrier do to systematically build a stronger connection with an agent and grow their book? Celent surveyed a group of agents to understand those areas most likely to make a carrier the agents’ top choice.

The report addressed the following key research questions:

  1. When it comes to placing business with carriers, what criteria are most important to an agent?
  2. How are top carriers performing on those criteria?
  3. Where should carriers prioritize their investments in order to drive growth?

Key Findings

  • It is easy to think that price is the most important factor when it comes to where an agency chooses to place business. Competitive products and price certainly are important; however, even more important than products and price is the responsiveness of the underwriter. A fast underwriting decision is also quite important with over 60% of agents stating this is a must-have.
  • Money matters to agents although the specific components are not essential to all agents. The most important component is commissions. Interestingly enough, 40% stated that the commission rate does not necessarily have to be competitive. Only 30% said incentive compensation programs were must-haves – and 40% said they were nice to have or didn’t matter at all
  • Beyond that, agents also look for support in other areas. A strong brand is important, as it is easier to sell a company where the prospect already has an emotional connection. Marketing, training, and consulting support is seen as important by more than half the agents and especially younger agents who may benefit more from these types of services than older established agents may.
  • Mobile tools and social media support are generally not seen as important items to most agents – but there is a significant generational difference here. 25% of younger agents see mobile as a must-have compared to 4% of those over 60. Generational differences will become more important to carriers as baby boomer agents increase their rate of retirement and are replaced by GenX and Millennial agents.
  • Agents want carriers to invest in those tools that are most important in helping them perform their job of writing business and providing customer service to the policyholder. Most important to agents is continuing to build out both the integration with the Agency Management System and expanding the functionality of the Portal. Least important to agents are features such as mobile apps, online certificates of insurance, online commission statements, and access to marketing materials.

Looking ahead, the industry is likely to continue to experience increasing channel complexity and increasing regulation, which means there are opportunities both to improve the agent experience and to reduce costs along the way.  Carriers who are looking to drive growth by improving the agent experience should start by looking at their technology offerings and make sure they are delivering the functionality that is most important to their agents.

This report presents the results of an online survey conducted during May 2015 of independent insurance agents. It contains 13 figures and 1 table. You can find it here: Driving Growth by Optimizing the Agent Experience

UBI, personal data and the global implications of the European Union data directive

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Jul 17th, 2015

On Monday, I was asked to present at a UBS conference for investors on technology disruption facing the industry. It was far from Celent’s usual audience of business leaders and technologists, and as a result the questions being asked were quite different, sometimes challenging, however refreshing at the same time. One of the most interesting sections of the day for me was looking at the adoption of usage based insurance (UBI) across the industry and the implications for data protection.

Ever since personal data was first discussed as having the potential for emerging as a new asset class at the World Economic Forum in 2011, capturing and incorporating personal data into the proposition design has been seen as a potential gold mine, fueling the creation of many start-ups and, in our industry, propositions based upon understanding individual risk and investment behaviors. It’s hard to think of any digital proposition today that doesn’t require you to first mark a check-box to say that you’re willing to give up the rights to some of your personal data as part of standard terms and conditions.

When used well, it can enhance the experience enormously. As an avid Netflix ‘box-set’ watcher, I’m sure that I’d quickly get lost (or bored) without it for example. However, I’ve also learnt to be increasingly picky about who I let have access to my data and what links I click. I’m often amazed by how many apps want access to my location without seemingly having a purpose for it. What’s harder for me to know, however, is what happens to my data once I’ve given permission for where I can see it benefits me to do so.

At Celent, we’ve talked for quite a while about how personal data willingly shared could be a major asset in fuelling new proposition design and aiding risk avoidance. It’s not just UBI propositions that can benefit. The potential applies to all nearly all propositions – including commercial and specialty. Data sources such as LinkedIn, Twitter feeds, Glassdoor, and potentially even driving patterns could prove to be an interesting indicator of the quality and morale character of senior management teams for example. However, at the heart of these propositions or services needs to be an acute understanding of the legal implications and ethics around personal data use.

One related piece of upcoming legislation discussed that every insurer with operations in Europe needs to be aware of is the new European Union Data Protection Directive. This directive seeks to unify data protection laws across Europe and is due to be finalized later this year, with a likely implementation date set in 2016. One of its aims is to protect the consumer and, in doing so, strengthen the laws on security, privacy, residency, permitted use and portability. The maximum fine for a firm getting it wrong could be as large as 5% of global turnover. So, for example, if you’re a US or Chinese insurer with operations in an EU country that suffers from a data breach or allows sensitive personal data to leave permitted EU jurisdiction, then your global profits could take a nasty hit.

So, how does this relate to UBI and the use of personal data within the design of propositions and servicing? Well, apart from the obvious security, anonymity and archival implications, insurers will need to watch carefully what data they use and the permissions consumers have signed up for around its use, probably placing them squarely in control of it.

These changes will inevitably tip the balance more firmly in favor of the individual. Open, transparent, incentivized and positive engagement around the use of personal data will need to become the norm. The days of fortuitous use or situations where policyholders are unaware of how much of their data is being used to underwrite risk may be numbered.

Three things to consider when choosing your vendor partner

Colleen Risk

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Jul 6th, 2015

Choosing a vendor can make your head spin. There are so many things to consider. I know I have been tempted to create a dartboard and throw a dart to make the final decision. After hearing multiple presentations, most with similar pitches, the result can be “vendor soup.”

So how do you decide? There are three things that I consider when making a decision that have nothing to do with the system itself. It is important to keep in mind that each insurer is unique, and there is no single answer that is right for all. The goal is to find a partner who is a good match for you.

  1. Delivery Approach

Aligning on how the deliverables will be carried out is critical. Project success depends on having everyone on the same page. Some questions to consider are:

  • What is the project methodology?
  • What is the development methodology?
  • Do you want the vendor on-site during the entire project?
  • How involved do you want the vendor to be with requirements and user testing?
  • How involved do you want to be with construction and unit testing?
  • Will the delivery schedule match your in-house schedule – not too short or too long?
  • How often does the vendor provide fixes?
  • How will the vendor work with your current vendors and/or outsourcers?
  • What is the vendor’s experience providing system deliverables along with the existing business priority deliverables?
  1. Culture

Projects that appear headed for success can take a nose dive because of a mismatch between insurer’s expectations and what is possible based on the vendor’s culture. Culture cannot be changed in the short term so it is essential to ensure a good match.

Questions to ask:

  • What is the experience in the domain?
  • Are you more comfortable with a mid-size or large vendor?
  • Will the project team be dedicated to your project?
  • What is the profile of the staff who will be assigned to the project team? How deep is the bench?
  • What percentage is on-shore vs off-shore?
  • Will the project require 24×7 support to meet deadlines?
  • Who will be the main contact? How many domain experts are available?
  • What is the turn-over rate for developers, project managers, business analysts and business architects and is there a good mix of each of the skill sets?
  • What is the organizational structure?
  • What is the governance structure? How are issues escalated and resolved?
  • Are the vendor’s values and behaviours a match for your company?
  1. Industry Experience

Everyone enjoys a good marketing story. However, to run a successful project, it is a necessary to understand the vendor’s actual experience.

The following questions will provide a good assessment:

  • How long has the vendor been selling systems? How many similar sales has the vendor made?
  • Does the vendor have the capacity to run multipe projects simultaneously? Can the vendor provide successful references?
  • Does the vendor use system integrators?
  • Do the estimated time frames match the actual time frames for the implemented projects?
  • Do the projects expected benefits match the actual benefits?
  • Is there an active user group?
  • What is the vendor’s financial strength?
  • Will the vendor provide thought leadership and best practices from actual experiences?
  • Is there a five year roadmap? Is the roadmap innovative or does it reflect the addition of common features or functions?

There are no guarantees that the decision will be the right one. However, having a set of vendor specific questions and expectations will assist in highlighting the best choice for your company. One of the keys to program success is to choose the vendor understanding that delivery approach, culture, and industry experience are as critical as the features and functions of the system.

Ace buys Chubb: what it means for insurance technology

Donald Light

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Jul 1st, 2015

Today’s blockbuster announcement of Ace buying Chubb will have a lot of industry ramifications—some of which will play out in the IT sphere.

No doubt there has already been an IT assessment element in each insurer’s due diligence efforts. Between now and the effective date of the merger, there will be a lot of planning focused on:

  • Efficiencies and platform rationalization–aka “let’s figure out what is the right number of core systems, which core systems will be the survivors, and how data conversion and integration will work”
  • Cloud, SaaS, data management/stores, and analytics
  • Professional service and SI support capabilities that can scale to the new Chubb
  • Which systems will best support a digital roadmap

Some seemingly redundant systems may survive—at least over a 1 to 3 year period. For that to happen, the business (and/or various geographies’ compliance) requirements of the operating units using these system will be too divergent or too difficult to quickly build into a single surviving system.

All this reinforces the reigning market message to insurance technology firms. If you want to be around in 10 years:

  • Design highly configurable and agile systems that feature ease of integration
  • Have enough scale to meet the needs of bigger and bigger insurer customers—grow, merge, or wither

 

The changing demographics of the U.S. and how they affect insurance

Tom Scales

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Jun 26th, 2015

The U.S. Census Bureau recently released new information on the diversity of the population in the US and it is a fascinating read, at least for an insurance nerd like me.

Census Report

To summarize some key points for insurers:

  • For the first time, Millennials outnumber Baby Boomers. This means that your potential target market is more technology literate and less understanding of the weaknesses of your systems. No phone app? They’ll find the carrier that has it.
  • For the first time, more than 50% of youth (5 years and younger) are minorities. If you don’t have diverse marketing programs, this single statistic says you should, and will be reinforced below.
  • The 65 and older group grew to 46.2 million, a growth of over 1.5 million in one year. This group is also more technologically literate than ever before. Don’t underestimate this group’s expectations.
  • Only ten states have a majority male population, highlighting the need to market directly, and properly, to women.
  • All race and ethnic groups had more births than deaths except non-white, non-Hispanic, where the population declined, again highlighting the need for diversity marketing.
  • Hispanics outnumber Blacks 55.4 million to 45.7 million. While both should remain targets, specialized Hispanic programs make sense.
  • Asians represent 20.3 million, a growth of 3.2% in a single year.

For the most part, this information is of interest to the curious and to the actuaries, but it strongly reinforces the image of the United States as a melting pot. We’re diverse, we’re all both unique and alike, and the needs of our customers are rapidly changing. If you’re not offering new ways to engage, including Exchanges, Roboadvisers, Mobility and more, your company will be left behind.

All of this highlights a particular need – the need for Innovation. How do I connect this raw data to the need for Innovation? It’s simple. Our industry has a well-deserved reputation for moving slowly and for being behind other financial services companies. We are even farther behind companies in other industries. The barriers to enter our space have never been lower. Capital is cheap, technology is improving and the marketplace is shifting.

Which leads to the question: Has your company culture embraced innovation? Do you have a process to encourage experimention and fast failure? Do you have an approach to change that can bypass the traditional, and constraining, project gates to fast track new ideas?

Having discuss this topic with some many companies, it is clear that many, if not most, insurers have not reached this step. The desire is there, but that last leap to make it happen is often lacking. There are stellar examples of exceptions, but even more examples of the status quo.

My colleague, Mike Fitzgerald, has made innovation his primary focus for the last eighteen months and his research and his work is insightful. If you have not spoken to Mike, then I strongly suggest such a call is worthwhile. His insights into innovation in insurance are wonderful and can help you company overcome the barriers and hurdles.

It is an exciting time in our industry. Let’s all be part of the change.

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