It’s been a while since my May 2009 post, whose title was: The consequences of printing money. What has changed since end of May 2009? Let’s try to review the two main ingredients that are influencing our economy:

Government debts are increasing. Based in Switzerland - in the heart of Europe (geographically I mean since Switzerland is neither part of the European Union nor the Euro zone) - I was in the first raw to follow the Greek crisis. The lack of fiscal discipline and the absence of economic growth in Greece have contributed to put pressure on the Euro zone but eventually a new bail-out plan (at least a guarantee to launch one if needed) has been decided with the agreement of the German government. This test has demonstrated that the Euro currency system works well in good times but represents a weakness for Euro zone countries when some of their members are in a difficult financial situation as it is the case now not only for Greece but also for Spain, Portugal and some others.

Stimulus packages have still to prove they work. The US counts on stimulus packages to boost its economy. Many policymakers thought the stimulus package decided following the 2008 financial crisis would help the US economy to get back rapidly to growth, which it temporarily did but it appears now that the overall economic situation in the US is deteriorating again.

If we look at the industrialized world right now we can make the following statement:

1) European countries (at least the majority of them) and the US have serious concerns with relation to their debt level. Some European countries have decided to cut public spending like the UK, Greece and Spain. So far, there is not a clear trend to implement massive tax increase.
2) The US still continues its Quantitative Easing (QE) strategy. The Fed purchases the US government debt contributing to printing more money. Right now it seems that the debt level is not a priority for the US government.

This situation leads me to ask myself important questions for the future:

If there is no or very slow growth for a while how will governments improve their financial situation without increasing taxes? If they increase taxes will it contribute to kill any potential economic growth that is already predicted to be anemic? Is it possible to see a major government failure in the next 5 years?

Government’s bail-outs of financial institutions have not solved the problem but just allowed them to gain some more time. But we should not forget that governments can print money but they cannot print jobs. There might be a no-exit path here unless governments address the chronic deficit and debt problems and together agree to restructure the international monetary system.

I happened to come across this article today about Pennsylvania state possibly using of road side cameras, number plate recognition software and an insurance database to automatically fine vehicles on the road without insurance.

In the UK this type of technology is already in heavy use. Number plate recognition cameras and the Motor Insurance Database or MID fulfil this purpose. The UK’s Motor Insurers Bureau quoting figures of over 500 uninsured vehicles seized by the police a day through the use of the MID. It is worth noting the MID is not used to automatically fine individuals in the UK at present. Police are automatically alerted to uninsured cars by an in-car camera and can phone an insurance company to verify a customers insurance before seizing the vehicle.

In addition, the City of London gains significant revenue from charging for car access to the city. The toll is called The Congestion Charge and uses number plate recognition technology to monitor and enforce the fee. Similar deployments have been made in other European cities to enforce various road laws, with Celent’s very own Karen Monks observing one in action in Florence, Italy.

So in this time of economic uncertainty, where various US states are looking for cost savings and revenue streams - should insurance align itself with the Big Brother approaches to monitoring drivers? The number of uninsured drivers on the road has always been a significant problem and with household budgets under pressure the problem will increase. Dealing with this issue comes at a significant price though.

The cost to the insurance industry of setting up such a system is considerable, especially one that can be reliable enough to automatically fine customers. Insurers not able to update the central database in a timely manner risk having their customers fined or if the UK method is adopted - stopped by the police while their cover status is checked over the phone. Once again timely data integration will have a significant impact on customer satisfaction.

Whilst the insurance industry will resist the costs involved and customer advocacy and privacy groups will lobby against such moves it seems inevitable that automatic checking of vehicles status using number plates will eventually become a reality in most developed countries, if it is not already in place.

The direct channel requires an appropriate front end: To take advantage of the growing adoption of the direct channel, insurers have to emphasize low cost, highly automated flexible processes on a scalable platform. This goal can be best achieved through the implementation of open and flexible front end systems facilitating interactions with potential customers, integrating modern communication tools for call center officers and allowing a high level of reactivity in terms of product, pricing and discount changes.

Communication with aggregators is key: With the growing adoption of online insurance, aggregators gain more importance and insurers need to make sure that communication with aggregators is optimal (for more on the importance of aggregators, read  the following Celent report “The Perils of Success: Rethinking the Maturing Online Insurance Market in Europe, February 2010”). There are two alternatives that can be chosen from. The first one consists in letting online shoppers fully perform the purchasing process on aggregator’s websites. With this alternative, customers and quote data are transferred to insurers via XML files on a periodic basis either daily or weekly following a batch process agreed between the aggregator and the insurance company. The second alternative consists in directing shoppers automatically onto the insurance online platform to perform the last step of the buying process (the effective purchase of the insurance product and its payment). This alternative requires an instantaneous transmission of customer and quote data by aggregators to insurers. I consider the latter alternative to be preferable for online insurers.

Insurers need to improve integration of affinity and bank channels: Banks and affinity channels tend to deal with more complicated insurance products. They offer specific advice to customers through in-person meetings. To leverage the value generated by these types of channels, insurers need to implement relevant portals allowing management and process of sophisticated insurance products.

Use brokers and agents in specific customer segments: Brokers and agents have still an important role to play. However it is important insurers use these channels for specific segments of customers requiring particular attention, products and services. To promote a frictionless communication with brokers and agents, I recommend insurers to implement sophisticated portals with rich functionality to provide point of differentiation.

Responding to multi-channel management: The changes affecting the distribution landscape make it more difficult for insurers to apply an efficient multi-channel management strategy. I believe insurers should prioritize sophisticated portals providing a single view of the customer based on service oriented architecture (SOA) with high level of automation. In addition, as the multi-channel environment evolves, it is important insurers implement all on a scalable infrastructure.

As the insurance distribution landscape is changing fast and drastically, I expect this topic to be part of the European insurer’s top priorities in the coming years.

As we all know, legacy IT systems are the major stumbling block to new initiatives from our business folk. And I was reminded once more this week how the business can ask some pretty crazy stuff from IT. Here in the UK, there is a new business called Whipcar, which is a crowd-sourced rental car model.

Reduced to it’s basics, you rent a car from a street near you through this intermediary website. The model is about leveraging spare capacity in the existing car market by renting the car out when it’s not needed. This works well in large metropolitan cities such as London when a car is seldom used on a daily basis. With Whipcar, you can “sweat your asset” for the periods when you don’t need the car. One of the principles is that you are likely to be more careful with your neighbours car than with some faceless global car rental company and so the rentee has little to worry about. But insurance is still a requirement.

So how does insurance work? As the car owner, you will already have a car insurance policy in place. Whipcar has negotiated an agreement with a London Market insurer to provide an overlay to that insurance policy whilst the car is being rented out. This is a unique product (variable time for the policy, insurered value variable, billing requirements variable) that would test any current policy admin application.

So my challenge to you is this. You may be well down the path of legacy simplification or modernization, or you may be still considering how best to approach it. I would propose that in ascertaining if your target (or new) application stack is fit for purpose, the small case study of Whip-car is an interesting little use case scenario. Let us know how it goes.

It was in 1964 that Walt Disney first told us in song that “it’s a small world, after all.” As we apply the concept to insurance in 2010, it is clear that Walt was well ahead of his time. The opportunities and challenges for today’s insurers around the globe seem to transcend time zone and cultural differences.

I recently spent a week in Tokyo, in part for the Celent Insurance Roundtable. (No, I did not go to Tokyo Disney.) To be successful, a trip like this has to include some very fresh sushi, and a flurry of fresh perspectives. Thankfully, I found both.

In our roundtable discussion and in my conversations with Japanese clients I was struck by how similar Japanese insurer concerns are compared to those of North American insurers. Common themes included finding the right levers to drive company-level growth despite flat industry-level demand, concerns over outdated IT approaches, and the challenges associated with optimizing short- and long-term strategies simultaneously.

Comparing Tokyo consumers to their counterparts in North American cities of similar size is also interesting. Looking around a Tokyo Starbucks, I saw that same curious mix of eccentric 20-somethings and 40-something professionals that I see in New York. Most were on laptops or smart phones, enjoying high speed connectivity to stay in touch with friends or to crank out emails from their virtual offices. The Japanese may still have more affection for their keitai (cell phones) than do North Americans, but the gap is clearly closing.

Another symptom of our rapidly shrinking planet (where is Al Gore when you need him?) is that global competition is no longer limited to the manufacturing sector. Looking at the names on Tokyo buildings tells the story. IT services firms are aggressively building out their presence in new geos. Insurers are buying companies halfway around the world. Software vendors that got their start in one country are now reaching critical mass in others. While I typically preach focus for any firm that haven’t mastered its “home” domain, I think that expanding the vision to new countries is essential for successful firms that have high growth ambitions. Good ideas, powerful tools, and game-changing strategies are welcome visitors to just about any country.

As a futurist and as an entrepreneur, Walt Disney dreamed big dreams. We may not be commuting to work by personal jet pack (yet), but otherwise Walt had it about right. It’s a small world, indeed.

What is the link between improving service technology and improving sales incentives?  This was the topic of a very insightful conversation that I had recently with an insurance CIO.  It highlighted how interrelated the processes are in the insurance value chain.  Investments can be made in one area, but if other, correlated areas do not receive attention, the benefits from the initial investment may be less than expected.

The two areas in question are policy administration and distribution management.  This company has determined that the key to managing their profitability properly is the ability to change their mix of business in order to respond to market conditions.  This strategic imperative led to a recent investment in best-in-class rating technology to increase the responsiveness of product updates and the speed of new product introductions.  The company also upgraded their BI and analytic capabilities, allowing their actuaries to develop new discounting and pricing methods.

The CIO shared that they were pleased with the cycle time reductions and productivity increases that resulted.  However, he reports that they only got full benefits they sought after they updated their compensation system.  They needed to be able to change incentives in line with product modifications in order to effectively modify their portfolio and manage profitability. In other words, they had to be able to give their distribution force a reason to sell the new products, not just deliver product changes.

This was a twist on the phrase “if you build it they will come” and a reminder to be sure and consider the interplay between separate processes when evaluating investments.  In constructing a product administration roadmap, an assessment of incentive management should be made.  Incentive system upgrades may be necessary in order to fully benefit from administration enhancements.

The story that Ben & Jerry’s are dropping email marketing in favour of social media hit something of a sweet spot with me. Not only do I not like trawling the ever increasing mass of emails each day but I also have a keen interest in how the Internet is evolving and a highly developed sweet tooth.

The story is quite interesting as it tracks some of the trends Celent observed in our Digital Marketing in Insurance report. For many insurers email marketing and communication is the primary digital method of reaching consumers, however most insurers saw social networks and social media as becoming an increasingly important channel to market. Perhaps Ben & Jerry’s move is both a little early and a sign of things to come.

This also comes at a time when rumours abound regarding yet another social network set to come from Google, possibly to be called Google Me. Indeed there are stories that disenfranchised companies working with Facebook may already be signed up to work with Google Me. A slide show published by a user experience researcher at Google offers some insights into the key issues with current social networks, how the new social network will look and the features it will offer businesses.

For insurers looking at social networks as a medium to customers or looking at how they can expand their use of social networks Celent’s report on the subject may well be of interest.

Addendum: Also making waves in social media is the old spice campaign on YouTube. Effective use of this style of campaign is discussed in our report but it is particularly well executed here.

Several forces are underway that will result in significant changes in the way that insurance companies use actuarial resources.  An increase in qualified actuarial resources and a need to move company actuaries into more strategic activities will offer opportunities that have previously been unavailable. The exact timing and pace of this change is uncertain, but the economics are so compelling that I think it is not a question of if, but when, a new model will prevail. 

First, over 10,000 people in India are currently sitting for the actuarial exams.  As the result of the growth in the knowledge worker outsourcing industry and the privatization of the Indian insurance industry, actuarial studies are now much more attractive to qualified students.  Scarcity (read price), will be reduced as a result of this increasing supply of expertise. 

Second, companies increasingly need to apply their internal actuarial talent to more strategic activities such as sophisticated price modeling and risk management. Predictive modeling and multi tier pricing require constant attention and monitoring.  Existing regulation in Europe regarding Solvency II consumes increasing amounts of resource. Both of these activities are best performed in-house. 

Leading companies will recognize that the traditional insurance product pricing process can be separated into separate activities, some of which can be outsourced.  For example, the development of loss triangles and the updating of price indications are examples of discrete, measurable work that can be effectively performed remotely.  Once these tasks are complete, internal actuaries can then review them and make final, proprietary pricing decisions.  Moving the tactical work offshore lowers costs and frees company resources to focus on higher value activities. 

There are barriers to this transition.  Tradition and inertia will slow adoption.  It may take seven to ten years, but the cost advantages and a need to redirect company talent will eventually result in a shift the norm to a multi-source, onshore / offshore actuarial model.

The Guardian newspaper in the UK reported that the UK Government is looking at closing up to 75% of it’s websites. The challenges facing the UK Government in terms of cutting costs and ensuring that they are getting value from assets are no different to the issues facing insurers in these uncertain economic times. Whilst it may not be typical to look at the approaches taken in the public sector to cost cutting there are some interesting features of the approach taken by the Government.

Of particular interest was a KPI quote in the report regarding cost per visit. The article cites one website that costs £11.78 a visit versus on that costs £2.75 a visit. Such an analysis and metric would be most useful to insurers - particularly those that are operating multiple brands on different sets of technology. Of course getting to the true cost of running a web site can be difficult, but an educated estimate along with existing web site analytics data would allow a similar analysis - one that could produce the same savings in a direct insurer or any insurer with multiple Internet applications.

The other point made in the report is that some government units were competing with each other in terms of marketing and search engine optimisation spend. Having two units in the same organisation bidding for the same search term in Google advertising for instance is simply not cost effective. As above, in any insurer operating multiple web sites or multiple brands this kind of activity could be prevalent but not immediately obvious, perhaps this is something insurers could review and see where savings could be made.

I doubt insurers should make the kind of culling of 75% of their websites that the UK Government is discussing but the principle is sound and relevant to Insurance. Insurers should ask themselves how many websites they are running, are they all equal in cost and could any of the services be merged onto cheaper platforms.

In these cost constrained times it’s key that insurers not only examine core systems for possible cost savings but also the eco-system of ancillary applications and servers running the enterprise.

The much feared UK emergency budget speech was made yesterday, and amongst a raft of changes impacting every corner of the British society was an increase in the tax on insurance purchases. The rate is to increase to 6%. A new peculiarity to this system is that tax on insurance sales will rise to 17.5% where the insurance is sold by seller of another product e.g. mechanical breakdown insurance (eg on domestic electrical appliances and secondhand cars), travel insurance, and insurance sold with TV and car hire.

The challenge for the IT department is to respond in a timely fashion. Older legacy systems will have charges codified in several places and this reflecting this increase is not a simple matter. And once the change is made in the several systems and many places, there is the round of testing that is required. This whole cycle of change can be up to 9 months depending on current workload and dedicated IT test slots.

In a conversation with a CIO on a different set of regulations, Solvency II, she raised the prospect of potentially having to replace incumbent legacy systems if they could not capture the additional data elements required in a reasonable cost. Adding new data elements to a core system, and having this reflecting in the appropriate screens is no trivial matter. And once again, requires serious investment of IT staff for testing for production.

These real life use cases highlight the need to IT systems to be able to keep up with the change of the business, without a crippling cost. In choosing new systems, IT folk must focus as much on functionality as on the cost of ownership. As this week has shown once more, fleet of foot should be a key mantra in new system investment.