The fourth annual Celent Model Insurer Awards will be held tomorrow, January 28^th, in New York City.  We would like to thank all of the participants in this year’s process.  It was extremely competitive, with a 70% increase in nominations over last year and only a 40% increase in awards.  We invite carriers and vendors to nominate projects for the 2011 cycle.  The call for nominations will be issued at the end of the 3^rd quarter.

For 2010, we are pleased to recognize 28 companies for their outstanding efforts in realizing significant business value by applying technology to the insurance process.  Many of the submissions this year dealt with growth initiatives.  For example, the rationalization of automation across distribution channels was a common theme.  We also observed a greater use of industry standards (ACORD, DTCC) to tie together partners in new, effective ways.

Celent is also proud to recognize Missouri Employers Mutual as the Model Insurer of the Year.  Not only was their claims system replacement project brought in on time and on budget, but the initiative introduced multiple new capabilities to their IT and business organizations.

Details on the MEM implementation and on all of the Model Insurer designees are available on the Celent website at http://www.celent.com/124_2741.htm.  

Since the publication of my Solvency II report in April 2008, there have been a lot of discussions around the new set of prudential regulation currently in implementation in Europe. For instance there is a wave of criticism coming from France notably from major players on the market. According to Groupama, a few internationally diversified banks have nearly collapsed in the recent past, demonstrating that the Basel II regulation could not prevent even well-diversified institutions from experiencing solvency problems. Therefore, what happened to the banking sector with Basel II during the financial crisis should prompt a reconsideration of the whole set of regulation and approach of Solvency II.

More recently a French association gathering mutual insurers called the “Réunion des organismes d’assurance mutuelle (Roam)” representing 7% of the French market (around 10 million insured) has launched a website called “stopsolvabilite2.com” demonstrating that not only major French insurance players are worried about Solvency II and dubitative about the real benefits the new set of regulation can bring. Among others, what French insurers and mutual companies fear is that Solvency II could have potential negative consequences on future growth and consumers. They believe that consumers would not be more protected than they are today with the current solvency regulation, and in addition they think that Solvency II might trigger tariff increases and decrease the level of competition due to concentration or failure of companies.

These actions led by French insurance companies could trigger new rounds of discussions and delay the effective implementation of the Solvency II directive. There is a country in the middle of the European Community, whose some insurance companies have decided to resist. This could be a new story of Asterix the Gaul.

The British property insurance market is a sizable one, and is the second largest sector in general insurance, after motor, with a reported premium of £12.1 billion in 2008. In the last five years, claims and expenses for the sector have risen by 22%, while premium (commercial, household, and domestic) has only grown by 15%. Extrapolate these growth trends, and it’s clear that the sector will face serious profitability challenges in the coming years.

In addition, these are not benign times for property insurers— increased flooding, aggregators, and fraud all pose challenges. Insurers remain constrained by a financially challenged government with overwhelming budget pressures with regard to flood protection. If the motor market is anything to go by, it will be very difficult to stop the erosion of premium by the aggregators. Continued investment in fraud detection processes and technology will help keep the fraud contained.

It will become increasingly important for insurers to have control over indemnity spending to reverse this trend. Celent believes that there are solid technology options to support the insurer in doing just this. The application of estimation tools can improve fairness, accuracy, speed, and consistency of claims.

Using technology, an insurer can anchor the claim at the point of FNOL and improve fairness, accuracy, speed, and consistency of claims. The claim handler can make better decisions about fulfillment choices according to insurer strategies. Case studies show reductions in indemnity spending of 10%, and a reduction in adjuster review time of 50%. These are precisely the types of improvements insurers need to seek in the coming years to protect their property book.

Estimation tools can help speed the process by providing quality data earlier in the process, and through automated assignments to field adjusters. The improved accuracy of the work required improves transparency for the policyholder and reduced overpayments by the insurer. These tools create a clear audit trail of how the claim has been handled, which can support an insurer’s efforts in TCF regulation.

As a relative youngster and an American college football purist, I remember cringing when my employer, John Hancock, inserted its name in the official title of the bowl game that it sponsored. Overnight, the Sun Bowl became the John Hancock Sun Bowl, and the world of sports marketing was never the same.

Of course now the practice is widespread. In the marketing game that is measured in eyeballs, it makes sense to have your logo plastered just about anywhere viewers will look, in return for your massive sponsorship fees. And if a sports writer from Boise plays by the rules and writes something about the Tostitos Fiesta Bowl, that’s exposure for the Tostitos brand that money can (and just did) buy.

A skating and gymnastics show over the weekend, “presented by Progressive,” with Prudential as another prominent sponsor, represents a new twist for insurers. (In case you’re wondering, I’m not a big fan of either sport, not even in an Olympic year. My wife was watching, and I just happened to be in the room. No, really!)

The upside for Progressive looks like this. They got their name all over the ice, the walls, and the TV graphics. Even on the banner behind the teeny-bopper band that lip-synced the soundtrack to the event. They ran what seemed like 100 spots over the course of the show. They doubtless won the gratitude of fans of these relatively obscure sports, just in time for the Olympics, when interest is sure to peak. (I’m guessing Olympic ad buys were part of the deal.) If their intent with this effort was to build brand awareness among female insurance buyers, particularly younger ones, they probably did that fairly well.

The downside? Unless 13-year-old girls are now driving or influencing insurance purchases (“Why can’t we have a higher deductible like Alice’s family?! Please, mom, puhhhhleeeease?”), there were a lot of wasted eyeballs in the buy. And more importantly, from my perspective, there was a certain smarminess to the event. For example, most of the other sponsors—which included Musselman’s, Silk, MetaboLife, and Kentucky Fried Chicken—created heinous live product placement segments, wedged between athletic exhibitions. It turns out these professional and Olympic athletes just love popping supplements while sitting around munching on fried chicken and applesauce, and washing it all down with soy milk. Who knew?

These awkward endorsements, delivered by skaters and gymnasts that most viewers probably had trouble recognizing, may have hurt the brands more than they helped.

It is hard to imagine a way to do product placement with insurance that isn’t too jarring or unbelievable. Go ahead, try it. “When Uncle Chester died, I was sad. But I was the beneficiary of his insurance policy from XYZ Carrier, so now I can redo my kitchen!” “As a professional athlete, I’m worried that if I cause an accident I will get sued for all I’m worth. So my ABC Umbrella Policy gives me peace of mind…”

The good news here is that the insurer sponsors of this event didn’t try to get cute with their sponsorships. They just captured eyeballs, in a fairly innovative way. Did they build awareness of their brands and their current offerings? Absolutely. And they successfully leveraged the fact that the lines between sports, entertainment, and marketing are blurring.

For online insurance shoppers,  price is the most important parameter and in mature markets aggregators exert strong pressure on insurers and online players need to improve product pricing. To do so, insurers should invest in pricing optimization and sophisticated analytic tools. Predictive analytics and price optimization both together support insurers’ capability to adapt to customer behavior changes, new pricing signals on the market and ranking on aggregators websites.

Price optimization helps insurers maximize data set to perform testing and refine models and pricing strategies. If there is a business sector where insurance companies can take advantage of price optimization, it is certainly in online insurance. Indeed, online sales platforms represent a great opportunity to gather instant information from the market. Implementing real time price optimization consists notably in performing real life field tests that allow insurers to capture trends in customers’ behavior directly from the market. Price optimization also contributes to shorten the time needed to implement new tariffs by using scenarios and pricing strategy models. Overall, real time pricing optimization engine allows for daily pricing scheme changes while helping insurers better capture market data and modify price strategies.

With the strengths of business analytics tools offered on the market, insurers are able to refine their analysis and the evaluation of certain risk’s elements. But the biggest value these tools bring to the industry is the democratization of risk evaluation principles (actuaries have no longer the monopoly of data and risk evaluation elements), which in turn contributes to generate more discussions about identification of new key parameters impacting the risk pricing. We are now in an era where specific teams are built within insurance companies, whose objective is to ask questions that have never been asked and then build models that include dynamic parameters (and not only static parameters) to improve pricing algorithms. According to me, time has come now for insurers to shift from a reactive analytics approach to a proactive analytics approach.

It is at this time of the year that Celent conducts its famous surveys providing useful insights about insurers preoccupations, priorities and plans for the coming year. This year we have decided to apply the same usual method for the United States market. In other words, our readers will be able to access our famous US insurance CIO survey report in late January. On the European front, we have decided to get a more focused look at two countries. Indeed, Celent is currently conducting interviews with CIOs in United Kingdom and in France and we will publish a specific report for each country.

I am personally dealing with France and so far, the main concerns of French CIOs are the following:

• Distribution: French CIOs understand that the distribution landscape is changing fast. They have all listed distribution as one of their priorities for 2010 and most of them intend to launch IT initiatives to take advantage of the growing importance of online insurance notably.
• Regulation: the Solvency II regulation framework affects directly insurers IT investment priorities. As the results of the quantitative impact study 4 launched by the CEIOPS in 2008 tend to demonstrate, there is a growing interest by French insurers in understanding what are the impacts of the new set of prudential regulation not only on their solvency ratios but also on their ability to comply with the other elements of the regulation. Some insurers have already invested in new IT systems for instance capital modeling tools but some others still need to understand what they have to start with and what they need to focus on to be ready in 2012.
• Improvement of core processes and cost reduction. Even though most of the CIOs interviewed so far clearly mentioned they had not really implemented drastic measures (layoff program, IT investments cancellation, etc.) following the financial crisis and the economic downturn, improvement of core processes leading to cost reduction via a smarter use of IT resources represents a priority for 2010.

Celent pays full attention to insurance and IT trends and having the chance to discuss directly with key players on specific markets makes our job interesting. I hope our clients and readers feel our passion for our research and the insurance industry when they read our reports. I wish to all of you a happy Christmas and a successful new year.

The Mobile App Prediction:

Since I’m frequently asked about mobile device use in the insurance industry, I’d like to restate a prediction I’ve been making for a few years:

Custom, downloadable applications for smart phones will become less important or unnecessary.

Having told many people this, it’s been a bit of a tough time for my analyst ego. The rise of the Apple iPhone and its widely touted app store has brought an explosion of downloadable mobile applications. With several other devices and mobile platforms attempting to mimic Apple’s success, it looks like the importance of custom, downloadable applications for mobile phones will only be increasing.

The Desktop App Evolution:

Compare mobile applications to desktop computers. Before high-speed internet access was widely available in North America, most applications (both business and consumer) were installed on the computer, either via download or via disk. IT organizations at insurers spent a great deal of their time distributing and installing enterprise software on each user’s machine.

As internet connections became more ubiquitous and–just as importantly–web browsers became more flexible and powerful, these installed applications were replaced by web-based interfaces.

Installed desktop applications included just about all business activities but also most consumer tasks: personal banking, weather updates, stock trading, and personal e-mail, just to name a few examples. These are all activities that are primarily done through a web browser today.

Some users complained that the shift from desktop application to web-based interface resulted in a loss of usability or functionality. But the appeal of a platform so easily distributable, upgradable, and maintainable was worth the tradeoff, and as Web 2.0 technologies have matured, web-based applications have surpassed many desktop equivalents in terms of ease of use.

A Similar Mobile Path:

It was my belief that mobile applications were following a similar path to desktop applications. Just a few years ago, businesses that required mobile use were not only designing custom applications for mobile devices, they were designing entire, single-purpose mobile devices (whether gathering paramed surveys or managing a warehouse floor).

These devices became more generalized and business could focus on the applications rather than the entire physical unit. And as mobile phones became smart phones, the devices themselves became cheaper, multi-purpose platforms.

The next logical step would be to generalize the distribution mechanism itself.  Instead of requiring a downloaded application onto the phone, I expected this to be replaced by the mobile web.  Mobile web applications will be easier to upgrade and maintain and can be the based on the same web applications used on a desktop computer (except, perhaps, with a scaled-back interface). When I first saw an iPhone browsing fully rendered web pages I thought my prediction had come true.

Is my prediction wrong?

Instead, the iPhone App Store explosion occurred and we entered the golden age of downloadable mobile applications.  The very device that I thought was going to prove that downloadable applications were unnecessary proved the opposite. But I don’t think this means I’m wrong.  I just think we need more time.

Soon, mobile browsing will become more flexible and powerful, just like it did on desktop computers. Technologies like “Flash Lite” will bring interactive and usable interfaces to the phone browser. The trade-off between features and ease-of-distribution will shrink. And instead of worrying about maintaining new channels, insurers will be able to focus on their existing platforms with web-based interfaces. Some applications will always remain downloaded on the device, just like some applications remain installed on desktop computers. But–especially when companies are distributing applications to all of their employees or customers–the clear answer is a robust, functional, mobile web.

I think that the few insurers who have released mobile applications have done a great job demonstrating an aggressive and modern approach to technology. But, eventually, every insurer who has invested in a web-based channel will be taking full advantage of every mobile device.

Today, the U.S. House of Representatives passed The Wall Street Reform and Consumer Protection Act (H.R. 4173) that creates a Federal Insurance Office.  Title VI of the Act, outlines three specific objectives of the new group: 1. provide a source of industry expertise in the federal government, 2. represent the U.S.  in international insurance issues, and 3. promote stability in the financial system through greater knowledge at the federal level. The act also deals with the regulation of systemic risk.  It establishes an emergency fund, funded by major financial companies (over $50 billion in assets), which would be tapped if needed.

The commercial craziness that is the run up to Christmas has kicked off here in Britain with the checkout tills are humming from Oxford street to Covent Garden in London. But if you listen carefully, you should also be able to hear the whirrings of transactions in the darkness of cyberspace. The English have embraced on-line shopping, and there are estimates that we will buy 15% of our Christmas goodies on-line this year.

I’m a great example of someone who uses the Internet for work and play. As if being wedded to the laptop for more hours of the day than necessary isn’t enough, I choose to shop on-line as well. And for the most part, I love it. As an industrious cyber-shopper and pedant, I pride myself in spotting website shortcomings.

What surprises me is just how many sites with shortcomings I’ve stumbled across in this last week. Have Santa’s little helpers gone on strike ahead of the rush to Christmas or is this poor planning on part of IT and operations? Here’s a few examples:-

• A hotel booking website which couldn’t successfully take a booking via  credit card – no surprise, I choose another hotel.
• Two retail sites that send tracker notification emails without the tracker ids – annoyance factor that grates at their brand.
• A mobile phone site requiring me to re-key all details when I move to another section – more brand erosion.
• A retail site who’s “shopping basket” had a memory limit of 5 minutes.

Some of these shortcomings contribute to the annoyance factor. It’s like going into a brick-and-mortar store, and they don’t have the item on the shelf. You can’t sell what you don’t have in store. So you take your pounds elsewhere, and the company never knows they even lost your business.

Business should be smarter about their on-line stores. You don’t leave your high-street store unattended, or without stock? You should pay similar attention to detail in your on-line offering.  The direct channel will become an increasingly important in the future, for retailers, and insurers alike. Relative to retail, insurers have been a little slow at embracing on-line commerce, but should remember that they get measured along the same factors as an on-line retail store. After all, that’s what the consumer knows.

The English are happy to buy insurance on-line, particularly motor. We have some of the better websites in Europe for doing exactly that. And there is plenty of activity. Through an aggregator site, one insurer gets 250,000 quotes between 8pm and 9pm on Monday’s – apparently, this is the time consumers look to shop for insurance. You couldn’t make it up!

The key take-away here is the importance of having a solid customer portal that behaves in the manner a customer expects. This requires continued investment to reflect changing customer behaviour, and to leverage new technologies. In conversations, we see this as one of the key areas for IT investment in 2010. (We will be writing more on the topic of B2C in insurance in January). Owning the distribution space remains an important objective for insurers looking for growth in the coming year.

The holiday TV classic, Rudolph the Red Nosed Reindeer, was on last night. I watched the whole show with some delight, as it brought me back to a more innocent time. The 60s sensibility of the production is funny now, and a bit jarring. When Rudolph’s dad told Rudolph’s mom that she can’t go looking for Rudolph “because this is man’s work!” I laughed out loud. I don’t think that line would make it past the editors today.

But there are more enduring themes in this production that are as true today as the day they were written. One of my favorites is the Island of Misfit Toys. For those of you who need a reminder, the Island is a gathering spot for mismatched toys that no one wants. For example, there is a train with square wheels. There is a dolly that cries. There is a bird that swims in a fishbowl. And there is a Jack-in-the-Box named… Charlie.

Over my career as a consultant, in conversations I’ve often imitated Charlie’s plaintive line, in his cracking voice: “Nobody wants a Charlie-in-the-Box!” It’s a catch-all phrase that reminds me that some things are just…not…quite…right.

In our day to day work, we all recognize these things readily. Systems that don’t do what we want them to. Processes that are head scratchers. People that don’t seem to fit in the roles that they’ve been given. But once you learn to live with a Charlie-in-the-Box, you can almost forget the obvious. You begin to have some misplaced affection for those hapless systems, processes, and people. They’re not very good, but they’re yours. And that’s why they persist.

In Rudolph’s day, it was important to have a happy ending. So the show ends with Santa going to the Island, picking up the Misfit Toys, and finding children who are happy to give those sad toys homes. Awwwwww! But in the real world, our job is to recognize when our affection for systems, processes, and people is misplaced. Our options include repairing or replacing our misfit toys, and that is the only happy ending we should entertain.