Archives for August 2009

Some considerations around innovation

Innovation! What does it really mean to be innovative for an insurer? Does innovation deal mainly with insurance products or does it concern also processes? Are there external elements or factors that contribute to facilitate innovation? According to me, innovation relates to both products and processes: Product innovation: In European life insurance for instance, as the market for asset protection and retirement planning grows, insurers are increasingly adopting an aggressive strategy of product innovation. They plan to maintain control over customer acquisition and distribution by managing the distribution lifecycle. While variable annuities may not be the shining star in the next few years, insurers remain under pressure from consumers and professional intermediaries to continue to innovate. Process innovation: One of the business frustrations has been that IT constrains business agility. Adding new products, new channels, making process changes or responding to new regulation must happen on a critical path determined by the technology assets and infrastructure. In this context process innovation can be an important source of competitive advantage for an insurer. In both cases, product or process innovation, IT is not necessarily a “must have”. IT is only an enabler that can help companies give birth to an innovation. But are there other factors to be considered that help innovations succeed or contribute to change the insurance competitive landscape? Past examples in other industries tend to prove that at least two parameters have a direct impact on innovations’ success or failure: Timing: to be visionary is very important but to implement a new idea or a concept too early can lead to bad results. Successful innovations are the ones that have an impact on a large mass of people and not only a handful of passionate thinkers. Insurers should carefully consider timing and analyse carefully the readiness of the market when thinking to initiate innovations. Dynamic view: some innovations are self-imposed through changes of market conditions. For instance as Web 2.0 technologies push people behaviour to change, insurance players have to understand that even in their own industry the Schumpeter “creative destruction” theory can apply. Blogs, chats, social networking are currently changing the way insurers interact with their customers and diminishing the importance of face-to-face meetings with agents especially in the general insurance sector. Celent’s mission is to keep an eye on how the insurance industry apprehends innovations, analyses and evaluates them as well as how insurers decide to implement them. Our goal is to help insurers identify initiatives that will help them gain competitive advantages in the long run and to do so it is important they understand what the term “innovation” really means and what factors can play a crucial role in making an innovation succeed or fail.

Why social networking can be bad for your house premiums

As reported in the press today, Legal & General here is the UK is considering adding the usage of social network sites in deciding on premiums. On the back of their own commissioned research, the company believes that burglars are increasingly using sites such as Facebook to identify targets. I can understand the logic of this approach, but it seems a little heavy handed. The idea is to penalise homeowners who has anyone in the family using a social network site. Given the prevalence of these sites, a very high number of people will be caught in this net (given the insurer plans include any family member). I know of people who are very careful about what they put up on these sites, never declaring holidays until they are complete, and “friending” their children so as to be aware of what information the offspring might put into cyberspace. Are these people to be cast into the group of “higher” risk? Being aware of the evolution of criminal behaviour is important and educating your policy holders seems a more positive way to approach this problem.

So what are you doing in this recession?

So what are you doing in this recession?

In August, much to the surprise of their own governments, economic data suggested that France, Germany and Japan had exited the recession. Similar good news has yet to be heard in the other major economies, but Celent’s recent research about perceptions and attitudes of insurers in this recession does show that there is increased optimism in the world of insurance.

Over the course of the first half of the year, insurers have made more progress in implementing tactical responses to the current recession. Around 80% have already or are in process of freezing discretionary spend and travel. Two-thirds have are in the process or have already cut staff salaries. But these tactical responses dont inspire.

In our new upcoming report on the impact of the recession, we added a new question trying to get at the strategic response of insurers. In quarter one, the outlier was a change in strategy, with only a quarter of respondents having done this — a clear reflection of the severity of this measure both on long-term capacity and the difficulty to execute. By mid-year, almost half had undertaken this difficult task. The other area with the most noticeable change was that of budgets. By the end of the second quarter, almost two-thirds of insurers had undertaken or were in the process of revising budgets.

Streamlining of processes is the top area of focus and is already underway or completed in 77% of respondents. The second area with a high level of activity is divestment of assets. A return to the focus on core business is a response to be expected in difficult times, and 70% of respondents had undertaken this option.

Outsourcing is also on the agenda. Responses indicate a higher frequency of business process outsourcing to IT process outsourcing. This is probably attributed to the already high level of IT process outsourcing in the industry. Almost half of respondents have already outsourced business processes and another fifth are taking this under consideration.

There are a large number of insurers considering or undertaking the launch of a new product or a new channel. Over 50% of respondents are in discussions or already doing so. Launching into a new geography and acquiring new company assets are strategies that appear fairly low on the list of priorities.

So the question to your business is what are you doing in this recession? Many insurers clearly see some opportunities in these difficult times and such innovative and progressive strategies are clearly going to put them ahead of the pack when time improves.

Better Than a Green Shoot

SNL Financial released their initial compilation of Q2 statutory results for the U.S. P&C industry yesterday. Loss ratio numbers were in the low 70’s, demonstrating good pricing and underwriting decisions. The combined ratio for the quarter was right at 100% — surprising given that revenues have been decreasing and this lower revenue base makes the loss and expense ratios worse. Investment gains added to net income results at many companies as the rise in the markets benefitted badly battered portfolios.

The numbers also highlight the revenue challenges I wrote about last week. Direct written premium was down in Q2 by 2.76%, after falling in Q1 by 2.43%. Lower insurance values are coming through in the numbers and I expect Q3 and 4 to be even worse. Here’s raising a glass to underwriting discipline and betting on the markets to stay buoyant. (Don’t anyone mention hurricanes, either…)

What European Insurers Think

Life insurance companies have different perspectives in terms of policy administration systems (PAS). Expectations are different geographically and IT vendors must adapt to insurers needs if they want to be successful in the long run not only in a dedicated market but on a larger European scale. “Getting The Value from Life Policy Administration Systems: The European Insurer Perspective” is the title of a report Celent is about to publish that provides key information not only for IT vendors but also for insurers desiring to understand what their peers experience on the market.

49 insurers from 20 different European countries have contributed to provide their evaluation of various life policy administration systems offered on the market. Celent has classified the respondents in three geographical categories (UK, Continental Europe and Eastern Europe) and tried to identify what were the main differences in terms of value perceived by companies in each region.

The above chart shows clearly some important differences in terms of new technology adoption between regions. For instance, it seems that UK insurers are in advance in terms of PAS replacement. Indeed, around 80% of them have been using their PAS for more than 3 years. Celent thinks that this figure demonstrates clearly that UK companies are a step ahead in terms of core applications replacement and modernization. In addition, it might also be a good proof that UK insurance companies have a higher acceptance of value of buy over the build approach. This figure also demonstrates that Eastern European insurers are currently adopting new technology. In opposite to insurers based in the UK, the majority of Eastern European companies having contributed to our survey have been using their PAS for less than 12 months. In other words, it seems that Eastern European based insurance companies are currently in the process of upgrading their core applications to new technologies. Finally, there are laggards in Continental Europe. If we trust the sample of our participating companies based in Continental Europe, it seems that there is a clear difference between insurers having already replaced their PAS (almost two thirds of the respondents from this region) and the ones that have just completed this exercise during the last 12 months period.

For those of you who are interested in what life insurers think about policy administration systems and IT vendors on the European market, I invite you to read my report.

Agents, the dominant distribution channel in China again

China Insurance Regulatory Commission (CIRC) issued an insurance distribution report for the first half of 2009 on August 7. One interesting result is that the insurance sold through banks and post offices decreased 3% compared to the same period in 2008, while insurance sold through the sales agent channel increased 39%. This is the first time that business from banks and post offices channel decreased in the last several years, and agents is the dominant distribution channel in China again.

Bancassurance increased dramatically in the first half of 2008 in China. Most of the business was paid-up investment type life insurance. Life insurance companies paid very high commissions to banks and post offices, which increased business but reduced the profit of bancassurance. This phenomenon is not healthy for the long-term development of China’s insurance industry, so CIRC issued a policy to adjust life insurance business structure in August 2008. The effect has been gradually becoming evident since Q4 2008:

  • Agents’ market share increased, and banks’ and post offices’ share decreased.
  • Protection products’ share increased, and investment products’ share decreased.
  • Periodic payment business increased; paid-up business decreased.

In future, China insurance premium growth rate may slow down, but the profitability, risk control, and solvency of insurance companies will increase. Insurance companies might spend more on agent training and support to increase agent productivity and retention.

A Bigger Piece of a Smaller Pie

What is the next best strategy for insurers in response to the economic crises? As shown in an upcoming Celent report on insurer response to the market crisis, companies are now taking or have completed the short-term cost savings/efficiencies steps such as staff redundancies, renegotiation with suppliers, asset rationalization, etc. But, once these actions have been taken, attention must move to top line growth.

Prior to last October, there were a number of initiatives around innovation and speed to market in order to expand market share. After so many years of continued growth, there was a belief that “if we build it, they will come”. Now, it is realized that the contraction of the economy is likely to be “semi-permanent” – that we may be adjusting to a new anchor point; that growth may be stalled in the 1 to 2% range for some years to come. Consumer confidence and spending is expected to remain low and will result in fewer personal and business assets to insure. This means that the market pie has shrunk and that it is not likely to grow significantly any time soon.

How does a company get a bigger piece of this smaller pie? What strategic response fits best in this environment? Across industries, customer service/experience initiatives will be stressed. Look for an increased focus on increasing customer penetration and retention.

For insurance, there also will be investment in improving the experience of managing the distribution of products and services. More satisfied and productive producers bring you more business. Insurance companies will focus on the issues that are important to their agents (see Celent reports Independent Producer Survey: Technology, Services, and Other Drivers of Carrier Choice (Property/Casualty Edition) and Independent Producer Survey: Technology, Services and Other Drivers of Producer Choice (Life/Annuity/LTC/Health Edition)

Insurers are also upgrading their process and automation dealing with the administration of agents and producers. Some examples include:

· increasing the in flexibility and speed in establishing and administrating sales incentive programs

· managing very granular commission schemes — down to the individual coverage level to drive sales of specific product features

· reducing the costs of recruiting, retaining and managing producers and producer licenses.

Look for more activity in the producer management area in the months to come as insurers seek to “get their fill” of the market pie.

New Resource: Boardroom Series

We are pleased to announce the introduction of a new resource for our clients and selected invitees that we are calling the Boardroom Series. These monthly briefs explore the current challenges faced by insurance companies, helping C-level executives prepare for the next “hard question” their Board of Directors is likely to ask. This will be a monthly brief that explores the current challenges faced by insurance companies, helping C-level executives prepare for the next “hard question” their Board of Directors is likely to ask. Each brief focuses on a single question, provides Celent’s view of the issues behind the question, and defines specific action steps that will position a carrier to deliver an effective response. The first installment, “U.S Federal Regulation of Insurance–Are We Ready?” was released this week. Upcoming topics include Effective Disaster Recovery Planning, Implementing Green IT, Web 2.0 Adoption in Insurance and Making Major IT Investments in an Uncertain Economy. If you would like access to the series, or if you have any feedback for us after you’ve read the first installment, please email the boss, at We are especially interested in any topics you would like to see covered.

Is it possible to have a positive customer service experience?

In my last blog, I shared with you the challenges of having an unusual risk (a house with possible subsidence). Once more, the personal experience of being an insurance consumer warrants mentioning on this blog as it is a great anecdote representing a broader industry challenge. Almost 4-weeks have elapsed, and I am still waiting for my house insurer to come back to me on whether the premium has changed, based on the surveyor report. I now have an email address of a customer service technician who I bother weekly. But the process leaves me immensely frustrated and annoyed at the insurer. Questions in my mind –

· The renewal cost to the insurer is a function of the amount of time (read resources) a policy requires in it’s handling, so just how much is this renewal costing them?

· What technology is in place, and how much automation is being leveraged? Do they have a workflow system?

· How paperless is the process? Have they scanned in the surveyor documents to reduce the friction costs of passing this through the organization?

· Have they considered using mobile updates to the customer to keep them informed of progress? My on-line supermarket uses a similar process with fantastic results.

But all is not lost – there is a glimmer of hope for UK PLC customer service. I had an email from Kwik-Fit just after my last blog post, who commiserated with me and informed me of their unuique approach to customer service in personal lines (motor only at this point). This company has account managers assigned to customers and this account manager is responsible for the sale, and post-sale service. As a Kwik-fit customer, I would have this person’s name, and direct number. Any changes that I need to make, or any queries at renewal, I can call this person directly. What a refreshing change. A key element to customer service is keeping the customer informed and such direct access into the organization does just that. I challenge my house insurer to take a note out of the customer-service booklet of Kwik-fit. The old adage is that insurance is sold and not bought, inferring that it’s a forced purchase. Whilst that is true, insurers could learn a lot from best practice in the retail industry who know the value of looking after the customer. So for this month, the Onion award goes to my house insurer (who shall remain nameless), and the Orchid Award goes to Kwik-fit. NOTE: This author has no shares or any other links to Kwik-fit!

Attacking Business Complexity

This week, Celent is pleased to feature an article from guest contributor, John Boochever, who leads Oliver Wyman’s Global practice focused on strategic IT and operational issues across financial sectors. For senior executives facing the turbulence of today’s financial crisis, reducing the cost base of their business operations now sits squarely at the top of the agenda. After decades of product and service variation, channel diversification, geographic and operational expansion, all supported by layers upon layers of technology, many institutions are finally compelled to deal with a fundamental reality: their businesses are overly complex for the value they generate. Not only is this excess not valued by customers, it actually impedes value delivery by limiting the sales force’s ability to respond, increasing service and fulfillment costs, compounding operational risk, and making the organization more unwieldy to manage. The siren call for a simpler “core business” approach, incorporating elements of modular design and industrial engineering is being heard across the industry. But when senior executives take the first steps toward “dialing down” complexity, they rapidly come up against three immutable features that overshadow their ability to make change in their environment: Complexity is structural, deeply embedded in the business and operating models of their institutions. Poorly understood network effects across functions and businesses create linkages and interdependencies that compound complexity. There is a general lack of transparency of the features of complexity required to generate value versus those that do not. Eliminating complexity requires a “front-to-back” approach that identifies and addresses the root causes of complexity and all of its network effects. As an example, “eliminating 20% of non-profitable products” has limited impact if it is not followed through with a systemic simplification of the supporting operations and IT infrastructure. By the same token, introducing new middleware to make the IT architecture more “service oriented” is a waste of investment if the institution’s operating model is not built around modular services at all. Financial institutions have to not just cut but eradicate complexity to regain their focus and flexibility, and sustain efficiency. The long-term rewards of eliminating complexity include a radically simplified operating model, an improved client experience and a dramatically reduced cost structure. John Boochever leads Oliver Wyman’s Global practice focused on strategic IT and operational issues across financial sectors, and can be reached at