Mike Fitzgerald

About Mike Fitzgerald

Mike Fitzgerald is a senior analyst with Celent's Insurance practice. His career includes leadership positions in property/casualty automation, operations management and insurance product development. Mike's research focuses on innovation, billing, business process and operations, social media, and distribution management.

Slice Labs Case Study: New Economics at Work

Slice Labs Case Study: New Economics at Work

Just published: a detailed case study on the first year of Slice Labs. (see @Celent_Research http://bit.ly/2pgJ65b ) This insurtech delivers a tailored insurance contract to sharing economy operators on a digital platform. Homeshare coverage is live in production in multiple states and rideshare was just released to pilot. The experience of Slice Labs provides a valuable benchmark against which insurers, insurance technology providers, and insurtech firms can measure their innovation efforts.

Truly disruptive insurance innovations are rare. Most insurtech propositions are service improvements for current products in existing markets.  Slice Labs is disruptive in that it targets an underserved customer niche with a proposition that involves changes to the core insurance product using new technology tools and development methods. The solution was delivered to pilot within one year at a predicted and managed cost within the limits of their initial capital raise. This combination of insurance expertise, new tech skills, and dev ops processes illustrates a new model for insurance development.

Some of the key lessons from the case study include:

  • A one-year timeframe and an accurately predicted investment delivered a minimum viable insurance product and IT platform. This low-cost threshold and speed challenge in-house insurance innovation approaches and argue for wider use of greenfield initiatives.
  • The effort and elapsed time necessary to identify a risk sharing partner are significant and should not be underestimated.
  • Affinity groups/communities of interest can create significant pull demand.

This model is repeatable. The challenge for incumbent insurers is to develop approaches which allow them to benefit from the new economics at work in insurance product development.

Insurtech 2016=Hype; Insurtech 2017=Value

Insurtech 2016=Hype; Insurtech 2017=Value

As I look back on insurance innovation in 2016 and forward to 2017, the insurtech phenomenon looms large. But, the sight in my rearview mirror is very different from the road before me through my windshield.

Behind I see great excitement, new patterns of interactions, and intriguing applications of technology. I also note unwarranted claims of massive industry disruption and extensive business model revolution. The last few months have brought some more measured discussion, especially around new partnerships. (For research data on incumbent-startup partnerships, see the Celent reports Accelerating Insurance Transformation: The Good, the Bad, and the Ugly of Innovation Relationships (Jan 2016) and Insurer-Startup Partnerships: How to Maximize Insurtech Investments (June 2016).)

It may take until the middle of 2017, but I expect to see a move away from hype and to value. In some cases this will be positive value; in others, it will be learning or failure (in other words, negative value). Several levers are in motion:

  • There are more players, and thus a greater chance of success (or failure).
  • More time will have passed for propositions which are currently online to produce results.
  • More efforts will come to production in the next few months; and for other initiatives, the time (read money) to prove their hypothesis will run out.
  • There will be increased recognition of the importance of partnerships as the tedious work of integration proceeds.
  • From a macroeconomic standpoint, interest rates in the US will rise, increasing the attraction of alternative investments and making the competition for investment more fierce.
  • Finally, Brexit and a new US political administration will result in increased uncertainty, which will change risk attitudes.

These challenges will be good for insurtech as they will prove that the easiest thing to do in innovation is to “write a check.” The majority of the difficult work of making insurtech part of a comprehensive insurance innovation approach is in front of us, and 2017 will be the pivotal year when the winners make this happen.

You Must Be Present to Win: Reflections on InsureTech Connect and the Conference Season

You Must Be Present to Win: Reflections on InsureTech Connect and the Conference Season

October is a busy month for insurance technology conferences. I am fortunate in my job to be able to attend these events, and I always come into the end of the year with a refreshed gauge on the major challenges and opportunities facing our industry.

Having attended six events in the last five weeks, I can report that the interest in innovation is at an all-time high. In multiple presentations, speakers outlined how changing consumer preferences, improved technical capabilities, and powerful market forces are reshaping our industry. “Digital,” “digitization,” and “digitizing” seemed the most frequently used words, followed closely by “innovation.” However, despite all the talk and attention about change, I observed a problem — there were not many insurance leaders attending. Given the need to gain perspectives on how to move the industry forward through the forces that are under way, this is a red flag.

As a data point, consider InsureTech Connect. (Full disclosure: Oliver Wyman, the parent company of Celent was the main sponsor of the conference.) The inaugural event crushed its attendance goals, attracting more than 1,500 professionals. It brought together groups of people that traditionally do not attend the same show: – insurers and reinsurers, technology startups, venture capitalists, and private equity firms. An analysis of a random sample of more than 700 attendees shows that there were equal numbers from startups and from insurers. I would hope that the 2,700 US insurers would be better represented.  

Of the insurers that were there, most were from the firms which have stated publically that they are aggressively pursuing innovation in their business models. Undoubtedly, these folks were taking the pulse of their competition and looking for opportunities. However, the numbers demonstrate that the vast majority of carriers were not there. In addition to the small number, I noticed that, of those attending, most had titles which were at the execution level, not the decision-making level. There were some some senior leaders, but not as many as I would hope.

At the other, more traditional conferences, there was great interest, and some concern, in new technology, emerging business models, and the Insuretech market. Many of the questions dealt with “What are our competitors doing?” “How do we learn more or get more involved?” “What are the real opportunities and threats?” There clearly is a desire to know and understand what is under way.

My headline from the conference season is: “you must be present to win”. As insurers finalize their plans for 2017, I encourage them to broaden the number and type of conferences for the coming year and include a mix of both “traditional” and “emerging” gatherings, Particular emphasis should be placed on attendance by senior leaders with decision-making responsibility.

Such adjustments will be a welcome indication that our industry is moving beyond words and into action.

The Muslin is off the Lemon — Lemonade Launches

The Muslin is off the Lemon — Lemonade Launches

Today’s announcement by Lemonade provides an example of what actual disruption in insurance looks like. Disruption — the term is overused in the hype around innovation. In Celent’s research on innovation in insurance, we see that what is often tagged as disruptive is actually an improvement, not a displacement, of the existing business model.

The information released describes how Lemonade seeks to replace traditional insurance. Yes, they have built a digital insurance platform. Beyond that significant feat, they seek to replace the profit-seeking motive of their company with one based on charitable giving, acting as a Certified B-Corp (more info on B-Corps). They are also using the charitable motive as the guide to establish their risk sharing pools, thus creating the peer-to-peer dimension. Unlike other P2P efforts, Lemonade goes beyond broking the transaction and assumes the risk (reinsured by XL Catlin, Berkshire Hathaway and Lloyd’s of London, among others).

However, like other P2P models, such as Friendsurance, Lemonade faces a real challenge regarding customer education. The Celent report Friendsurance: Challenging the Business Model of a Social Insurance Startup — A Case Study details the journey of the German broker along a significant learning curve regarding just how much effort was required to teach consumers a new way to buy an old product.

The next few weeks will surface answers to they second-level questions about this new initiative such as:

  • How/if their technical insurance products differ from standard home,renters, condo and co-op contracts;
  • What happens to members of a risk sharing pool when the losses exceed funding;
  • Will the bedrock assumption, that a commitment to charity will overcome self interest and result in expected levels of fraud reduction?

It is refreshing to see some disruption delivered in the midst of all the smoke around innovation. Celent toasts Lemonade and welcomes this challenge to business as usual!

 

Fintech is a Development Opportunity for High Potentials in Financial Services

Fintech is a Development Opportunity for High Potentials in Financial Services

What does the development of high-potential Financial Services employees have to do with Fintech? Possibly, quite a lot. 40-something executives climbing the corporate ladder, or anyone mentoring such a person, or anyone concerned with developing future leaders in financial services – this blog is for you. You have an opportunity to differentiate yourself if you act now.

There is significant energy and investment happening outside of the four walls of financial services companies. The question many incumbents are asking is, “How do we best engage with the new, external innovation ecosystem?” Catherine Stagg-Macey @Staggmacey and I just released a report that outlines a framework for leveraging this emerging business approach (Making the Most of the Innovation Ecosystem: Adapting to the New Insurtech World). The report includes insights from more than a dozen interviews with a range of players in the innovation system including internal company venture capital staff, independent venture capital employees, innovation service providers, system integrators, accelerator, and innovation lab leaders. A central conclusion is that the new innovation ecosystem will eventually mature into a form where financial services firms and startups coexist and regularly form partnerships to improve specific parts of the value chain. A few new entrants may find success as disruptors, but the predominant model will be a mix of joint ventures, partial ownership, and outright purchase of emerging technology firms by incumbents.   

This is very different from the traditional buyer-supplier relationship that financial services companies usually enter into with technology companies. The feedback we received from innovation participants is that differences in culture, process, the speed of decisions (or lack thereof), risk tolerance, and goals must be deliberately managed in order to get the most out of these partnerships.

Leadership experience on “both sides of the fence” – both in the startup and the financial services worlds – will be a differentiator. The candidate with a financial servcies background who can demonstrate an understanding of the challenges in bringing both of these very different worlds together will be very valuable. Those actively managing personal development plans in banks, insurance companies, and capital market firms are encouraged to:

  • Mentor startups though a technology accelerator that is focused on financial services; StartupBootcamp @Sbootcamp, Global Insurance Accelerator @InsuranceAccel, and Plug and Play @PlugandPlayTC are examples
  • Attend technology “meet ups” in your local area to learn about startups in your area and network your way into the community
  • Offer your services as a sounding board for new tech companies, either informally as subject matter expert or more formally as a board member
  • Communicate with your mentor and your H.R. career development resources about your goal to develop the necessary skills to effectively act as a “go-between”

The realization that such a role is valued is just beginning to emerge, so those acting now will be slightly ahead of the curve and well-positioned to step into critical leadership positions.

The Future May Be Closer Than You Think: Cat Bonds Traded on Blockchain

The Future May Be Closer Than You Think: Cat Bonds Traded on Blockchain

In June @JamieMacgregorC and I published a Celent report, Blockchain in Insurance: Use Cases which included a scenario we labeled “Alternative Marketplaces”. We described it as a blockchain that provided a:

shared environment for placing insurance risk, where brokers or the insured and the insurer capture the status of the risk, including exposure, risk share, and policy conditions. Smart contracts are then used to ensure collection and disbursement of premium amounts and the checking of coverage in the event of an incident. The distributed ledger acts as the record of risk placement, including layers and participants.

We didn’t expect that, in July, we would see an announcement that @Allianz and their partner, Nephila Capital, had completed a proof of concept around trading catastrophe bonds on a blockchain. http://www.carriermanagement.com/news/2016/06/15/155462.htm

In general, there are challenges with blockchain technology regarding handling large transaction volumes, managing complex rules, and delivering acceptable response time performance, but this announcement is an indication that the platform is moving forward.

In Insurtech, Partnership Will Override Disruption

In Insurtech, Partnership Will Override Disruption

There is much discussion in the press and at conferences about insurance incumbents and the disruption that is coming their way. A close examination of what is actually going on reveals that what is being labelled disruption is actually partnership.

Complicating a meaningful discussion about what is happening is clarity around what is meant by the word “disruption”. The term is used so often that it now carries a range of meanings. On one hand, it refers to a specific market phenomenon defined by Clayton Christenson’s theory of Creative Disruption. On the other end of the scale it represents a recognition that technology is changing the industry.

In most articles and presentations the term is not explicitly defined. Many times disruption is used in the context that portends doom for insurers and that predicts that the revolutionary shifts will cause insurers to go the way of the photo film industry or pre-digital music firms. This is a compelling argument given the challenges incumbents face because of the burden of their legacy systems, their aversion to failure, and a habit of extended decision cycles.

However, there are several significant barriers for newcomers to address if they are to displace incumbents. Celent’s analysis of what has happened to date in Insurtech concludes that the need to overcome these challenges results in a model of cooperation rather than destruction.

First, capital considerations must be taken into account. This is not the capital required to build a technology solution. Agreed, it is no small feat to fund the activities required to build, test, pilot, launch, and sustain a technology solution. However, this pales in comparison to the amount of capital required to underwrite risk (pay claims and hold necessary reserves). To date, a few startups have overcome this challenge by securing relationships with primary insurers or reinsurers, but if this is the approach, it is cooperation, not disruption.

A second barrier is regulatory expertise. This is not only a knowledge of regulation, but the ability to account for regulatory requirements from the earliest stages of ideation, through design, to sustained maintenance.  For startups, detailed regulatory experience can be bought, but this is an additional capital expense. It also can be sourced from a partner, but obtaining this assistance is not likely if the startup is a “disruptor”.

Finally, there is the biggest barrier – customers. As examples of this challenge, startups in the P&C and Life space that have been around since 2010 to 2012 have failed to achieve significant scale. In insurance, attracting and retaining customers is much more expensive (there is that capital problem again) and more difficult than in consumer goods.

The inherent challenges faced by both “tribes” argue for a partnership, rather than a replacement, solution. Insurers can address their legacy technology, risk aversion, and decision challenges by working more closely with the new technology firms that actively seek risk and have a bias to action. Startups need risk and regulatory capital and expertise as well as a customer base to serve.

Partnerships between insurers and startups are a new business model. Unlike supplier-buyer relationships of the past, where a contract is negotiated through an extended procurement process, these partnerships must be governed by a common vision and controlled through active communication from both sides. Celent’s research into the best practice in these partnerships emphasizes the importance of adjustments on both “sides” of such relationships. (see report Accelerating Insurance Transformation: The Good, the Bad, and the Ugly of Innovation Relationships).

It will take time to work out the best ways to accomplish this new model, but the barriers faced by both sides will force each to adjust. Economics will drive transformation to occur in a collaborative manner. Success will come to those insurers and startups which are able to make the necessary adjustments to their own preferences, cultures, and working models to create meaningful partnerships.

The predominant Insurtech approach will be one in which startups coexist with, not replace, insurers.

Regulators will hug their blockchains – takeaways from Consensus 2016

Regulators will hug their blockchains – takeaways from Consensus 2016

"Show of hands, how many people don't know insurance at all?"

I attended the blockchain (BC) conference Consensus2016 this week and came away with some enhanced perspectives about the technology and its market. The ability to immerse myself in the subject, hear multiple points of view, and learn about different projects was extremely valuable. Here are my highest level takeaways along with some general observations.

 

Specific take-aways:

Regulators will love their blockchains
The transparency and audit trail capabilities of BC will reduce frustration, lower costs, and increase the effectiveness of regulators. Delaware’s announcement to move selected regulatory processes to the BC is an early recognition of this potential.

Benefits beyond the technology
The power of BC to eliminate counterparty risk, stop reconciliation, and increase efficiency were discussed repeatedly, but I also noted a few subtle, nuanced, and powerful benefits related to the BC development process. The most significant examples are the benefits that arise when multiple organizations partner to build a shared BC. Because the companies are building a common automation platform, their joint development results in a single set of code to automate contracts and identical data definitions. This eliminates the unintended consequences that currently result from a traditional approach — where organizations agree on legal terms but then automate them separately. I am now looking at BC with one eye on what the tech delivers and one on what the process around it yields.

Nascent, but sufficient to test with
No doubt the platforms will continue to develop, but based on reported activity in capital markets, banks and insurers, the tech is moving forward in leading corporatations, most in a testing mode. One insurer offered an intriguing insight based on their experience to date. They found as they started testing, their use cases all dealt with processes which already have existing automation solutions in place, with the goal of efficiency/cost improvements. However, they found that they were not getting traction/attention from their senior executives that they expected and needed. They have since pivoted and are now focusing their BC testing on problems that do not currently have automation solutions in place. (by the way, this insurer is another example of a firm which is using its innovation infrastructure to execute their BC tests. They are being done in their innovation lab under the governance in place for experimentation projects — see my previous blog about a similar approach taken by John Hancock.)

General observations:

Evangelism
There are strong emotions associated with this technology. The implementations that deliver financing and banking services to developing economies, or that improve health care, certainly warrant an emotional reaction. However, when I hear comments like “BC technology’s impact will be as significant as the railroad in the 1800s,” my hype alarm goes off. I suppose I haven’t been indoctrinated yet, but neither have the majority of financial services executives.

Market transition
Suppliers are changing from geeks to suits, from startups to more established tech and consulting firms. In some comments during a number of presentations and occasional tweets and audience reactions, I detected a curious, and unhelpful, undercurrent of antagonism towards this shift. The economics of BC will inevitably move it to the enterprise. In fact, its full promise cannot be realized without this change. I am confident that virtually everyone attending a conference like Consensus2016 wants to see the tech reach its potential, but, as a first time attendee, it sure seemed that not everyone was acting that way. I am looking forward to catching the vibe in next year's show.

Kudos to the organizers Coindesk for developing a solid, varied program and for executing it well.

For sustained innovation, it is not only the “What” but also the “How”

For sustained innovation, it is not only the “What” but also the “How”

I read an excellent article recently by CoinDesk on John Hancock Insurance Company’s testing of blockchain in insurance. This is one of the early, public declarations that insurers are exploring the potential of this technology. Jamie Macgregor and I also explored this subject recently in the report: Blockchain in Insurance: Use Cases

There is another important angle to the John Hancock story that lies beyond the technology. In our approach to innovation at Celent, we separate the “what” of innovation (blockchain, artificial intelligence, analytics that personalize the customer experience) from the “how”. How companies execute on innovation involves building repeatable processes, incentive systems, and cultures of experimentation that establish a new “way we do things around here”. Note that John Hancock’s LOFT program provided the mechanism through which the insurer could test blockchain. Next week, month, year it will be a different “what” to feed into the “how” machine.

Beginning in the Q3 of last year, Celent research observed the pattern that leading financial services companies which have invested in the "how" of innovation are beginning to gain fast mover advantage over those that have not.  We expect to see an increasing, widening gap between those insurers which have investe in the how of innovation and those that have not. The leaders will use their innovation machines to more rapidly and effectively figure out how to make the “what” of the possible real in their organizations.

Young, broke, and no credit: Financial services reborn

Young, broke, and no credit: Financial services reborn

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You are young, broke, and don’t have any credit. You also don’t have many bright prospects since you have never been independent and you don’t even have a bank. Sound like most 20 year olds? It certainly might. However, I’m talking about The United States of America in 1790. When our nation began we were in a tough spot and did not have very many prospects. Luckily, Alexander Hamilton, supported by George Washington and other leaders, had the vision to build what we now recognize as our modern financial system.

What does this have to do with today? At Celent, we are convinced that a confluence of forces places Financial Services at another crossroads. Customer expectations and digital technologies are combining to compel a transformation across the industry. We expect this will play out as a rebirth of financial services, one that will combine the DNA of our past with digital processes to create a new industry, related to the one we know now, but not the same.

Drawing inspiration from the past is the theme of this year’s Celent Innovation & Insight Day #celentiandi. We look forward to hosting over 350 financial services professionals at the Museum of American Finance in New York City on Wednesday. We will use this unique location to take the best lessons learned from the past and apply them to the opportunities of the future.

Our agenda includes keynotes from a global venture capital leader, Nadeem Shaikh of the Anthemis Group, the CEO of an insurance blockchain start up, Leanne Kemp of Everledger, and, of course, the recognition of our 2016 Model Bank and Model Insurer award winners. You can find all of the details here.

This year, we are introducing a new feature, an interactive emerging technology expo area that we call the Geek Playpen. Attendees will have the opportunity to touch, feel, and experience items like virtual reality goggles, drones, and onmichannel digital platforms. There will even be an example of using location-aware mobile devices to assist in the evacuation of buildings. We thank our inaugural Geek Playpen sponsors Cognizant, Mindtree and Relay IT for their participation.

Safe travels to all joining us and we’ll see you soon!