The Great Insurance Experiment

The Great Insurance Experiment

There is a battle going on today for the future of the insurance industry. Like other industries there are those within the insurance industry and new entrants who are seeking to test whether alternate, digital models will prevail. As a participant in the industry and an observer the intriguing thing for me is no one has proven the existing model is actually broken or that there is a better proposition out there. It seems the telematics experiment I wrote about a few years ago is expanding in focus.

I'm sure taxi drivers said the same when faced with Uber, hotels with AirBnB, the print industry, the travel industry, etc. However let's look at the benefits of digital propositions to customers and see if they apply to insurance.

Transparency
One of the key benefits of digital propositions is transparency and low prices – something that telematics and IoT propositions endeavour to deliver for consumers. The peculiar thing about insurance is that transparency and too much data is at odds with what insurance tries to achieve. Put another way, insurance is designed to hedge the risks to a population across the whole population, so that individuals pay a reasonable price and those that suffer a significant loss are reimbursed disproportionally to what they put in. Absolute data and visibility – transparency in its purest form – will reveal the poor risks and in practice deprive them of the very service they need. Good for some who will not see a loss, but not good for all and not good for society as a whole.

Propositions in this area have moved towards education and rewarding behaviours that reduce risk – the win-win for insurer and client. Many have observed that this is arguably not insurance but rather risk advice, engineering and management. Others observe that claims prevention is absolutely part of insurance and has been all along, albeit the tools of old have been regulation, law and classical education rather than the digital variants.

Existing experiments reveal customers care do care about not claiming, about limiting the impacts of a claim and about small rewards for good behaviour. Regulators have also shown they're keen that all parts of society have access to financial services and insurance at a reasonable cost. Use of transparency and data can go so far in insurance but there are limits to how far it can disrupt.

Control
Another key benefit of digital propositions is the just in time and just enough nature of them – the ability to finely control the product and as a result the costs. This is another area that is being tested in insurance with micro control over what is and isn't on cover available to customers via their phone.

The challenge here of course is that this again removes some of the hedging. By assigning a cost per item turning everything on will typically yield a higher price for insurance than a classic contents policy which offers blanket cover for items in a property or even while travelling.

The other benefit of the classic policy is that one doesn't have to engage with it. It's all well and good that one can turn cover for items off and on quickly but to really take advantage of this capability the insured has to care deeply about the level of cover or the cost.

There will be customers who want this level of control in their insurance and will actively seek it – but for the mass market a good enough policy at a reasonable price will be just fine.

The long tail
Now here we could see some disruption, or at least shake up of the market. We're already seeing some splits in the market as people interested in health rewards take up the various incarnations of vitality insurance, young people take up telematics car insurance after being priced out of the classic policies. There will be customers interested in control over their policies, customers who give up human interaction in favour of digital cost control.

In this way we might see smaller, more agile companies with lower cost bases taking their share of the market by satisfying a niche.

Conclusion
In practice, the jury is still out and the experiment still continuing. Do todays consumers want the products they have always been offered or something new? What of tomorrows customers?

What does Brexit mean… ?

What does Brexit mean… ?

This is the question on everyone's lips. I had delayed writing this in the event that some clarity emerged but in day 5 of Brexit that clarity and certainty is proving elusive – indeed uncertainty seems to characterise the whole affair. This has been a discussion within the European team (thanks to Jamie and Nicolas) for some time and this post will briefly concentrate on the impact of the events so far on insurers with operations and interests in Europe. This will not discuss the UK governments response thus far.

The only certain thing about Brexit as it stands is uncertainty. Will Brexit really happen? When will the process start? Who is negotiating? What is the opening position? What we can say with some confidence there will be little regulatory and legal change in the short term and some unknown quantity of regulatory and legal change in the medium term.

The key unknown is the continuing participation in the single market and the other institutions in Europe, particularly the passporting. This more than Brexit itself, will define how strongly businesses with operations in the UK will respond.  Those with headquarters and staff in the UK to be present in the EU will need to reconsider this position if Britain leaves the single market as well as the EU – or indeed if any of the agreements reached put this position in jeopardy.

Uncertainty breeds volatility in the markets, a depressed investment environment and bond rates will hit the market further, particularly life insurers. This could well impact sales of investment products across the EU and UK until some certainty is restored. Existing products would not be safe either, with some investors looking to cash out.

The outlook for technology investment is trickier. If anything the pressures for reducing costs, agility and flexibility will be exacerbated. In the short term it is reasonable to assume reduced investment with alternate investments and clarity increases. It is plausible that this will affect the InsureTech market as well – particularly in London.

For UK insurers, It is likely that the FCA will engage with insurers and the ABI as the UK seeks to set out how it differentiate itself from the EU which will require agility and flexibility from the insurers to adapt to the new opportunities. A similar process may occur within the EU.

As is probably clear above, the one thing needed is clarity.

Do follow our Brexit posts from the wealth management team as well

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.

The UK’s First Personal Insurance Policy for ‘driverless cars’: Too early or just in time?

The UK’s First Personal Insurance Policy for ‘driverless cars’:  Too early or just in time?

Yesterday, we received a press release announcing the launch of a new insurance proposition targeted at personal use for ‘driverless cars’ from Adrian Flux in the UK. This news arrives hot-on-the-heels of the Queen’s Speech last month that announced the UK Government’s intention to go beyond its current ‘driverless’ trials in selected cities and legislate for compulsory inclusion of liability coverage for cars operating in either fully or semi-autonomous mode.

As the press release suggests, this may be the world’s first policy making personal use of driverless cars explicit in its coverage (we haven’t been able to validate this yet). Certainly, up until now, I suspect that most trials have been insured either as part of a commercial scheme or, as Volvo indicated last year, by the auto manufacturer itself or trial owner. 

What I find particularly interesting about this announcement is that they have laid the foundation for coverage in their policy wording and, in doing so, been the first to set expectations paving the way for competition.

Key aspects of the coverage (straight from their site) include:

  • Loss or damage to your car caused by hacking or attempted hacking of its operating system or other software
  • Updates and patches to your car’s operating system, firewall, and mapping and navigation systems that have not been successfully installed within 24 hours of you being notified by the manufacturer
  • Satellite failure or outages that affect your car’s navigation systems
  • Failure of the manufacturer’s software or failure of any other authorised in-car software
  • Loss or damage caused by failing when able to use manual override to avoid an accident in the event of a software or mechanical failure

Reflecting on this list, it would appear that coverage is geared more towards the coming of the connected car rather than purely being a product for autonomous driving. Given recent breaches in security of connected car features (the most recent being the Mitsubishi Outlander where the vehicle alarm could be turned off remotely), loss or damage resulting from cyber-crime is increasingly of concern to the public and the industry at large – clearly an important area of coverage.

Given the time taken to legislate, uncertainty over exactly what the new legislation will demand, and then for the general public to become comfortable with autonomous vehicles, I suspect that it may be quite a few years before a sizeable book of business grows.  Often, the insurance product innovation is the easy part – driving adoption up to a position where it becomes interesting and the economics work is much harder.

Maybe this launch is a little too early?  Or maybe it's just-in-time?  Regardless of which one it is, in my opinion, this is still a  significant step forward towards acceptance. I also suspect that some of these features will start to creep their way into our regular personal auto policies in the very near future. I wonder who will be next to move?

If you’re interested in learning more about the potential impact of autonomous vehicles on the insurance industry, why not register here for Donald Light’s webinar on the topic tomorrow.

 

Reporting from Celent’s Model Insurer Asia Summit

Reporting from Celent’s Model Insurer Asia Summit

If 2015 was the year of FinTech, 2016 will surely be the year that InsurTech comes into its own. Celent has been presenting our views on InsurTech and emerging technologies at insurance conferences throughout Asia for some time now, so naturally we see this as a welcome—and inevitable—development.

We held our 7th Annual Model Insurer Asia Awards event in Singapore last month, with presentations focusing on InsurTech and digital financial services. Celent Research Director Karlyn Carnahan set the tone with a keynote presentation on the challenges facing insurers as customers are increasingly seeking real-time, digital interactions tailored to their personal needs and channel preferences. Karlyn outlined the steps to becoming a digital insurer and provided many insights on how insurers can embrace the digital paradigm. In the afternoon session, Karlyn also led a peer-to-peer discussion on how insurers in Asia are responding to these significant changes in the digital landscape.

We were delighted to have GoBear, one of the stars of Asia InsurTech, on the program. GoBear is an online financial services aggregator with a decidedly digital offering that is expanding at a remarkably fast pace throughout Southeast Asia. In his keynote presentation, GoBear’s CEO Andre Hesselink discussed how his firm developed their product with the goal of better serving consumers while at the same time satisfying the business needs of their suppliers, the insurance carriers. Quite the balancing act I am sure.

Celent Analyst KyongSun Kong presented the results of Celent’s annual Asia Insurance CIO survey, revealing that nearly 80% of insurers surveyed are engaged in digital transformation initiatives.

Finally, we came to the heart of the event: the Model Insurer Asia Awards themselves. This year we celebrated best-practice technology initiatives at 14 insurers, including ICICI Lombard General Insurance, Taikang Insurance, multinationals Aegon and MetLife, and online insurance innovator DirectAsia, among many others. All winning initiatives are profiled in our report Celent Model Insurer Asia 2016: Case Studies of Effective Technology Use in Insurance.

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.

Slice: Insurance disruption in action

Slice: Insurance disruption in action

Most “disruptive” Fintech propositions are actually incremental; Slice.is promises to be an exception.

Celent’s Banking and Capital Markets analysts have tracked Fintech since 2013 and continue to track movements in areas such as payments, digital banking, and blockchain. More recently, our insurance team has begun looking at Insurtech, especially the initiatives coming out of the Global Insurance Accelerator (@InsuranceAccel) and Startup Bootcamp.

One observation emerging from this experience across the three verticals is that most startup propositions are actually incremental innovations. Despite numerous broad claims of disruption, most of the solutions alter part of the traditional value chain. In insurance, for example, start ups target narrow activities such as claims settlement or customer engagement with advanced algorithms, direct distribution schemes, and/or new data sources. Undoubtedly, some will deliver value, but to label them as disruptive is a reach and strikes me as sensationalist.

An exception to such incrementalism surfaced today in the launch of Slice. Its press release today announces $3.9million in funding and describes their approach as one addressing a new market – the on-demand economy – with a new product – one that combines both personal and commercial coverages into a single contract. The stated goal is to not only change the way we work with insurance products, but to change the way the insurance product works. This is why I consider this as one of the very few examples of disruption – delivering a new proposition to a new market.

Slice has worked with primary insurers and reinsurers to develop policies which provide insurance coverage on a per event, time period-specific basis. Their forms combine what is traditionally both personal and commercial coverages in order to address ridesharing, homesharing, and (eventually even delivery) services. It acts as an MGA, sourcing business both directly and also through on-demand apps such as Uber and Lyft driver platforms. Their goal is to close the current gaps that are not addressed by traditional products and cover the exposures which are often unintentionally retained by operators.

It is exciting to see a new market / new product proposition in the mix. Examples such as Slice reframe the discussion around what true disruption looks like in insurance.

Blockchain in insurance – who needs it, anyway?

Blockchain in insurance – who needs it, anyway?
Interesting feedback from Celent’s What If… Conference in London last week. We were fortunate to have both Leanne Kemp and Pascal Bouvier present on blockchain in insurance. Surprisingly, the extensive treatment of the subject received mixed reviews. Some attendees were pleased and stated that discussing blockchain was valuable and that these conversations, in insurance, are rare and are just beginning to take place. Others felt that the time could have been better used reviewing a subject which has more relevance to insurance. It was mentioned that the technology was for payments, banking, and securities trading. The comments reminded me of the early 2000s, when online retailing began to impact business. I recall insurance industry veterans’ comments about the opportunities for the internet. Summarizing generally, it was something like: “Well, it is a great way to sell plane tickets and books, but it won’t catch on in insurance. Insurance is different.” We see how that has worked out. In 2014, our Celent colleague, Zilvinas Bareisis, positioned blockchain this way in his report, The Disruptive Potential of Bitcoin: Why Everyone in Financial Services Should Care: “Just like HTTP became a protocol for information exchange, Bitcoin, Ripple, and other decentralized ledger-based solutions might be seen as the protocols for value exchange, promising exciting possibilities, some of which are difficult to imagine at this stage.” However, evidently there are insurers that are not only paying attention, but are investing significantly. Allianz announced work with six startup companies in their accelerator in Nice, France. Also, just this week, AXA made public their USD$55million investment in a blockchain technology company. So, is this the “new internet”? Without a doubt, there are huge challenges to blockchain in insurance. The technology still requires maturation around scalability and latency. Additionally, regulatory aspects are yet to be determined. However, it is clear that, right now, some insurers are placing some hefty bets and others can’t even find the casino.

Rethinking the role of the intercap

Rethinking  the role of the intercap
The trend-naming fashion of capital letters in the middle of words continues. I believe those “InterCaps”—also known as “BumpyCaps” and “CamelCaps”—are mostly a marketing trick intended to make terms sound important. I find them annoying. The hot example of late is FinTech. Plus its close cousins, BankTech, InsurTech, and RegTech. They’re popping up everywhere, including within the hallowed halls of Celent. We are all guilty of putting a new veneer on something that has been around for ages. What does that capital T in Tech imply, and why do the terms get such rapt attention? Is applying technology to the business of financial services new, and more worthy of our attention today than it was years ago? Is how we manage new technology fundamentally changed? I don’t think so. Maybe the point is to let us collectively off the hook for pursuing technology change so casually (was that it?) for the last 50 years. I can imagine the bank or insurance CIO, late in his/her career, saying, “Hey, if we had FinTech 30 years ago, this place might look a damn sight different by now!” Right, that’s what we were missing: Technology startups! Youngsters in hoodies! The truth behind technology and the financial services industry requires no such defense. Changing the world through application of technology didn’t depend on the arrival of startling new tools, or dorm room genius, as helpful as those might be in today’s world. It required a risk/reward shift. As an industry, we didn’t change because we didn’t have to. Our existence was not threatened by new consumer behaviors. Our livelihoods were not at risk from upstart competitors. We took a hard look at the costs and benefits of new technology, and behaved accordingly. Which meant…changing…slowly. But something is certainly different today. I believe that existential threats are emerging for our industry. We are now at risk. I’m firmly convinced that relationships between consumers and their financial providers are changing, with the industry’s participation or without it. There is a new dynamism, and it is clear that the entire ecosystem is feeling the impact. Instead of looking at FinTech and all the other Techs with an annoyed editor’s eye, maybe I should embrace the way intercaps communicate something important. They’re a stylistic irritation. But they’re also a visual cue that helps us rethink technology. And that is sorely needed in these times of powerful disruption.