Predicting the Future – Illustration Systems to the Rescue

Life insurers continue to strive to increase growth and point of sale tools used by producers continue to evolve. Illustrations are becoming a key factor in keeping producers happy by improving the probability of the life insurance sale. Modern illustration systems provide the ability for agents to illustrate a variety of “what if” life events such as college education, retirement or purchasing a home to show how life insurance can be used to plan for the future events. Quality illustrations can move a “nice-to- have” to a “must-have” for a prospective client.

Functionality changes such as more emphasis on the illustration output, the use of mobile devices, user-level configuration, and full integration with other point of sale tools are just a few of the changes Celent has seen in vendor based illustrations solutions.

In Celent’s new report, Predicting the Future, 2016 North American Illustration Solution Spectrum, 11 vendors providing illustration systems to North American insurers are profiled.  The following trends in North American illustration systems were observed:

• Regulatory changes including NAIC model regulation and Department of Labor fiduciary rule driving increased transparency.
• Disconnected mode of operating with automatic synchronization upon reconnection.
• Increased security with role-based authentication and single sign-on capability.
• Ability to limit the products displayed to those that the agent is licensed to sell and the potential insured is eligible to purchase.
• Configuration has replaced coding for calculation engines but still requires IT involvement.
• Standardization of transactions for third party interfaces.
• Improved user experience with prefilled data, fewer forms, and conversational English-like labels for data entry. Output provides graphs and charts in addition to tabular data.
• Omnidevice support for phone, tablet, laptop, and desktop. An agent can start the quote or illustration on one device and complete it on another.

Today, an insurer can manage what used to be myriad of POS tools that included needs analysis, advanced sales support, suitability, illustrations, and e-applications, which were provided by a combination of vendors and in-house systems, through one interoperable, integrated vendor system.

Insurers also have the choice in the level of system development and maintenance in which they want to partake. Today’s vendor systems offer a spectrum from full vendor maintenance to user-level tools for the insurer to maintain its own systems.

Although homegrown illustration systems are still being developed and used, Celent believes that most carriers looking to invest in a new illustration system should consider vendor systems for core functionality and tools that can help them produce illustration systems more quickly and at a lower cost.

A companion report of 14 illustration vendors selling in EMEA, APAC and LATAM is coming soon!

How the IoT caused the Internet of Upside Down

The architecture around the Internet of Things and the constraints it poses has fascinated me for a long time. The good news for insurers is integrating the Internet of Things into insurance processes has some fairly common patterns now as described in my recent report [http://celent.com/reports/emerging-architecture-internet-things]. For those with responsibility for the infrastructure of the Internet however, it is providing some interesting headaches. 
 
Upside down?
Why do I say upside down? In the early days of the Internet it was a collection of machines each with broadly the same importance connected together. As information services moved onto the Internet, followed by commerce and retail sites, banks and insurers and then streaming companies the Internet shifted more towards many machines seeking to consume from a (relatively) few machines. 
To support this demand architectures evolved to n-tier structures where data storage areas sat behind application servers, which sat behind web servers and then, not that long ago, caching servers and content delivery networks. 
The Internet has become a pyramid with a consumers machines at the bottom, hooked up to broadband geared towards downloading content quickly and increasingly powerful infrastructures delivering that content to be consumed. 
 
And then homes became data rich farms…
Suddenly homes are the sources of data everyone wants! Key information possibly of use to insurers even, now sits on devices at the bottom of the pyramid. In practice the Internet is shifting more towards the structure it had originally, but the infrastructure supporting todays services is not well suited to this new paradigm – or perhaps one that has re-emerged. 
 
In practice, most of this activity has moved from a pyramid to a less structured cloud already but software of the Internet is still catching up. 
 
So as you're looking at InsurTech firms or attending InsTech groups spare a thought for those poor architects and operations staff of the Internet and the headaches you're causing. 

Guidewire Acquisition of FirstBest – A Wakeup Call for Core Suite Vendors?

The Guidewire acquisition of First Best should come as a wakeup call to other suite vendors in the marketplace.   Not to be a doomsayer, but the reality is the market for core system replacements is shrinking.  Many carriers are in the middle of a replacement or have already completed their replacement.  There are fewer and fewer deals to be had and more and more vendors in the marketplace chasing those deals.  

Let’s look at the numbers.   Donald Light’s recent PAS Deal Trends report shows that we’ve seen an average of around 85 deals a year over the last two years.  But there are more than 60 suite vendors out there.  Of those available deals, a very few key vendors – including Guidewire – will likely get half or more of them.   That leaves around 40 deals for the remaining 60’ish vendors.  That’s less than one each.  And that’s IF we assume the market will stay steady at 80-85 deals a year. This basic math shows that many core suite vendors will not get a single deal in 2017.  

So how can vendors satisfy their shareholders?  How can they generate growth and remain viable players?  The truth is some of them won’t.  But smart vendors are thinking about other options for growth.  And they have a few paths they can take. 

  • Sell things other than suites.  This is the tactic that Guidewire is showing with their recent announcement of the FirstBest acquisition and is also illustrated by their prior acquisitions of Millbrook and Eagle Eye.  Duck Creek is doing the same as shown by their acquisition of Agencyport.  Providing other core applications that carriers need allows a vendor to continue to grow their existing relationships, and allows them to create new relationships with carriers – even if the carrier doesn’t need a new core system.  Some vendors will purchase these additional applications; others will build them.
  • Sell to a different market – Insurity’s acquisition of Tropics lets them go down market to work with small WC carriers.  Their acquisition of Oceanwide gives them the ability to handle small specialty, or Greenfield projects.  While there are still plenty of deals to be done in the under $100M carrier market, most vendors can’t play in this space. Their price points won’t work for small carriers, and their implementation process won’t work. It’s too expensive and takes too many carrier resources.  The implementation process has to be drastically  different for a carrier with only 6 people in the IT department than it is for a larger carrier.   This strategy of going down market only works if a vendor can appropriately sell and deliver their solution to a small carrier while still making margin – and many vendors just can’t do that. 
  • Enter a different territory – Vue announced today they’ve entered Asia with Aviva; Sapiens entered the US by purchasing MaxProcessing.  And we see other vendors including Guidewire, EIS, and Duck Creek moving outside the US.
  • Sell services – many vendors provide cloud offerings – which provides a steadier stream of income.   Vendors such as CSC or The Innovation Group (prior to the split) had/have a large proportion of revenue coming from services.  Vendors like ISCS provide additional BPO services such as mail services and imaging.   

Any of these strategies are viable – but I predict we’ll see more vendors using them as the market for core system replacements shrinks.  Smart vendors are already thinking ahead, working on their long term strategy. 

Carriers who work with these vendors should be watching as well.  No one wants to work with a vendor that won't be here for the long term.  If you’re a carrier considering a new system –

  • Make sure your vendor is showing momentum – new sales.
  • Look to see what the signals are for their long term viability – will they be a survivor selling new suites?
  • Do they have the resources to create or acquire new capabilities like portals, analytics or distribution management?
  • Are they entering new markets, new territories or providing new service offerings?

If you don’t see these signals, you may want to start having a conversation with your vendors today. 

 

 

Complexities, Capabilities and Budgets

I've just published a new report called Complexities, Capabilities, and Budgets.   Here's a quick overview – ping me if you'd like to chat in more detail aboaut it.

Insurance is being transformed by rapid changes in information technology, skyrocketing customer expectations, rapidly evolving distribution models, and radical changes in underwriting and claims. How are IT organizations changing to accommodate the new capabilities they’re delivering, and how are budgets shifting to accommodate this transformation?

In this environment, IT leaders have had to become very smart about how to run, grow, and transform the business with relatively stagnant budgets. The most effective IT leaders have assumed a strategic role in guiding their companies.  

A growing number of leaders have made understanding and maximizing the value of IT a critical part of their missions. Insurers that have moved toward an outcome-based measure of IT value are increasing, and CIOs using value-based metrics are increasingly seen as more strategic members of the teams.

Most carriers have not increased IT resources significantly to meet these challenges.  Insurer IT budgets have stayed fairly flat as a percentage of premium over the past 10 years, although the percentage spent on maintenance is shrinking as carriers invest more in new capabilities. 

Looking out for the next two to five years, Celent believes that carriers will continue to rapidly deploy new technologies. Measurements of IT value will continue to mature and shift toward value metrics (those looking at the outcomes of cost, time, and value improvements) to rate the performance of IT. This will enable a more informed debate over where to spend scarce IT dollars. 

For many insurers, the approach toward IT budget construction and the measurement of value remains rooted in a traditional approach of centrally planned budgets and top-down portfolio metrics which can mask where IT value is being delivered,  IT organizations that are seen as more strategic are more likely to measure the overall financial impact of technology delivered.

The privacy bomb and cost of personal data debt

I often hear architects talk about technical debt but it strikes me that a different debt is waiting for insurers.

Imagine a world where the regulator says that a customer owns data about the customer, regardless of where it is stored. The key observation here is the decoupling of ownership and control with storage. Most regulators have gone nearly this far and made statements about consumer ownership of consumer data, so perhaps it's not out of step with reality. This is discussion so far but perhaps the technology hasn't caught up with the intent. If we ignore the limits of technology …

There are perhaps 3 models emerging:

  • A. The data remains where it is and is controlled from there. Requires APIs…
  • B. The data moves as customer moves. Requires data standards…
  • C. Customer data is held in a shared environment. Requires APIs and data standards

Let's take a moment to really think that through for an insurer. If you hold data about a customer in your systems, that data is owned by another party. Ownership here is a complex word – it implies but is not limited to controlling access to the data, determining appropriate use of the data, revoking access to the data, determining how long that data is kept.

Scenario A
What if the storers are obliged to provide these controls to the owner of the data and actually – what if that obligation exists regardless of whether that owner is a customer?

Such a scenario may make it prohibitive for insurers to capture and store data directly. What would the world look like in such a scenario? Insurers would request access to customers data and have to disclose why they want the data, what they will do with it and perhaps the algorithms used  in order to offer products. Such a world might favour insurers with simpler pricing algorithms that are more expensive but customers understand what is being done with the data.

If we take it a step further, in theory there would be intermediaries emerge who help manage consumer data and help consumers simply share their data with trusted partners. I would suggest most people would not dig into the detail of who is sharing what so a service that says, "we've found these 15 services that only use the data in these ways and we've packaged that up for you" would be most welcome.

If however, we take existing businesses into this world then suddenly enterprises will be faced with the issue of how do they offer appropriate controls and management around the data already in place.

The standard already exists for sharing information in this way leveraging OAUTH as is used by Twitter, LinkedIn, Google and Facebook.

Scenario B
The cost for doing migration and conversion will lie with the party holding the data. A different type of debt.

This is the model the insurance industry is assuming will come to pass but it requires shared data standards which are harder to implement than API standards. There is also the issue of potentially lossy data migrations – I.e. The quality of the data is reduced in the migration – will this be 'OK' from a regulatory point of view?

Further this is more confusing for a consumer since the mechanism and means to manage access to the data will change each time there is a move. An approach intended to increase portability and movement could become an inhibitor as consumers grow concerned about retraining.

In theory though, this would allow insurers to differentiate on trust and service – a place where they already play.

Scenario C
The greatest challenge with a shared environment is who is the trusted party? Google, Twitter, Facebook and LinkedIn among others have made moves into authentication but they don't hold all the data and regulators in multiple countries are seeking to grasp control and this is a topic for Insurtech startups as well.

Some see Blockchain as a possible solution – the data in a shared open place, but secured and encrypted.

At this point this seems like the least likely solution, requiring the greatest cooperation and investment from the industry and governments. Regulators at this point seem to be supporting the other two.

Which will come to pass
There is a clear trend with private data becoming more valuable, but the cost of storing it is becoming more onerous. Regardless of which of the scenarios comes to pass or if some other scheme emerges – insurers must balance the cost of storing the data and the value it may bring now and in the future.

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 Great Pokemon Experiment

Nintendo's latest mobile phone (and mobile) game just keeps smashing records – it's already the biggest mobile game in the US and is looking set to become a worldwide phenomenon.

It's not relevant to insurance though is it? Well it is sort of introducing new risks with players being mugged and wandering into dangerous places including Downing Street in London apparently.

What's more interesting to me though is the mix of gamification, rewards for movement and the way it is making people meet up in novel locations.

Two opportunities sprang to mind for the industry:

  • What's most interesting to me is that if we were to measure health app's impacts by how far they get people to walk Pokemon Go could be the biggest health app of 2016, despite only launching in July. I'm curious how the Vitality and similar propositions rewarding customers for healthy behaviour will respond to the sudden uptick in activity. 
  • From an advertising point of view and ability to drive foot traffic to say, an agents office, Pokemon Go has huge potential – potential not missed on the developers as hidden code in the game already points to a hook up with McDonalds. For now though, if you have a Pokemon gym at your office location it might be a great time to do a little advertising or push that recruitment drive you've been thinking about.

As a technologist the photos springing up around the world of "Squirtle" being found in toilets (be careful where you point the camera) also goes to show how augmented reality has become mainstream as well, along with the threats AR and virtual reality could pose in at least distracted walking. I love that the digital and physical world are coming together and it's actually bringing families together too.

Whilst some will marvel at this latest craze, for those insurers with investments in the real world like agencies, offices, billboards – and for those that are agile enough – this surprise trend could serve as a great marketing route to catching all the customers, as well as all the Pokemon.

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?

Is State Farm Pre-positioning Itself for the End of Auto Insurance (and Maybe the End of Homeowners Insurance Too)?

Once in a while an insurance company asks me for advice—and occasionally even follows the advice which I provide.

I can say, however, that State Farm has never asked me for any advice about what they should do if the need for auto insurance disappears or substantially declines. Nor has State Farm ever asked me what they should do if the demand for homeowners insurance should take a similar dive.

Some readers may be wondering why would State Farm seek advice from your humble blogger about either topic?

Well, because I have been writing and talking about the end of auto insurance for four years. My just posted Celent Report, The End of Auto Insurance: A Scenario or a Prediction?  looks at how three technologies—telematics, onboard collision avoidance systems, and driverless cars—will depress auto insurance losses and premiums over the next 15 years.

I have also been writing and talking about the impact of the Internet of Things on the property/casualty industry for two years. Celent research subscribers can look at my reports: The Internet of Things and Property/Casualty Insurance: Can an Old Industry Learn New Tricks and Can a Fixed Cost Property/Casualty Industry Survive the Internet of Things?

So without even a word of advice from me, it looks like State Farm has pondered potential declines in auto and homeowners insurance; and decided to start some early positioning for itself and its agents if such things come to pass.

Proof Point: A new State Farm commercial called “Wrong/Right” shows a world without windstorms, traffic accidents, building fires, and emergencies. The commercial goes on to ask what about State Farm in such a world? The implied answer is that State Farm and its agents will be in the lending, wealth accumulation, and retirement income businesses. The tag line is “Here to help life go right.”

Which personal lines property/casualty insurer will jump in next?

Re-inventing underwriting: New ingredients for the secret sauce

Innovation is exploding across all aspects of underwriting and product management. New technologies are transforming an old art. But if there is one lesson to be learned, it is that carriers whose systems are not already capable of handling these changes will be alarmingly disadvantaged.  I've just published a new report looking at innovation in underwriting. 

Underwriting is at the core of the insurance industry. It is the secret sauce of the insurance industry. For hundreds of years, this process was accomplished through the individual judgement of highly experienced underwriters. Insights were captured in manuals of procedures and carefully taught to succeeding generations. 

Over the last few years, carriers have been heavily engaged in replacing core policy admin systems enabling a fundamental transformation of the underwriting process.  Gone are the days of green eye shades and rating on a napkin.  Gone are the days of identical products across the industry.  Gone are the days of standard rating algorithms used by all carriers. 

Carriers are using their newly gained technology capabilities to create dramatically different products, develop innovative processes driving efficiency, improve decisions, and transform the customer experience.  This transformation of underwriting is enabled by the ability to use business rules to drive automated workflow, but even more importantly this is a story about the fundamental transformation of insurance through the application of data.

This report looks at underwriting and product management and describes some of the newest innovations in each area with specific examples provided where publicly available.

What you’ll see is that almost every aspect of the underwriting and product management functions are being fundamentally transformed as carriers find new ways of utilizing and applying data. Carriers are using their newly gained technology capabilities to create dramatically different products, develop innovative processes driving efficiency, improve decisions, and transform the customer experience.

Key findings:

  • Carriers are using product innovation as a competitive differentiator and are experimenting with new types of insurance products that go well beyond basic indemnification in the event of loss.  Parametric products, behavior based products and products that embed services to prevent or mitigate a loss are becoming more common.
  • Predictive analytics are being used to better assess risk quality and assure price adequacy, as well as to control costs by assessing which types of inspections are warranted, or when to send a physical premium auditor, or when to purchase third party data.
  • Individual risk underwriting hasn’t gone away for commercial Ines, but the characteristics that are driving it are more quantified, requiring more data and more consistent data. 
  • The role of the product manager is changing dramatically to one of managing the rules rather than managing individual transactions.  This requires new skills and new tools. It also will drive changes in how regulators monitor carriers underwriting practices. 

We expect to continue to see innovative technologies being deployed in underwriting and product management over the next 3-5 years – especially in the following areas:

  • Carriers will continue to focus on product differentiation.  The Internet of Things will facilitate more behavior based products and more parametric products. Carriers will find new ways of embedding services within the product, or as part of the remediation after a claim. 
  • The role of the product manager will change dramatically focusing on deep understanding of rules.  Vendors will need to provide tools to better analyze the usage rates, the impact, and the stacking of rules. 
  • We’ll continue to see a massive eruption in the amount and types of data available.  Unstructured data such as in weather, car video, traffic cameras, telematics, weather data, or medical/health data from wearable devices will become even more available.  Carriers will invest in managing and analyzing both structured and unstructured data.  Implementation of reporting and analytic tools as well as supporting technologies – data models, ETL tools, and repositories – will continue to be major projects.
  • New technologies will create new exposures, drive new products, and generate new services.   From wearables, to advanced robotics, from artificial intelligence to gamification and big data, carriers will be applying physical technologies as well as virtual technologies to drive product development and risk assessment.

The available technologies to support property casualty insurance are exploding. Shifting channels, new data elements and tools that can help to improve decisions, provide better customer service or reduce the cost of handling are of great interest to carriers.  Investments are being made across all aspects of underwriting and product management. Staying on top of these trends is going to continue to be a challenge as new technologies continue to proliferate.  But if there is one lesson to be learned, it is that carriers whose systems are not already capable of handling these changes will be alarmingly disadvantaged.

For carriers who are already moving down this path, this report will shine a light on some of the creative ways carriers are transforming the process of underwriting.  For carriers who have not begun this journey, this report may be a wakeup call. The pace of change is increasing and carriers who continue to rely purely on individual underwriting judgment will find themselves at a disadvantage to those who are finding new sources of insights and applying them in a systematic manner to improve profitability. Wherever you sit, this rapid pace of change is exciting, empowering and galvanizing the insurance industry.