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.
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.
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?
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.
- 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.
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
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?
Today’s announcement of Apax Partners’ acquisition of Agencyport makes sense. This deal is a further commitment by Apax to the property/casualty software sector—following shortly after Apax’s announcement of its equity investment in the soon to be independent Duck Creek.
Insurers want the internal and external users of their systems to have seamless mobile access to new business and other functionality. Agencyport has developed one of the leading solutions for agents, brokers, and policyholders find information and execute transactions with insurers’ core systems.
As is true for any technology acquisition, the soon to be combined management teams of Agencyport and Duck Creek will need to focus on communicating the benefits of their new relationship to current and prospective customers—sending a “good before, better now” message. Providing “vendor neutral” support to Agencyport customers who do not use Duck Creek solutions and Duck Creek customer who do not use AgencyPort solutions will also be crucial.
I’m currently dealing with two group email box issues. In one instance, I’m a frustrated customer, irritated beyond belief by the lack of response to my repeated email service requests. In the other instance, I’m the party ultimately responsible for a group email box, and I’m getting an earful from a frustrated customer. The overlay of these two, unrelated incidents is perfect: Some sort of cosmic justice is clearly being served.
Stages of Group Email Box Grief
You might be familiar with the Kübler-Ross model, which shows how grieving people progress through Denial, Anger, Bargaining, Depression, and Acceptance. I think something similar happens when any of us try to use a poorly managed group email box. It goes something like this:
Hope. After the initial disappointment of not finding a human being with whom we can interact directly, we console ourselves that, at least, our problem has been recognized by our service provider. By creating a named email box, the service provider is clearly implying that help is a click or two away. Got a generic question about your health plan coverage? Email email@example.com. Need help from someone in Finance to get an expense check cut? Why, ExpenseTeam@yourcompany.com sounds like a productive place to turn. But the relief at finding such elegant, targeted service solutions is often short-lived.
Perplexity. After a day or so of non-response, we wonder. Did I really send an email to that email box? Did it get through? If it got through, did anyone read it? This stage is characterized by self-doubt and forensic examination. We check and recheck our Inbox, Spam Folder, and Sent Mail under the (reasonable, by the way) assumption that if the tool was working, someone would have responded by now.
Dismay. A week has passed. On the realization that no process could possibly take this long, Dismay sets in. In this stage, we ratchet up the pressure, typically by resending our original note with a snarky addition, like, “I really would like to hear from someone on this! Please?”
Anger & Activation. At this stage, we realize that help is not forthcoming. For most of us, this happens between Day 7 and Day 8. (Though my experience with them suggests that Millenials make the entire progression from Hope to Anger & Activation in as little as an hour.) We start looking for alternatives, as confidence in the system plummets. In the extreme, we try to get face to face with someone who can solve our problem (“I’m going to drive in to the cell phone store and make them solve this billing issue!”). But alternatives include calling switchboards and asking for the CEO, starting a Twitter rant, or activating a defection to other providers. None of these reactions enhance a customer relationship.
The Service Provider’s Response
As a service provider myself, I’m embarrassed to admit that emails to firstname.lastname@example.org don’t always get perfect, productive responses. Of course we have a process in place that routes inbound queries to more than one person, to make sure we don’t run into out of office issues. But things occasionally fall through the cracks, due to technical reasons (e.g., aggressive, evolving spam filters), scheduling quirks (e.g., all Celent staff are in the same meeting), or simply due to human nature.
The latter category is particularly vexing. When several people are responsible for something, the real-world effect is that no one feels responsible. I’m convinced that using an info@ email box inevitably lessens the sense of accountability and responsibility that drives all effective service teams. Add in the dynamic of impersonal, electronic communications—which by its nature generates less empathy than a simple conversation between two human beings— and you’ve got a recipe for disaster.
In this annoying age of one-to-many communication (says the blogger, ignoring the irony), there’s a strong case to be made for enabling more direct, personal connections. Many companies will resist this old-fashioned, and by some measures, expensive, view. They will go down the path blazed by online retailers, and try in vain to provide acceptable service levels via FAQ and info@ email boxes. But the price they will pay is customers who frequently progress to Anger & Activation, and then walk away grumbling.
A smarter play is for firms to foster real relationships with their customers. For me, that means going old school. Making it easier for customers to navigate to a real person who is ready to listen and willing to solve problems. I’ve told my team to plaster their direct contact info on every report, presentation, and marketing piece. I’ll keep the email@example.com address open as a benign trap for spammers. But the rest of you are encouraged to email me directly at firstname.lastname@example.org.