Long Live Legacy and Ecosystem Transformation

When I started working at Celent back in November 2007, one of the research topic we were covering extensively was the legacy system modernization or replacement topic. Nowadays, legacy modernization remains a topic that has still a high importance in insurance CIOs’ agenda across the globe. Indeed based on our 2017 insurance CIO survey and out of 150 responses received across the globe, 57% of insurers are currently working on legacy modernization system projects. Another 10% are in the planning process and 11% will begin new legacy transformation projects next year.

It is therefore important for us to help our insurance customers understand what embarking in a core system replacement or modernization project means. While the benefits of modernizing core legacy systems are clear and compelling (gaining a competitive advantage — or achieving competitive parity, reducing operational and IT costs, making better underwriting and claims decisions, seizing analytic advantages when information and processes become completely digital), there are a lot of factors at play from the definition of the new system requirements, the approach to be chosen between the development of a new system and the purchase of a package or a best-of-breed component, to the selection of the optimal partners. Another crucial part of a legacy system replacement is the implementation of the new system as it can represent a major challenge notably in terms of project management, customization effort and migration. Implementations are particularly challenging when they involve multiple vendors and integrations.

To help our insurance customers figure out all the factors at play, every year we describe some cases in the frame of our Model Insurer program. This year we will be presenting the three cases we have received among more than 20 submissions in the frame of our Innovation & Insight Day event, which will take place in Boston on the 4th of April 2017. In addition to presenting the legacy modernization category award winners, we will also explain why they have decided to replace their legacy systems and what opportunities have been identified. We will also describe the implementation effort and draw out lessons learned. For those of you who will not be able to make it in person, we will publish a report profiling the three winners but I hope to meet you in big number at our event in Boston.

DOL Fiduciary rule delayed

On Friday, President Trump signed an executive order that begins the process of rolling back Dodd-Frank. He also signed an executive memorandum that directs the Labor Department to review the effect of its fiduciary rule on investors’ ability to access financial advice. If there is an adverse effect, the memorandum authorizes the DOL to rescind and revise the rule.

The DOL rule has been a point of particular discussion since the inauguration between a group of us at Celent and our parent company, Oliver Wyman. The discussion focused not on whether the rule would be implemented but instead on how insurers should plan and react. It would be easy to believe that President Trump’s executive memorandum is the first step in the revocation of the rule because it is delaying it. It is certainly a believable outcome; however, we believe delaying preparation would be the wrong decision for a number of reasons.

Most prominent among them is that there is considerable uncertainty as to what Friday’s delay actually means. Insurers are, by definition, in the business of assessing and hedging risk and not knowing how the DOL review will turn out has risk associated with it. We believe that the right response is to hedge this risk by continuing to prepare for the implementation of the rule, even if the rule is likely to be modified or even rescinded.

Why? Because the fiduciary rule as it written today might happen. It might go into effect with a modest delay. It is easy to see a path that results in changes in compensation in the qualified market. It is even conceivable that this rule, or a similar one, would ultimately affect the entire life insurance and annuity market. There is considerable precedent, globally. For example, the UK implemented their Retail Distribution Review (RDR) in 2013.

In simple terms, the end consumer, ultimately, will believe that a rule that requires advisors to make decisions in their best interests would be popular. We suspect most of them expect that their advisors already do this!

There is clearly a cost of implementing the new rules and this cost is significant. However, most companies have already made the majority of their investment and completing these efforts makes sense. We are even hearing from advisors that they believe that conforming to the rules of a fiduciary could be a competitive advantage. You can see it now: “I work in your best interests. My competitors don’t”.

This is not the time or place to debate the topic in detail, but we would welcome the conversation. We would love to hear your thoughts on the matter. Feel free to email me directly at tscales@celent.com. If I get enough feedback, I’ll post a summary soon.

You might also find a few publicly available reports from Oliver Wyman interesting:

Implications of the Trump administration for financial regulation

The State of the financial services industry in 2017

How Insurity’s Acquisition of Valen Could Create a Virtuous Analytics Circle

It’s open season on insurance technology acquisitions in general, and for Insurity in particular. Today’s announcement of Insurity’s acquisition of Valen Analytics is now Insurity’s fourth acquisition in a multi-year string: Oceanwide, Tropics, and in rapid succession Systema and Valen.   The potential for crossing selling among the five customer bases is obvious.   Less obvious, but of potentially even greater value, is Insurity’s ability to invite all of its insurer and other customers to use its Enterprise Data Solutions IEV solution as the gateway to Valen’s contributory database and Valen’s InsureRight analytic platform.   Insurity now has the scale and the means to create a virtuous analytics circle: individual customers contributing a lot of data through IEV to Valens and receiving back analytic insights to feed into their pricing, underwriting, and claims operations.   Good move.

A History of Model Insurer

I have had the great privilege of running Celent’s Model Insurer program for four of its eleven years. I also participated in the evaluation of the winners in three other years, so it’s fair to say I am Celent’s Model Insurer historian. It is only right that I give a brief history of the program! Since the beginning, the vision for Celent’s Model Insurer research has been to try to answer an apparently simple question: “What would it look like for an insurer to do everything right with today’s technology?” As we all know, technology plays an integral role in every insurer’s strategy to grow its business and remain competitive, so learning about other companies’ initiatives helps you learn if you are doing the right thing. Our inaugural “Model Carrier” report recognized 39 insurer technology initiatives as “Model Carrier Components.” Our approach was to offer, at a high level, some best practices in the use of technology across the product and policyholder lifecycle (product definition, distribution, underwriting, policy administration, service, billing, claims, reinsurance) and in IT infrastructure and management that a “model carrier” would use. Recognized insurers participated in Celent’s first Model Carrier Summit in NYC on Wednesday, January 17, 2007. Model Carrier was renamed Model Insurer in 2010. In 2011 Celent introduced Model Insurer Asia. Insurance in the Asia-Pacific region faces its own set of business challenges, and insurance technology has evolved along a distinctive path. The inaugural Model Insurer Asia report and event used Celent’s globally recognized methodology and highlighted 18 Asian insurers for their state-of-the-art technology in the region. After 11 years of reviewing Model Insurer submissions, Celent is able to see firsthand how technology is changing the insurance industry. In total Celent has received nearly 700 submissions from insurers across the globe since that first report in 2007. Each year builds upon the trends of the previous year — the technology we saw as innovative in 2012 or 2013 is now more commonplace, and new, different opportunities are emerging for leading insurance companies every year. For example, one 2017 case discussed robotic automation, a technology unseen in insurance before 2015. As the program became more popular, Celent created a consistent, rigorous standard of evaluation. Since our Model Insurer program started, Celent has identified Model Insurers by looking at best practices in the use of technology across various areas of the industry. Model Insurer-winning initiatives are selected from the many submissions received and presented in our annual Model Insurer reports as case studies of specific initiatives and capabilities. In 2012 we changed how we categorized the projects to include Celent’s research themes, replacing the product and policyholder lifecycle components. This year we received over 60 submissions from 19 countries for Model Insurer (over 100 when you include Model Insurer Asia). Although the United States and Canada accounted for 52% of the submissions, EMEA, Asia-Pacific, and Latin America were represented well with 27%, 13%, and 8% respectively. They span the themes legacy and ecosystem transformation (40%), innovation and emerging technologies (25%), digital and omnichannel technologies (17%), operational excellence (12%), and data mastery and analytics (7%). Model Insurer winners stand as examples of successful IT project implementations across the globe. Celent believes that insurers can look to Model Insurer case studies and the knowledge Celent gains from analyzing all of the submissions as a means of understanding what is happening technologically in the market and a means of comparing themselves to a group of insurers challenging the status quo. Please join Celent in Boston on April 4 for Innovation and Insight Day, where the winners of the 2017 Model Insurer awards will be announced. I promise that the day will be worth your while! You can register here.

Guidewire makes blockbuster acquisition of ISCS

Long sought after by Private Equity firms, other insurers, and the occasional investment banker looking for a transaction, privately held ISCS has chosen to join Guidewire (NYSE:GWRE).   ISCS adds its SurePower Innovation end-to-end suite to Guidewire’s existing InsuranceSuite end-to-end suite. This is a decided change of acquisition strategy for Guidewire. Up to now, all its acquisitions have fit into—or added a single new element—to InsuranceSuite.   Why?   Well, if you are a publicly held company growth is good. ISCS immediately brings more revenue and more importantly brings good market momentum with a solid sales pipeline.   ISCS’ focus on small and midsize insurers brings a few other intriguing possibilities. One is that Guidewire and its SI alliance partners will now aim at the large and very large insurer market, leaving the small and midsize market to ISCS. A second is that ISCS will become a vehicle for small insurer growth outside of the US. The third is that ISCS’ more extensive cloud experience, especially with AWS, will step up Guidewire’s movement to the cloud.   For now Guidewire shareholders have a heckuva gift under their Christmas trees.  

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

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.

It’s Not Just Twitter’s Problem: What Insurers Need to Know about DDoS and the Snake in the IoT Garden of Eden

On Friday October 21 a massive Distributed Denial of Service (DDoS) made over 1,000 websites unreachable, including, Twitter, Netflix and PayPal. Two cloud providers, Amazon Web Services and Heroku reportedly also experienced periods of unavailability.

The attack was directed against a key part of the internet’s infrastructure, a domain name system provider, Dynamic Network Services aka Dyn. When a person enters a web address into a browser, such as google.com, the browser in turn needs an IP address (a string of numbers and periods) to actually connect with that web address. Domain name system providers are a critical source of IP addresses.

On Friday Dyn was the target of perhaps the largest ever DDoS, when its site was overcome by tens of million of requests for IP addresses. Because Dyn could not provide the correct IP addresses for Twitter and the other affected sites, those sites became unreachable for much of the day.

It also appears that the DDoS was mounted using a widely available malware program called Mirai. Mirai searches the web for IoT connected devices (such as digital video recorders and IP cameras) whose admin systems which can be captured using simple default user names and passwords, such as ADMIN and 12345. Mirai can then mobilize those devices into a botnet which executes a directed DDoS attack.

There are a number of potentially serious implications for insurers:

  • An insurer with a Connected Home or Connected Business IoT initiative that provides discounts for web-connected security systems, moisture detectors, smart locks, etc. may be subsidizing the purchase of devices which could be enlisted in a botnet attack on a variety of targets. This could expose both the policyholder and the insurer providing the discounts to a variety of potential losses.
  • If the same type of safety and security devices are disabled by malware, homeowners and property insurers may have increased and unanticipated losses.
  • As insurers continue to migrate their front-end and back-office systems to the cloud, the availability of those systems to customers, producers, and internal staff may drop below acceptable levels for certain periods of time.

The Internet of Things will change insurance and society in many positive ways. But the means used to mount the October 21 attack highlights vulnerabilities that insurers must recognize as they build their IoT plans and initiatives.

Where is the innovation in Individual life and annuity?

I had the pleasure of attending an amazing event last week in Las Vegas. The InsureTech Connect event drew over 1,500 people, from insurers to vendor to investors. Given the unprecedented size of an inaugural event, I was very impressed with how well the event worked. The sessions were good, but for me, the opportunity to have individual meetings with key industry players was even better. Our own Oliver Wyman was the primary sponsor of the event.

As I cover individual and group products, plus health and have an experience in P&C, I personally got a lot out of the event. I did have one major observation which I think speaks of the individual life and annuity industry. While I did not do a scientific study, I would estimate that over 50% of the content was focused on P&C insurance. This is not particularly surprising as they have all the cool technology like drones. My estimate was that the group insurers and health insurers were about 45% of the content, with an emphasis on topics like wellness programs and direct to consumer exchanges.

If you did the math, this only leaves 5% of the content for individual life and annuity products and that may very well have been a stretch. There was one session on eliminating the health data gathering for underwriting, which was well done and well attended, but past that, not so much.

Some insurers are diversifying, into Group or Wealth management, but I would not characterize that as innovation.

So what is holding us back as an industry? There are many things, from risk aversion, to length of the application to the sheer amount of data required for underwriting. I could write pages and pages on the topic, which explains why the next blog post you read from me is likely going to discuss the report I am finishing on this exact topic.

The potential for disruption in the space is huge and the coveted Millennial buyer is looking for just such innovation. Let’s make it happen.

“All that glitters is not gold”: Four concepts, four potential insurtech responses

As a few of us head to InsureTech Connect in Vegas this week to explore what the world has to offer in insurtech, I feel the need to keep my feet firmly on the ground and not to get too caught up in all of the glitz and glamour of both the location and the trendy start-up scene with its sea of beards.

“Bah, humbug!”, I hear you taunt in response.

Although I love the insurtech scene and welcome the fresh ideas, enthusiasm and willingness to be bold it brings (….and it’s way overdue and our industry needs a really good shake-up), I am mindful that history warns us that we should maintain an air of caution at this stage in any tech market’s development.  As the saying goes, “all that glitters is not gold” and there will undoubtedly be winners and losers (perhaps making Vegas all the more appropriate for the location).

Also, until wider market commentary around insurtech switches from the investment going in towards the value coming out of the start-ups (with real numbers on stealing market share, run-away customer demand, and incredible returns), we simply won’t know which way the market will move…if at all.

So, where will I be looking for the signs of a fresh gold seam and what might be an appropriate response for an insurer’s ‘insurtech strategy’?  From my perspective, there are four areas to focus upon:

  • Distribution. Undoubtedly, this is the area under the greatest threat of change through mobile, embedded micro-transactions and a change in demographics.  If you’re a traditional agent or direct writer, watch-out. If you’re an insurer on the other hand, your biggest challenge is likely to be the “speed of pivot” between current traditional and new channels that emerge. As a primary insurer, market scanning, operational agility and partnerships are likely to be critical elements of your insurtech strategy.
     
  • Automation, Analytics and AI. For decades, the industry has been running on robust (at least ‘robust’ for some of the time) transactional systems. For the bold, we’re now at a point where a substantial chunk of the operating model could arguably be replaced by not much more than an algorithm surrounded by a much smaller team of people to handle the customer touch-points. “Cloud native”, analytically driven micro-service architectures are the direction of travel. In markets exposed to aggregators, we have already seen some evidence of these characteristics being adopted by new entrants to the market.  As an incumbent, the challenge remains an age-old one of internal operational transformation and overcoming cultural inertia. Here, an insurtech strategy may be one of partnership in order to catalyse a change.
     
  • New propositions.  New risks, new data sources and, with them, new services.  Whether cyber-risk, the sharing economy or IoT enabled services, there is a lot of ground to cover here.  Out of these, new risks and use of new data sources appear to show the greatest promise in the near-term, and within the normal remit of an everyday insurer’s strategy. The IoT requires a different response. Although very very hot, it is a slower burn than other proposition related areas, primarily due to differing rates of sensor adoption, sensor installation economics, the absence of standards, the “what’s in it for me?” end-user proposition and the number of parties to engage, each with different agenda and requiring co-ordination. That said, it’s inevitable that it will become ever more pervasive across the industry. The bigger question, however, is what will the insurance industry’s role be in shaping it? Any insurer interested in the IoT needs to have effective partnership strategy with adjacent industries at its core.
     
  • New risk-bearing models. The word ‘disruption’ is overused in our industry, often without a solid understanding of what it truly means (for example, I’ve lost count of the number of times I’ve seen it used to describe a neat technology ‘widget’ that performs just one step in an end-to-end process).


Simply speaking, in order for an industry to be disrupted, one of two things needs to happen. Either new technology needs to open-up a significant jump in productivity (rendering the old ways of doing things as obsolete) or there emerges an effective substitution for the need being satisfied (with the consumer switching as a consequence).  Anything else could be argued as just normal competition and shpuld be expected.

As highlighted in my first point above, it’s evident that distribution is facing an increasingly turbulent time.  It is also clear that some technologies may enable a leap in productivity once implemented in the extreme (and not just for a single process step). However, for me, the court is still out for the substitution of the main risk-carrying entity itself.

However, one area that threatens this position is P2P (both at the front-end with insureds and the back-end with methods of alternative risk transfer). Even though it appeals to the more geeky and technical side of me, the barriers to adoption at scale just feel a little too high currently – whether market education related or regulatory (as, if executed poorly, a misselling scandal may result).

Furthermore, market efficiency is probably still better served through the current market structure than P2P owing to the ‘law of large numbers’, albeit implemented on better technology and with greater transparency. After all, there is a reason why mutual insurers have been merging or converting to public companies around the world.

That said, I’m willing to be proven wrong and will be looking eagerly for firms / evidence to demonstrate otherwise. In this area, although the brave will venture out regardless, an appropriate insurtech strategy for the more cautious feels like a classic ‘watch, learn, and be ready to pounce’ with a ‘Fast Second’ strategy.

For insurers reflecting on their engagement strategy for insurtech, the common thread across all but one of the areas above is the need for effective partnerships between insurers and start-ups. As Mike Fitzgerald observes in Insurer Start-up Partnerships: How Maximize the Value of Insurtech Investments:

“Both sides face challenges. Industry incumbents face the burden of their legacy systems, their aversion to failure, and a habit of extended decision cycles. Newcomers lack the capital to underwrite risk, do not understand the regulatory environment, and cannot scale easily." 

There is value (and hopefully gold) to be gained from both sides in engagement.

Finally, while interest in insurtech is high, any insurer ought to be maintaining a watch on activity, providing that a strong bias towards value being delivered is taken (as opposed to money going in).

So, in summary, that’s what I’ll be focused on over the next few days – the hunt for value around these four themes.