Insurtech 2016=Hype; Insurtech 2017=Value

Insurtech 2016=Hype; Insurtech 2017=Value

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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?

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

“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.

The Muslin is off the Lemon — Lemonade Launches

The Muslin is off the Lemon — Lemonade Launches

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

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

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

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

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

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

 

Vrooom: New Federal Guidance Should Accelerate Development of Autonomous Cars

Vrooom: New Federal Guidance Should Accelerate Development of Autonomous Cars

September 20 was a good day for the development of autonomous cars. The Feds, as embodied by the Department of Transportation and the National Highway Traffic Safety Administration (NHTSA), have issued guidance and principles for the development of autonomous cars.

There are two key takeaways:

  1. By issuing guidance, rather than regulation, the Feds are trying to facilitate, but not control, the technological developments that will lead to street-ready autonomous cars
  2. The guidance makes some common sense delineations between what the federal government should do and what states should do
  • The feds want one national standard for how manufacturers conduct driverless car R&D–following a 15 part safety assessment protocol (covering data recording, system safety, human:machine interface, etc.).
  • The feds want the states to focus on vehicle licensing and registration, traffic laws, and motor vehicle insurance and liability

If actually followed (are you listening California?) the political and regulatory environment should speed the day when a consumer can walk into a dealer, and be driven out by a shiny, brand new autonomous car.

That day will be good for car buyers, for manufacturers, and for society as a whole.

However, for insurers that day will also hasten the decline of auto insurance—per the recent Celent report The End of Auto Insurance: A Scenario or a Prediction.

Changing the Landscape of Customer Experience with Advanced Analytics

Changing the Landscape of Customer Experience with Advanced Analytics

That timeless principle – “Know Your Customer” – has never been more relevant than today. Customer expectations are escalating rapidly. They want transparency in products and pricing; personalization of options and choices; and control throughout their interactions.

For an insurance company, the path to success is to offer those products, choices, and interactions that are relevant to an individual at the time that they are needed. These offerings extend well beyond product needs and pricing options. Customers expect that easy, relevant experiences and interactions will be offered across multiple channels. After all, they get tailored recommendations from Amazon and Netflix – why not from their insurance company?

Carriers have significant amounts of data necessary to know the customer deeply. It’s there in the public data showing the purchase of a new house or a marriage. It’s there on Facebook and LinkedIn as customers clearly talk about their life changes and new jobs.


One of the newest trends is dynamic segmentation. Carriers are pulling in massive amounts of data from multiple sources creating finely grained segments and then using focused models to dynamically segment customers based on changing behaviors.

This goes well beyond conventional predictive analytics. The new dimension to this is the dynamic nature of segmentation. A traditional segmentation model uses demographics to segment a customer into a broad tier and leaves them there. But with cognitive computing and machine learning an institution can create finely grained segments and can rapidly change that segmentation as customer behaviors change.

To pull off this level of intervention at scale, a carrier needs technology that works simply and easily, pulling in data from a wide variety of sources – both structured and unstructured.

The technology needs to be able to handle the scale of real-time analysis of that data and run the data through predictive and dynamic models. Models need to continuously learn and more accurately predict behaviors using cognitive computing.

Doing this well allows an carrier to humanize a digital interaction and in a live channel, to augment the human so they can scale, allowing the human to focus on what they do best – build relationships with customers and exercise judgment around the relationship.

Sophisticated carriers are using advanced analytics and machine learning as a powerful tool to find unexpected opportunities to improve sales, marketing and redefine the customer experience. These powerful tools are allowing carriers to go well beyond simple number crunching and reporting and improve their ability to listen and anticipate the needs of customers.

Using private consumer data in insurance: Mind the gap!

Using private consumer data in insurance: Mind the gap!

Insurance is no different to other industries when it comes to capturing valuable data to improve business decisions. At Celent we have already discussed how and where in their operations insurance companies can leverage private consumer data they can find on social networks, blogs and so on. For more information you can read a report I have published this year explaining Social Media Intelligence in insurance.

Actually there are various factors influencing insurers' decision to actively use private consumer data out there including among others regulation, resources adequacy, data access and storage. I think that an ethical dimension will play a more important role going forward. More precisely I wonder whether consumers and insurers' perceptions about the use of private consumer data are divergent or similar:

  • What do consumers really think about insurance companies using their private data on social networks and other internet platforms?
  • What about insurers; does it pose an issue for them?

In order to assess this ethical dimension, we have asked both insurers worldwide and also consumers (in the US, UK, France, Germany and Italy) what where their view on this topic. To insurers, we simply asked them what best described their opinion about using consumer data available on social networks (Facebook, Twitter, LinkedIn, etc.) and other data sources on the internet (blogs, forums, etc.). To consumers, we asked what were their opinions about insurers using these open data sources for tracking people potentially engaged in fraud or criminal activity.

The following chart shows the result and indicates that there is a big gap between the two sides:

UseConsumerData

Overall what is good for consumers is not necessarily good for insurers. In the same way, what insurers want is not always in line with what consumers expect from their insurers. Going forward the question for insurance companies will be the find the right balance between the perceived value of private consumer data and customers' satisfaction. In addition, it will be tough for them to figure out the impact (pros and cons) of all factors at play in the decision to invest in technologies allowing for the efficient use of private consumer data accessible on the Internet.

At Celent, we are trying to define a framework that can help them structure their reasoning and make an optimal decision. So more to come in the coming weeks on this topic…

Re-inventing underwriting: New ingredients for the secret sauce

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.