2014 Latin America Outlook

2014 Latin America Outlook
The following text was published today in Inter-American Dialogue’s Financial Services Advisor under the title: “What is driving the insurance market in Latin America?” I provided my view to FSA in advance, and now that it is out there I thought it made sense to share it with you through our blog. Growth continues to be a common theme throughout the region, though not at the same pace that before and not equally in all countries. The Pacific Alliance countries have been growing faster than Mercosur countries, for example. Insurance in Latin America has its own dynamics and has been growing year over year, even beyond GDP increase, and is expected to continue this trend through 2014. A growing middle class is driving insurance buoyance in the region, with Brazil much setting the tone. Estimates indicate that 40M people have gone from living in poverty to the middle class in the past decade in Brazil. Nevertheless, there is a large number of people in the base of the pyramid (BoP) which is also of interest of insurers. Infrastructure investments, trade, and group life and benefits to attract employees are key drivers for commercial insurance growth. We are seeing moves towards consolidation in certain countries which are imposing stronger capital requirements and also acquisitions and new entrants into high growth potential markets, such as Brazil, Colombia and Peru. Competition is increasing and new segments are being targeted with more focus. All this is driving higher investments from insurers as well as competition for qualified talent in the marketplace. Some countries are moving towards a stricter risk-based capital measurement, and the rest should move in the same direction as part of a global and regional trend. In many countries sales practices are far from innovative and what customers expect to be. There is a need to evolve in the use of distribution channels and provide a better customer experience. Most insurers are still tied to legacy systems that impose a burden to become more competitive, efficient and smart. Rising inflation, weakening of financial market due to lower quality of loans (as they compete for the raising middle class); lower demand of products from China (mostly commodities), Europe and USA, and risk aversion from foreign investors are some of the concerns shadowing the region’s potential.

Stop Designing to be a Digital Insurer; Use a Business Value Proposition

Stop Designing to be a Digital Insurer; Use a Business Value Proposition
So much has been written about social, mobile, analytics, cloud (SMAC, previously SOLOMO). Insurers are encouraged to be “digital”. It appears to me that most of these efforts are “technology searching for a solution to solve.” I was lucky enough to be listening to my mentor once when he told me “Don’t ever start designing a solution with specific technology, begin with the business problem/opportunity.” One of my expectations for 2014, is that we can start discussing our opportunities in the framework of a higher design principle, one that is not technology-led, but speaks to delivering value for consumers of insurance (both individuals and businesses). By the end of the year, I hope to have had some great back-and-forths on what these principles could be. To start the dialog, I suggest that we start designing our solutions to increase Awareness, helping insurers, customers and agents become more aware of the risks faced by their policyholders and how initiating actions when risks change. To paint the picture, I’ll start with what Awareness looks like in insurance. Then I’ll describe how I think this can lead to higher value solutions as compared with starting with specific technolog(ies). Here are two examples from the Celent research library on innovation in insurance that tell the story of how the Awareness principle has been applied. One is live and one is a past implementation:
  • Tokio Marine & Nichido partners with a telecommunications firm to deliver location awareness for their one day insurance products. If I drive to the airport, I receive a text on my phone with an offer for trip insurance.  If I am approaching a ski area, I get a message that ski event insurance can be bought for one day for as low as $4.00. If I work at the airport or ski employee, I don’t receive the texts after the first few – the system learns that I am not a prospect. Based on location awareness, Tokio Marine is Aware that I am engaging in an activity that is not part of my typical day-to-day routine, one for which I may not be covered, and offers me a policy to cover the gap at the right time.
  • In the United Kingdom, the insurer AXA combined several pieces of public data with their internal policyholder information and created a visual map of where the London riots occurred on the morning after each of the five nights of the 2011 riots. They could tell by looking at the map which of their policyholders (mostly small retail businesses) were located in the affected areas. For those that had not reported a claim, they called them to make sure that everything was alright – NOTE: the insurer called the insured to ask if they had a loss. AXA reversed the traditional FNOL (first notice of loss) process and proactively contacted their policyholders based on this Awareness of the increased risk of their customers.
In an Aware Insurer, the process is engineered to be continuous. For example, data tools allow automated monitoring of the inventory of small business policyholders to detect changes in purchasing patterns and it is discovered that a general contractor begins to purchase roofing materials. Predictive analytics examines these changes and assigns a confidence sore regarding if this is a one-off event or more permanent change — has the contractor started delivering roofing services? Automated rules compare the inforce policy coverage with the possible new operations to determine if the contractor is performing an excluded operation that is not covered for liability loss. Digital technology then notifies the insured of this situation immediately across several technical platforms and suggest coverage options, or sends an immediate notification to the agent and prioritize is appropriately in his/her work queue. The technologies underneath Awareness include digital, analytics, cloud, perhaps some social, but these are not the “end state”. Digital should deliver unprecedented awareness anywhere any place; big data infrastructure should combine varied types and, likely, large amounts of data effectively and efficiently; analytics (algorithms) should mold this data into new insights and predictions. So, does an insurer need to be digital to make this happen? Yes. Have big data skills? Definitely. Be able to conceive, construct and test analytic algorithms? Definitely. But being a “digital insurer” won’t itself deliver this increased awareness, being able to hoover up and handle vast amounts of purchasing data won’t either.  Combining the different forces around making the insured, agent, and company more aware when a risk profile changes will bring the technologies together to solve a business problem.

I’m convinced that starting from this higher order of design will deliver more value faster, will help get business sponsors on board earlier and more completely and will avoid investment in technology for technology’s sake.  As we enter 2014 I am also sure that we are ready to have this conversation and design solutions what change insurance from a backward-facing, financial indemnity product to a continuous, predictive, risk management service.