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.

A long time ago in a galaxy far far away, I went to a two hour meeting to reinvent insurance

It was in the Galaxy InternetBubble, stardate 2000.12.1. I was at a technology firm that was riding the Internet rocket up—and a couple of years later rode it back down. (It actually made a soft landing, and those early Web-anauts lived to tell the tale). In those heady early days of the web, there was a general feeling that the Internet was going to “change everything.” True, there wasn’t a lot of clarity about what “everything” or “change” were, but it was something many people said (and possibly believed). In any event, there was a steady stream of VC-funded insurance start-ups that would visit us, asking for our vision of what the web would wrought—while we were trying to think of some ways to be hired by those start-ups to make those visions real. If any of this sounds familiar to anyone, let me know. So there I was, minding my insurance Subject Matter Expert business, and someone asked me to attend a meeting that afternoon. The purpose of the meeting was to reinvent insurance. And I thought, “Why not?” I entered the conference room, and saw that the other attendees (bright and articulate professionals each and every one of them) had very limited insurance experience. No one in the room (with the exception of your humble blogger) could have defined hazard, exposure, or probable maximum loss, or the law of large numbers, and so on. At the end of the two hours, we had in fact not reinvented insurance. There was no follow-up meeting. Why bring up this bit of ancient history? Because we have arguably entered another period in which claims are made that technology, or digital, or insurtech is going to, if not change everything, at least disrupt everything. As an example, see these Celent reports about the end of auto insurance, or the Internet of Things, or digital strategies. If you want to separate the disruptive wheat from the buzz-based chaff this time around, here are some basic questions to ask:
  • Does the proposed use of a new technology impact the basics of the insurance model?
  • Can it scale?
  • Will it change the relationships among cost, price, and value in a way that is fair to the insurer, the distribution channel and the policyholder?
If the answers to these questions are all yes, maybe maybe someone will reinvent insurance this time around. This time around, may the In-Force be with us.

For Halloween: The Tricks to Get Innovation Treats

Innovation is not witchcraft but, when done successfully, there is a touch of magic. The magic happens when innovation becomes “part of the way we do things around here” (read: corporate culture). When people across the firm approach their jobs constantly through the lens of “how do I change my job so that I deliver more value to my customers?”, magic can happen. We discussed this in a webinar this week (Innovation in Insurance: Differences across Continents). The point was made that there are specific actions (tricks!) that prepare a corporate environment for magic. Specifically:
  • Establish a common language around innovation; what is it? what is it not?
  • Revise reward systems, especially around encouraging “fail fast” behaviors
  • Develop a communication plan around innovation – leverage Corporate Communication expertise to sustain a messaging effort around innovation
  • Tune existing governance structures to handle innovation initiatives differently than run-the-business projects
The message coming through in Celent research is that innovation is more process, sweat, and political capital than black art. So, try these tricks in your organization so that you (and your customers and teammates) can enjoy some innovation treats!

“End the Carnival!” – Innovation as Part of the Business – Practitioner Roundtable

We just held our 3rd Innovation Roundtable in New York City and the event further underscored how important this area is to financial services institutions.  The format of these gatherings is discussion-based and senior leaders from banks and insurers share their experiences in building innovation capabilities in their firms. The New York group included large insurers (all were $5B DWP and above) and a variety of banks, from among the largest in the world to smaller, regional providers.  Mick Simonelli, previously the Chief Innovation Officer at USAA, also attended and contributed his experience. Across these firms, there is a real diversity in their approach – a reflection that innovation programs are most successful when they adapt to the culture of a company. One attendee describes their innovation strategy as making big bets only on carefully selected areas that are the highest importance to their company. Another wants to increase their “innovation velocity” and pursues incremental initiatives that, when added together, result in meaningful contributions the short to medium term. In contrast to these differences, the participants agree that that their senior leaders recognize emerging disruptive threats and/or opportunities posed by new entrants, increasing commoditization, and changing consumer expectations.  For example, one bank reports that its senior leaders are very actively tracking Amazon’s recent activity offering loans to small businesses. This awareness in these companies is not surprising, since these roundtables are attended by organizations which are already actively pursuing innovation.  Most attendees mentioned that they regularly report to their Boards of Directors on their progress. In Celent’s opinion, just the presence of a firm at the roundtable signals that they are building, or on their way to building, a competitive advantage. Without identifying individual participants, here is a sampling of the content of the afternoon:
  • One company, in their 5th year of a focused innovation program, describes their current approach as “moving away from the Carnival”, away from event, one-time crowdsourcing ideation efforts and towards making innovation a systemic and continuous part of their business. Their objective is to “create a social layer of innovation.” They were kind enough to detail the technology and process that they have used so far.
  • There was agreement that financial services firms advance innovations much too slowly.  This has been confirmed in numerous conversations that Celent has had with clients and has also validated our research. In order to address this, one company actively establishes 3rd party partnerships in order to move innovation faster. They partner with startup firms in order to increase their velocity of change.
  • A common theme throughout the day was evolving digital capabilities and how other firms, outside of financial services, are changing the customer experience.  One firm concentrates on building a “macro view” of what they want their customer to experience. As they improve and innovate their current customer process, they are using this this wider set of considerations to ensure that they remain focused. This is exactly consistent with a recent post on this blog regarding designing digital platforms (see Stop Designing to be a Digital Insurer; Use a Business Value Proposition)
  • The attendees were also global, both by birth and by company.  They report the greatest adoption of mobile platforms occurs in Asia and in emerging economies.  It was also noted that in EMEA, the experience of dealing with multiple languages, cultures and multiple European regulatory regimes increases their companies’ agility and, thus, their innovation capability. For firms that have global operations, concentrating on reverse engineering innovations from one region to another is a valuable investment and a viable strategy.
  • During the discussion about changing company culture to further innovation capability, one practitioner noted that innovation leaders have to be very careful about the manner in which they discuss emerging threats (and opportunities) with their business partners.  Leaders must be very careful to use what was called “empirical specificity” in such discussions. In other words, before beginning a discussion about an emerging threat or opportunity, an innovation leader must do their homework and be prepared to offer exact examples of actual cases where the threat/opportunity has actually taken place. Otherwise, the communication is ineffective and “Pollyannaish”.
There were a number of other very useful areas that were covered – governance, prioritization, prototyping, building to a minimal level of functionality, testing innovations, etc. Thanks to all of the participants for an active, open and productive dialog. Celent is continuing this series and we invite senior innovation leaders to join a session.  Listed below are the dates and links to the upcoming roundtables. Tokyo Feb 26: https://www.regonline.com/builder/site/Default.aspx?EventID=1435248 London March 5: https://classic.regonline.com/builder/site/default.aspx?EventID=1439152 Chicago March 20: https://classic.regonline.com/builder/site/default.aspx?EventID=1446980  

Answers to Questions from Innovation Webinar

Thanks to everyone who participated in the Current State of Innovation in Financial Services webinar. Over 140 people were listening in! Here is the link to the audio recording: http://www.celent.com/reports/webinar-current-state-innovation-financial-services We especially appreciate all the great questions that came in.  A few were more specific to individual company situations and, in those cases, we will reach out to the specific folks that submitted them. We grouped similar questions and also reworded a few for clarity.  If you don’t see your question in these, give us a shout and we’ll be in touch. Email mfitzgerald@celent.com with any follow ups. Look forward to working with you to move innovation in financial services forward! Mick and Mike  Q: Can you help better define “breaking a tradeoff”? A: We have to credit Michael Porter with the thinking behind this important concept.  The classic example of breaking a tradeoff is delivering better quality at a lower cost.  Normally, increased quality comes at an increased cost. For example, Apple’s iTunes delivered music easier (on an iPod) and at what was perceived to be a negligible cost ($0.99). As a result, the music industry was disrupted.  An example in insurance is the multi-tiered rating of automobile policies.  Insurers using this approach were able to more accurately price high-risk drivers and the tradeoff between pricing and risk acceptability was broken. Q: Should an organization set up a standard process for innovation activities? How flexible should the process be? A: Contrary to popular belief, innovation is not all art.  There are processes which are consistent across companies which are generally recognized as leaders in innovation — identifying ideas (“ideation contests”), incubating new efforts, rotating staff into an out of standing innovation centers of excellence are all examples. An organization should have process for innovations but a key balancing act is required to ensure that the process don’t encumber the innovations (otherwise it’s the wrong process). Additionally, different types of innovations require different processes. A process improvement innovation within the organization should be managed differently from a disruptive product idea that potentially cannibalizes the traditional business. Q: Where can I learn about “Innovation report card for financial services organizations”?  (We promise, this was a question from an attendee and not a plant!) A: The report card is a consulting engagement that provides an organization with an objective and comprehensive assessment on how it rates in key success areas regarding innovation.  It is a stand-alone program designed to meet a strong emergent market need of our clients. Celent has teamed with a leading industry innovation consultant, Mick Simonelli, to deliver a practical, expert evaluation of a company’s innovation efforts. The report card results in a multi-dimensional assessment in areas such as: culture, processes, resources, strategy linkage, rewards and incentives, and performance in key areas of competitive pressure. Q: I have a feeling that th[e report card] is the classical framework in organization infrastructure for any program to be successful. It looks like it doesn’t help to answer the question on how to make the innovation flourish in a structure? (Again, we promise, not a plant!) A: Yes, the innovation report card framework includes many of the classic change management dimensions as these are necessary for success in innovation as they are with other major organizational changes.  However, at its most granular level, key characteristics specific to innovation become clear.  For example, the process assessment contains an evaluation of prototyping capability in a financial services company.  Failing fast is a necessary skill and the ability to rapidly and effectively build prototypes is key to identifying “winners and losers”. Q: What environment is ideal to build a culture of Innovation within a Company? A: This is a great question, and a real key to success. Generally an innovative culture is characterized by a spirit of open communications, teamwork, the recognition of the art of the possible at all levels, supportive leadership, and processes specifically tuned to identify, evaluate, launch and assess innovations. Cultures are all very different though, so it is important to account for the “way things are done around here” at each organization and use that as a framework for developing a plan to influence innovation within the culture. Q: Do you know on average, how much % is dedicated to an IT innovation, especially in an autofinance company? A: About the closest metric that can compare across companies is for public companies, the reported research and development expense.  Building innovation metrics across financial services is a key objective of Celent’s research and we look forward to bringing some clarity here. Q: Some companies have designated a CTO (C Tech O). Is that also an initiative that tries to cater to the same issue (drive innovation) or is that different? A: In our experience to date, the designation of a CTO does not necessarily result in improved innovation results.  A key success factor that is emerging is the degree of ownership of innovation by business leaders. While an effective CTO can be a big help to executing innovation, we recommend that a business evangelist be found. Q: Do you think innovation is critical enough for the CEO to integrate the CIO role with his own and become the CIO too? A: Great point. Every CEO should have the heart of a CIO. However, CEOs are also responsible for the business.  To ensure innovation thrives, we believe it is important to have a dedicated business executive at the top table, charged with leading innovation across the entire enterprise.

Making Innovation Happen – Practioners Speak at Celent Rountable

Celent facilitated a roundtable discussion between innovation practitioners this past week in San Francisco.  The three hour meeting was so dynamic and the time went by so fast that the group worked straight through their planned mid-afternoon break! Numerous threads were explored around the practical implementation of innovation in financial services companies. The agenda was organized around the themes of scanning the external environment for opportunities and threats, implementing innovation processes and technology, and successfully engaging the organization around innovation. Fifteen companies participated across the verticals of banking, capital markets and insurance. A few were just beginning their innovation journey but most were experienced practitioners with three to seven years of experience. I won’t try and summarize the entire session in this blog — you really had to be there to get the full depth of experiences shared around the table.  I will highlight several of the key adjustments to “business as usual” that the group agreed were necessary for success.
  • Traditional roadmaps that detail process and technology future states have not worked. As one participant said they “don’t survive the first contact with reality”.  Successful innovations have much shorter cycle times than roadmaps and must be executed much more rapidly. Incubation and prototyping are critical. One company has committed to prototyping new innovations every four weeks.
  • In some organizations, the standard annual planning process has been adjusted to support innovation.  One participant reported that an innovation “lens” is now part of their business planning routine and that front line business leaders are contacting the innovation group to assist with budget planning to ensure that innovation is considered along side their day-to-day operational investments. Another person admitted that they were still striving to find the right balance between investments in routine improvement, incremental innovation and disruptive innovation.
  • Ideation approaches varied across companies.  My sense was that ideation techniques evolve as a company moves through its innovation journey.  Many reported continuing success with internal crowdsourcing of innovation opportunities.  Others discussed that they have moved to a more focused approach using tailored processes and specialized skill sets.
  • External crowdsourcing of innovative ideas was also explored at length. One participant cited their success in identifying innovations by engaging employees in their technology providers’ organization. They have found that front line developers understand their business and also are less encumbered by traditional approaches.
  • Fit-for-purpose innovation software packages provide a “force multiplication tool” that enables one company to engage all of its employees in innovation.  Surprising results were discovered  when they used the tool to develop network maps of information flows within their organization. Unexpected sources and “hubs” of innovation were found in surprising places.
A recurring theme was that continuous innovation is not an objective in and of itself.  Much like other business improvements in the past such as total quality management, e-learning, and Six Sigma, successful  innovation  is achieved when it is integrated into on-going business processes. One participant stated that a goal of Chief Innovation Officers should be to “work themselves out of their jobs!” For disruptive innovation, the group discussed that there are specific processes, incentives and organizational structures that are required for changes that, by their very definition, threaten the core business.  These efforts must be protected, nurtured and implemented differently than incremental innovation.  The group shared some of the approaches they use to meeting this challenge. The meeting ended with frank observations about the cultural changes necessary to bring about sustained innovation.  Financial services firms face special challenges related to its risk adverse nature and traditional incentive and organization structures.  Several interventions were shared related to successful communication and leadership interventions.  It was recognized that the companies making progress with innovation in financial services recognize that the cultural changes required are long-term in nature and that success will come through a continuous commitment to reduce fear and increase engagement between employees, partners, and customers. As one person put it “this is a five to seven year transition we are in and we are learning and adjusting as we go”.  

Heard At IASA, In Insurance Innovation, Fast Followers Also Have Work To Do

I had many conversations at #IASA2013 about how insurers can improve their innovation capability. As insurers prepare their 2014 plans, this is an area of particular focus.  An increasingly commoditized market requires new approaches in order to build a sustainable advantage. A few of these discussions included a comment like “we have decided to be fast followers”. That comment implied that, by making that strategic choice, those companies don’t need to concentrate on innovation. Based on Celent’s work over the past year, fast following is not the same as just following.  It is an innovation strategy that requires specific actions in order to be successful. Choosing this approach still means you build skills in innovation. Some of these are the same as the first adopters and some are different. For example, successful fast followers have mature innovation processes in place for activities such as: • Scanning the market to identify new innovations – “what is going on out there”: you can’t be late if you are going to be fast • Establishing decision criteria to select which solutions should be “followed fast”: not everything can or should be followed quickly • Employing metrics around the acceptable length of time fast adoption: how “fast is fast”? For those insurers which have chosen the fast follower approach, here are some situations they might find themselves if they do not have these processes in place: • If a personal lines insurer does not have predictive pricing in place, they aren’t fast following, just following • If a heavily intermediated insurer hasn’t established their digital strategy — what it means for their business, what initiatives will be needed over the next two years, it is not fast • If any insurer does not have a mobile platform in place, they cannot claim to be a fast follower • For lines of business where fraud affects loss results, an insurer settling claims in those LOBs now has several automated detection schemes in place if they are following fast Just to make sure that the company is not chasing the latest buzzword, realize that just following is an option too, but be prepared for the consequences. Following in innovation is a passive strategy of adoption without focus, measures or timetables.  As technology continues to change insurance, following will increasingly result in reverting to the mean — average to sub average ROE or return on surplus and increasing adverse selection. Most recently, predictive pricing has given the industry the best example of what happens with a passive following approach. Innovator and fast follower insurers have used this technology to refine their pricing and leave follower insurers with the worst risks. Making a conscious decision to end up in such a situation is not good, but is better than ending up there as the result of randomness and a lack of focus.

Creative Disruption – The Votes Are In!

In preparation for the Creative Disruption event in Boston on November 3rd, Celent surveyed insurers to gather their views on using creative disruption to bring sustained, fundamental change to their organizations. By creative disruption, we mean implementing the initiatives that are required to fundamentally alter how insurance products are developed, implemented, and serviced.

With over 90 insurer responses, the two areas with the highest potential value for disruption are customer service experience and product design. These processes will be explored in depth at the event, as insurance IT executives present how their organizations used tools such as modern policy administration systems and agile development to deliver materially different results to their business. For more information on the event, please visit http://celentinsurance.eventbrite.com/. If you cannot attend, you can follow the event on Twitter at #creativedisruption.