The Best Advice is Personal

Much discussion has happened in the industry portending the inevitable elimination of the insurance agent as consumers move to purchasing insurance direct and online. Disruption of the agency model seems to be a foregone conclusion judging by the amount of recent investment in InsureTech startups focused on transforming the distribution model. The increase in insurers offering commercial insurance direct may be seen as an inflection point not just in terms of commercial lines sold direct, but in terms of a shift in momentum from the agent to technology, across lines of business. It’s not surprising that both insurers and consumers are interested in a shift in channels. It promises to be less expensive for an insurer to go direct, and consumers are clearly showing a shift in preferences for accessing coverage

However, consumers use agents for very good reasons. Prior to direct purchase on the internet, consumers needed agents to access different markets. There was no mechanism for a consumer to purchase directly from an insurer. With the advent of digital agents, aggregators, and direct-to-consumer insurance insurers, this reason is less important than it used to be. However, replacing an agent isn’t as simple as simply automating access to markets.

One of the primary points of value provided by an agent is personalized advice. Although access to markets is more readily available, consumers still need advice and guidance. Insurance is a complicated product. Understanding which coverages they should purchase, what limits and deductibles are appropriate, and whether additional terms or endorsements are relevant is one of the key points of value that an agent offers.

Consumers are more financially literate than ever before given all the information available on the internet, yet still want transparency in the choices available, and value guidance and advice as to what options are appropriate and why they are appropriate. 58% of consumers surveyed say that when choosing a financial services provider, they are looking for a personalized offer, tailored to the individual firm or person.

Until an insurer can accurately and appropriately provide advice it is unlikely we’ll see a wholesale shift of the channel. Some insurers focus on giving consumers choices by providing price comparisons with other insurers. Others have tried to provide choice by labeling side by side choices with titles such as “less coverage”, “standard coverage”, and “more coverage”. But these choices don't usually have any relationship to the actual risk profile of the prospect and don’t offer any suggestion as to why one option is better than another. Consequently, consumers aren’t confident enough to make a decision.

Want to know how to improve online conversion? Provide actual advice to a prospect with an explanation as to why a particular limit, deductible or coverage is relevant. Anecdotal conversations with companies who have implemented a feature like this indicate potential conversion improvements of 20-30% or more.

Automated advice comes in a variety of permutations that vary depending on how much automation is utilized and how much personalization is provided. Insurers can assess their capabilities and determine how to proceed down the path. Even small amounts of advice seem to have an impact on conversion.

Automated advice can range from very simple parameter driven advice, to incredibly sophisticated advice-for-one backed up with sophisticated analytics. It can be delivered via simple online suggestions, or through a guided journey using a chat bot. Each successive generation of advice engine seems to bring increasing benefits when it comes to conversion.

Yet automated advice also carries potentially significant risks. The customer is relying on the technology – including the assumptions and methodologies that underlie it. For example – did the system ask the right questions; did the prospect understand the questions adequately to answer accurately; did the algorithms act as intended, were the underlying business rules appropriate?

Using third party data can mitigate some of these risks, but raises other issues including the accuracy of that data. On the one hand, consumers are more financially literate, are looking for more transparency and control, and expect insurers to utilize technology in an online environment. However, insurers also have to be careful not to be creepy when using third party data.

Insurers can overcome creepiness by not overreaching, and by clearly communicating how they arrived at their conclusions. In this transparent world, the path to the recommendation becomes nearly as important as the outcome.

Interested in learning more about automated advice engines? Check out my newest report “The Best Advice is Personal: Robo-Advisors v. Agents”.  

Rethinking the role of the intercap

The trend-naming fashion of capital letters in the middle of words continues. I believe those “InterCaps”—also known as “BumpyCaps” and “CamelCaps”—are mostly a marketing trick intended to make terms sound important. I find them annoying. The hot example of late is FinTech. Plus its close cousins, BankTech, InsurTech, and RegTech. They’re popping up everywhere, including within the hallowed halls of Celent. We are all guilty of putting a new veneer on something that has been around for ages. What does that capital T in Tech imply, and why do the terms get such rapt attention? Is applying technology to the business of financial services new, and more worthy of our attention today than it was years ago? Is how we manage new technology fundamentally changed? I don’t think so. Maybe the point is to let us collectively off the hook for pursuing technology change so casually (was that it?) for the last 50 years. I can imagine the bank or insurance CIO, late in his/her career, saying, “Hey, if we had FinTech 30 years ago, this place might look a damn sight different by now!” Right, that’s what we were missing: Technology startups! Youngsters in hoodies! The truth behind technology and the financial services industry requires no such defense. Changing the world through application of technology didn’t depend on the arrival of startling new tools, or dorm room genius, as helpful as those might be in today’s world. It required a risk/reward shift. As an industry, we didn’t change because we didn’t have to. Our existence was not threatened by new consumer behaviors. Our livelihoods were not at risk from upstart competitors. We took a hard look at the costs and benefits of new technology, and behaved accordingly. Which meant…changing…slowly. But something is certainly different today. I believe that existential threats are emerging for our industry. We are now at risk. I’m firmly convinced that relationships between consumers and their financial providers are changing, with the industry’s participation or without it. There is a new dynamism, and it is clear that the entire ecosystem is feeling the impact. Instead of looking at FinTech and all the other Techs with an annoyed editor’s eye, maybe I should embrace the way intercaps communicate something important. They’re a stylistic irritation. But they’re also a visual cue that helps us rethink technology. And that is sorely needed in these times of powerful disruption.

$13 million investment in social insurance signals disruption

Will a sharing economy model work in insurance? The announcement about the start up Lemonade highlights the challenges that social insurance (also called peer-to-peer insurance) faces. A Celent colleague, Jamie Macgregor attended a panel on social insurance propositions at FinTech Connect Live in London this past week (see Jamie’s blog post). On the panel were leaders of three such companies, Sebastian Herfurth, co-founder of Friendsurance, Steven Mendel, CEO and co-founder of Bought by Many, and Louis de Broglie, President and co-founder of Inspeer. These companies operate as brokers, managing the transaction between the end consumer and insurers. They offer either a deductible sharing scheme or a pooling mechanism to gain price discounts. The panellists spoke about their common challenges — sustaining growth and educating the consumer about an alternative approach to insurance. It remains to be seen if any can achieve critical mass. Of the three, Friendsurance is further along having started (way back!) in 2010. (See Celent report: Friendsurance: Challenging the Business Model of a Social Insurance Startup — A Case Study) Similar brokerage models have also been adopted by Guevara and Tongjubao. These companies seek to apply social insurance to more complicated lines of business – automobile (motor) and life, respectively. The Lemonade announcement stated that it will expand the social insurance model beyond sales and service by taking on risk on its balance sheet. They report that they have applied to be an insurer in New York. This will be an early, significant test given that state’s past regulatory reputation. However, the company has some strong arguments to make. They can point out that sharing increases transparency and aligns the interests of an insurer with their consumers. Additionally, the sizable initial capitalization will positively influence regulators. These alternative approaches are good news for the industry as they challenge the traditional, sometimes adversarial, relationship between insurer and insured. The ability of Lemonade to secure $13 million in initial funding from veteran venture capitalist firms (Sequoia Capital and Aleph) is a serious indication of industry change.

The schizophrenic nature of innovation in insurance

I have attended various conferences on innovation over the past few years. In almost all of them futurologists of all kinds and innovation experts who are invited to present tend to use the same examples, such as Uber and AirBnB, to describe how new business models can disrupt an industry. The message to insurers is strict and clear: one day the insurance industry will have its own Uber that comes in and disrupts the traditional insurance business model. They present these models as forming part of social revolution where consumers come together to demand a new style of service, based upon social equity and reinforced by free-spirited democratic principles. In some respects, they’ve taken their lead from the Internet generation of superfirms that dominate our digital lives (such as Google, Amazon, eBay, and Facebook). While I fully agree that insurers have to innovate, anticipate, and adapt to changes impacting our industry, I have to confess that I find the usual message too simplistic. What particularly strikes me is the lack of criticism towards these firms. Indeed companies have been embracing and advocating non-discriminatory values for decades in various guises (e.g., gender equality, ethnical diversity, etc.). The US has been proudly supporting these values in the global economy, and the Silicon Valley companies have been keen to promote this message. Therefore I am surprised to observe that these companies have exported their business model but neglected its social impact in new territories. The recent developments around Uber in France are a good example of this. Taxi drivers have to pay a high license authorization to be able to do their job. Many of the taxi drivers have to invest their pension to get a steering wheel. This entry tax is compulsory and supports the community, like all taxes do in every country. Don’t get me wrong, these innovative companies have brought to the market great products, services, and added value. I think they contribute to helping their industry change in a positive way. However, I think they are schizophrenic in a certain way, as they tend to forget their social egalitarian values when economic value is at stake. I am maybe naïve enough to believe that the future of our industry is not only about innovation at all costs but also about responsibility of all economic agents, including companies as well as consumers. In a world where innovation experts place schizophrenic innovators as examples, I hope consumers’ responsibility and their sense of fairness will help our industry keep a critical mind on the future of innovation and innovators. Maybe there is an innovative business model to create out of this concept?

A pivotal day for the insurance industry

There were a few key assumptions underlying Celent’s End of Auto insurance report:
  1. Cars would crash less, requiring lower claims expenditure and lower premiums
  2. Cars would drive themselves, liability would shift to manufacturers and ‘driver insurance’ would be a thing of the past
Today with Volvo’s announcement (also linked here) that they would accept all liability for the car in autonomous mode we see the first of three steps towards the end of auto insurance. This is a key moment in human history, a pivotal moment that will redefine how human beings travel albeit that may not be apparent today. Today, this looks like an inevitable check box on the route to autonomous cars. It is in fact both. Now the other manufacturers must follow suit or relegate themselves to manufacturing cars with no autonomous ability. Immediately, Blockbuster and Kodak come to mind. Initially they may deal with this through captive insurers but this will change over time. I mentioned this is the first of three steps. The next inevitable one will take place in the court of law, perhaps after the first death where the car was liable. Here the specifics will be tested and understood. This will be a different milestone in different jurisdictions. The third step will be a few years from now, when the autonomous systems have had enough time to partially fail due to poor maintenance. I am assuming we still own the cars at that point we’re not just renting them by the hour. At this point clarity will be given to who is responsible for making sure an autonomous system is still fit to drive on the road. Governments and lawmakers will have to define a minimum capability that is required before one can turn on the system. In some countries it may happen sooner than others but one imagines this will be a reactive exercise as manufacturers challenge their liability due to customers meddling with or failing to maintain the equipment. As interesting and drawn out as these second and third steps are, history will show they are insignificant compared to the point in time when the first manufacturer stood up and said they would accept full liability for their cars when in autonomous mode. Update: Other manufacturers are already following suit. and the Volvo CEO is already calling on the US government to establish testing guidelines as part of the speech.

Insurance IoT – you can sense the disruption: Innovation Roundtable summary

We held another in our series of Innovation Roundtables in NYC last Friday. These are small gatherings, attended by insurers and banks, meant to provide an open forum for a deep discussion of a chosen topic. As Mick Simonelli, one of the facilitators put it: “The format provides a chance for innovators to come out of their day-to-day battles, take a tactical pause, gain some perspective and share their knowledge with other practitioners.” This edition was focused on the Internet of Things in insurance. More than any other previous Roundtable, the threat of disruption amongst the group was very prominent. The discussion was best summarized by one participant: “We have been doing the business of insurance according to “effects analysis” for 300 years. That is, actuaries and underwriters have been looking backwards and projecting what contract terms (rates, guidelines, etc.) should be going forward. IoT in insurance will provide new territory, which is as yet unclaimed by any provider. It will allow insurance to move toward “causal analysis”: what are the true causes of loss and in what interventions can be undertaken to avoid them?” Much of the discussion was about how insurance risk professionals can accomplish casual analysis using IoT tools and techniques. However, there was also a recognition that other entities, outside insurance, may figure this new approach out before insurers. This may be the well-know data firms such as Google, Amazon, etc., or may be a group of data scientists yet unknown. Other main points from the session include:
  • These practitioners report that they sense that the velocity of change around IoT is different than what has been seen before. Unlike other changes in insurance, decision-makers cannot wait for the data to roll in and the “case to be proved” or it will be too late to respond. Companies reported that they have lost partnership deals with start-up firms because they were unable to make a decision in a timely manner. This dynamic supports the need for a “dual governance track” that has been reflected in Celent’s innovation research.
  • Donald Light presented Celent’s model of IoT, and the group engaged in a good deal of discussion about what part of that ecosystem insurers will want to “own”. There was recognition of the incredible predictive value of the data that will be produced by IoT. However, it was pointed out that what has happened in commercial lines fleet IoT applications is that insureds prefer to retain control over the data as the value for them of using it to manage their fleet vastly outweighs any premium discount that might be awarded. It remains to be seen if this will play out in other lines of business.
  • Regarding commercial lines applications of IoT, it was notable that the group spent as much or more time discussing these opportunities as it did discussing the usual suspects – auto telematics, connected home, and health/lifestyle. Celent sees this as a further maturation of IoT in insurance. The consensus of the group was that commercial IoT is not yet widely addressed and is beginning to be a focus for their companies going forward.
  • A lack of cross-industry integration standards was recognized as a significant barrier to expansion. The participants expressed that there is a need (and opportunity) for a data standards group to facilitate this between insurers and potential device providers. Without such agreement, progress will be more expensive and will take longer than it should.
A final discussion point was perhaps the most exciting. The group is tracking the manner in which IoT is changing the profile of the skills required in insurance. Actuarial science is giving way to data science as more predictive techniques and more non-traditional data sources are used. The participants discussed forming a consortium of insurers to partner with NYC-area universities to establish an insurance data scientist training program. Stay tuned!

Board member to insurers: “Don’t get Uberized”

At the National Underwriter Executive Conference last week, a member of the Board of Directors at one of the largest life insurers in the world warned insurers: “Don’t let what happened to the taxi industry happen to us. Taxis thought regulation would protect them and you see where that got them. We can’t allow ourselves to be Uberized.” Beyond the fact that this was the first time I have heard the verb form of Uber (remember when Google was just a noun?), the statement represents a valuable summary of the disruptive threat for our industry. The public expression of this possibility by such a highly visible leader is another in a number of recent signals that insurance innovation is gaining real traction. A recent Celent survey provides the datapoint that innovation practitioners expect the probability of disruption to rise in 2015:   Disruption chart Note that no one responded that the threat would decrease. However, recent events demonstrate that the Uber effect is also an opportunity for insurers — the high level of trust that the industry has earned over the past 150 years. An Uber driver in India has been charged with assaulting a female passenger, reminding us of the dark side of the sharing economy. I am not suggesting that this is a reason for insurers to become complacent, or think that the need to invest in experimentation and to reward risk taking has lessened. Rather, I trust that our industry will heed the threat expressed by one of its most prominent leaders and leverage the positive relationships it has established with its consumers to deliver new solutions which increase its value proposition.

Microinsurance as a Disruptive Force

Some of you may be familiar with Michael Raynor’s work around disruption. In his latest book he refers to being deliberately disruptive and how most companies that disrupt powerful incumbents start out focused primarily and often exclusively on connecting with a specific segment of the market, one that is poorly served — or not served at all. The microinsurance market is, with no doubt, an excellent source of innovation for insurers. It matches perfectly with the underlying conditions required for disruption to occur. Microinsurance is a foothold to an underserved, untapped, and fragmented market with a high cost to serve under the present business model. Innovative approaches to serve this market, including the required technologies, could afterwards be used with success upmarket, where insurers could benefit from agility, scalability, low operating costs, and the lessons learned by servicing a market with totally different dynamics. Innovation around product, pricing, packaging, distribution, processes, and technology, just to mention a few aspects, will be required skills. A good example is Bradesco Seguros in Brazil. Bradesco offers Accidental Death through a product named “Primeira Proteção Bradesco” which sold 1.3 million policies within the first year with monthly premium of US$3.50, single benefit of RS.20,000.00 and 1 monthly sweepstake of RS.20,000 (US$ 10,800). In fact, sweepstakes are an important marketing tool; apparently the most important motive for customers in buying the insurance product.  Distribution is done through Banco Bradesco’s own network of +3,500 branches, +25,000 banking correspondents (supermarkets, pharmacies, grocery stores, etc.) and mobile (sms). For those cities and villages close to the Amazon River, accessible only by boat and out of Banco Bradesco’s traditional network, it required technological support and some inventive: Banco Bradesco introduced a boat containing a bank branch. Technology, such as web/mobile on.iBusiness and traditional POS, is used by agents and correspondents to manage the complete end-to-end process. Focus in simplicity and speed using an accelerated enrollment process by capturing customer data from the CPF or Social Security number. Banco Bradesco has years of experience financially serving the segment market aimed by microinsurance and they are taking advantage of this, though they encountered some more challenges you can read about, along with more real cases and in depth discussion around Microinsurance, in our recent report “Microinsurance in Latin America: Disruption in Practice” at http://www.celent.com/reports/microinsurance-latin-america-disruption-practice

Disruptive Innovation: The Next Day

What a journey! Celent’s “What’s next: The Search for Disruptive Innovation” brought together an exciting group of people to look into innovation in financial services yesterday in the Bay area. You could feel it in the air.  Cases from all around the world were the perfect set-up to let our minds wonder during one day exclusively dedicated to innovation. Too many things I would like to share with you for just one blog, but better than that, please be my guests and look into what people had to say about the different sessions during the day as they shared their thoughts through twitter #celentnext: https://twitter.com/search?q=%23celentnext&src=tyah&f=realtime  As for me, I would like to share with you my main takeaways:
  • Innovation is inevitable. Either you innovate, even at the extent of having to reinvent yourself, or someone else will do and then you will have no business to re-invent.
  • Innovation management is improving but is still on the “must do” list for many.
  • Any time we talk about innovation we end with a few imperatives: Be bold enough to try, execute to perfection and learn and adapt. Always remember that the breakthrough will be possible only if you achieve a systemic approach to innovation, which is totally tied to your organization culture and how it deals with innovation.
  • You need to protect your innovation initiatives for them to nourish.
  • The industry needs to find a balance between what millenials expect today from financial services and running a profitable business. Both sides can and should learn more from each other, and don’t forget that there is nothing such as a free meal.
  • It is not all about financial transactions. Customer experience and delight comes from other sources of interchange that might have financial transactions as a consequence but do not put them in the center of the scene. That is why customers want simple interactions, convenience and logically designed touch points. Nothing more, nothing less.
Most of the presentations will be available soon in our website and the video recording of the sessions will be there as well in a few weeks.  If you want to know more please ask. The entire Celent team will be happy to chat with you around the exciting theme of innovation.  Have a great day!

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.