Lost in Innovation?

So, how do you avoid getting lost in innovation? The simple (and maybe glib) answer might be to buy a map, a compass and start to plan your route. However, what do you do when there is no map, no obvious path to take and no-one to follow?

The last 24 months have seen an incredible amount of activity across the sector in experimenting with novel proposition concepts fuelled by emerging technologies in the internet of things, distributed ledgers and bot-driven artificial intelligence. Although each new concept shows promise, we are yet to experience a clear and obvious pattern for winning new clients or delivering a superior shareholder return using them. Many of the most exciting novel ideas (and many are genuinely exciting) are yet to see any real business volume behind them (see my earlier blog for additional context of what insurtech has to offer in defining the ‘dominant design’ for new tech-enabled propositions).

So, as an insurer faced with having to balance how much it should invest in these new concepts versus furthering the existing business in what is probably a highly successful and scalable model, two of the big questions we often hear from clients are: “Which of these nascent concepts are most likely to deliver real business value the fastest?” and “How much effort should I be devoting to exploring them today?” These are the questions that we looked to address at our latest event in London that we called ‘Lost in Innovation’, attended by just over 70 inquiring insurance decision makers.

Faced with uncertainty, we followed an agenda that focused on the things that an insurer can control, such as the innovation-led partnerships they enter, the skills they develop internally, the criteria used for measuring value, and the potential challenges ahead that they need to plan for.

Celent analyst Craig Beattie presenting on emerged software development approaches

Alongside presenting some of our latest research on the topic, we were joined on-stage by:

  • Matt Poll from NEOS (the UK’s first connected home proposition in partnership with Hiscox) shared his experience on the criteria for a successful partnership.
  • Jennyfer Yeung-Williams from Munich Re and Polly James from Berwin, Leighton, Paisner Law shared their experience and views on some of the challenges in the way of further adoption, including the attitude of the regulator and potential legal challenges presented by using personal data in propositions.
  • Dan Feihn, Group CTO from Markerstudy, presented his view of the future and how they are creating just enough space internally to experiment with some radical concepts – demonstrating that you don’t always need big budget project to try out some novel applications of new technologies.

So, what was the conclusion from the day? How do you avoid getting lost in innovation? Simply speaking, when concepts are so new that the direction of travel is unclear, a more explorative approach is required – testing each new path, collecting data and then regrouping to create the tools needed to unveil new paths further ahead until the goal is reached. Scaling concepts too early in their development (and before they are ready) may be akin to buying a 4×4 to plough through the scrub ‘on a hunch’ only to find quicksand on the other side.

Some tips shared to help feel out the way:

  • Partnerships will remain a strong feature of most insurer’s innovation activity over the next 12-24 months. Most struggle to create the space to try out new concepts. Also, realistically, many neither have the skills or the time to experiment (given that their existing capabilities are optimised for the existing business). Consequently, partnerships create a way to experiment without “upsetting the applecart”.
  • Hiring staff from outside of the industry can be a great way to change the culture internally and bring-in fresh new ideas…however, unless there is an environment in place to keep them enthused, there remains a risk of them turning ‘blue’ and adopting the existing culture instead of helping to change it.
  • There are several ways to measure value created by an initiative. The traditional approach is a classic ‘Return on Investment’ (RoI). However, RoI can be hard to calculate when uncertainty is high. To encourage experimentation, other approaches may be better suited, such as rapid low-cost releases to test concepts and gather data to feel the way. Framing these in terms of an ‘affordable loss’ may be another way to approach it – i.e. “What’s the maximum amount that I’m willing to spend to test this out?” – accepting that there may not be an RoI for the initial step. Although no responsible insurer should be ‘betting the house’ on wacky new concepts, reframing the question and containing exposure can sometimes be all that’s required to create the licence to explore.
  • There’s still an imbalance between the promise of technology and the reality of just how far end-customers and insurers are willing to go in pursuit of value. The geeks (or ‘path finders’) have rushed in first – but will the majority follows? Regardless, to avoid getting lost in the ‘shiny new stuff’, a focus on customer value, fairness and transparency around how data is being used need to be at the heart of each proposition – plus, recognising that the regulator will not be far behind.

In summary, the journey ahead needs to be less about the ‘what’ (with all of its bells, whistles and shiny parts) and more about the ‘how’ (deep in the culture of the firm and its willingness to experiment – even in small ways) – at least while the map to future value is being still being drawn.

Celent continues to research all of these topics, including assessing the different technologies and techniques that insurers can use. Feel free to get in touch to discuss how Celent could assist your organisation further.

Celent clients will be able to access the presentations from the event via their Celent Account Manager.

Learning from the Best: Operational Excellence from a Model Insurer Viewpoint

I am privileged again this year to be part of the team that judged the Celent Model Insurer nominations. My focus is on the nominations in the Operational Excellence theme. In reality, every nomination demonstrates a high degree of operational excellence. It is a tough job to choose only three winners in the category. 

You may wonder how Celent decides which nominations are the best of the best. We look at the disciples included in successful operational outcomes. Achieving operational excellence, requires transforming processes and systems into competitive advantages by making them leaner, faster, more flexible and of higher quality.

It’s not just what is done, but how it’s done. The project should have lasting effects and transform the organization in multiple aspects: Processes, Technology, Culture and Business Model

This year’s operational excellence nominations run the gamut from project methodology to straight through processing to infrastructure outsourcing.  Following are examples of a few of the nominations: 

  • A P&C insurer in the Cayman Islands moved to a virtual business. Instead of replacing their on premise infrastructure, they transitioned to a cloud environment for all systems including: core insurance operations, human resources, and call center. By moving to a third-party cloud provider, the insurer could go global to support local operations with consistent technology expertise to host and maintain the applications.
  • One of India’s leading life insurance companies which had experienced tremendous growth of 380% in the last financial year required a simple, streamlined and cost effective system to service their growing customer base and extend the enterprise for continued growth and market penetration. The company implemented a document management solution for processing new business and claims. The solution is designed so that it requires no or minimal manual intervention for the end-to-end document life cycle process.
  • An innovative testing solution created in collaboration between a North American P&C insurer and its vendor was implemented after it was found that the existing testing environment, approach and methodology was causing delays and quality assurance problems for the transformation program. The solution is a cloud based, open-source testing environment that has reduced both risk and cost by improving the quality of the testing. 
  • A North America supplemental benefits insurer adopted an Agile project methodology in response to its need of modernization and in recognition that it will undergo more change as the industry continues to capitalize on social, mobile, wearables, etc. The change brought about increased accountability, efficiency and organization that have allowed the company to be poised and ready for all opportunities, producing results at record speed.
  • A reinsurer based in Europe implemented artificial intelligence and machine learning algorithms to allow automatic verification of clauses in contracts and matching of official comments stored in a large database.  This allows experts to focus their attention on parts of the contract that have not been seen before and will allow back searching thought any collection of documents for clauses containing issues of interest as well as comparing contracts on a clause level with calculated accuracy scores.   

As you can see from this sampling of nominations, choosing the winners was hard.  However, it is easy for you to be on hand to network with and learn from the insurers and vendors who submitted the winning projects.  Please join Celent in Boston on April 4 for Innovation and Insight Day where the winners of the 2017 Model Insurer awards will be announced.  You can register here.   

Insurtech 2016=Hype; Insurtech 2017=Value

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

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

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

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

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

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

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

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

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

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

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

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

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

The Evolving Role of Architects

In the last couple of weeks I’ve had the great opportunity to spend time with IT architects of various sorts both inside and outside of the insurance industry. The discussions have been illuminating and offer different visions and futures both for technology that supports insurers and for the future of the architecture function in insurers.

One of the main events that allowed for this conversation was a round table held in London with architects from insurers. The main topics were the relevance of microservices style architectures to insurance, the role of the architects in AI and InsurTech and the future role of architects at insurers. Another event that offered an interesting contrast was the inaugural London Software Architecture Conference which I'll call SACon below (Twitter feed).


I won't fully define microservices here but briefly it’s an approach to delivering software where each service is built as it’s own application which can be scaled independently from other services.

Microservices as a way of delivering software was the default approach at the SACon. There were sessions where architects sharing stories about why sometimes you had to work with a monolith or even making the case for not having the services in discrete applications. Meanwhile at the round table the monolith was the default still with the case being made for microservices in some parts of the architecture.

There are use cases where microservices make a great deal of sense, particularly in already distributed systems where a great deal of data is being streamed between applications. Here the infrastructure of microservices and the libraries supporting the reactive manifesto such as Hysterix and Rx* (e.g. RxJava) and indeed one insurer related their use of microservices to support IoT. Others discussed using this style of approach and the tooling surrounding these architectures to launch new products and increase change throughput but in all cases these were far from replacing the core architecture.

For now microservices is not the default for insurer software but is certainly a tool in the box. An observation or two from SACon from those looking to adopt: First it doesn’t solve the question of how big a service or a component is, something architects need to discuss and refine and; Second, microservices needs a great deal of automation to make work, a topic covered in our DevOps report to be published shortly.

Architects and AI

I have a background with training and experience both in computer science, AI and machine learning. One thing that I noticed going to the analytics conferences where AI is discussed is the absence of IT representation – plenty of actuaries, MI/BI folks, marketing folks – was this a place for architects?

Most insurers present at the round table had activity within the organisation for AI. For the most part only data architects are involved in this discussion – AI being distinct from business and applications architecture for now. It’s my opinion that AI components will form part of the wider applications architecture in the future, with AI components being as common place as programmed ones.

Architects and InsurTech

Here is an area where architects can more immediately contribute in a meaningful way both in reviewing opportunities and unique capabilities from InsurTech firms and in discussing integration where acquisition rather than investment is the goal.

The challenge here of course is the age old challenge for architects – to have a seat in the discussion the architect function needs to demonstrate the value it can bring and it’s internal expertise.

Finally, one amusing discussion I had was with a few architects from startups. As I discussed legacy systems they also related seeing legacy systems in their organisations – albeit the legacy systems were 2 or 4 years old rather than 20 or 40 years old. The intriguing thing here was the reasons for them becoming legacy were the same as insurers – availability of skills, supportability and responsiveness to changing demands. It may hearten architects at insurers that start ups aren’t immune to legacy issues!



In search of a new ‘dominant design’ for the industry. What does insurtech have to offer?

There is little in the world of insurtech happening today that insurers couldn’t arguably choose to do for themselves if they were motivated to do it. They have the capital to invest. They have resources and could hire to fill gaps in any new capabilities required. They importantly understand the market and know how to move with the trends. And yet, despite having all of these things, they readily engage with the start-up community to do the things that arguably they could do for themselves.  So, why is that?   

In Making the Most of the Innovation Ecosystem, Mike Fitzgerald’s observes the main cultural differences between insurers and the start-ups they court. These cultural differences give us a strong clue as to why insurers engage with start-ups, even though on paper they do not and should not need them.

Alongside these deep cultural differences, I believe that there is another angle worth exploring to help answer the question, and that’s the market’s maturity stage and, with it, the strategies required to succeed.

One model that helps explain this relates to the work of Abernathy and Utterback on dynamic innovation and the concept of the ‘dominant design’. To be relevant to this discussion, you first need to believe that we’re on the cusp of a shift from an old world view of the industry based upon a well-understood and stable design towards one where substantial parts of the insurance proposition and value network are up for grabs. You also need to believe that, for a period at least, these two (or more) worlds will co-exist.

So, here’s a quick overview of the model (in case you’re not familiar with it)…

Settling on a “Dominant Design”

First introduced way back in the mid-1970s and based upon empirical research (famously using conformance towards the QWERTY keyboard as an example), Abernathy and Utterback observed that when a market (or specifically a technology within a market) is new, there first exists a period of fluidity where creativity and product innovation flourishes. During this period, huge variation in approaches and product designs can co-exist as different players in the market experiment with what works and what does not.

In this early fluid stage, a market is typically small, and dominated by enthusiasts and early adopters. Over time, a dominant design begins to emerge as concepts become better understood and demand for a certain style of product proves to be more successful than others. Here, within an insurance context, you'd expect to see high levels of change and a preference for self-build IT systems in order to control and lower the cost of experimentation.

Once the dominant design has been established, competition increases and market activity switches from product innovation to process innovation – as each firm scrambles to find higher quality and more efficient ways to scale in order to capture a greater market share. This is the transitionary stage. 

Finally, at the specific stage, competitive rivalry intensifies spurred on by new entrants emulating the dominant design, incremental innovation takes hold and a successful growth (or survival) strategy switches to one that either follows a niche or low-cost commodity path. Within an insurance context, outsourcing and standardisation on enterprise systems are likely to dominate discussions.

Applying the ‘dominant design’ concept to the world of insurance and insurtech

Building upon the co-existence assumption made earlier, within the world of insurtech today, there are broadly (and crudely) two types of firm: (1) those focused on a complete proposition rethink (such as Trov, Slice and Lemonade); and (2) those focused on B2B enablement (such as Everledger, Quantemplate and RightIndem). The former reside in ‘Fluid’ stage (where the new ‘dominant design’ for the industry has not yet been set and still may fail) and the latter in the ‘Transitionary’ stage (where the dominant design is known, but there are just better ways to do it).

Figure: Innovation, Insurance and the 'Dominant Design'


(Source: Celent – Adapted from Abernathy and Utterback (1975)

Outside of insurtech, within the 'Specific' stage, there is the traditional world of insurance (where nearly all of the world’s insurance premiums still sit by the way) that is dominated by incumbent insurers, incumbent distribution firms, incumbent technology vendors, and incumbent service providers.

So what? 

What I like about this model is that it starts to make better sense of what I believe we’re seeing in the world around us. It also helps us to better classify different initiatives and partnership opportunities, and encourages us to identify specific tactics for each stage – the key lesson being "not to apply a ‘one-size fits’ all strategy to the firm".

Finally, and more importantly, it moves the debate on from being one about engaging insurtech start-ups purely to catalyze cultural change (i.e. to effect the things that the incumbent firms cannot easily do for themselves) towards one begging more strategic and structural questions to be asked, such as will a new ‘dominant design’ for the industry really emerge?, what will be its time-frame to scale?, and what specific actions are required to respond (i.e. to lead or to observe and then fast-follow).

Going back to my original question “What does insurtech have to offer?”. Insurers can do nearly all of what is taking place within insurtech as it exists today by themselves…but, as stated at the start of this blog, if, and only if, they are motivated to do so.

And there’s the rub. Many incumbents have been operating very successfully for so long in the ‘specific’ stage optimizing their solutions that making the shift required to emulate a ‘fluid’ stage is a major undertaking – why take the risk?. However, this is not the only issue that is holding them back. For me, the bigger question remains one of whether there is enough evidence to show the existence of an emerging new ‘dominant design’ for the industry in the ‘fluid’ stage that will scale to a size that threatens the status quo. Consequently, in the meantime, partnering and placing strategic investments with insurtech firms capable of working in a more ‘fluid’ way may offer a smarter more efficient bet in the meantime.

In a way, what we’re seeing today happening between insurers and insurtech firms  is the equivalent of checking out the race horses in the paddock prior to a race.  Let the race begin!







The Rise and Rise of Analytics in Insurance

As noted in our prior research insurance has always been an industry that relies on advanced analytics and has always sought to predict the future (as it pertains to risk) based on the past. (For research on advanced analytics in insurers see here, here and here).

As observed in the last post here analytics, AI and automation has been a key focus of InsurTech firms but do not assume that the investment is limited to newbies and start-ups. I have for a few years now been attending and following the Strata+Hadoop conferences and others focused on advanced analytics and the broad range of tools and opportunities coming out of the big data organisations. This last week I attended a conference focused on the insurance industry and was surprised to see the two worlds have finally, genuinely overlapped – just take a look at the sponsors.

As Nicolas Michellod and I have noted in the past, insurers have already been investing in these technologies but only those that have made the effort to speak “insurance”. What the conversations at Insurance Analytics Europe (twitter feed) demonstrated was a new focus on core data science tools and capabilities. This continued the theme from DIA Barcelona (twitter) earlier in the year.

The event followed InsTech London’s meeting (Twitter) looking at data innovation and it’s opportunities for Lloyd’s, the London market and the TOM initiative. Here the focus was on InsurTech firms that would partner on analytics, would sell data or would enable non-data scientists to benefit from advances in machine learning, predictive analytics and other advanced analytics disciplines.

While this trend of democratising advanced analytics was discussed by analytics heads and CDO’s at the analytics conference the focus was much more on communicating value, surfacing existing capability and tools within the organisation and to put it bluntly, getting better at managing data.

In short – AI, Analytics, Machine Learning, Automation – these were all hot topics at InsurTech Connect and similar events but for the insurers out there – don’t assume these are purely the domain of InsurTech. Insurers are increasingly investing in these capabilities which in turn is attracting firms with a great deal to offer our industry. For those big data firms that ruled out insurance as a target market a couple of years ago – look again, the appetite is here.

As a techy and AI guy of old I am deeply enthused by this focus and excited to see what new offerings come out of the incumbent insurers and not just InsurTech.

Do have a look at the aware machine report and the blog too. We’re increasing our coverage in this area so if you have a solution focused on this space please reach out to Nicolas, Mike or myself so we can include you and for the insurers look out for a report shortly.


Fintech is a Development Opportunity for High Potentials in Financial Services

What does the development of high-potential Financial Services employees have to do with Fintech? Possibly, quite a lot. 40-something executives climbing the corporate ladder, or anyone mentoring such a person, or anyone concerned with developing future leaders in financial services – this blog is for you. You have an opportunity to differentiate yourself if you act now.

There is significant energy and investment happening outside of the four walls of financial services companies. The question many incumbents are asking is, “How do we best engage with the new, external innovation ecosystem?” Catherine Stagg-Macey @Staggmacey and I just released a report that outlines a framework for leveraging this emerging business approach (Making the Most of the Innovation Ecosystem: Adapting to the New Insurtech World). The report includes insights from more than a dozen interviews with a range of players in the innovation system including internal company venture capital staff, independent venture capital employees, innovation service providers, system integrators, accelerator, and innovation lab leaders. A central conclusion is that the new innovation ecosystem will eventually mature into a form where financial services firms and startups coexist and regularly form partnerships to improve specific parts of the value chain. A few new entrants may find success as disruptors, but the predominant model will be a mix of joint ventures, partial ownership, and outright purchase of emerging technology firms by incumbents.   

This is very different from the traditional buyer-supplier relationship that financial services companies usually enter into with technology companies. The feedback we received from innovation participants is that differences in culture, process, the speed of decisions (or lack thereof), risk tolerance, and goals must be deliberately managed in order to get the most out of these partnerships.

Leadership experience on “both sides of the fence” – both in the startup and the financial services worlds – will be a differentiator. The candidate with a financial servcies background who can demonstrate an understanding of the challenges in bringing both of these very different worlds together will be very valuable. Those actively managing personal development plans in banks, insurance companies, and capital market firms are encouraged to:

  • Mentor startups though a technology accelerator that is focused on financial services; StartupBootcamp @Sbootcamp, Global Insurance Accelerator @InsuranceAccel, and Plug and Play @PlugandPlayTC are examples
  • Attend technology “meet ups” in your local area to learn about startups in your area and network your way into the community
  • Offer your services as a sounding board for new tech companies, either informally as subject matter expert or more formally as a board member
  • Communicate with your mentor and your H.R. career development resources about your goal to develop the necessary skills to effectively act as a “go-between”

The realization that such a role is valued is just beginning to emerge, so those acting now will be slightly ahead of the curve and well-positioned to step into critical leadership positions.

The Great Insurance Experiment

There is a battle going on today for the future of the insurance industry. Like other industries there are those within the insurance industry and new entrants who are seeking to test whether alternate, digital models will prevail. As a participant in the industry and an observer the intriguing thing for me is no one has proven the existing model is actually broken or that there is a better proposition out there. It seems the telematics experiment I wrote about a few years ago is expanding in focus.

I'm sure taxi drivers said the same when faced with Uber, hotels with AirBnB, the print industry, the travel industry, etc. However let's look at the benefits of digital propositions to customers and see if they apply to insurance.

One of the key benefits of digital propositions is transparency and low prices – something that telematics and IoT propositions endeavour to deliver for consumers. The peculiar thing about insurance is that transparency and too much data is at odds with what insurance tries to achieve. Put another way, insurance is designed to hedge the risks to a population across the whole population, so that individuals pay a reasonable price and those that suffer a significant loss are reimbursed disproportionally to what they put in. Absolute data and visibility – transparency in its purest form – will reveal the poor risks and in practice deprive them of the very service they need. Good for some who will not see a loss, but not good for all and not good for society as a whole.

Propositions in this area have moved towards education and rewarding behaviours that reduce risk – the win-win for insurer and client. Many have observed that this is arguably not insurance but rather risk advice, engineering and management. Others observe that claims prevention is absolutely part of insurance and has been all along, albeit the tools of old have been regulation, law and classical education rather than the digital variants.

Existing experiments reveal customers care do care about not claiming, about limiting the impacts of a claim and about small rewards for good behaviour. Regulators have also shown they're keen that all parts of society have access to financial services and insurance at a reasonable cost. Use of transparency and data can go so far in insurance but there are limits to how far it can disrupt.

Another key benefit of digital propositions is the just in time and just enough nature of them – the ability to finely control the product and as a result the costs. This is another area that is being tested in insurance with micro control over what is and isn't on cover available to customers via their phone.

The challenge here of course is that this again removes some of the hedging. By assigning a cost per item turning everything on will typically yield a higher price for insurance than a classic contents policy which offers blanket cover for items in a property or even while travelling.

The other benefit of the classic policy is that one doesn't have to engage with it. It's all well and good that one can turn cover for items off and on quickly but to really take advantage of this capability the insured has to care deeply about the level of cover or the cost.

There will be customers who want this level of control in their insurance and will actively seek it – but for the mass market a good enough policy at a reasonable price will be just fine.

The long tail
Now here we could see some disruption, or at least shake up of the market. We're already seeing some splits in the market as people interested in health rewards take up the various incarnations of vitality insurance, young people take up telematics car insurance after being priced out of the classic policies. There will be customers interested in control over their policies, customers who give up human interaction in favour of digital cost control.

In this way we might see smaller, more agile companies with lower cost bases taking their share of the market by satisfying a niche.

In practice, the jury is still out and the experiment still continuing. Do todays consumers want the products they have always been offered or something new? What of tomorrows customers?

In Insurtech, Partnership Will Override Disruption

There is much discussion in the press and at conferences about insurance incumbents and the disruption that is coming their way. A close examination of what is actually going on reveals that what is being labelled disruption is actually partnership.

Complicating a meaningful discussion about what is happening is clarity around what is meant by the word “disruption”. The term is used so often that it now carries a range of meanings. On one hand, it refers to a specific market phenomenon defined by Clayton Christenson’s theory of Creative Disruption. On the other end of the scale it represents a recognition that technology is changing the industry.

In most articles and presentations the term is not explicitly defined. Many times disruption is used in the context that portends doom for insurers and that predicts that the revolutionary shifts will cause insurers to go the way of the photo film industry or pre-digital music firms. This is a compelling argument given the challenges incumbents face because of the burden of their legacy systems, their aversion to failure, and a habit of extended decision cycles.

However, there are several significant barriers for newcomers to address if they are to displace incumbents. Celent’s analysis of what has happened to date in Insurtech concludes that the need to overcome these challenges results in a model of cooperation rather than destruction.

First, capital considerations must be taken into account. This is not the capital required to build a technology solution. Agreed, it is no small feat to fund the activities required to build, test, pilot, launch, and sustain a technology solution. However, this pales in comparison to the amount of capital required to underwrite risk (pay claims and hold necessary reserves). To date, a few startups have overcome this challenge by securing relationships with primary insurers or reinsurers, but if this is the approach, it is cooperation, not disruption.

A second barrier is regulatory expertise. This is not only a knowledge of regulation, but the ability to account for regulatory requirements from the earliest stages of ideation, through design, to sustained maintenance.  For startups, detailed regulatory experience can be bought, but this is an additional capital expense. It also can be sourced from a partner, but obtaining this assistance is not likely if the startup is a “disruptor”.

Finally, there is the biggest barrier – customers. As examples of this challenge, startups in the P&C and Life space that have been around since 2010 to 2012 have failed to achieve significant scale. In insurance, attracting and retaining customers is much more expensive (there is that capital problem again) and more difficult than in consumer goods.

The inherent challenges faced by both “tribes” argue for a partnership, rather than a replacement, solution. Insurers can address their legacy technology, risk aversion, and decision challenges by working more closely with the new technology firms that actively seek risk and have a bias to action. Startups need risk and regulatory capital and expertise as well as a customer base to serve.

Partnerships between insurers and startups are a new business model. Unlike supplier-buyer relationships of the past, where a contract is negotiated through an extended procurement process, these partnerships must be governed by a common vision and controlled through active communication from both sides. Celent’s research into the best practice in these partnerships emphasizes the importance of adjustments on both “sides” of such relationships. (see report Accelerating Insurance Transformation: The Good, the Bad, and the Ugly of Innovation Relationships).

It will take time to work out the best ways to accomplish this new model, but the barriers faced by both sides will force each to adjust. Economics will drive transformation to occur in a collaborative manner. Success will come to those insurers and startups which are able to make the necessary adjustments to their own preferences, cultures, and working models to create meaningful partnerships.

The predominant Insurtech approach will be one in which startups coexist with, not replace, insurers.