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.

Transparency
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.

Control
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.

Conclusion
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.

Regulators will hug their blockchains – takeaways from Consensus 2016

"Show of hands, how many people don't know insurance at all?"

I attended the blockchain (BC) conference Consensus2016 this week and came away with some enhanced perspectives about the technology and its market. The ability to immerse myself in the subject, hear multiple points of view, and learn about different projects was extremely valuable. Here are my highest level takeaways along with some general observations.

 

Specific take-aways:

Regulators will love their blockchains
The transparency and audit trail capabilities of BC will reduce frustration, lower costs, and increase the effectiveness of regulators. Delaware’s announcement to move selected regulatory processes to the BC is an early recognition of this potential.

Benefits beyond the technology
The power of BC to eliminate counterparty risk, stop reconciliation, and increase efficiency were discussed repeatedly, but I also noted a few subtle, nuanced, and powerful benefits related to the BC development process. The most significant examples are the benefits that arise when multiple organizations partner to build a shared BC. Because the companies are building a common automation platform, their joint development results in a single set of code to automate contracts and identical data definitions. This eliminates the unintended consequences that currently result from a traditional approach — where organizations agree on legal terms but then automate them separately. I am now looking at BC with one eye on what the tech delivers and one on what the process around it yields.

Nascent, but sufficient to test with
No doubt the platforms will continue to develop, but based on reported activity in capital markets, banks and insurers, the tech is moving forward in leading corporatations, most in a testing mode. One insurer offered an intriguing insight based on their experience to date. They found as they started testing, their use cases all dealt with processes which already have existing automation solutions in place, with the goal of efficiency/cost improvements. However, they found that they were not getting traction/attention from their senior executives that they expected and needed. They have since pivoted and are now focusing their BC testing on problems that do not currently have automation solutions in place. (by the way, this insurer is another example of a firm which is using its innovation infrastructure to execute their BC tests. They are being done in their innovation lab under the governance in place for experimentation projects — see my previous blog about a similar approach taken by John Hancock.)

General observations:

Evangelism
There are strong emotions associated with this technology. The implementations that deliver financing and banking services to developing economies, or that improve health care, certainly warrant an emotional reaction. However, when I hear comments like “BC technology’s impact will be as significant as the railroad in the 1800s,” my hype alarm goes off. I suppose I haven’t been indoctrinated yet, but neither have the majority of financial services executives.

Market transition
Suppliers are changing from geeks to suits, from startups to more established tech and consulting firms. In some comments during a number of presentations and occasional tweets and audience reactions, I detected a curious, and unhelpful, undercurrent of antagonism towards this shift. The economics of BC will inevitably move it to the enterprise. In fact, its full promise cannot be realized without this change. I am confident that virtually everyone attending a conference like Consensus2016 wants to see the tech reach its potential, but, as a first time attendee, it sure seemed that not everyone was acting that way. I am looking forward to catching the vibe in next year's show.

Kudos to the organizers Coindesk for developing a solid, varied program and for executing it well.

For sustained innovation, it is not only the “What” but also the “How”

I read an excellent article recently by CoinDesk on John Hancock Insurance Company’s testing of blockchain in insurance. This is one of the early, public declarations that insurers are exploring the potential of this technology. Jamie Macgregor and I also explored this subject recently in the report: Blockchain in Insurance: Use Cases

There is another important angle to the John Hancock story that lies beyond the technology. In our approach to innovation at Celent, we separate the “what” of innovation (blockchain, artificial intelligence, analytics that personalize the customer experience) from the “how”. How companies execute on innovation involves building repeatable processes, incentive systems, and cultures of experimentation that establish a new “way we do things around here”. Note that John Hancock’s LOFT program provided the mechanism through which the insurer could test blockchain. Next week, month, year it will be a different “what” to feed into the “how” machine.

Beginning in the Q3 of last year, Celent research observed the pattern that leading financial services companies which have invested in the "how" of innovation are beginning to gain fast mover advantage over those that have not.  We expect to see an increasing, widening gap between those insurers which have investe in the how of innovation and those that have not. The leaders will use their innovation machines to more rapidly and effectively figure out how to make the “what” of the possible real in their organizations.

A golden day for insurance: Celent 2016 Model Insurer winners

In the historic Museum of American Finance, surrounded by golden exhibits including gold bars, a gold Monopoly game and even a gold toilet(!), the 2016 Celent Model Insurers were announced yesterday.  Part of our annual Innovation and Insight Day, we had over 150 insurance professionals in attendance (and over 300 in total), it was a great day for networking, idea sharing, learning about award winning initiatives and hearing inspiring speakers talk about the future of financial services. 

Yaron Ben-Zvi, CEO and co-founder of Haven Life, was the Model Insurer key note speaker. He discussed how Haven is using technology to reach a younger, digital-savvy customer with a life insurance experience that meets their expectations. He spoke about the journey from ideation to reality for their term insurance products which can be purchased online in only 20 minutes. He encouraged the audience to “think big but start small” and to apply the learnings along the way.

The Haven Life presentation was followed by the main event, the announcement of the 2016 Model Insurer winners. Every year, Celent recognizes the effective use of technology projects in five categories across multiple business functions.  We produced our annual Model Insurer Case Study report which clients may download here.  This year there were fifteen insurers recognized including Zurich Insurance, the Model Insurer of the Year.  Here are the winners: 

Model Insurer of the Year   

Zurich Insurance: Zurich developed Zurich Risk Panorama, an app that allows market-facing employees to navigate through Zurich’s large volumes of data, tools and capabilities in only a few clicks to offer customers a succinct overview of how to make their business more resilient. Zurich Risk Panorama provides dashboards that collate the knowledge, expertise and insights of Zurich experts via the data presented.

Data Mastery & Analytics

Asteron Life: Asteron Life created a new approach to underwriting audits called End-to-End Insights. It provides a portfolio level overview of risk management, creates the ability to identify trends, opportunities and pain points in real-time and identifies inefficiencies and inconsistencies in the underwriting process. 

Celina Insurance Group: Celina wanted to appoint agents in underdeveloped areas. To find areas with the highest potential for success, they created an analytics based agency prospecting tool. Using machine learning, multiple models were developed that scored over 4,000 zip codes to identify the best locations.

Farm Bureau Financial Services: FBFS decoupled its infrastructure by replacing point to point integration patterns with hub and spoke architecture. They utilized the ACORD Reference Architecture Data Model and developed near real time event-based messages.

Innovation and Emerging Technologies

Desjardins General Insurance Group: Ajusto, a smart phone mobile app for telematics auto insurance, was launched by Desjardins in March 2015. Driving is scored based on four criteria. The cumulative score can be converted into savings on the auto insurance premium at renewal.

John Hancock Financial Services: John Hancock developed the John Hancock Vitality solution. As part of the program, John Hancock Vitality members receive personalized health goals. The healthier their lifestyle, the more points they can accumulate to earn valuable rewards and discounts from leading retailers. Additionally, they can save as much as much as 15 percent off their annual premium.

Promutuel Assurance: Promutuel Insurance created a new change management strategy and built a global e-learning application, Campus, which uses a web-based approach that leverages self-service capabilities and gamificaton to make training easier, quicker, less costly and more convenient.

Digital and Omnichannel

Sagicor Life Inc.: Sagicor designed and developed Accelewriting® , an eApp integrated with a rules engine; which uses analytic tools and databases to provide a final underwriting decision within one to two minutes on average for simplified issue products.

Gore Mutual Insurance Company: Gore created uBiz, the first complete ecommerce commercial insurance platform in Canada by leveraging a host of technology advancements to simplify the buying experience of small business customers.

Operational Excellence

Markerstudy Group: Markerstudy implemented the M-Powered IT Transformation Program which created an eco-system of best in class monitoring and infrastructure visualization tools to accelerate cross-functional collaboration and remove key-man dependencies.

Guarantee Insurance Company: In order to focus on their core competency of underwriting and managing a large book of workers compensation business, Guarantee Insurance outsourced its entire IT infrastructure.

Pacific Specialty Insurance Company: Complying with their vision is to become a virtual carrier, meaning all critical business applications will be housed in a cloud-based infrastructure, PSIC implemented their core systems in a cloud while upgrading infrastructure to accommodate growth in bandwidth demands.

Legacy Transformation

GuideOne Insurance: GuideOne undertook a transformation project to reverse declines in its personal lines business. They launched new premier auto, standard auto, and non-standard auto products, as well as home, renter and umbrella products on a new policy administration system and a new agent portal.

Westchester, a Chubb Company: Chubb Solutions Fast Track™, a robust and flexible solution covering core business functionality, was built to support Chubb’s microbusiness unit’s core mission of establishing a “Producer First,” low-touch mindset through speed, accessibility, value, ease-of-use and relationships.

Teachers Life: Teachers Life has achieved a seamless, end-to-end online process for application, underwriting, policy issue and delivery for a variety of life products. Policyholders with a healthy lifestyle and basic financial needs can get coverage fast, in the privacy of their own homes, and pay premiums online in as little as 15 minutes.

The quality of the submissions this year is a clear indication the industry is turning a corner and embracing transformation, digital initiatives, innovation and valuing data analytics.  It is inspiring to see the positive results the insurers have achieved and a pleasure to recognize them as Model Insurers for their best practices in insurance technology.

How about your company? As you read this, are you thinking of an initiative in your company that should be recognized? We are always looking for good examples of the use of technology in insurance. Stay tuned for more information regarding 2017 Model Insurer nominations.  

 

Blockchain in insurance – who needs it, anyway?

Interesting feedback from Celent’s What If… Conference in London last week. We were fortunate to have both Leanne Kemp and Pascal Bouvier present on blockchain in insurance. Surprisingly, the extensive treatment of the subject received mixed reviews. Some attendees were pleased and stated that discussing blockchain was valuable and that these conversations, in insurance, are rare and are just beginning to take place. Others felt that the time could have been better used reviewing a subject which has more relevance to insurance. It was mentioned that the technology was for payments, banking, and securities trading. The comments reminded me of the early 2000s, when online retailing began to impact business. I recall insurance industry veterans’ comments about the opportunities for the internet. Summarizing generally, it was something like: “Well, it is a great way to sell plane tickets and books, but it won’t catch on in insurance. Insurance is different.” We see how that has worked out. In 2014, our Celent colleague, Zilvinas Bareisis, positioned blockchain this way in his report, The Disruptive Potential of Bitcoin: Why Everyone in Financial Services Should Care: “Just like HTTP became a protocol for information exchange, Bitcoin, Ripple, and other decentralized ledger-based solutions might be seen as the protocols for value exchange, promising exciting possibilities, some of which are difficult to imagine at this stage.” However, evidently there are insurers that are not only paying attention, but are investing significantly. Allianz announced work with six startup companies in their accelerator in Nice, France. Also, just this week, AXA made public their USD$55million investment in a blockchain technology company. So, is this the “new internet”? Without a doubt, there are huge challenges to blockchain in insurance. The technology still requires maturation around scalability and latency. Additionally, regulatory aspects are yet to be determined. However, it is clear that, right now, some insurers are placing some hefty bets and others can’t even find the casino.

One prediction for 2016 is about to come true – our event on February 3rd

With just under a week to go until our event at The Magic Circle in London is on February 3 I though it worth reflecting on 2016 and the folly of predictions in today’s world. One of the key challenges for any organisation trying to respond to an unpredictable future is the hockey-stick graph or geometric growth that is increasingly describing adoption and the impact of technology on our society. That is to say that the figures stay relatively flat and predictable and then grow out of all proportion to what went before. Adoption of the Internet is a good example, the rise of the smart phones and that of tablets is another. Some may still argue that wearables as a fad has passed, citing them being around for a while but not really seeing the growth one would expect. Perhaps though, this is the false sense of security brought by the flat bit of the graph? The same is true of self-driving cars, a concept that’s been alive and well in Hollywood and on TV shows for decades (anyone remember the Hoff and Kit?) and is only now starting to creep onto real world roads. If the trends of cheaper and ubiquitous technology continue then these trends could at some point see that hockey stick moment, that massive growth in adoption and impact. For insurers – just reacting may not be good enough, instead perhaps it is worth spending time thinking: it is only a matter of time until it is ‘normal’ for clothes and accessories to be internet connected, for cars to drive themselves and for people to live longer through better management of their health. This is precisely the type of thinking we’re hoping to bring to our event, which will be a mix of folks who are on the curve of some of these changes and also some tools to help insurers plan and respond. So while I’m waiting for my Internet connected suit to come along (not that fanciful, you can already get connected yoga-pants and nappies that tweet) and the car that drives me to work – I look forward to spending some time those of you can attend our event next week to discuss the future of insurance and to ask the question, What if … ?

Will your next insurance administration system be on the Blockchain?

Policy, claims, and billing administration systems have not fundamentally changed since their inception. Yes, there have been technical improvements, but the basic model remains the same as originally designed – each insurer buys (or subscribes) to a version of code to use against their own database and (hopefully) integrate with external sources to service a client. This is about to change with the advent of Blockchain 2.0. With an appreciative nod to material developed by our parent company, Oliver Wyman, here is a brief summary of this technology (Celent subscribers will have access to a full report on this platform in the very near future):
Blockchain is built on a series of innovations in organizing and sharing data. The objective is to create a single version of the truth, used by all participants, which contains a much richer dataset than exists in any one system today. This, in turn, enables new industry processes to be developed based on the use of transparent real-time data, immediate settlement of transactions and the expansion of auto-executing “smart” contracts with business logic encoded into the ledger. The technology incorporates two facets, a blockchain (lower case) which is the process of adding blocks of cryptographically signed data to form perpetual and immutable records, and distributed ledgers – a database architecture where all participants in a system collaborate to reach a consensus on the correct state of a shared data resource. Applying business rules to this infrastructure, called smart contracts, drives transactions immediately. Real time data exchange, increased security, and more efficient settlement of transactions and processing are some of the benefit areas waiting to be realized. Before this though, the platform must solve hurdles including scalability issues, regulatory concerns, and common standards and governance.
To this last point, our brethren in the banking industry have joined the R3 consortium to begin to address the challenges. Founded in New York City in September last year by nine founding banks, it now has 42 members spread across multiple geographies. It is led by a startup organization and is in its very early stage — the technology team is being built and initial use cases have not been completed. But what of insurance? Celent is aware of insurers who are active in this space. Most are leveraging the investments made in an innovation infrastructure (Innovation Labs, Centers of Excellence, co-development partnerships, accelerators) to conduct limited experiments with Blockchain. However, these efforts are individual and not connected. Is there a similar group of 9 insurers that want to work together to explore the opportunities and coordinate on standards? Or is there a policy, claims, or billing technology provider who is going to fill this void? We expect movement in these areas in the first half of the year with some possible ways forward identified by year-end.

US patents in 2015 – who are the leaders?

I thought this chart from the firm Statista was interesting and topical given my post from last week. What particularly caught my eye was their observation that IBM is number one for the 23rd straight year. In addition, over 2,000 of their patents focus on cloud computing and cognitive computing, both areas of particular interest to insurance and the broader financial services industry. And for those that wonder (like me), Apple was in 11th place, just 18 patents short of 10th.   Infographic: Top 10 U.S. Patent Recipients | Statista You will find more statistics at Statista