The Great AI Wars

The Great AI Wars

Last week saw one of the last big players make their position in machine learning and AI clearer at Apple's WWDC event with the launch of their machine learning options. These days you're not a credible large cloud provider if you don't provide some interesting APIs around machine learning and AI with the likes of Google, IBM, Amazon, Microsoft (Azure), and Alibaba (Aliyun) to name but a few. Apple's discussion focuses on being able to embed these technologies on the device with the Apps rather than perhaps the building of the models and the execution – much less focus on pushing data into the cloud.

The war I speak of in the title however, is not some dystopian future where humanity fights for survival but rather the current war over talent that enables the use of these technologies. Insurers going through digital transformations and looking deeply at their analytics are finding they are competing with ever more unlikely companies for talent including rising InsurTech firms as observed in previous blogs. The good news is that basic machine learning capability and training is increasingly available as the democratisation of machine learning continues apace – in fact if you look at Apple's documentation this discusses the ease downloading and converting models and integrating them to Apps rather than the nuances of various training algorithms.

Machine learning isn't new to insurance with coverage in our predictive analytics reports courtesy of Nicolas Michellod and case studies. It is clear however that these tools and techniques are increasingly being embedded into solutions throughout the insurance eco-system and beyond – and they are raising customer expectations. A discussion on what this means for core systems is given in my recent report here, as well as a discussion on what this means for new front end opportunities with the rise of chat bots in our discussion on conversational systems and a broader discussion on the differences in designing intelligent systems versus programmed ones is discussed in designing the aware machine.

While AI is a battleground for the big players for insurers it is becoming an increasingly accessible source of new approaches and automation – both an opportunity to better serve customers as well as cut costs. The ease with which machine learning and AI can be embedded into simple applications now will only increase adoption and there are small things any insurer can do. Of course if you want to go much deeper, as pointed out in this Harvard Business Review article, if your company isn't good at analytics, it's not ready for AI. I disagree a little with the authors perhaps, we're in a world where anyone can do something – one can just download and convert a model and incorporate it into our systems as pitched by Apple.

For those looking to go further, the good news is there are many vendors that can help, and many partners too of all shapes and sizes. I'm happy to say the InsurTech investments in the industry are only increasing this number and the opportunities for applied AI in insurance. Further, there are many conferences discussing both analytics and the rise of AI – if you're attending or looking for them do get in touch, I or my colleagues would love to discuss.

Closing the deal with e-signature

Closing the deal with e-signature

E-signature has become such a part of my life that I am surprised when I am asked to provide a wet signature. I sign for credit card purchases, deliveries and legal documents, even my tax returns (!), using a click or a digital signature pad. But, if I want to change my beneficiary for my life insurance, I have to download a .pdf, sign the document with a pen, and mail it to the insurer. Insurance has been a slow adopter of e-signature. However, as the process of buying life insurance and receiving post-issue service is becoming increasingly more digitized, insurers are working to remove paper from everyday processes.

The adoption of e-applications, web portals, and mobile technology is helping to drive the change, but it is my belief that it is primarily driven by customer expectations set by other industries offering easy-to-use digital processes. Consumers expect companies to be easy to do business with and will choose the company they purchase goods or services from based on the ease of use. E-signatures provide a way to offer a digital experience that is easy to use, fast, and secure.

In our new report, Putting a Lock on Straight Through Processing, my colleague Karen Monks and I profile 11 providers of e-signature technology for insurance. This is the final report in a series that began last year.  During the year, we looked extensively at new business acquisition and the technologies that power it. We wrote reports on solution providers for illustrations, e-application, and new business and underwriting in addition to e-signature. Along with the vendor reports, the series included two benchmarking reports and a report in which insurers compared their level of automation to Celent's automation capability matrix to determine if they are minimally, moderately, or highly automated.  

With the increased emphasis on cycle time and cost, e-signature is being increasingly being adopted as a way to check the box on making processes fast, flexible, and efficient. E-signature software frequently integrates with other solutions to support new business acquisition as well as post-sale service.

The ability to collect an electronic signature for a new application at the time of sale providing the legal authorization to obtain underwriting requirements and evidence from third party providers has enabled straight-through processing and the ability to provide a decision to the applicant within minutes, instead of weeks.

Common e-signature use cases for life insurance:

  • New policy application
  • Disclosure delivery
  • Agent licensing and appointment
  • E-delivery of policies
  • Beneficiary change and other policy servicing
  • Premium payments

Life insurers that investigate e-signatures will be pleasantly surprised by how quickly and relatively inexpensively e-signature can be implemented as well as how easily and securely a paper signature process can be automated. I am a big fan, as I’m sure you are, of less paper and more automation!

 

The Real Value from Insurtech — A New Way to Develop Products

The Real Value from Insurtech — A New Way to Develop Products

The long-term sustainable value from insurtech lies in its ability to change how insurance products are created. The economic model behind how startups bring their products to market is bending — no, breaking — the traditional development cost curve. Insurers which recognize this dynamic and adjust their innovation activities accordingly will create more value form insurtech than their competitors.

Insurtech has already gone through at least two iterations in its short lifespan. A little more than a year ago, the market was abuzz about widespread disruption. Now that it is recognized that there is value in integrating insurtech, partnership is the rage. The next phase will see an increase in greenfield operations. Over the next 12 months, the economics of insurtech development will result in a significant increase in spin-offs and stand-alone propositions.

The reasoning is this – economics will motivate different behavior. Traditional insurance product development is typically characterized by these approaches/tools/techniques:

  • Product or process-centered design
  • Waterfall development (although agile techniques are catching on)
  • Centralized, on-premise infrastructure
  • Package or custom-built software
  • Periodic release and control procedures
  • Service-oriented architecture (SOA) integration

Contrast that with insurtech operations. They are typically characterized by these approaches/tools/techniques:

  • Customer-centered design focused on delivering a minimal viable product as quickly as possible to the market
  • Agile development using small teams
  • Cloud infrastructure
  • Microservices architecture
  • Use of DevOps to control updates
  • Use of open source software
  • API integration

Here is where the economics comes in. Without reading ahead, answer the following question:

If you spend $1 delivering a specific set of functionality in the traditional approach,
what amount would be needed to deliver exactly the same functionality using the new development approach?

I have been asking this question for the last two months. It is a tricky one, because the best input comes from the limited number of people who have delivered insurance products in both the traditional and the new development approach. These few professionals have “lived” both environments. My sample size is small so far, but I have polled about 30 people.

The answer ranges between 20 and 30 cents on the dollar. So, call it a quarter. That means that a $4 million dollar project delivered with the traditional approach is only $1 million using the new tools/techniques. Or, better yet, entire propositions, which include changes to both the insurance product and a new automation platform, can be delivered for under $4 million. (For more on this, see the @Celent_Research report Slice Labs: A Case Study of Insurance Disruption.)

With this cost profile, a greenfield startup approach becomes much more attractive. Investing in a new product/market approach is much less risky given the smaller level of investment. If we marry this with the innovation fatigue expected as incremental efforts fail to deliver sufficient value to the core business, the environment is ripe for spin-offs.

This is not to say that the current “partner with a promising insurtech firm” or the “we want to make innovation part of our culture” approaches will go away. However, expect to see significantly more stand-alone efforts than we have seen in the past.

Immediate adjustments to this opportunity include:

  • Insurers should include multiple start ups in their innovation portfolios
  • Insurance software/IT services providers and venture groups should help both insurers and insurtech firms to set up greenfield propositions
  • Insurtechs should look beyond incremental solutions and apply their talent and techniques to entire insurance propositions

As some of the spin-offs succeed (and most of them fail), insurers will learn how to develop in the new environment and will transfer these techniques to their core business. As a result, the true value of insurtech will not be an either/or choice, but change through absorption of new approaches and techniques.

Insurtech = new way to develop insurance products

The Evolving Role of Architects

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).

Microservices

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!

 

 

The Muslin is off the Lemon — Lemonade Launches

The Muslin is off the Lemon — Lemonade Launches

Today’s announcement by Lemonade provides an example of what actual disruption in insurance looks like. Disruption — the term is overused in the hype around innovation. In Celent’s research on innovation in insurance, we see that what is often tagged as disruptive is actually an improvement, not a displacement, of the existing business model.

The information released describes how Lemonade seeks to replace traditional insurance. Yes, they have built a digital insurance platform. Beyond that significant feat, they seek to replace the profit-seeking motive of their company with one based on charitable giving, acting as a Certified B-Corp (more info on B-Corps). They are also using the charitable motive as the guide to establish their risk sharing pools, thus creating the peer-to-peer dimension. Unlike other P2P efforts, Lemonade goes beyond broking the transaction and assumes the risk (reinsured by XL Catlin, Berkshire Hathaway and Lloyd’s of London, among others).

However, like other P2P models, such as Friendsurance, Lemonade faces a real challenge regarding customer education. The Celent report Friendsurance: Challenging the Business Model of a Social Insurance Startup — A Case Study details the journey of the German broker along a significant learning curve regarding just how much effort was required to teach consumers a new way to buy an old product.

The next few weeks will surface answers to they second-level questions about this new initiative such as:

  • How/if their technical insurance products differ from standard home,renters, condo and co-op contracts;
  • What happens to members of a risk sharing pool when the losses exceed funding;
  • Will the bedrock assumption, that a commitment to charity will overcome self interest and result in expected levels of fraud reduction?

It is refreshing to see some disruption delivered in the midst of all the smoke around innovation. Celent toasts Lemonade and welcomes this challenge to business as usual!

 

Predicting the Future – Illustration Systems to the Rescue

Predicting the Future – Illustration Systems to the Rescue

Life insurers continue to strive to increase growth and point of sale tools used by producers continue to evolve. Illustrations are becoming a key factor in keeping producers happy by improving the probability of the life insurance sale. Modern illustration systems provide the ability for agents to illustrate a variety of “what if” life events such as college education, retirement or purchasing a home to show how life insurance can be used to plan for the future events. Quality illustrations can move a “nice-to- have” to a “must-have” for a prospective client.

Functionality changes such as more emphasis on the illustration output, the use of mobile devices, user-level configuration, and full integration with other point of sale tools are just a few of the changes Celent has seen in vendor based illustrations solutions.

In Celent’s new report, Predicting the Future, 2016 North American Illustration Solution Spectrum, 11 vendors providing illustration systems to North American insurers are profiled.  The following trends in North American illustration systems were observed:

• Regulatory changes including NAIC model regulation and Department of Labor fiduciary rule driving increased transparency.
• Disconnected mode of operating with automatic synchronization upon reconnection.
• Increased security with role-based authentication and single sign-on capability.
• Ability to limit the products displayed to those that the agent is licensed to sell and the potential insured is eligible to purchase.
• Configuration has replaced coding for calculation engines but still requires IT involvement.
• Standardization of transactions for third party interfaces.
• Improved user experience with prefilled data, fewer forms, and conversational English-like labels for data entry. Output provides graphs and charts in addition to tabular data.
• Omnidevice support for phone, tablet, laptop, and desktop. An agent can start the quote or illustration on one device and complete it on another.

Today, an insurer can manage what used to be myriad of POS tools that included needs analysis, advanced sales support, suitability, illustrations, and e-applications, which were provided by a combination of vendors and in-house systems, through one interoperable, integrated vendor system.

Insurers also have the choice in the level of system development and maintenance in which they want to partake. Today’s vendor systems offer a spectrum from full vendor maintenance to user-level tools for the insurer to maintain its own systems.

Although homegrown illustration systems are still being developed and used, Celent believes that most carriers looking to invest in a new illustration system should consider vendor systems for core functionality and tools that can help them produce illustration systems more quickly and at a lower cost.

A companion report of 14 illustration vendors selling in EMEA, APAC and LATAM is coming soon!

The Great Insurance Experiment

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?

The Future May Be Closer Than You Think: Cat Bonds Traded on Blockchain

The Future May Be Closer Than You Think: Cat Bonds Traded on Blockchain

In June @JamieMacgregorC and I published a Celent report, Blockchain in Insurance: Use Cases which included a scenario we labeled “Alternative Marketplaces”. We described it as a blockchain that provided a:

shared environment for placing insurance risk, where brokers or the insured and the insurer capture the status of the risk, including exposure, risk share, and policy conditions. Smart contracts are then used to ensure collection and disbursement of premium amounts and the checking of coverage in the event of an incident. The distributed ledger acts as the record of risk placement, including layers and participants.

We didn’t expect that, in July, we would see an announcement that @Allianz and their partner, Nephila Capital, had completed a proof of concept around trading catastrophe bonds on a blockchain. http://www.carriermanagement.com/news/2016/06/15/155462.htm

In general, there are challenges with blockchain technology regarding handling large transaction volumes, managing complex rules, and delivering acceptable response time performance, but this announcement is an indication that the platform is moving forward.

Who has the best life insurance new business and underwriting system?

Who has the best life insurance new business and underwriting system?

Celent has published a new report, North American LHA New Business and Underwriting Systems: 2016 ABCD Vendor View, in which Celent profiles fourteen providers of new business and underwriting systems. Each vendor responded to a request for information. Seven vendors met the criteria for inclusion as a potential Xcelent winner. The seven vendors eligible for the awards provided a demonstration and briefing of their billing solution.

Due to the ongoing economic conditions that continue to have an adverse impact on life insurance application volumes, insurers have strong interest in reducing the cost of acquisition, processing and issuing life insurance applications. Automating the new business and underwriting functions are critical components in reaching a level of straight-through processing (STP) for new business. Insurers hope that these systems will help reduce unit costs and improve margins. Celent believes that these initiatives are necessary to help the insurers address growth, service, and distribution mandates, in addition to reducing the cost per policy issued.

After years of development that started almost 30 years ago, automated underwriting systems have become highly flexible in allowing insurers to define and configure underwriting rules and workflow. Most systems include or integrate into eApplications. Data from the applications drive reflexive questioning and identify risk classes associated with application data. They offer high levels of automation when gathering third party medical requirements and flag risks when the third party data results are outside of the ranges set by the rules. They also can deliver decisions to the point of data entry or to an underwriter.

New business image

The interest in new business and underwriting systems is on the upswing. Deciding the best new business and underwriting system is unique to each insurer. The goal of the report is to provide detailed information so that an insurer will be able to make an informed decision on which systems may be the best for them.

The secret to profitable organic growth? Deliver a customer experience that your competitors can’t match

The secret to profitable organic growth? Deliver a customer experience that your competitors can’t match
Maintaining growth and relevance is more challenging than ever for carriers. It is a hyper-competitive market with new entrants, a poor investment market, and rapidly changing customer expectations.  
  • Customers are demanding a different relationship model from their insurers. They are increasingly demanding transparency and simplicity with simpler contracts, clearer pricing disclosures and tailored recommendations with extraordinary service.
  • They are more and more self-directed and using non-traditional third party advice. Clients are more financially literate and are increasingly relying on aggregation and comparison tools. They look more for concepts than for entities – diminishing the value of advertising.
  • They are demanding collaboration and participation in product choices, claims, and risk management. They expect proactive communications that demonstrate knowledge of the customer. They expect customer service to be fast, excellent, and available through any channel they choose.
  Whether you define your customer as a policyholder or an agent, (it’s a matter of religion in this industry), expectations are being driven by innovations by non-insurance players. Uber provides instant information availability without long waits on the phone, which gives control and transparency to the customer. Amazon recognizes their customers and provides product and service recommendations that come to the customers without any additional work. Apple provides variations on their products that allow customers to choose among the different value propositions and the flexibility to change those purchases with minimal hassle.   But limited customer interactions in insurance have pushed incremental innovation to focus on products rather than customer experience.   As ardent incrementalists, most players in the insurance industry look at the customer experience from the inside out by thinking about all the points where WE touch a customer. However, being good at the discipline of focusing on customer experience requires taking a broader view of customers’ lives and the context in which they are interacting with the brand. Those who excel at customer service are masters at looking from the outside in, understanding what is going on in a customer’s life when THEY touch us and then delivering unexpected signature moments across a broader expanse of experiences.   Certainly efforts have been made to drive effectiveness for insurance processes, nevertheless, there are still many areas where improvements are possible. The way forward requires a comprehensive digital view that goes well beyond process automation. By recognizing that customer experience is about more than designing a clean and friendly user interface (UI), insurers can move beyond the superficial and achieve real results.   The technology is there to support this. But what keeps us from moving forward? Surprisingly, few carriers have anyone who owns the entire customer experience. Customer experience is usually owned by organizational silos. When no one owns the experience, it becomes a low priority. If there are limited metrics, or metrics which don’t focus on the quality of service from a customer viewpoint, then there are too many competing priorities to drive investments here.   Digital makes possible a level of engagement that was never possible before. But beware – the democratization of digital technology is eroding competitive barriers. And to meet customer expectations in an increasingly digital world, carriers will be required to make both cultural and physical shifts to incorporate new systems and processes while harnessing data and using real time analytics.   Like it or not, customer and distribution partner behaviors and expectations are changing the business model. It is not just about reducing expenses and writing more business. Carriers have to look at new distribution models, new product types well beyond pure indemnification products, and revolutionizing the customer experience.