My first experience with an electronic application was in 2002. I was working with a major credit card company who included a flyer along with the billing statement that provided information about how to apply on-line for their term life insurance product. We didn't know how many applications to expect; but based on the wide distribution, we planned on a high number. Many months of effort went into developing the eApplication on the website and creating an interface for the collected data into the new business and underwriting system. This was cutting edge technology at the time. The electronic application collected the Part 1 – demographic information – of the application. The Part 2 – medical information – was collected by a third party. A whopping 523 applications were received from the first mailing. The campaign continued on an intermittent basis for a year with a few over 2,000 applications received. At the end of the year, we threw in the towel and quietly closed down the campaign.
Why did the campaign fail? There was nothing wrong with the process and the technology, while primitive compared to today, worked well. The problem was that the idea was ahead of its time. People were not ready to buy insurance on the internet. In fact, most of the applications received were declined or heavily rated. The people who applied were driven to do so by a less than stellar health history and had few other options available to them.
Flash forward to today; digitization of life insurance new business is a hot topic. Consumers are buying everything from mutual funds to groceries on the internet. However, based on Celent’s recent new business and underwriting benchmarking report, Resetting the Bar: Key Metrics in Life Insurance New Business and Underwriting, nearly 52% of all insurance applications received are still in paper form.
There are a number of problems associated with paper applications, from missing forms to illegible writing, which creates a tremendous impact on an insurer’s ability to process an application quickly and/or accurately. Industry benchmarks have placed NIGO (not in good order) rates at greater than 50%. Electronic applications essentially eliminate NIGO.
Our research shows a significant reduction in new business cycle time for insurers between 2007 and 2016. For high face amount writers, the average cycle time decreased from 52 days to 44 days and from 42 days to 33 days for moderate face amount writers. When asked how the better results were obtained, the majority of insurers had seen a reduction in cycle time due to the use of technology. Some responses included “increase in eApp adoption and increased use of an automated UW engine,” “eApp, more skilled staff, cross-training with 60% automated underwriting, so huge reduction,” and “increase in auto-issue rate.” Obviously, the new business process is ripe for automation.
In Karen Monks’ and my new report, The Doorway to Straight-Through Processing: Life Insurance Electronic Applications 2016, we profile nine software vendors and their 10 electronic applications marketed to life insurance. The report focuses only on stand-alone solutions in North America. For each vendor the solution is described using the customer base, data sources supported, functionality, and technology, as well as implementation and costs.
In 2002, the buying public wasn’t ready to shop for insurance on-line. That attitude is changing. An electronic application, along with an underwriting rules engines and electronic contract delivery, to enable straight-through processing will soon be the norm. The time for eApplications has arrived. An electronic application opens the door to transform the insurance buying experience, increase agent and customer satisfaction, and potentially sell more insurance.
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!
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.
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!
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.
The Guidewire acquisition of First Best should come as a wakeup call to other suite vendors in the marketplace. Not to be a doomsayer, but the reality is the market for core system replacements is shrinking. Many carriers are in the middle of a replacement or have already completed their replacement. There are fewer and fewer deals to be had and more and more vendors in the marketplace chasing those deals.
Let’s look at the numbers. Donald Light’s recent PAS Deal Trends report shows that we’ve seen an average of around 85 deals a year over the last two years. But there are more than 60 suite vendors out there. Of those available deals, a very few key vendors – including Guidewire – will likely get half or more of them. That leaves around 40 deals for the remaining 60’ish vendors. That’s less than one each. And that’s IF we assume the market will stay steady at 80-85 deals a year. This basic math shows that many core suite vendors will not get a single deal in 2017.
So how can vendors satisfy their shareholders? How can they generate growth and remain viable players? The truth is some of them won’t. But smart vendors are thinking about other options for growth. And they have a few paths they can take.
- Sell things other than suites. This is the tactic that Guidewire is showing with their recent announcement of the FirstBest acquisition and is also illustrated by their prior acquisitions of Millbrook and Eagle Eye. Duck Creek is doing the same as shown by their acquisition of Agencyport. Providing other core applications that carriers need allows a vendor to continue to grow their existing relationships, and allows them to create new relationships with carriers – even if the carrier doesn’t need a new core system. Some vendors will purchase these additional applications; others will build them.
- Sell to a different market – Insurity’s acquisition of Tropics lets them go down market to work with small WC carriers. Their acquisition of Oceanwide gives them the ability to handle small specialty, or Greenfield projects. While there are still plenty of deals to be done in the under $100M carrier market, most vendors can’t play in this space. Their price points won’t work for small carriers, and their implementation process won’t work. It’s too expensive and takes too many carrier resources. The implementation process has to be drastically different for a carrier with only 6 people in the IT department than it is for a larger carrier. This strategy of going down market only works if a vendor can appropriately sell and deliver their solution to a small carrier while still making margin – and many vendors just can’t do that.
- Enter a different territory – Vue announced today they’ve entered Asia with Aviva; Sapiens entered the US by purchasing MaxProcessing. And we see other vendors including Guidewire, EIS, and Duck Creek moving outside the US.
- Sell services – many vendors provide cloud offerings – which provides a steadier stream of income. Vendors such as CSC or The Innovation Group (prior to the split) had/have a large proportion of revenue coming from services. Vendors like ISCS provide additional BPO services such as mail services and imaging.
Any of these strategies are viable – but I predict we’ll see more vendors using them as the market for core system replacements shrinks. Smart vendors are already thinking ahead, working on their long term strategy.
Carriers who work with these vendors should be watching as well. No one wants to work with a vendor that won't be here for the long term. If you’re a carrier considering a new system –
- Make sure your vendor is showing momentum – new sales.
- Look to see what the signals are for their long term viability – will they be a survivor selling new suites?
- Do they have the resources to create or acquire new capabilities like portals, analytics or distribution management?
- Are they entering new markets, new territories or providing new service offerings?
If you don’t see these signals, you may want to start having a conversation with your vendors today.
Yesterday, we received a press release announcing the launch of a new insurance proposition targeted at personal use for ‘driverless cars’ from Adrian Flux in the UK. This news arrives hot-on-the-heels of the Queen’s Speech last month that announced the UK Government’s intention to go beyond its current ‘driverless’ trials in selected cities and legislate for compulsory inclusion of liability coverage for cars operating in either fully or semi-autonomous mode.
As the press release suggests, this may be the world’s first policy making personal use of driverless cars explicit in its coverage (we haven’t been able to validate this yet). Certainly, up until now, I suspect that most trials have been insured either as part of a commercial scheme or, as Volvo indicated last year, by the auto manufacturer itself or trial owner.
What I find particularly interesting about this announcement is that they have laid the foundation for coverage in their policy wording and, in doing so, been the first to set expectations paving the way for competition.
Key aspects of the coverage (straight from their site) include:
- Loss or damage to your car caused by hacking or attempted hacking of its operating system or other software
- Updates and patches to your car’s operating system, firewall, and mapping and navigation systems that have not been successfully installed within 24 hours of you being notified by the manufacturer
- Satellite failure or outages that affect your car’s navigation systems
- Failure of the manufacturer’s software or failure of any other authorised in-car software
- Loss or damage caused by failing when able to use manual override to avoid an accident in the event of a software or mechanical failure
Reflecting on this list, it would appear that coverage is geared more towards the coming of the connected car rather than purely being a product for autonomous driving. Given recent breaches in security of connected car features (the most recent being the Mitsubishi Outlander where the vehicle alarm could be turned off remotely), loss or damage resulting from cyber-crime is increasingly of concern to the public and the industry at large – clearly an important area of coverage.
Given the time taken to legislate, uncertainty over exactly what the new legislation will demand, and then for the general public to become comfortable with autonomous vehicles, I suspect that it may be quite a few years before a sizeable book of business grows. Often, the insurance product innovation is the easy part – driving adoption up to a position where it becomes interesting and the economics work is much harder.
Maybe this launch is a little too early? Or maybe it's just-in-time? Regardless of which one it is, in my opinion, this is still a significant step forward towards acceptance. I also suspect that some of these features will start to creep their way into our regular personal auto policies in the very near future. I wonder who will be next to move?
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.
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.
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.