Experimenting with external data: What's the real motivation?

Recently, we held a UK CIO Roundtable on the myths versus realities of ‘Big Data’.  The roundtable was made up of a mix of insurers from both the P&C and Life industry. I guess that it will come as no surprise that finding new ways to extract insight from data is a hot topic.  In a low interest rate environment, improving results from the core disciplines of sales, underwriting and expense management take on a greater level of importance within many firms, and data is at the heart of this. For many firms, the business drivers for investment in data and analytics have not really changed in recent years, i.e.
  • Risk mitigation – Minimising the frequency and impact of losses, through fraud detection and loss scenarios.
  • Growth / Maintaining market position – Identifying profitable segments and understanding the propensity to take a particular course of action.
  • Improving service – Identifying ways to improve the quality of service through ensuring that the right data is in the right place at the right time to aid decision making.
What has changed, however, is the increased focus on using data to make a difference to business performance coupled with a growing interest in the search for and use of new alternative external sources of data to augment with existing internal data, such as social profiles, health app data, public records, etc. Unsurprisingly, many of the firms represented stated that they were active in experimentation with new external data sources, albeit on a small scale.  What I personally found fascinating was when one insurer, having been questioned about the motivation for experimentation in new sources of data, gave the following refreshingly honest answers:
  • Competitive threat – Concern that a competitor or start-up could use data in a way that threatens their current position, rendering the way they underwrite and service customers obsolete.  Telematics in auto-insurance and use of public health records & personal health tracker apps for enhanced annuities being two examples.
  • Regulatory threat – Concern that local market regulators may extend anti-discrimination laws to prevent the use of existing rating factors used for pricing risk, such as age.  The origins for this concern were triggered by the European Union’s decision to implement the Gender Directive that came into law at the end of last year. (For non-EU citizens, the Gender Directive prevents insurers from using gender for pricing within Europe.  Since its implementation, there has been an increased interest in telematics across the region as insurers look to use the data generated to predict driving behaviour).
When I reflect on this further, the insurer’s stance makes perfect sense to me. For years, established players have relied on their scale and the history captured within their systems to provide them with a competitive edge.  All of the time that market rules of engagement remain unchanged, the insurer is better off prioritising investment towards making use of the data it already has, rather than place a big bet on a risky source of new data or a new data led propositions for unproven markets. However, in maintaining a capability to search for and then experiment with these new sources of data, this insurer has enabled themselves to be better placed to respond when the threat finally occurs.  This is a fast follower strategy (or ‘Fast Second’ to use a phrase coined by Constantinos C. Markides in his book of the same name).  For incumbent players in service industries, this strategy can often prove to be highly successful as a response to a disruptive play by a new entrant. Perhaps today more than in recent history, it could be argued that new entrants and small agile competitors using alternative sources of data to gain a competitive advantage are becoming a real threat to established insurers.  We have seen early examples within the industry already, such as with the Climate Corporation’s entry into the crop insurance market (and then its subsequent acquisition by Monsanto for an eye watering ~$1B earlier this month), the positioning of personal health apps to assist in managing risk for health insurance, and the growth of telematics for ‘pay how you drive’ insurance models. Once these new non-traditional data sources and data-led propositions start to gain real market traction, the key to success for industry incumbents may not lie in being first but instead in first being aware followed by being the fastest to execute.

EU wins Nobel Prize but it's a tough time for European insurers

A lot has been said and written about the political and economic situation in Europe. Interesting news came from Oslo last week with the Nobel Committee awarding the Peace Nobel Prize to the European Union. While I reckon that some may be right to believe that the 70-year period of peaceful time we have been experiencing in Europe since the end of World War II could have been the fruit of the European Union construction, I have my doubts that what has been true in the past decades can be verified in the future. Being Swiss and therefore not part of the European Union, I think it would be worth providing my thoughts on the topic and what it means for insurers who are about to invest in Europe today and in the near future.

Obviously there is a “BEFORE” and an “AFTER” the financial crisis and I think it is important to analyse what has changed since 2008 and the collapse of US subprime bubble, the bailout of major financial institutions including banks and insurers and the downturn in the economy experienced immediately after that.

In terms of political stability we have to admit that the situation has been pretty shaky in certain EU member countries. Actually there is a rule that applies in a majority of them: governing politicians or political parties have lost power following the financial crisis. Examples include: Spain with the defeat of the Socialist party of prime minister Zapatero, Italy with the forced resignation of Silvio Berlusconi, France with the defeat of the UMP party and president Nicolas Sarkozy, Greece with the emergence of the fragile coalition following this year’s elections. This is without saying claims from regions asking for more independence like Catalonia in Spain or Flanders in Belgium.

With regard to the economic situation, some countries parts of the Euro-zone are cause of worries. With more than 25% unemployment, Spain and Greece top this list. But what is still more worrying is not the state of their economy but its dynamic. Indeed, not only the number of unemployed people is high in these countries but the increase in unemployment is very fast. For instance the unemployment rate in Greece has been increasing at a 1% pace over the past few months. More than a debt issue, the problem faced by countries such as Spain, Greece, Portugal, Italy and to certain extend France is a lack of competitiveness and with the recession looming I fear the situation could not improve.

It is in this tough environment that insurers are planning new investments in Europe. What we have already predicted in terms of investment in new core insurance systems in the life insurance sector seems to materialize. Uncertainty seems to hit less severely the general insurance sector (property and casualty) but the industry has still to generate underwriting profits in key lines of business for instance motor insurance in France and United Kingdom. I personally think that identifying and investing in innovative business models is key to grow and generate profit in the long term in this difficult market environment and I encourage insurance companies to challenge their traditional business model.

Changing the rules in online insurance

My colleagues Craig Beattie and Catherine Stagg-Macey published an interesting report back in April about the change in behaviour of online shoppers when looking for car insurance policy online in the UK. The title of the report is The Customer, Google, and UK Car Insurance: Lessons from Evolving Customer Search Behavior. In summary this study tells us that with the growing use of internet and aggregator websites when searching for the best car insurance products, online shoppers have become more educated and understand now better what a motor insurance product is all about. This self-education has allowed them to change their behaviour to now look for tailored insurance products that not only better fit their needs but also makes them less price-focused.

Celent has published various reports on the online insurance topic. We have also advised insurance companies on this strategic subject. What we learn out of the UK history is that aggregators take control of the customer relationship as long as they are focused on price and almost solely on price. Aggregators can therefore be dangerous for online insurers for two reasons. Firstly aggregators force insurers to squeeze their margins down in order to be in the top ranking and secondly many insurers tend to accept the price focus imposed by aggregators and sometimes neglect the service-to-consumer aspect which in the long run makes them stick to the same insurance provider.

Even though we think that the past ten-year evolution of the UK online insurance market represents a useful benchmark for continental European insurers, we think there are differences that will always characterize specific markets. In France for instance, online insurance is less developed than in the UK right now. A handful of insurers are competing in this market but not more than 2% of new motor insurance sales are completed online. On the other hands we see a growing use of internet by consumers in order to gather information before purchasing an insurance policy (in the vast majority via traditional channels such as agents, brokers and banks). What is interesting though is how the aggregator market is getting crowded in this country. Indeed, there are about thirty websites in France that compare motor insurance quotes online! In this jungle, it will be interesting to see how consumers will find their way. Maybe it would be interesting for insurance companies to launch a specific website comparing aggregators… using some criterias like independence, trust, website usability, etc.

This being said, we can already predict than less than ten aggregators will survive in the mid to long-run in France. In the meantime and unlike in the UK market there is an interesting strategic initiative, which I think deserves a comment on this blog. In order to counter the growing importance of price aggregators in the French online insurance market, Axa has tried to differentiate by anticipating what Celent has discovered to be happening to customers behaviour over time in its UK report mentioned above. Indeed, Axa has launched a website comparing services of insurers instead of price of motor insurance. The website is called www.quialemeilleurservice.com (for our English-speaking readers it means “who has the best service”) and in substance it is a website comparing the level of services provided by insurers for different types of cases. For instance if you are a young driver and would like to know who has the best service to replace your vehicle in case of accident you can get a ranking of insuers using this website. I find the strategic move from Axa interesting and I am curious to see how it can change the usual online insurance pattern. In the meantime, I think this website should be a first step allowing the French insurer to better understand customers and anticipate the critical moment when they’ll become educated enough to start to be looking for more tailored insurance products. Customer behaviour and preference data gathered now will help Axa tailor the products that will be best placed to meet customer requirements in the future and I think http://www.quialemeilleurservice.com is an interesting tool to achieve this goal.

And the winner is…

It is in difficult times that we identify the best managers. In good times it is much more complicated to find out which insurers have outstanding executives since the whole industry tends to show strong figures not only in terms of sales but also in terms of profit. According to me an outstanding Chief Executive Officer (CEO) should gather – among others – the following skills: Humility: Managing an insurance company (of any kind, midsized or large) is a complex mission and nobody can achieve great performance alone. Therefore CEOs need to structure their organization optimally and find the right people for each strategic position. The choice of adequate human resources is particularly important in core areas such as risk management and IT since the main business of insurance consists in managing different types of risks and analysing risk requires mastering data qualitatively and quantitatively. Vision: The most important key role of a CEO consists in defining a relevent strategy, communicating it appropriately at each level of the hierarchy and delegating optimally the implementation of corresponding actions. There are many ways to define a strategy but there are not many executives combining outstanding reasoning ability with a deep vision of the future. Understanding (or feeling) what the future holds is a strength that only a handful of CEOs in the insurance industry have been able to demonstrate in the past decade. Focus: As soon as a long-term strategy has been determined and appropriate goals defined, CEOs should keep focused and avoid changing their perspectives if no external factors alter significantly their actions plan. Of course, a high level of reactivity is necessary when parameters influencing a business model become very volatile but overall insurance companies that have meticulously evaluated all external factors through different scenarios do not generally need to change drastically their plans but will be just required to proceed with tactical adjustments. “Focus” means also being determined to achieve long-term objectives. In other words, CEOs should avoid getting trapped in a logic consisting in guessing only what the company figures will be at the end of the next financial quarter. This is certainly one of the most difficult constraints today’s CEOs in all industries have to face: impatience of shareholders. In summary, a great CEO should be at least a great visionary demonstrating outstanding skills at finding the best people and appointing them where they can bring the highest value for the organization. In addition, he/she should demonstrate a strong ability to articulate logically a strategy and to communicate it appropriately down the hierarchy levels. Finally, he/she should keep a strong focus on established plans and long-term objectives. Since the beginning of the financial crisis back in autumn 2007, I have been thinking many times about which financial companies will get out of this crisis as the winners and the losers. As months have passed, we have seen many CEOs in the financial services industry being under pressure, stepping down or even being sacked. Even though it might be too early to give awards taking into consideration that the economic crisis we are currently experiencing could generate additional surprising news, I strongly believe that Zurich Financial Services (ZFS) is one of the insurance players that have managed to take advantage of this difficult and uncertain environment so far. According to me, its CEO – James Schiro – represents a good example of an executive demonstrating a high level of humility, vision and focus.