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March 20, 2017

Innovation Challenge for Commercial Lines

Summary:

Insurtech also must mean breaking down existing operational silos and building new, streamlined structures.

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Let’s be realistic. Managing customer requirements is expensive and exhausting with current structures for commercial insurance operations! While insurtech is currently seen as incorporating technology into an organization to produce new products or touch customers in new ways, it also must mean breaking down existing operational silos and building new, streamlined structures.

Any reengineering should incorporate strategic innovation and technology to ensure that all parties have aligned objectives to rapidly respond to new opportunities and exit unprofitable ones while improving operational efficiency and controlling costs.

Operational Silos – Release the wrecking balls!!!

Commercial insurance companies consist of various operational silos. Unfortunately, over the years, these silos have subsumed the key functions of underwriting and claims and, in effect, are controlling the overall strategy and direction of a company’s risk appetite without substantive feedback from underwriting and claims – the teams that actually interact with customers! There are numerous reasons why these operational silos have been implemented, but a key reason is the inclination to avoid risk.

Yes, there is a touch of irony here, as the industry is supposed to be in the business of assuming risk — but these companies are protecting their balance sheets while attempting to manage increased regulatory requirements. If you are an underwriter or claims manager, climbing over the ice walls in the Game of Thrones must appear easier than dealing with the daily internal operational challenges.

The primary support that operational silos receive means that underwriting and claims team struggle to receive resources and appropriate technology investments to support existing business, improve service and produce innovative, effective and profitable risk management products in an extremely competitive market.

See also: How Insurtechs Will Affect Agents in 2017  

We are repeatedly informed that insurers spend between 20% and 40% of each dollar/pound/euro of premium on costs of operations and customer acquisition costs, marketing and distribution. I would argue these costs do not factor in costs due to internal frictions — and they are VERY expensive! Prioritizing operational silos means that internal imbalances affect all areas of the organization:

Product deliverables – Whose team are you actually on?

For those who would argue that the structure of commercial insurance companies is not a hindrance to producing business or creating products, I’d like to share a real-life example of how one commercial insurance company saw its market share and resulting profitability significantly reduced due to its own operational silos:

The underwriting teams’ inability to respond quickly to market conditions was driven by a lack of support and priority by the legal and governance departments. The company had no streamlined collaborative protocols between departments to support new product or policy form development, nor was technology used to manage the product development process.

Company A’s internal operational silos restricted a path for innovation, reduced long-term value and allowed competitors to reduce Company A’s market share. The company’s poor execution also evidenced the inability to respond quickly to market changes — brokers and competitors began to challenge Company A’s market leadership abilities.

Compliance operations – The growing beast

The disconnect between regulators and commercial insurance compliance is a pet peeve of mine — instead of investing in systems that improve compliance by streamlining internal processes, risk identification and risk management, companies have greatly expanded compliance staff numbers over the years and added another silo of operations. This operational expansion slows customer support, increases costs and still contains high levels of inefficiency. Of course I’m aware that compliance is critical, but there are easier and more cost-effective ways to achieve compliance goals and improve regulatory reporting.

My team at Artemis Specialty conducted a London market broker survey in 2015 to identify how quickly the market develops products and the quality of service — the results were depressing. Brokers expressed a growing concern that underwriters were spending as much as 40% of their time on internal and regulatory functions in lieu of servicing business.

Further discussions indicated that many commercial insurance companies have inadequate technology in place to support their business. Effective technology will provide underwriting and claims personnel with the required tools to meet corporate underwriting, claims and regulatory guidelines and reduce the number of compliance employees (no, I’m not anti-compliance employee). Additionally, underwriting and claims teams can focus 100% of their time on new and existing customers — the key reason they are employed!

Innovation labs – Another operational silo?

A number of commercial insurance entities have created innovation labs, which, at first glance, is an admirable step to introduce disruption — but it does raise a number of questions:

  1. Will the lab be viewed and managed internally as an additional operational silo?
  2. If the innovation lab is separate from existing operations, how will it challenge the status quo?
  3. Where is the buy-in at all levels of the company? How do you create excitement across the entire organization to participate in innovation experiments?
  4. Can the lab be described as innovation if it is only created to digitize existing legacy products?

Internal disruption is difficult, but M&A is easier? Seriously?

Over the past 15 years, it has become glaringly obvious that it is time to develop a new business model for our customers — they deserve it! So, why is internal disruption difficult?

During the last 10 to 20 years, there have been numerous commercial insurance mergers and acquisitions. Companies instill a new corporate identity in to the acquisitions and new employees while integrating legacy systems. If a company is capable of a merger and acquisition, why is it not capable of implementing and managing its own internal disruption to create innovative, efficient and customer-focused environments?

I have restructured numerous departments over the years to refresh the innovation culture, create products, improve efficiencies and increase customer service and satisfaction — surely this can be replicated throughout an organization and at the corporate level? How many operational meetings have I attended over the years to push for improved internal collaboration, efficiencies and the transformation of the broking, underwriting or claims operations and processes? Why is the response almost always: “It’s too difficult.”

See also: 10 Predictions for Insurtech in 2017  

Many analysts cheer when companies are acquired or merged, as there is now “scale” and a reduction of costs through layoffs and other efficiencies. I have attended numerous analysts’ calls throughout my career and noted they rarely question M&A technology efficiencies in depth; in fact, it’s rare when technology questions are raised during annual or quarterly financial investor and analyst updates. Will analysts and investors now raise more technology questions due to the increased insurtech enthusiasm and press? I would be a bit more curious about how a company is meeting new technological challenges and its impact on future company profitability.

Existing commercial insurance strategies of top-line growth or releasing underwriting reserves are not sustainable — nor is it a sustainable strategy to create mass layoffs when the former strategies no longer work.

A new commercial insurance model is not about implementing a digital front end to create a smoke-and-mirrors modernization image to support existing products — nor is it simply about partnering with or acquiring an insurtech company. It’s about breaking down existing operations and rebuilding a collaborative and innovative model to improve operational efficiency, control costs, create innovative products, improve customer engagement experiences and produce sustained profitability. Let’s break down these barriers!

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About the Author

David V. Cabral is the founder and managing director of Artemis Specialty Ltd., a consulting firm that helps clients develop new products, reduce risk, improve operational efficiencies and increase profits.

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