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February 10, 2020

Innovation: Top Down/Bottom Up

Summary:

For those that leverage corporate venture capital and innovation committees, all levels of the organization are evangelists for change.

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The importance of driving innovation and adapting to change has never been more important. There are over 1,500 insurtech companies looking for ways to improve efficiency on multiple fronts. From the internet of things (IoT), robotics process automation (RPA) and artificial intelligence (AI) to wearable technologies, telemedicine and augmented reality/virtual reality training (AR/VR), everyone is looking for a way to automate and speed up processes. 

In 2020, insurance customers can now apply for a policy by answering a fraction of the questions they had to answer a decade ago. Why? Some data fields are now pre-populated using third-party data vendors or information captured by sensors, wearable technology and drones (e.g., a homeowner adds a pool, or assessing the condition of a roof, etc.). The insurance customer now receives a quote in minutes, as many carriers are attempting to leverage, in the insurance space, lessons learned from companies like Amazon, Uber and Netflix. 

This article will discuss Chesapeake Employers’ Insurance’s approach to innovation and why a top down/bottom up approach leveraging a corporate venture capital (CVC) subsidiary could help your organization stay ahead of the innovation curve.

CVCs and Investing Categories

Some of the largest companies in the world have used CVCs to enhance their organizations through technology scouting, innovation committees and acquisitions of startups. Examples include Amazon, Apple, Motorola, IBM, Google, AT&T, Verizon and Volvo. More recently, insurance companies such as USAA, XL Catlin and American Family have begun leveraging CVCs to help put the innovative technologies of insurtechs into the hands of their employees, agents, policyholders and injured workers. As noted in the book, Ten Types of Innovation, “Successful innovators analyze the patterns of innovation in their industry. Then they make conscious, considered choices to innovate in different ways.” 

Insurer-affiliated CVCs can leverage certain advantages over traditional venture capital institutions. Insurer-affiliated CVCs bring industry knowledge and expertise, significant volumes of data for testing and validating an insurtech’s solution and a network of users who can support the rollout of any product and ultimately provide references for future customers. This partnership, formed between a data-rich insurer and an idea-rich startup, helps both sides succeed. Nevertheless, to sustain a successful CVC program, efforts taken on by CVCs will need to align with either a strategic or financial corporate objective or strike a balance in between the two objectives. 

See also: A New Frontier for Venture Capital  

Investing at Chesapeake Employers

Chesapeake Employers has developed five categories to describe how it plans to invest and innovate through a subsidiary, iCubed Ventures, LLC. The focus will be on providing market intelligence for Chesapeake Employers and investing in opportunities that align with the core mission and while improving the speed to value experienced by customers.

  1. Investing that connects to current business models (correlated investing) — Investing in insurtech-focused VC funds or insurtech/startup companies that align directly with Chesapeake Employers’ core purpose of improving the experience of agents, policyholders, injured workers and employees. This type of investments is straightforward, as it is focused on strategic objectives. 
  2. Investing not directly connected to how the company processes business (non-correlated investing) — Investing in VC funds or startup companies that do not directly map to the current business platform but present an opportunity for creating a significant return on investment (ROI). 
  3. Socially responsible investing — Investing focused on the betterment of society, the local economy and improving relationships with government and regulators. The direct ROI on these investments can be lower than the previous two categories but should be enough for the efforts to be self-supporting. Chesapeake Employers believes that socially responsible corporate actions enhance the long-term success of all Maryland businesses.
  4. Hot-spot investing — Investing focused on creating awareness and the opportunity to “try before you buy.” With over 1,500 insurtechs funded by $29 billion in capital, insurance companies can serve as a beta site for startup insurtech companies. These activities provide additional sources of innovative ideas while helping to allocate resources to the opportunities most likely to succeed, enhancing the CVCs ROI indirectly. 
  5. Non-CVC investing — Chesapeake Employers, with CVC assistance, may invest in self-developed efforts focused on creating speed to value with agents, policyholders, injured workers and employees. This area covers call centers, claims systems, underwriting systems, marketing, advanced analytics, robotics process automation, apps, IoT, etc. Given the rapid change in the marketplace, internally developed solutions are becoming more heavily influenced by external trends and insurtech activity. 

Bottom line, Chesapeake Employers is looking for opportunities to invest in processes and procedures that will improve operating efficiency, drive down costs and improve profitability while making a difference in people’s lives. These are forward-looking opportunities for the company.

Top Down/Bottom Up Innovation

Chesapeake Employers believes the innovation tone from the top is just as important as the passion and energy being displayed by employees from the bottom up, so it formed the Chesapeake Innovation Committee (CIC), composed of marketing, finance, claims, medical, underwriting, IT, actuarial, premium audit, subrogation and legal professionals from across the organization. 

The team of 20-plus employees analyzes deal flow reports from investments made with venture capital funds, monitoring departmental trends and innovations, networking with universities, listening to podcasts (e.g., Spot on Insurance, the Insurance Innovators Podcast, 11FS InsurTech Insider), attending industry conferences, monitoring LinkedIn and more. 

As Andrew Romans said in his book, Masters of Corporate Venture Capital, it is important to “[a]ccess business intelligence and innovation in order to understand technologies, business models and trends that impact core and peripheral businesses. Many corporations call this technology scouting. This activity can be viewed both as offensive and defensive.” 

The CIC helps take the pulse of the marketplace, allowing the company to scout technologies that could be differentiating. For example, at the 2019 RIMS Annual Conference & Exhibition, some CIC members had the chance to walk the halls and visit over 400 vendors sharing their innovative solutions. The vendors focused on work flows such as security monitoring, opioid addiction prevention, co-branding of products, claims analytics, claim adjuster metric measurement and monitoring, return to work, certificate of insurance tracking, durable medical equipment (DME) cost reduction, occupational medical services on the job site, social media detection for special investigative units and much more. The CIC created a recap of the top vendors of interest, including information from the company website, company contact information, key features of the solution shared at RIMS and the opportunity that would be created if Chesapeake Employers leveraged the solution in the future.

In an example involving LinkedIn, some members identified and viewed the 2019 Global Insurance Symposium video. CIC members provided a recap of the key points from the conference including comments made by guest speakers from the Global Insurance Accelerator (GIA) and the 10 insurtechs the GIA invested in during 2019. Watching the two-hour video led to booking a demo at RIMS with one of the insurtechs, with a solution targeting workers’ compensation claims adjusters. 

See also: Insurers: the New Venture Capitalists  

The Drivers of Change

There are several themes affecting the world around us. In no order, these are some of the themes we feel will change the face of insurance as we know it for generations to come:

  • Customers and agents want speed to value (S2V) as expectations rise with regard to customer experience and self-service capabilities.
  • The “Uberization” of everything is all around us (i.e., replacing inefficient, outdated processes with ones that marry digital and customer experience).
  • The human-machine partnership and augmenting human processes with artificial intelligence and robotic process automation are here to stay.
  • The convergence of big data, advanced analytics and capitalizing on the “digital footprints” customers leave behind to nudge customers and change habits is more important than ever in the insurance industry.
  • Transparency is all around us, and injured workers, patients and our customers will expect it going forward.
  • The impact of apps and wearables is growing due to ease of use and easy access to information via gamification and GUIs.
  • Wallet share and customer face time are critical.
  • Outlier and anomaly detection techniques for identifying bad actors/fraud are becoming more powerful.

With the CIC identifying and researching innovation trends, and the CVC making minority interest investments through third-party funds, co-investments and direct investment channels, the company is well-positioned to stay ahead of the innovation curve. Each day, more employees are sharing innovative ideas via email and “water cooler” chats. These conversations, which discuss ideas and technology that could help the company achieve greater effectiveness and efficiency as a company, represent a culture of continuous learning, marketplace awareness and taking action. 

Conclusion

As Lior Arussy said in his book, Next is Now, 5 Steps for Embracing Change, “We cannot predict what the future will bring, but there is plenty of compelling evidence that those who embrace change will reap the rewards of financial stability and marketplace relevance.” It will be important for the entire insurance industry to measure and monitor innovations inside and outside our industry. For those that leverage CVCs and innovation committees, where all levels of the organization are evangelists for innovative change, we believe our industry will not only survive but thrive well into the future.

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About the Author

Thomas J. Phelan, CPA, has been the CEO of Chesapeake since April 2007. In this capacity he is responsible for setting the vision for the organization, making strategic decisions, and is accountable for the organization’s financial results.

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About the Author

S. Mitchell He, CFA, CPA, is chief investment officer for the Baltimore, Maryland based Chesapeake Employers’ Insurance Company. Mr. He has over 16 years of institutional investment management and capital market experience.

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About the Author

Kevin Bingham, ACAS, CSPA, MAAA, is the chief results officer of subsidiary initiatives at Chesapeake Employers’ Insurance. He has over 27 years of industry experience, including 21 years of consulting.

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