Paul Carroll

What advice would you give to insurance executives on how to think a little differently about operational efficiency?

Paul Leinwand

The environment we're in right now, with so much uncertainty, is leaving a lot of executives anxious about placing big investments for growth. The concern is that the environment could shift, and those investments might not pay off. The cost lever is always available and it's very easy to see why executives turn to cost in managing performance.

Costs are often seen as a negative topic, right? Well, cost is actually the precious investment we make in the most important things we can do to drive growth.

So the advice we provide is that executives need to think about costs in a strategic way. We really believe that taking costs out as an independent cost exercise often leaves companies weaker. You're just managing costs down rather than fundamentally rethinking where does the investment need to go in the business?

That’s quite different than how most companies take out cost “Let's do across the board 10% or 15% cuts. Everybody will figure it out.” That approach will often cut the good cost and the bad cost all at the same time. An article we wrote for Harvard Business Review delves into how to think about cost strategically, using a framework we've described as Fit for Growth. It describes a segmentation of costs and explains what to do with the various elements. Should you keep them? Should you take them out? Should you actually invest more in some of the costs because there is significant upside?

Paul Carroll

What are the elements of that framework?

Paul Leinwand

We think of costs in four main categories, which span every business unit, every function, every geography, and they can be used to rethink the nature of where we put investment.

The first is what we describe as “lights on.” A cost that's “lights on” is required to operate, to be legally compliant, but we certainly don't think of those costs as providing any mechanism to drive differentiation from competitors. So, we want to be as lean as possible in those categories.

The next category is what we've described as table stakes. These are defined by what your customer expects and what your competitors are providing. Here again, while these might be more than required legally or operationally to run the business, they aren't the source of growth. They aren't the source of why a customer is going to choose us versus another organization.

That is the third category: differentiation. Those capabilities help determine whether customers choose us today or might choose us tomorrow. They are a pretty limited set. There are probably three to six areas where you’re really going to be better than anyone else and should be because you believe it supports your value proposition and has a meaningful return.

The fourth category is “not required.” These could be areas that maybe supported projects five years ago that were going to drive growth but didn't. They might have supported parts of the portfolio we no longer own. They might support things that some team believes are important but may not be important.

The exercise around these four segments of costs is to in some ways take everything out of the building. Then each area has to be meaningfully debated based on tremendous objectivity. We often take a lot of costs for granted, but we want to look at everything through a fresh lens: Is this cost generating the type of return we need? Or is there a better use for that money?

One of the really interesting things about this exercise is that executives often have a clear list of areas where they’d like to invest more to drive growth. But there's always a shortfall of cost available to do that. The perspective changes when executives realize they’re protecting a cost at the expense of something that could differentiate them. There might be a better use for that cash.

Paul Carroll

But if you wait until you see the big opportunity for differentiation, you don’t have enough time to cut costs and free up the funds, at least in a measured way, right? What example or two would you offer of a company approaching cost-cutting correctly?

Paul Leinwand

There are various companies approaching cost-cutting efficiently across industries. As mentioned in our book published under PwC’s Strategy& division, Strategy That Works, companies like IKEA are approaching cost-cutting strategies in an effective manner every step of the way. The key is to incorporate such cost exercises throughout the business and not view it as a last-minute mundane task. In other words, you don't wait until you need to take out cost. You think of cost reallocation as strategic. You prevent the growth of costs beyond what they should be, and you have the opportunity to constantly reallocate the investments that you have.

One of the things we see a lot with all our client work is that annual budgets typically represent plus or minus from the year before. I have a marketing budget; maybe it's plus 2% this year. I have a finance budget; it's plus three. I've got an HR budget….

If every year we're just doing plus or minus, our budgets are largely representations of the world of maybe 10 years ago and cannot possibly be the right allocation of cost, given today's priorities.

The opportunity that I think some companies seize is being able to reset their budgets based on what is needed and what's most important and not getting locked into the idea that the budget is the budget. In our view, there is no such thing as a strategy until it's been translated into the budget itself. If the strategy effort is over here, and the budget is running over there, and they're not talking to each other, there is no such thing as execution of the strategy.

Paul Carroll

That’s great. Is there anything I didn’t ask you about that I should have asked about?

Paul Leinwand 

I'd be remiss not to mention another article we wrote in HBR recently, on growth, with Paul Blase. The article points to companies that are building a growth engine, rather than just searching for growth.

Searching for growth is thinking about paths to pursue: Do I go into a new business, do I acquire something, should I consider adjacencies? Should I pursue new customer segments, new product segments? The companies that have really done well have first built the capabilities to grow. Then, when they thought about the places to grow, it was much easier to succeed because they were differentiated. They had the underlying wherewithal to innovate, to drive customer success, to drive insights that are going to yield the type of growth that we need.

So there’s a very different way of looking at growth, one being very much about the growth itself, and the other being about the underlying system that an organization needs. The article highlighted a really helpful analysis that showed that growing consistently has significant excess returns. For companies with the same CAGR across time, those that grow consistently saw greater returns to shareholders. Shareholders return companies that don’t just randomly find growth, but have built the unique capabilities to do so repeatedly.

There's no way to build the system of growth without spending money in the right places. So tphere has to be a connection back to the cost agenda and to the reallocation of that precious investment that we have. When you run through the cost exercise and take everything into the parking lot, the argument for taking something back into the building has to be that it links to your differentiation, to that underlying system of growth.

Some of this works against human nature. We want to be amazing at everything. But we can’t be. We need a lens that lets us decide: It’s okay to be just good enough on this capability, so we can spend money on something else.

That's a pretty hard concept to put in place, but it's a really important one to get right.

Paul Carroll

Thanks, Paul. It’s been great to catch up a bit.

Independent agents are a critical part of the insurance value chain and significantly influence business placement in the insurance industry. Ensuring that agents have the tools to offer policyholders a superior customer experience and improve their own operational efficiencies should be top of mind for carriers. 

Beyond selling additional policies to existing insureds and attracting new business, agents play a crucial role in policyholder retention. The relationship an agent cultivates with customers is a significant factor in the policyholder experience, across all age groups. New Invoice Cloud research shows that even Millennials still purchase policies through agents, which perfectly demonstrates the far-reaching importance and continuation of the insurance agent role.

To empower agents and yield the most profitable opportunities, insurers must make it easy for agents to do business with them. Since payments-related activities – including taking deposits, answering calls, researching collections issues, etc. – consumes much of an agent’s time, it’s imperative that carriers implement a simple, digital billing and payments platform. Not only can an easy-to-use payment solution positively impact the agent experience with your organization, but this type of platform can also benefit carriers seeking to improve customer retention and attract new, profitable business. 

Since selecting the right online payment platform can have this significant impact, here are a few key factors to look for when selecting a payment solution that will thrill insurance agents. 

1. An easy-to-use agent interface 

Insurance agents are creating your company’s best, most reliable stream of revenue – so why wouldn’t you provide these key players with the best, most reliable tools? 

Companies are all vying for profitable business in this competitive insurance market. While pricing and policy options play a role in where agents place business, it is well-known that the experience an insurer provides (for both the agent and their policyholders) is often the deciding factor.  

When it comes to online payments, agents want an intuitive platform that is easy to use and promotes excellent customer service to policyholders. Solutions that enable transparency also allow agents to quickly access payment information and better service customers. 

Bottom line: offering a streamlined solution that is simple, transparent, personalized, and easily accessible will compel agents to place more profitable business with your company. 

2. Optimized, omni-channel payment options 

To keep pace with changing policyholder demands, carriers must offer insureds multiple ways to receive bills and pay premiums, also known as omni-channel payment options. The more payment options an insurance organization can offer, the higher that carrier’s online adoption rates will be. 

When online adoption rises, billing-related calls, delinquent payments, and policy cancellations tend to decrease significantly, allowing agents to focus on more value-adding activities.  

It’s important to note, however, that each channel must be equally optimized to be truly effective. This means an insured should have the ability to start making a payment on, say, their mobile device and continue online or over the phone later, with the same context and ease. Without this cross-channel consistency, your organization cannot provide a top tier policyholder experience. 

3. Intelligent payment reminders  

Agents want to avoid delinquent payments and cancellations more than anyone. Collection calls are not only uncomfortable but deter from an agent’s valuable time. In our research report, Customer Experience in the Insurance Industry, we found that 50% of insureds who missed a monthly premium installment simply forgot to make their payment. Stemming this forgetfulness would benefit any insurance organization, particularly from an agent perspective. 

The best way to keep payments top of mind for policyholders is with targeted, dynamic payment reminders through multiple channels (i.e., text, email, voicemail). 

Your payment solution should be able to notify customers of upcoming payments with personalized notifications, detailing their policy type, amount due, due date, and more. Even better, your online payment solution should offer communications that go beyond payment reminders. For instance, Invoice Cloud offers Outbound Campaigns, allowing billing organizations to quickly send targeted messages to your customers about COVID updates, changes to their policies, and more. 

These reminders keep payments consistent for agents and improve their customer’s experience, which, ultimately, reflects positively on the agents themselves. 

4. Designed to drive self-service 

We’ve touched on the importance of finding an online payment solution that’s simply designed for policyholder and agent ease of use. More importantly, though, the solution’s design must actively work to drive self-service enrollment. 

Self-service options, such as automatic payments (AutoPay) or paperless billing, provide significant value for both policyholders and agents. These services save your policyholders time and provide peace of mind regarding their monthly payments, not to mention the major positive impact self-service routes have on policyholder and agent satisfaction. 

But here’s the catch – insureds will only enroll in these options if they’re aware they exist and they are easy to use. To ensure full utilization of your self-service options, look for a digital payment platform designed with customer engagement in mind. 

The more you engage policyholders throughout the payment process – guiding them toward your self-service routes at every opportunity – the more insureds will enroll. 

This boost in self-service is one of the best things your organization can do for its agents. Policyholders want the option to make payments when, where, and how they prefer. So, offering these self-service capabilities should enhance customer satisfaction, reduce delinquent payments and cancellations, and increase operational efficiencies for both the agent and the carrier. 

Improving the insurance agent experience 

To stand out from the sea of carriers vying for insurance agent’s business, you must provide agents with tools that will make their job simple. When it comes to payments, that means offering an online payment solution that can: 

Save agents time by reducing call volumes and manual processes. 

Keep premiums consistent with payment reminders and high rates of self-service enrollment. 

Assure the policyholder payment experience is quick and simple. 

Invoice Cloud has a proven success rate of 2 to 3 times higher than the industry average when it comes to online payment adoption. Our insurance solution has helped countless insurance organizations like yours increase policyholder satisfaction, save costs, reduce workloads, and much more. 

Watch the video below to see how California Mutual Insurance Company partnered with Invoice Cloud to save 780 hours annually on the reconciliation process and more:

  

 Read Original Article Here

Sponsored by ITL Partner: InvoiceCloud

A prominent venture capital firm, Andreessen Horowitz, published a provocative note last week that calls into question the future of the customer relationship management systems that have been the backbone for sales organizations for decades.

"We believe AI will... fundamentally reimagine the core system of record.," the note says. "Instead of a text-based database, the core of the next sales platform will be multi-modal (text, image, voice, video), containing every customer insight from across the company. An AI-native platform will be able to extract more insight from a customer and their mindset than we could ever piece together with the tools we have today."

While I'm not suggesting you rip out your Salesforce system any time soon, I do think it's worthwhile to start imagining what your future system of record will look like--and how you get there from here. 

The Andreessen Horowitz note offers a good explanation of the limitations of today's CRM systems and of how AI-based systems could go well beyond them:

CRM companies "were enabled first by the arrival of the relational database, and later, of course, the cloud. The core of these companies’ foundation is a structured representation of sales opportunities, in rows and columns, with their related criteria in text.    

"Today, due to the reliance on point solutions, data is often siloed in discrete activities along the sales funnel. There’s no complete view of what’s happening, end-to-end, across the sales process. A solution that adds personalization to increase conversion at the top-of-funnel has no data on whether that personalized touch ultimately increases the close rate. 

"With LLMs [large language models], the core of the next sales platform could be entirely unstructured and multimodal, including text, image, voice, and video. A company’s sales platform could include data about existing and prospective customers from countless sources: recordings and transcripts from any conversation with someone at the company, emails and Slack messages, sales enablement materials, product usage, customer support activity, public news, financial reports…the list is endless. Furthermore, the LLM powering the platform would be constantly ingesting data to create the most up-to-date context."

I'll be more colloquial. 

Today's databases, as great as they are, require an awful lot of up-front effort. The data has to be clean, and it has to be put in just the right cubbyhole in the right set of cubbyholes in the right room in the right building on the right campus full of cubbyholes... or you won't be able to find it when you need it.

An AI-based version of CRM could be like my Mom was. She always knew where everything was, even in a house full of eight rampaging kids. Once, when my older brother and I were trying to quietly leave on a Saturday morning for a Boy Scout camping trip, we couldn't find something-or-other. As we slunk past her bedroom door, she said quietly, so as not to wake my Dad, "It's on the top shelf of the closet in the family room." And it was. 

Andreessen Horowitz goes on at length about how an AI-based version of my all-seeing, all-knowing Mom can allow for radically better sales processes. It also, being a VC firm, speculates at some length about whether Salesforce and other incumbents will lead the way to these new systems or whether what they call an AI-native approach will win -- the VCs, of course, root for the startups, because their whole business is based on identifying and backing the next set of industry giants.

But I think those issues are a ways down the road, unless you want to try your hand at early-stage investing. The technologies have to be developed before you can use them to start revolutionizing your sales processes.

What matters more for now, I think, is getting a sense of how soon this AI vision can be realized and who is going to get you there.

You should design your optimal sales process for five or so years out and use it as a benchmark to see if the upgrades your current CRM supplier is providing will get you there. If not, you might want to start building some flexibility into your plans so you could cut over to a competitor, possibly a startup.

You also should start mulling when you're going to make the switch to an AI-based CRM like Andreessen Horowitz describes, because, make no mistake, the switch will be a massive endeavor. You'll not only be replacing a core piece of your sales architecture, but you'll have a fundamental issue to solve with your new system: While it sounds great to have an AI grab every bit of information about every single customer or prospect, the holders of those bits of information may feel differently. 

Should a colleague be able to dip into my personal contacts and call a friend of mine without my permission? If I'm paid on commission, do I have to share everything I know with everyone in my office, some of whom may be competing with me for business? And so on. 

A huge amount of work will have to go into figuring out all the rules for accessing and using the information that an AI will be able to gather. You can't just let an AI run loose.

Marc Andreessen was once asked how he decided which technologies would bear fruit and which wouldn't. He replied that, in his experience, all technologies worked. The key was to figure out the timing.

In the case of the future of CRM systems, I think he's spot on.

Cheers,

Paul 

In the early 1800s, a French builder brought the “Russian mountains” to Paris. Since the 1600s, Russians had been sending people zooming down hills on sleds on tracks made of ice, and the Frenchman wanted to duplicate the experience. But French winters aren't nearly as cold as those in Russia, so he built tracks with wooden rollers and ran the sleds over them. Thus, the term "roller coaster." 

The roller coaster came to the U.S. in 1884, on Coney Island in New York, and is now a ubiquitous amusement ride. Somewhere along the way, “roller coaster” began to be used to describe any series of unbridled ups and downs. 

Over the past four years, the P&C industry, among others, has fit the roller coaster analogy perfectly. In fact, think of the wildest ride you've ever been on.

Homeowner and auto lines have been the most tumultuous in comparison with commercial lines, mainly due to premium adequacy efforts. For instance, long-term underperforming business auto insurance had the humbling benefit of constant rate increases attempting to bolster anemic loss ratios -- an eye-popping 50 quarters in a row, now going on 13 years. Meanwhile, carriers were in a virtual home and auto race to the bottom in the pre-COVID years. Insurers pursued “switch and save,” “bundle and save” marketing strategies along with huge investments in lead generation as they recognized most consumers first shop online before speaking with an agent to bind the sale.

These prolonged competitive conditions are partly responsible for the nearly unaffordable rates in the market today, particularly in homeowner lines. In hindsight, home lines were underpriced, not keeping pace with replacement costs. And in real time, carriers consciously balance overall profitability, products per household and the whole other side of insurance -- generation of revenue from investments. In other words, a trade-off of weak underwriting margins for healthy investment returns does happen.

Converging weather exposure, inflation, higher accident frequency, social inflation and other factors are hammering both home and auto underwriting performance. However, consumers struggle to digest massive differences in premiums from just a few years ago or even the last renewal. Bankrate reports a 26% increase for full coverage auto, and for $300,000 in dwelling coverage premiums average $2,270. Such increases are wreaking havoc on the housing and auto industries, as total cost of ownership is a real barrier. Car repossessions are up 23% over last year according to Cox Automotive, while the tandem of higher interest rates and insurance costs has disrupted real estate markets.

See also: 10 Pivotal Challenges Facing Insurers in 2024

Remain Buckled In: The Ride Is Not Over

Since 2017, there was only one year with a homeowner underwriting profit (2019), per S&P. Although the reinsurance market has begun to stabilize, the first half of 2024 global insured natural disasters reached $62 billion, higher than the 10-year, $37 billion average, according to Munich Re, jeopardizing rate flattening. Likewise, collision repair and injury claim costs remain elevated. The underlying factors of repair technician shortages, longer repair cycles, increased cost of new car technologies, distracted driving, higher accident frequency and social inflation continue or are rising.

On the upswing, overall insurer profitability and premium growth has been boosted by top line revenues simply due to major rate increases while net income has benefited from strong investment returns. Auto lines are recovering much more quickly while the outlook for homeowner lines underwriting profitability is less optimistic. Climate and weather exposure, inflationary pressure and reinsurance costs will fuel the coaster ride, with expected twists and turns ahead.

Uh Oh: More Ups and Downs

High rates only tell part of the story. So-called underwriting actions are taking hold, with more to come throughout 2024 and beyond. Such actions span: risk eligibility, specific requirements, limited capacity in certain markets, inspections and so on. This translates to higher scrutiny and greater burden to consumers and business owners, such as required roof replacement costing tens of thousands of dollars to be or remain eligible. Or high deductibles, moving from standard $250 to $500 amounts to percentage deductibles. Example, a 5% deductible on $300,000 “coverage A” home policy is $15,000. – a dramatic change by any measure.

Meanwhile the P&C industry and ecosystem have experienced numerous ups and downs, with layoffs, hiring sprees and reshuffled priorities as attention is diverted to profitability and all hands “righting the ship.” Despite innovation being the lifeblood and future to insurance modernization, insurtech solution providers are experiencing even longer sales cycles when working with carriers. Project investment and innovation budgets are evaporating, or the dreaded carrier ‘reprioritization’ realities can derail a budding partnership altogether. Just when the insurtech ride is slowing down... hold on... global insurtech funding surged ahead to $1.27 billion in the second quarter of 2024, the highest level since the beginning of 2023, according to Gallagher Re.

But not all carriers are in the same position.  

Imagine the roller coaster ride consisting of 10 cars linked together and representing the top 10 U.S. carriers slowly ascending to the next peak before rapidly accelerating into the next dip. Now freeze-frame that image so some of the cars are ascending and others already descending.  Apply this mental image to rates, profitability, layoffs, hiring, underwriting actions and market growth appetite, and we see several recovering and others yet to catch up. 

It’s easy to visualize a very uneven, bumpy ride for all. For instance, Nationwide announced a 5% workforce reduction last week while Progressive reported growth plans to fill some 10,000 roles in April. Similar variation is found among combined ratios, from Progressive’s impressive 91.9 second quarter to others over 110.

This tail effect will continue throughout 2024-25 as evidenced through recent second quarter earnings. Variance in loss ratios translate to ranging rate indications and ultimately differences in rate selections by individual insurers. Likewise, consumers will shop for relief. Auto insurance shopping rates reached an all-time high between April and June as the quarterly quote rate increased to 13%, per J.D. Power.

See also: Insurance in 2030: What Does the Future Hold?

What’s Around the Next Bend?

As home and auto insurance affordability takes center stage, the looming consequences of uninsured and underinsured or growing protection gaps have yet to be fully realized. In auto claims, policyholders can be left holding the bag when an at-fault driver has insufficient or no insurance. This can be devastating when there are serious injuries. Increased out-of-pockets, delayed or forgone damage repairs, delayed or avoided claim reporting have implications to consumers as well as insurers and are more likely scenarios due to fundamental changes in risk transfer. Fraud and claiming for unrelated damages are of particular concern. Further, consider the next coastal tropical storm with more homeowners self-insuring or carrying massive percentage wind deductibles. More disruption is likely.

Outlook and Solutions

Aside from longer-term efforts to incorporate building resilience, several lawmakers are calling for federal disaster insurance. If it is modeled like the National Flood Insurance Program, it is reasonable to expect widening protection gaps, not to mention tremendous burden to taxpayers and costly premiums, as the NFIP has run a deficit since Hurricane Katrina in 2005, despite re-mapping, new underwriting standards and constant last-minute federal funding.

Technology and new products/services will play a major role in filling gaps and solving the insurance crisis, presenting, opportunities for entrepreneurs, solution providers, insurtechs and carriers. At a high level some of the potential concepts that are new or in-market look like:

• Climate tech to better predict, mitigate and prevent losses
• Aerial/geospatial services already in market and expanding
• Parametric insurance, filling gaps and addressing emergency costs
• Deductible and repair financing -- specialized and embedded
• Repair marketplaces matching customers with experts  
• Micro insurance protection
• Home spending account savings and planning services
• Actual cash value coverages and policies
• Accident settlement services (outside of insurance claims)
• ADAS collision avoidance systems
• Sensor technology, alerting and avoiding damages, e.g. weather
• Telematics coaching and safe driving features

Reform and legislation will also play a key role, albeit long-term in nature. Recent reforms to Michigan’s no-fault system have already lowered premiums. Florida instituted sweeping tort reform in early 2023 and is showing signs of improvement. A handful of states are tackling litigation financing. And California has modified CAT risk modeling to permit a more prospective forecast in rate making for wildfire exposure. Clearly, more reform and legislation are needed to keep pace and tamp down abuses geared to unfairly inflating insurance costs.

So, buckle up. The roller coaster ride is far from over.

If, like me, you kept a weather eye on the Olympics while working Monday, you probably saw occasional images of an unlikely figure leaning back in a chair, looking like he was trying to take a nap amid the chaos around him. That was Stephen Nedoroscik, a member of the U.S. men's gymnastics team, who was readying himself for about 20 seconds of supremely important effort. 

His four teammates were going to perform the first 17 routines that were part of the team competition. Then they were going to turn to Nedoroscik, the only American to ever win a world championship on the pommel horse, and ask him to bring them home on his specialty. At stake: the team's first Olympic medal in 16 years.

He delivered. Big time. His teammates knew it, too, long before they saw the score that put them well ahead of the fourth place team. They were jumping up and down even as he began his dismount, and they mobbed him as soon as they could get to him.

Social media mobbed him, too. My daughters tell me that for a while their various feeds were 80% about Nedoroscik. 

How did Nedoroscik even get the change to be the hero? The 25-year-old began to specialize in the pommel horse way back in high school, when he found he wasn't progressing in the other events. That specialization is the only way he could have made an Olympic team.

And what does his success have to do with insurance? More than you might think. I'll explain. 

Nedoroscik is a quirky fellow... some of it by necessity: He has a disease that renders his eyes permanently dilated. Glasses let him deal with day-to-day life, but on the pommel horse he has to operate by feel. He's also an amiable nerd, an electrical engineering major who solves the Rubik's Cube in less than 10 seconds.

But his decade of specialization has parallels in insurance, where many MGAs and excess and surplus carriers have thrived in recent years. My theory is that insurers will be able to specialize more and more because we're gathering better and better data, letting us become far more precise than was possible with traditional risk pools. 

If you're intrigued by the possibilities, I commend to your attention the interview I did recently with my longtime friend and colleague Andrew Robinson, the CEO of Skyward Specialty, which has been extremely successful with a "rule your niche" strategy. (In case that interview doesn't set your heart racing, here is a link to Nedoroscik's medal-clinching routine.)

Not that specialization is easy. In fact, Andrew predicts a shakeout in specialty lines because he sees a lot of junk as well as some excellence. 

The key is to start with "a peril, an industry area, a line of business or some combination of the three" that isn't awash in competition, Andrew says — like, for instance, the pommel horse, probably the least glamorous of the men's gymnastics events. And that's just the start: You then have to figure out a way to become world-class, like Nedoroscik, at understanding and serving that market. 

After you figure out those issues, you can start working on your Rubik's Cube skills.

Cheers,

Paul

The last few years have been a whirlwind for homebuyers. Since the onset of the COVID-19 pandemic, home inventory has remained stubbornly low, supply chain challenges have remained complex and mortgage interest rates have soared. There is a perfect storm for those purchasing a home, especially first-time homebuyers. In fact, according to the National Association of Realtors (NAR), the median age for a first-time homebuyer has risen to 36, the oldest age recorded since NAR began compiling this information in 1981. 

Lenders require proof of homeowners insurance, and much of the economic volatility that is applying pressure on the housing market is also making the process of securing homeowners insurance harder than ever. Many are being forced to reduce their coverage to maintain protection at a rate they can afford. 

Simultaneously, climate change and the increasingly severe weather patterns that result from it – like hurricanes and wildfires – have destabilized regional markets, leaving tens of millions of homeowners without reliable coverage. While this once was a problem primarily for states like Florida and California, worsening weather events such as windstorms and hail are forcing people in states like Iowa to carry this burden, as well. 

A recent New York Times investigation on the state of the homeowners insurance market painted a grim picture. As insurers are forced to pay more claims due to the worsening effects of climate-related weather events, they’re raising rates to astronomical levels and leaving homeowners in a bind. Dave Jones, the director of the Climate Risk Initiative at UC Berkeley’s law school, went so far as to say we’re headed for an “uninsurable future.” 

See also: Climate and Catastrophe Risk Strategies

Don’t blame it on the rain

As seen with the New York Times coverage, climate change and the resulting severe weather events have received much national attention as the primary cause of the problem of insurance supply scarcity and rising premiums. But there is a bigger problem at work that is not widely discussed – the sheer complexity of bringing new insurance products to market quickly and updating them once in market. 

To put it plainly, the challenges in the homeowners insurance market brought on by climate change are just the symptom of not being able to react fast enough. Put another way, climate change alone isn’t to blame for the mess we are experiencing in the insurance market – it's the complexities of bringing new insurance programs to market.

See also: Parametric Insurance Can Tackle Climate Risks

Infrastructure issues

There is one fundamental thing that needs to change: the plumbing and pricing of the insurance industry. Consumer brands and large carriers are eager to quickly meet the protection needs of homeowners nationwide. However, these organizations know that the process to create new programs is complex, time-consuming and labor-intensive. Not only does it take three years on average to build a new insurance program, but even if they were to create them on their own, large brands and carriers aren’t equipped with the technology to distribute these products digitally.

That’s where rate service organizations (RSOs) typically come into play. At the base of building many insurance programs are RSOs, which provide the architectural plans of an insurance program and are a helpful step to bring programs to market. There are a handful of legacy providersm and they are all incredibly slow, costly and difficult to work with.

RSOs have been a mainstay of the insurance ecosystem because they have policies and rates that are already approved by regulators, making it a no-brainer for insurance carriers, MGAs and consumer brands to work with them for pre-approved insurance product filings. This may sound like an easy win, but the unfortunate reality is that it still takes a really long time to get to market. 

The delays come at a hefty cost. According to our recent 2024 State of Digital Insurance Report, 75% of insurance industry decision-makers said their companies spend at least $1 million annually on RSOs — and over 50% of those spend $5 million or more every year. Yet over 70% of respondents feel that RSOs require a massive amount of effort to get insurance programs off the ground. Many insurers have been forced to deal with this mismatch of effort and ROI because there simply aren’t better options in the market.

It’s clear that a lot needs to change to make launching and maintaining insurance programs less complex, and that doing so will make the process much faster. Outdated technological infrastructure cannot keep up with the urgent needs of present-day carriers and brands that are looking to extend insurance to customers. While RSOs have historically helped lay the architectural plans to build insurance products, they haven't streamlined the process — it can still take upwards of 30 different vendors to launch something like an embedded homeowners program for an online lender. 

The home insurance market has always been complex, but as the impacts of climate change grow worse, customers are feeling the impacts more acutely than ever. The insurance industry is failing consumers, and there is an inherent need to modernize the industry at its core. By reinventing how insurance products are combined with modern technology solutions, the industry can get insurance products to market faster and more seamlessly so consumers can get the protection they need. The demand is there – we just have to make the process of meeting this demand less complex.

Earlier this year, I spoke with Insurance Thought Leadership’s Paul Carroll about technology trends in insurance, including generative AI, machine learning (ML), natural language processing (NLP) and the Internet of Things (IoT). I said:

“You can incorporate more data sources without going through manual processes. You can improve the thought process of risk analysis, how you look at historical risks, and incorporate new risks from any new dataset. And those datasets are prolific and pervasive across the ecosystem, whether it's the Internet of Things (IoT), including telematics, or really anything that can allow insurers to adjust a premium based on actual behaviors.”

IoT technology should buoy us all. Unfortunately, we are all still wading choppy waters in insurance’s IoT journey. This floundering points to a more significant issue: IoT is yet to realize its full potential to simplify insurance. 

The proliferation and integration of IoT allows carriers to focus on what insurance is intended to do – protect people and businesses. Let’s look at ways IoT technology can help simplify insurance. 

Overcome or eliminate the industry’s talent and workforce struggles

The U.S. Bureau of Labor Statistics estimates that the insurance industry could lose approximately 400,000 workers through attrition by 2026. This problem is compounded with projections that approximately 50% of the current insurance workforce could retire by 2028. The next three to five years are critical.

People are the lifeblood of insurance. But they need help. The industry needs to maximize the potential of its talent, while attracting, recruiting and retaining new generations of the workforce. Workers demand advanced technologies and digital tools to do the job.

Studies show that approximately 70% of Gen Z employees would leave their current job for one with better technology. Deloitte says the future of work, filled with new workers, will require a fusion of key skills, including digital tools and technology skills, and comfort with analytics and data. 

Embracing IoT is critical to meet talent demand and close workforce gaps. IoT moves better data faster, whether automating data capture for claims adjusting through telematics or empowering underwriters with data prefill captured by sensors. The IoT also allows innovation and smarter approaches to insurance with more preventative approaches to risk mitigation. This lowers the demand for a stretched workforce. Preventing or mitigating risk by using data patterns from IoT can be more cost- and time-effective than responding to a situation that’s already taken place.

See also: How Smart Homes Are Changing Insurance

Overcoming the increasing cost of doing business

I recently keynoted at our Formation 2024 conference, and the cost of doing business in insurance was a hot topic. We learned from our discussions that a large majority of carriers suffer from siloed data and inefficient processes, which compound this problem. This must change – and quickly. New systems, new roles and new ways of working need to be embraced.

Why? To operate more efficient businesses and give IoT the opportunity to do its job. Automated data prefill saves time. Telematics data generates accurate pricing and helps provide safety and support around large scale natural disasters such as wildfires. With a market projected to reach upwards of $500 million by 2032 and IoT deployments expected to surge, there is opportunity aplenty.

To achieve potential, we must reposition the value of IoT in insurance to consolidate redundant systems and unify data in one place. Adding more disparate data helps the few, and it can also cause more headaches for the majority down the line. 

IoT is also a key to our industry maximizing the benefits of artificial intelligence, machine learning and natural language processing. With the right data available at the right time, these advanced technology solutions increase the velocity with which data can be turned into action. This means benefits for insurers and insureds.

You can’t build chains with broken links, so the industry must shore up its current technology platforms. It must modernize technology stacks, with IoT in mind. It must lower the overall complexity of accessing data. Then, and only then, can the industry see time and cost savings from IoT. 

Missed opportunities with customers

You’ve deployed IoT and worked to overcome its shortcomings compounded by data siloes. Now what? What do you do with all the data you’ve generated from these systems? Where is it going? How can you access it? Can you effectively turn that data into insight and action? If the answer to these questions is no, then we’re reached an impasse in IoT’s effectiveness.

The insurance industry needs to feed data back from IoT solutions into operations to better both worker and customer experiences. We’re seeing effective uses from early telematics deployments in automotive, where some carriers are getting this equation right.

The good news is, in general, insureds are showing a willingness to play ball. They are willing to adopt IoT solutions and share data for the benefit of their coverage. Beyond telematics for drivers, for example, more than 50% of survey respondents to a 2023 Global Consumer Insurance Insights study said they find the concept of on-demand insurance appealing.

IoT will have a significant role to play in on-demand insurance, whether through purchasing coverage, adjusting premiums based on behavior or verifying and adjudicating claims. Carriers that get it right will open opportunities for more tailored solutions and stronger relationships with their customers. In today’s world of personalized experiences, this can be the difference between success and failure.

See also: The Opportunities in Smart Cities

Simplifying insurance is the answer

This must be the promise of IoT – or any emerging technology applied to insurance. We do not need to rehash the number of “innovative solutions” that failed to make their mark in this highly complex, highly regulated, highly personalized industry. 

For IoT, we are beyond that inflection point. We are in the here and now. We must consolidate redundant systems, unify data in one place, ensure that it is available for action and amplify a full IoT-enabled technology suite that works for the betterment of our industry. 

That is the foundation on which our industry will succeed. 

Advancements in medical care and life-prolonging treatments have significantly increased life expectancy in recent decades. While this progress benefits society, it presents business challenges, particularly in managing workers' compensation claims. As workers live longer, their claims become more prolonged and expensive, leading to ethical and financial dilemmas. This article explores these issues and offers potential solutions to balance the benefits of medical advancements with the sustainability of workers' compensation systems.

Understanding the Impact of Increased Life Expectancy

According to the National Center for Health Statistics, life expectancy in the U.S. rose from 69.7 years in 1960 to 78.7 years in 2020. This trend is largely attributed to medical advancements and improved healthcare. A 2013 National Bureau of Economic Research study found that a one-year increase in life expectancy leads to a 7.5% increase in workers' compensation claim costs. Workers with permanent disabilities are likely to receive benefits for a longer time, driving up costs.

Medical advancements have also led to increased costs associated with workers' compensation claims. The National Council on Compensation Insurance (NCCI) reports that medical costs now account for about 60% of workers' compensation claim costs, up from 40% in the early 1980s. This increase is partly due to more advanced and expensive medical treatments. Additionally, the Workers Compensation Research Institute (WCRI) has found that the average duration of temporary disability benefits has increased over the years, particularly for older workers. Longer recovery times and more complex medical treatments contribute to this trend.

Older workers, in general, tend to have more severe injuries and longer recovery times, leading to higher workers' compensation costs. A 2021 study by the National Council on Compensation Insurance (NCCI) found that the percentage of claims with PPD benefits for workers aged 65 and older is more than double that for workers under age 35.

See also: How to Tackle the Long-Term-Care Crisis

Evidence From Recent Data

In 2023, the California workers' compensation system saw a 9.5% drop in private self-insured claim volume, representing the largest year-to-year decline in over 15 years. According to a report released by the California Workers’ Compensation Institute (CWCI), private self-insured employers covering 2.3 million California workers reported 94,386 workers' comp claims, down from 104,278 claims in 2022.

While claim volume and frequency declined, private self-insured employers’ total paid and incurred losses rose in 2023. Paid losses totaled $340.2 million, up 9.5% from 2022, and incurred losses rose 6.4% to $864 million. This situation highlights the increasing costs associated with each claim, driven by advancements in medical technology and increased life expectancy.

Ethical and Economic Implications

The rising cost of workers' compensation due to longer lifespans creates a significant ethical dilemma. While society rightly celebrates increased life expectancy and improved medical care, these advancements lead to higher business costs, necessitating a balance between providing adequate care for injured workers and managing financial sustainability. Ensuring fairness and equity in distributing workers' compensation benefits is crucial. Policies must be designed to distribute costs fairly among employers, employees, and possibly the government, ensuring injured workers receive the necessary support without disproportionately affecting any single group. Additionally, maintaining the long-term sustainability of workers' compensation systems is essential to avoid reducing benefits or increasing premiums, which could hurt both businesses and workers.

The economic impact of increased life expectancy and medical advancements on workers' compensation is profound. Higher medical costs and longer claim durations increase premiums, raising overall business costs. These expenses are often passed on to consumers, potentially reducing disposable income and overall economic activity. Small businesses are particularly vulnerable, as higher premiums and extended claims can strain their budgets, leading to difficult decisions about staffing, wages, and benefits, and, in some cases, business closures. Furthermore, rising workers' compensation costs can affect labor market dynamics, making employers more cautious about hiring, especially for high-risk positions. This can limit job opportunities and slow economic growth while potentially driving investment in automation and other technologies to reduce reliance on human labor.

See also: How to Predict Healthcare Costs

Potential Solutions

Addressing the rising costs of workers' compensation requires a multifaceted approach. Several strategies can help balance financial sustainability while ensuring adequate care for injured workers. These strategies include equitable cost distribution, investment in prevention, effective return-to-work programs, policy reforms, and leveraging technological advancements.

• One approach to addressing this issue is distributing the cost burden more equitably. A model where costs are shared among employers, employees, and the government could involve adjusting workers' compensation premiums, employee contributions, or government subsidies for certain types of claims.
• Investing in workplace safety and injury prevention programs is another effective strategy. By reducing the occurrence of injuries, businesses can lower long-term costs. Data-driven risk management can help identify high-risk workplaces and target safety efforts more effectively.
• Implementing effective return-to-work programs can also help reduce long-term costs. These programs assist injured workers in getting back to employment safely and quickly, which benefits both the employees and the employers.
• Policy reforms may be necessary to balance the needs of injured workers with the financial sustainability of the workers' compensation system. Exploring alternative solutions, such as long-term care insurance or government programs to manage lifelong care costs, could also be part of the solution.
• Encouraging the adoption of cost-effective technologies in treatment and rehabilitation can improve outcomes while managing costs. Technological advancements are crucial in lowering healthcare costs associated with work-related injuries.

Addressing the challenges of increased life expectancy and medical advancements requires a collaborative approach involving multiple stakeholders. Policymakers should review and potentially reform workers' compensation laws to address the changing landscape of medical care and its costs. Employers must invest in workplace safety, injury prevention, and effective return-to-work programs. Insurance providers should develop innovative products that balance cost management with quality care for injured workers. Healthcare providers should focus on developing and implementing cost-effective treatment protocols specifically for work-related injuries. Researchers must conduct studies on the long-term impact of medical advancements on workers' compensation and explore potential solutions. Workers should participate in workplace safety programs and actively participate in their recovery and return-to-work processes.

In conclusion, while the increased costs associated with medical advancements and longer life expectancy pose challenges to the workers' compensation system, they also present an opportunity to reimagine and improve how workplace injuries and their treatment are approached. By embracing prevention, safety, and innovative solutions, we can ensure that the benefits of medical advancements do not unduly burden employers and maintain a sustainable workers' compensation system.

Wild ideas about generative AI dominate tech discussions across our industry and others. But how are leading insurance agencies actually leveraging AI today?

Generative AI for Communications

One of the primary applications of artificial intelligence in advanced agencies is automating the creation of communications. Based on our 2024 industry survey, many agencies express excitement about AI's potential to enhance time management, facilitate growth and improve client satisfaction by automating tasks and providing valuable insights. 

Today, the majority of agencies we polled are using AI to accomplish tasks like:

• Day-to-day email communications
• Proposals
• Lead-gen marketing materials

AI tools generate personalized emails, craft detailed proposals and create engaging marketing content, saving time and ensuring consistency. These tools can also analyze customer interactions to tailor messages more effectively, enhancing engagement and satisfaction. Generative AI can streamline internal communications, fostering better collaboration and productivity within teams. By automating routine tasks, AI tools allow communication professionals to focus on more strategic initiatives. Additionally, it can quickly adapt to changing trends and preferences, ensuring that content remains relevant. 

See also: How Life Insurers Can Leverage Generative AI

Quick Understanding and Review of Insurance Policies

As agencies become more advanced, they find more complex ways to use AI, such as creating efficiency in policy management and comprehension:

• Policy Analysis: AI algorithms analyze and interpret insurance policies swiftly, providing instant answers to queries and comparing older policies with new ones. This ensures that policyholders and agents can make informed decisions quickly and efficiently.
• Document Comparison: AI streamlines the process of comparing different versions of policies, ensuring accuracy and compliance. This reduces the risk of errors and enhances the reliability of policy documentation.

Ingestion of Documents to Extract Data

AI also has the potential to revolutionize the handling and processing of data from various document formats, making it more efficient and accurate:

• OCR Capabilities: Advanced OCR (optical character recognition) converts flat documents like PDFs with handwritten notes into searchable formats for the extraction of data into ingestible formats.
• Data Integration: Extracted data seamlessly integrates into your agency management system for quoting, policy management, and all other operations, reducing manual data entry errors and saving your staff considerable time. 

Recommendations

In such a competitive marketplace, agencies must find innovative ways to sustain and grow their business. As veteran employees age out, technology can help fill some of the knowledge gap for the new generation of agents. AI-driven insights aid in personalized customer interactions and business growth:

• Customer Interaction: Optimal responses based on customer profiles and sentiment can enhance sales and customer service. By analyzing previous interactions and predicting future behaviors, AI can tailor responses to meet individual customer needs and preferences, leading to more effective and personalized communication.
• Cross-Sell and Up-Sell: Algorithms identify opportunities for additional coverage based on individual or business needs, boosting revenue. These AI-driven recommendations are continuously refined through machine learning, which adapts to emerging trends and customer behaviors, ensuring that the suggestions remain relevant and valuable.
• Best Practices: AI recommends expanded coverage options aligned with industry or agency-specific best practices. Ensuring adequate coverage improves client satisfaction and retention. By leveraging data from successful policies and customer feedback, AI systems can provide insights that help agents offer more comprehensive and appealing coverage solutions.

See also: Cautionary Tales on AI

Predictive Analytics

Predictive analytics empower agencies with strategic foresight, enabling them to anticipate market trends, identify potential risks and make data-driven decisions that enhance operational efficiency and competitive advantage. While the concept of predictive analytics may be new to many agencies, the technology has been available for quite some time, and ignoring it can be a recipe for failure. An agency management system should, at the very minimum, provide:

• Profitability Analysis: Identify profitable accounts, guiding resource allocation and investment decisions. By analyzing historical data and trends, predictive models can pinpoint which accounts are likely to generate the most revenue, allowing agencies to focus their efforts and resources where they will be most effective.
• Risk Mitigation: Algorithms predict attrition risks, enabling measures to enhance client retention. By identifying patterns and signals that precede client turnover, agencies can intervene early with personalized strategies to retain valuable clients, thereby reducing churn and increasing long-term profitability.
• Carrier Efficiency: Updated reports assess carrier performance, optimizing partnerships for operational efficiency. By continuously monitoring and evaluating carrier metrics, predictive analytics help agencies form strategic partnerships and improve overall service quality.
• Business Expansion: Insights on lucrative lines of business guide expansion efforts, maximizing growth potential. Predictive analytics can identify emerging markets and high-demand services, providing agencies with data-driven recommendations for expanding their offerings and entering new markets. Similarly, you can monitor employee performance, learn more about what makes high performers successful and replicate this behavior across the agency.

Embracing AI in the Future

The rapid adoption of AI technologies underscores a critical urgency for independent agencies to modernize or risk being left behind. As technology continues to evolve, outdated systems will increasingly hinder an agency's ability to serve its customers effectively. Embracing AI not only enhances operational efficiency but also empowers agents to focus more on personalized client relationships and advisory roles. 

Agencies must prioritize integrating AI to stay competitive, ensuring they remain agile and responsive to evolving customer needs. By taking aggressive steps toward AI adoption, agencies can secure their position as trusted advisers to those they serve.