KEY TAKEAWAYS:

--Client organizations must implement regular security assessments, vulnerability management and continuous monitoring.

--They must set up controls, such as multi-factor authentication, to make it harder for criminals to compromise privileged identities in corporate networks.

--Clients need to prepare well-defined plans to respond to any cyber incident.

--And they must build strong relationships with insurers and regularly discuss industry trends.

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In the face of continuously evolving and increasingly prevalent cyber threats, organizations have recognized the importance of cyber insurance as a crucial risk management tool. However, a recent survey conducted by Delinea shed light on one prominent challenge organizations encounter when seeking cyber insurance coverage – fluctuating costs.

The survey revealed that 75% of respondents said cyber insurance premiums were increased with their last renewal. U.S. cyber insurance premiums reportedly surged 50% in 2022.

The jump is primarily driven by the rising demand for coverage in light of frequent and costly cybercrime incidents. In 2022, the FBI reported that businesses had lost over $43 billion through business email compromise attacks since 2016.

With the frequency and sophistication of cyberattacks on the rise, insurance providers have been compelled to raise premiums and impose stricter requirements to maintain their economic viability. Some companies have reduced coverage caps or limited the number of policies they offer. Consequently, client organizations face greater challenges when attempting to secure the necessary coverage.

But cyber insurers have evolved and learned from past cyber incidents, which means policies are improving and risks are better understood.

To do their part, client organizations must understand that cyber insurance is a financial safety net and not security itself. Organizations need to adopt an aggressive and comprehensive approach to cybersecurity. Cyber insurance does not make your cybersecurity better, but it may force you to reduce your risks to meet the insurance requirements.  

See also: Cyber Insurance Market Hardens

Combat Rising Cyber Insurance Premiums

Here are a few strategies organizations can implement to combat rising cyber insurance premiums:

Proactive Cybersecurity Measures: These include regular security assessments, vulnerability management and continuous monitoring. 

Privileged Access Management (PAM): Insurers are increasingly emphasizing the importance of PAM in cyber insurance evaluations. Compromised privileged identities are the most common cause of data breaches, making securing privileged access critical to reducing risk. Implementing PAM controls, such as multi-factor authentication, password management, access control and least privilege, helps organizations secure privileged access and reduce the risk of data breaches. 

Incident Response Planning: Having a well-defined incident response plan is crucial for organizations to minimize the impact of cyber incidents. Insurers may consider the effectiveness of an organization's incident response capabilities when determining premiums. 

Engagement With Cyber Insurance Providers: Building strong relationships with insurers and regularly discussing industry trends and risk mitigation strategies can help organizations gain insights and negotiate more favorable terms. 

As cyber threats evolve and organizations increasingly rely on cyber insurance for financial risk management, the rising costs of cyberattacks pose challenges for the insurance industry and organizations alike. By demonstrating a commitment to risk reduction and implementing comprehensive cybersecurity strategies, organizations can manage financial risks associated with cyber incidents. Together, organizations and insurers can combat the escalating costs of cyberattacks and ensure the availability of comprehensive cyber insurance coverage now and in the future.

I've spent most of my career helping organizations build comparative advantage at the intersection of strategy, technology and innovation. I now believe both individuals and organizations should aim even higher.

We have the good fortune and awesome responsibility of sitting at the inflection point of the Fourth Industrial Revolution. For better or worse, ever better and cheaper technological building blocks, including pervasive connectivity and computing, AI, robotics and genomics, are blurring the lines of the physical, digital and biological worlds. They are already reshaping industries and societal patterns, and the transformation is accelerating.

Our individual and organizational opportunity is to guide our little slices of the universe toward the better, and away from the worse, potential outcomes. In doing so, we can help build a collective future with greater health, sustainability and prosperity. We can build a world we can proudly leave to our children and their children.

In this post, I am sharing the video and slides from a recent webinar where I explored this theme and offered three lessons drawn from my recent book, "A Brief History of a Perfect Future," written with Paul Carroll and Tim Andrews. (Thanks to Zoom for hosting and sponsoring the webinar as part of its monthly "Work Happy" series.)

Here are the three lessons, in brief:

1. Make a Third List. 

In addition to the daily and weekly to-do lists that many keep, develop a "third list" of your biggest, most ambitious goals. These are the audacious goals you and your colleagues want to accomplish in the next five, 10 or even 20 years. They might even be goals that can't be realized during your tenure. But they should be goals you are always on the lookout to materially advance in your time, whenever possible.

In my presentation, I talked about how Rahm Emanuel and his predecessors as mayors of Chicago had the restoration of the Chicago River on their third list. Through a combination of long-term master planning, patient zoning, opportunistic development and political savviness, they shepherded a decades-long transformation of Chicago's slimy, concrete-entombed downtown riverfront into the magnificent Chicago Riverwalk.

See also: 6 Words to Focus Your AI Innovation Strategy

2. Embrace the Laws of Zero. 

Seven technological building blocks—computing, communications, information, genomics, energy, water and transportation—are advancing exponentially in capability and, on a relative basis, headed toward zero cost. That means we can plan on being able to throw as much of these resources as we need to at any problem to address it intelligently. Success in doing so would bring us closer to what my coauthors and I call the Future Perfect.

But the building blocks are not the buildings. It is easy to imagine these capabilities being used to exacerbate societal problems in areas such as health, equity, civility, privacy and human rights.

3. Write Your 'Future History.' 

As the saying goes, "If you don't know where you're going, you might not get there." "Future histories" are narratives that help illustrate and crystallize a desired future scenario. Rather than predicting some abstract or fantastical future, they aim to describe an ambitious yet attainable scenario by a specific date. The target date should be far enough out so you don't worry about short-term noise, constraints and implementation details (yet) but near enough to allow realistic estimates of what is technologically possible. Working backward to today, you can chart the possible paths to that future.

For example, when President John F. Kennedy declared in 1961 that the U.S. would put a man on the moon by the end of that decade, he rallied the nation to achieve a complex challenge that might otherwise have taken many decades. Kennedy’s narrative was a magnificent example of a “future history.” With vivid strokes, JFK described an ambitious yet attainable goal by a specific date. His narrative captured public imagination and support and, as he said, “served to organize and measure the best of our energies and skills.” Working backward from Kennedy’s future history, an extensive public/private partnership laid out the path to invent the future Kennedy envisioned. This included, in no small part, developing and integrating a host of new technologies and capabilities, such as in materials, propulsion, guidance, control, communications and safety.

Here's a video that further explores future histories.

* * *

Today, the world finds itself facing challenges much more daunting than going to the moon, such as in climate change, war, health, equity and poverty. But we also have near magical building blocks and tools to augment our human ingenuity. It is the opportunity of a lifetime.

ITL: 

A couple of years ago, there was loads of enthusiasm about embedded insurance, but that seems to have lessened, at least in some quarters. To start us off, could you please tell us where you think we stand at the moment? 

Chris Bassett: 

Embedded insurance isn’t particularly novel. There have long been forms of insurance that are made available at the point of sale. There’s bancassurance, for instance. You buy coverage when you’re hopping on a plane. There’s the whole warranty model.  

You're capitalizing on the endorphins associated with making a purchase and the perception of the risk of losing that asset. What’s interesting is that a study found that consumers perceived the risk of loss of a particular item was around 7% while the actuarially calculated risk was 3% or 4%, so consumers may well be overestimating the potential for loss, which leads them to consider purchasing a warranty. 

The challenge is: How can we make insurance a natural part of an overall transaction? We shouldn’t just say there’s a pull at the point of sale that we can capitalize on. Embedded insurance shouldn’t just be a bolt-on. The idea behind the “point of design” approach is to find a way to weave the insurance into a purchase and make a meaningful connection. 

ITL: 

Where do you see opportunities to do that? 

Bassett: 

The first thing is to think about the design of the insurance product. Then we should also think about the long-term experience for the buyer. 

We were looking at this with a large jewelry firm that sells through boutiques. They sell very, very high-end watches and jewelry. We explored completely redesigning the purchasing experience, including the idea that an insurance component was bundled in as part of the warranty and would tap into specific emotional triggers associated with the purchase.  

You could actually take a step back and say, What if we redesign the entire product with insurance and potentially other financial services in mind? You want there to be such an obvious fit that it wouldn’t make sense to purchase the product and the insurance separately.  

An example of this might be, say, Nike shoes that have health and wellbeing coverage built in. The design questions that you have around what makes a really appealing sort of sportswear are similar to the sorts of questions that underwriters can draw from in thinking about what this particular risk profile looks like. And there would be a natural affinity among people who bought the shoes, so you could build a community aspect around them. 

You could also go beyond the point of sale. Let’s say you buy a car, and insurance is bundled in at the point of sale. There could also be an on-demand component. Maybe you later see the value of adding coverage, perhaps for long-term disability, and then take advantage of additional safety features in the vehicle. Maybe you tie home insurance together with risk prevention services and let people turn their coverage on or off, depending on whether they’re there.  

So, from a “point of design” perspective, you can design a new sort of insurance product, you can weave an asset or service together with an insurance product in a way that aligns their value propositions or you can do a combination of the two and possibly include an on-demand component.  

ITL: 

Let me ask about some of the objections I’ve seen raised about embedded insurance. I’ll start with agents and brokers. Don’t they get cut out? Won’t they block the trend or at least slow it greatly? 

Bassett: 

Yeah, absolutely, that’s an issue. But there is the potential to create enormous value for brokers and agents. We've looked at this in terms of vehicle telematics, more sophisticated home-related sensors and so on. The amount of information that agents and brokers now have access to about policyholders allows for a very different relationship. 

To give you an example, we looked at small commercial truck fleets and saw that, beyond just helping policyholders improve their driving, brokers and agents could work with them to improve their general risk profile. Agents and brokers can become kind of a risk management coach and help clients reduce premiums. There's also the potential to gather a lot more personality-based information, about how people are living, how they’re behaving and so on. That provides an opportunity to look at different products that might interest customers. 

Embedded products can create a continuing relationship that allows for data collection and engagement. That creates long-term opportunities even if there’s a short-term cost. 

ITL: 

That’s an interesting way to look at the issue. What about the complexity? What happens when I go to a jeweler who wants to sell me insurance, but I already have a homeowner’s policy that covers my belongings? 

Bassett: 

You’d look to design complementary coverage. With the jeweler, for instance, we were dealing with rings that cost hundreds of thousands of dollars and that weren’t covered under homeowner’s policies, even though many buyers thought they were. 

ITL: 

How about an objection that somebody raised in an article published with us recently? He wrote that, if the insurance becomes simple enough that I can just purchase it as I buy the ring or the plane ticket, then it becomes a commodity, and the airline or jewelry chain could easily swap out my insurance and swap you in. That would mean all the leverage in the relationship would go to the retail partner and make for a bad deal for the insurer. 

Bassett: 

We spent a lot of time looking at travel insurance, and, yes, there’s an enormous amount of control in the hands of the cruise lines and airlines as distributors. The key for insurers is to capture more information around clients’ personalities, around their risk preferences, and then reverse engineer to look at their value systems and build risk profiles.  

You say, Okay, you bought travel insurance with us, and we know from the cruise line which events you chose to go on and sort of the nature of your movements on the ship, so that leads us to believe that you might be interested in these types of coverages or these types of services that we can offer.  

This comes back to the difference between thinking about the point of sale and thinking about the point of design. Embedded insurance has got to be more than just the transaction. 

ITL: 

Any final words? 

Bassett: 

Outside of automotive, where some initial partnerships and exploration are happening, I haven’t seen a lot of activity. But I think there's a compelling opportunity for insurers to start working with technology firms to look at emerging technologies and see how they might enable embedded insurance offerings.  

I also think all organizations, including insurers, need to start building partnership muscles. The ability to identify the right kind of partners to work with and to build strong connections with them tends to be fairly weak. Companies need to work at better identifying partners and at codeveloping solutions.  

ITL: 

People don't think of developing partnerships as a skill that has to be developed. But it is, and building strength takes time. I think your description of the need for partnership muscles is spot-on. 

Thanks, Chris. 

Phoenix just wrapped up a month in which the high temperature exceeded 110 degrees Fahrenheit every day — many who simply fell in a parking lot had to be treated for burns from the asphalt. Water temperatures off the Atlantic coast of Florida exceeded 101 degrees, near the maximum recommended for hot tubs. The average global temperature on July 6 was the hottest on record, and the U.N. says we've entered "an era of global boiling."

Challenged by climate change, home insurers in the U.S. have lost money in five of the past six years and continued to rack up losses in the first half of 2023, according to an article that appeared in "the Wall Street Journal over the weekend. Insurers are raising rates as fast as they can, while narrowing coverage or even exiting troubled markets, the article says, but it quotes a colleague of ours from the Insurance Information Institute as saying underwriting losses are expected to continue through 2025.

"Progressive, for example, said catastrophe losses last month ate up 92% of home-insurance premiums earned" because of severe weather, the article said.

By raising rates and reducing coverage, insurers aren't just tackling their business problems but are sending signals to homeowners that will encourage them to reduce their risks from severe weather. Increases of thousands of dollars in premiums tend to grab people's attention, and media coverage is amplifying the message. 

Still, I think insurers need to greatly accelerate two incipient, data-related initiatives. Insurers need to be much more specific in their risk assessments and communicate them to clients — don't just tell me what my premium is; tell me that the vegetation around my house and my shake roof have increased my wildfire risk and thus my premium by X percent. Insurers also need to work with regulators to show that they have to be able to use predictive models to set rates, rather than base them entirely on historical data.

Setting rates for the 2020s based on historical data doesn't work when, according to the WSJ piece, insured damage in the U.S. from severe storms, wildfires, floods and other natural disasters averaged $40 billion for the 2000s and $54 billion for the 2010s (adjusted for inflation) while the figure has topped $90 billion in each of the past three years.

I'm especially sensitive to the recent heat wave because I had my own brush with wild weather over the weekend in Washington, DC, one that ended happily only because of an alert brother-in-law.

The weather has been exceptionally hot for DC, reminding me of visits to Florida — blistering, muggy days have repeatedly turned into thunderstorms in the late afternoon. On Saturday, my elder daughter and I stepped out of the National Gallery of Art into a moderate rain to walk a half-mile to a Metro stop to go see one of my sisters and her family for dinner in Arlington, Virginia. But as soon as we started to cross the National Mall — where there is no shelter to be found — thunder and lightning erupted, and we were in the middle of the most violent rain and windstorm that I may have ever experienced. Metal signs tore loose and starting flying at us from behind, and we began running. 

We made it to the Metro — where we stood, so we left our puddles on the floor, not the seats — and the storm subsided by the time we got to Arlington. As my sister drove us to her house, though, we had to take several detours because any number of massive trees had been uprooted and fallen across residential streets, blocking them. Most of the traffic lights were out because Arlington had lost power in many areas—- as had some 200,000 people in the DC area. Fallen trees and severed branches had crumpled some roofs.

My sister's house was undamaged, partly through the luck of the draw but also because her husband had become concerned about a massive branch of an old tree that was drooping toward their roof. He had a tree service cut the branch off a week before the storm hit. 

If everyone were as prudent as Erik, the world would be a safer place with much lower insurance premiums. In the absence of that possibility, though, insurers can push people in his direction. 

A recent McKinsey article explores two ways, in particular, that AI can lead to better underwriting and, as a result, better understanding of and mitigation of risks.

The article quotes an executive from ZestyAI as saying its analytics tools can let carriers tell a customer, “'We are giving you a wildfire score of eight because you have 70% overhanging vegetation, you have a wood shake roof and you are on a 15-degree slope.'” The executive added: "The former two, you can change. The last one, you cannot. And then when renewal season comes, the insurance company can say, 'Dear homeowner, have you made those recommended changes to mitigate your risk?'”

Another ZestyAI executive said it's key to model the risk property by property. He said: "I think even the DOIs [departments of insurance] would agree here, [that] the traditional risk models spread risk across large regions versus having a laser-focus on the individual property. So in the case of the traditional model, for example, everything east of I-95 in Florida might be considered all the same risk, when, in reality, it’s not."

Specific information about risks, along with an opportunity to address them, could go a long way. I could even imagine doing something akin to what OPower (now a part of Oracle) does with energy bills: letting people know how they stack up against their neighbors in terms of energy-efficiency. One of the cofounders told me years ago after we were on a panel together that his earlier work on political campaigns had shown him that the best way to get people to vote was to send them a note showing how their voting record compared with their neighbors'. He took that idea from politics to energy, where he nudges me every month and surely nudges many of you to think about how you compare with others.

Imagine how that might work with, say, wildfire risk: "Your risk puts you in the XX percentile compared with similar families in your area...."

You could even extend the idea to communities, given that your wildfire risk rises or falls based on what your neighbors do: "Your community ranks in the XX percentile compared with similar communities in the Sierra Nevadas...."

Peer pressure can be very effective.

The other key piece is that, as one of the ZestyAI executives said, the models for risk have to be predictive, "trained on the right amount of loss history.... That’s where the future has to go: Risk assessment has to be rooted in property-specific insights, and it has to be forward-looking. It can’t be just stochastic simulation."

His colleague said that will be a challenge for regulators, who want to deal in facts, not projections: "You will see a collision between an exponentially improving product versus a pretty static or maybe linearly improving regulatory landscape and IT landscape. I think you can build 10 times better products, but if you can only bring them to the market at the pace at which regulators would approve them, it’s still going to be a challenge."

The executives did express some optimism because ZestyAI recently got an AI model accepted as part of a rate filing in California. Winning approval took three years, but ZestyAI hopes that approvals will become simpler as regulators get more comfortable with AI and predictive models.

Carriers have their work cut out for them as they try to reverse years of losses on homeowners insurance while dealing with increasingly severe weather. But AI that enables property-by-property risk assessments and that allows for better predictive modeling (subject to regulatory approval) will increasingly help carriers and customers reduce risks.

In the meantime, we can all just try to be more like Erik.

Cheers,

Paul

In today's insurance industry, the abundance of paperwork can be overwhelming. However, the adoption of digital solutions has brought about advancements in paperless options. While traditional paper-based processes have been replaced by digital alternatives, the emergence of intelligent document processing (IDP) presents new opportunities and challenges. IDP has the potential to revolutionize the insurance industry, saving time and costs while ensuring accuracy and efficiency.

Take the Work Out of Paperwork
The manual processing of documents, such as rekeying information or extracting data from third-party systems, consumes valuable time and financial resources for insurance carriers.
Consider these findings*:

Underwriters spend up to 5-8 hours a week on non-underwriting tasks, such as building manual reports, rekeying and extracting data from third-party systems

26% of quote information produced while rekeying is inaccurate

26-50% of pricing processes still rely on spreadsheet calculations

Intelligent document processing  emerges as a game-changing technology that can address these challenges. Unlike traditional automation tools, IDP leverages Artificial Intelligence (AI) and Machine Learning (ML) to scan unstructured information and read documents in various formats, simulating human-like interaction without requiring extensive human intervention. The benefits of IDP include the ability to process documents up to 25 times faster, work 24/7, and achieve remarkable accuracy.

Unlike traditional Robotic Process Automation (RPA), IDP takes a different approach. It doesn't depend on predefined rules or templates for document processing. Instead, it uses AI and ML to scan and interpret unstructured information from documents in multiple formats, mimicking human-like understanding and comprehension. This advanced technology has made significant progress in automating tasks that were previously deemed impossible to automate. As a result, these once-challenging processes are now becoming increasingly commonplace in the insurance industry.

Versatility of Intelligent Document Processing

IDP offers a wide range of capabilities that cater to the diverse needs of the insurance industry:

• Data extraction: IDP employs a combination of Optical Character Recognition (OCR) and Natural Language Processing (NLP) to process various forms, including KYC forms, tax documents, and SEC filings. By scanning documents for specific terms or words, it extracts relevant data accurately.
• Data classification: Documents can be categorized based on their format, content, and attributes, allowing for efficient organization and retrieval.
• Verification: IDP validates and verifies data, ensuring accuracy and completeness, minimizing errors that could lead to potential risks.
• Error reduction: Through automated error detection and correction, IDP enhances data integrity and reduces the likelihood of inaccuracies.
• Digitization: Paper documents can be digitized and securely stored and retrieved electronically, eliminating the need for physical storage space, and facilitating easy access.
• Integration: IDP seamlessly integrates with existing systems and workflows, streamlining document processing and enhancing overall operational efficiency.
• Compliance and risk management: By protecting sensitive data and ensuring confidentiality, IDP assists in maintaining compliance with regulatory requirements and mitigating risks.

Top 5 Ways Intelligent Document Processing Can Help You 

1. Document Processing

IDP enables automated matching, uploading, categorization, and verification of policy applications, claim submissions, contracts, invoices, reports, receipts, and emails. By "reading" each document, extracting key data values, and entering them into underwriting systems, it accelerates the insurance submission triage process and enables handling more requests with existing resources.

2. Policy Administration

Throughout the life cycle of an insurance policy, IDP plays a crucial role. It supports initial policy processing, manages endorsements or riders, performs audits to ensure accurate pricing based on potential exposure, and resolves customer queries effectively. Additionally, IDP automates premium reminders, data validation, and policy uploads, optimizing the policy issuance process.

3. Claims Management

The claims process involves multiple stages, including First Notice of Loss, document review, data extraction, assignation of adjustors, claim uploading, and fund disbursement. IDP streamlines these steps by automating document handling from various stakeholders, reducing manual intervention, and increasing efficiency.

4. Underwriting 

Underwriting is another document-heavy process where underwriters extract and review thousands of documents before entering them into a downstream processing system. An intelligent system "reads" these documents like an underwriter, finds relevant data, and enters the appropriate data into the system, freeing up underwriters' time for higher-value work—resulting in improved productivity and underwriting accuracy. 

5. Invoice Processing

Automating invoice processing can save significant time and resources. IDP can extract, separate, and integrate data from invoices into accounting systems, eliminating manual data entry and reducing errors, leading to substantial time savings.
Intelligent Document Processing presents a transformative opportunity for the insurance industry to enhance efficiency, reduce errors, and deliver superior customer experiences. By leveraging AI and ML technologies, IDP streamlines document processing, optimizing various areas such as claims management, policy administration, underwriting, and invoice processing. As the insurance industry continues to embrace digitization, IDP will play a crucial role in shaping a paperless future, maximizing operational effectiveness, and enabling insurers to stay competitive in an evolving landscape.
 

If you'd like to learn more about how you can automate document processing and stay competitive, contact us.  

Murray Izenwasser, Senior Vice President, Digital Strategy

At OZ, Murray plays a pivotal role in understanding our clients’ businesses and then determining the best strategies and customer experiences to drive their business forward using real-world digital, marketing, and technology tools. Prior to OZ, Murray held senior positions at some of the world’s largest digital agencies, including Razorfish and Sapient, and co-founded and ran a successful digital engagement and technology agency for 7 years.

Sponsored by ITL Partner: OZ Digital Consulting

KEY TAKEAWAYS:

--One-off or standalone solutions acquired for specific tasks, incomplete conversions from one system to another and failures of large-scale modernization initiatives have resulted in insurers being invested in a myriad of systems and applications. Some work, some sort of work, some don’t work at all, but in a Lego sort of scenario, taking out the systems that don’t work is nigh on impossible because the “blocks” are now foundational to the insurer’s infrastructure.

--The solution lies in investing in specific areas that touch the customer and focusing on incremental change -- not attempting to do everything at once. It also requires a no-code/low-code environment, a more agile data platform and the right service provider.

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The future of insurance (and maybe the world) is personalized, streamlined and effortlessly automated. It rests in the capable hands of application programming interfaces (APIs), integrated systems, automation and insightful, democratized data. It is driven by digital transformation and the need to invest in systems and applications that will grow with the business and ensure increased data accessibility and visibility.

Over the years, insurance companies have amassed considerable, and complex, technology infrastructure, which is slowly failing. One-off or standalone solutions acquired for specific tasks, incomplete conversions from one system to another and failures of large-scale modernization initiatives have resulted in insurers being invested in a myriad of systems and applications. Some work, some sort of work, some don’t work at all, but in a Lego sort of scenario, taking out the systems that don’t work is nigh on impossible because the “blocks” are now foundational to the insurer’s infrastructure. Many insurers do want to find a way to consolidate data and integrate systems, but building connected systems through integration is hardly ever a simple task.  

‍To ensure system integration and automation deliver on so many promises, there are five key steps insurers should take.   

01: Meet Customer Demand With Intelligent Investment

Customers are more demanding today than ever, and customers will only become more demanding, more insistent on seamless, customized solutions. There will be an inevitable “lift and shift” to companies meeting increasing and evolving customer demands more efficiently.  ‍

Investments into digital transformation are the natural first step toward successful integration. In recent research, McKinsey finds that companies focusing on marketing and sales, underwriting and pricing, policy servicing and claims -- four areas that affect the customer journey, the customer experience and customer value -- are most likely to see measurable return on investment (ROI). 

See also: Insurers Turn to Automation

02: Focus on Incremental Change

The insurance industry juggles data challenges unique to its offerings and business structures. Most insurance solutions run for many years, introducing legacy data problems that affect efficiency and access. And, unfortunately, it is difficult to increase data mastery if significant percentages of solutions are legacy-driven and inherently complex.‍

The answer lies in incremental change to systems, data integration and the implementation of a platform capable of blending legacy with innovation. This hybrid approach minimizes disruption while ensuring the organization continues to move forward. With the right technology and service provider, incremental change can help the business adapt and evolve to ensure longevity. 

03: Create Flexibility With a Low-Code/No-Code Environment

Custom code, while great upon initial release, can grow stagnant with time or as requirements change. Unexpected delays, struggles with development processes or even data changes and growth, can affect written code and cripple a business’s ability to adapt to solutions and systems on demand. With a low-code/no-code environment, businesses can ensure data and operations remain agile and adaptable to new system requirements or as sales and marketing efforts call for segmentation. 

0‍4: Use a Platform That Empowers Data

Investment into a modern data platform is about more than just checking boxes, disrupting competitors or driving the business toward trends. It is about enabling and empowering every silo and solution within the business. This is the key to unlocking the door to a scalable, extensible and enterprise-ready solution that sits at the very center of your dataverse. What is needed is a solution that is powerful and future-proof. This does not equate to disruptive, destructive or expensive. It equates to elegant, intuitive and intelligent.

Investing in a solution that enables the efficient use of data allows for the hyper-personalization of policies, the creation of customized customer journeys and the ability to refine insurance policies into bespoke products. Such investments provide the freedom to innovate and the ability to truly explore intelligent decision-making. This requires more than just a giant box of tech; it needs to be backed by strategy that will help achieve the right value, improve speed of delivery and ensure investments can move dynamically with evolving business requirements. 

See also: What’s Beyond Robotic Process Automation

‍05: Choose a Solution Provider That Simplifies

Successful system integration and modernization requires more than just a digital overlay. It asks that the organization stop seeing technology as a magic cure-all for legacy data complexities. It isn’t. The real cure lies in finding solutions that simplify complicated situations and take every part of the customer’s organization into account to ensure the seamless flow of information across silo, system and solution.  

Often, this means finding a capable, compatible solution provider that can be trusted to help the organization increase data transparency and implement rules and policies that align with integration and data usage and ensure the workplace and workflows are managed intelligently.‍

Insurance enterprises today must meet the challenge of modernizing legacy data, automating business processes and building connected systems. In one scenario, the solution is a hybrid data automation platform implemented in a low-code/no-code environment. Insurers that are going to make it to the next level of this game need powerful technology and insurance-savvy expertise to grow and to make the most of data resources, today and in the future.

KEY TAKEAWAY:

--By communicating with policyholders in advance of premium increases, insurers give policyholders sufficient time to engage, ask questions and experience good customer service, all of which reinforce the relationship and can discourage churn.

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Over the past few years, inflationary pressures have made a notable impact on the economy – and on home insurance premiums. According to CoreLogic’s U.S. National Building Cost Trends report for Q2’23, building material costs for carpet, insulation, brick and concrete have continued to rise, increasing overall residential reconstruction costs by an average of 1.9% from February to May 2023 nationwide. In catastrophe-exposed states like Louisiana and Texas, reconstruction costs are even higher than the national average, at 3.1% and 2.5%, respectively. However, only approximately 30% of homeowners have sufficient coverage to account for the higher costs to rebuild their homes after a major loss.

This data underscores why carriers must price premiums to accurately reflect the true cost of reconstruction and repairs. Without accounting for the increased cost of building materials and labor, insurers run the risk of leaving policyholders underinsured, a phenomenon that’s not uncommon: The U.S. protection gap – or the losses insurance didn’t cover over the last 10 years – remains at 43%. 

By communicating effectively with customers, insurers can adjust premiums to keep pace with inflation and ensure appropriate coverage while building better customer relationships.   

Communicate Premium Changes Early On

Maintaining transparency about rate increases when the market shows signs of inflation can foster customer trust and help reduce sticker shock when new rates are implemented. 

According to MarketWatch.com, 90% of homeowners saw their insurance premiums rise in 2022. By communicating with policyholders in advance of premium increases, insurers give policyholders sufficient time to engage, ask questions and experience good customer service, all of which reinforce the relationship and can discourage churn. 

See also: What to Do About Rising Inflation?

Leverage Customers’ Preferred Channels

Better customer service begins with engaging customers in the way they prefer to be reached. Insurers that leverage both customer engagement analytics and multiple communication channels can refine outreach efforts and interaction cadences to meet customer expectations. 

Accessible, reliable communication and customer service is imperative in any industry, including insurance. In fact, based on a study by J.D. Power, customer service — not price — is ultimately the driver behind long-term customer value in home insurance. 

Educate Policyholders on Premiums and Protection Gaps

When customers understand the factors that influence their premiums – and the discounts available to them – they are better positioned to control the factors they can. For example, if homeowners understand how the age and condition of their roof affects premiums, they may be more inclined to fortify their roof to take advantage of available discounts. 

In the same vein, when customers understand why insuring their home to value is important to making them whole after a loss, the benefit may outweigh their price-sensitivity.

Proactive conversations with customers about rate adjustments for inflation can result in stronger customer relationships and higher retention. Moreover, it’s the chance for insurers to demonstrate to policyholders that their protection is top of mind.

Recently, Lemonade entertained us with their last pyrotechnic: "the synthetic agent." That follows a long list of shining and exotic concepts, which have been as essential in their DNA as their bloody combined ratio (for each dollar written, they have consistently spent more than $1.40).

Let's talk about some of these magnificent pearls:

1. Charity giveback. The storytelling, "Lemonade takes a flat fee and treats the rest of the money as yours, not ours," and their iconic slice of pizza have fascinated insurance professionals.

The hard reality: Last year, half a cent for each dollar of written premium in 2021 went to charity. The charity giveback has merely been crumbs of the pizza! I'm sure many insurance incumbents are donating a higher percentage of their premiums.

See also: Insurtech Startups Are Doing It Again!

2. Claim settlement world records. It was a Christmas gift in 2016, and in June 2023 their PR team did it again 👇

3. Alumni. At the 2022 investor day -- in answer to the question about the 30% to 40% churn rate -- Lemonade disclosed that it doesn't lose policyholders, they create alumni! Standing ovation for the guts to claim this!

4. Seasoned policyholders. The investor day was full of pearls! CEO Daniel Schreiber described portfolio pruning as "seasoning."

5. The synthetic agent. This is the most recent creation. A lender receiving a 16% interest rate is presented as a (synthetic) agent. The same day, Daniel gave one of the most honest comments I have ever seen from him:

His second explanation has been definitely more polished: "It may be tempting to dismiss synthetic agents as "good old-fashioned debt that's been given a glossy makeover. [...] Here are four key differences that make all the difference: 1. Cash Flow Synchronization vs. Fixed Schedule [...] 2. Adaptive vs. Static [...] 3. Operational Freedom vs. Restrictions [...] 4. Their Risk vs. Our Risk [...] ."

For my fellow actuaries reading this edition of the newsletter, you may enjoy the video below from some Lemonade fans.

Let's look at Lemonade customer growth and their marketing expenses (the Metromile acquisition at the end of July '22 should be pro rata reflected in the Q3 '22 data and entirely in the Q4 '22).

Customer growth from the end of Q1 '21 to the end of Q1 '23

At the end of Q1 '23, their customer base reached 1.85 million (compared with 1 million at the end of Q1 '21), but the growth has significantly slowed (excluding the quarter when Metromile was added). Total marketing costs stayed around $36 million until Q3 '22 and have been reduced below $30 million in the last two quarters. This sales and marketing spending has to deal with replacing the ALUMNI, and not much is left to grow the customer base.

The synthetic agents are supposed to provide that growth, but the interest paid will be on top of the already bloody combined ratio.

See also: How to Know If You Need Telematics

Talking about agents -- the real ones, humans selling policies, serving policyholders along the policy lifetime and being remunerated for doing so -- I desire to remind you of their important role. In Kyle Nakatsuji's beautiful words: "Agents deliver what we've come to call 'curated value.' They work on the customer's behalf to gather information, source options curate a selection process and validate choices. This gives the customer confidence they are seeing their real options (transparency), getting a good price (affordability) and getting the right coverage (value), all while doing less work themselves (convenience)." Amen!

My beloved insurance incumbents, the poor performances shown by the new kids on the block (who pretended to be the good guys disrupting the bad insurers) and their exotic blah blah blah shouldn't justify any reduction in your innovation efforts. There are clear demonstrations in any insurance business lines that the higher the level of innovation, the higher the financial performance (growth and technical results).

I'm talking about usage of data and technology to transform the way your organizations work. These insurtech-based business transformations require multi-year journeys and C-level sponsorship, unfortunately without any shortcut. However, the prize for this insurtech effort is clear: superior financial results!

I discussed this transformative power of technology and data in driving growth, improving customer experiences, and enhancing risk management a few weeks ago with my friends at Infosys. To see the fireside chat between Karam and me, click here.

Last, a Tesla surprise:

You know I've always challenged the common enthusiasm about using OEM data for an auto insurance telematics program. (Here are my thoughts about it!) My main point has always been the impossibility of building a sustainable business case on a constant flow of data from a connected car due to the OEMs' greed.

So, my suggestion to insurers has always been to go with an aftermarket solution (app, hardware or even a camera in some situations) and not wait for an affordable OEM data stream. I still believe this is the best way to address the telematics opportunity on your portfolio!

However, on a small fraction of your insured portfolio, you can now start using OEM data at ZERO cost! Tesla has exposed APIs with open data, totally free. You have it here: Tesla Open Telematics Data.

You need only to design a compelling value proposition able to win the customer inertia!

Looking forward to seeing your new value propositions based on this free telematics data!

KEY TAKEAWAYS:

--The cloud, open APIs and a microservices approach to IT architecture allow for experimentation and the mixing and matching of apps and services into new and improved business solutions.

--Improvements in AI and predictive analytics allow for much more sophisticated insights and smoother interactions with clients.

--No-code or low-code platforms empower insurers to build custom applications and solutions without the need for extensive programming expertise.

--Self-sufficiency enables traditional insurers to position themselves as agile, customer-centric organizations capable of delivering value and staying ahead in a dynamic insurance landscape. It begins with reducing reliance on third-party vendors.

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The rise of innovative technologies such as no-code tools, artificial intelligence-powered automation and predictive analytics has helped transform the ways insurers operate and interact with customers. 

The solutions leveraged by the industry based on these technologies have helped streamline insurance processes, reduce insurers’ overhead and increase profitability. However, traditional insurers have become dependent on those that offer this kind of technology – a dependence that can induce communication lags, lower productivity and decrease efficiency in the event of a back-end issue. 

Thanks to the digital revolution, insurance-related tech is now more accessible, more intuitive and easier to implement than ever. These improvements are being driven by user-friendly interfaces, cloud computing, software-as-a-service (SaaS) models and open application programming interfaces (APIs), among other innovative technologies.

By strategically implementing the following tools and solutions, traditional insurers can achieve a level of self-sufficiency that may have until now eluded them in this digital age. 

The Cloud + APIs + Microservices

Cloud platforms give insurers access to software applications, storage and computing power without the need for significant upfront investments in infrastructure, which allows them to leverage advanced technologies seamlessly and remain competitive. By way of these cloud platforms, SaaS providers – which offer software applications in the cloud – enable insurers to access and use sophisticated solutions that are resilient and scalable in a convenient commercial model that enables a best-of-breed approach and can drive innovation by experimentation.

The “microservices” architectural approach creates software applications as a collection of small, independent and loosely coupled services and is used by both SaaS providers and modern IT teams. This approach furthers the “composable business” approach by introducing new, discrete services, allowing for independent service lifecycles and upgrades and enabling the mixing and matching of apps and services into new and improved business solutions.

Finally, open APIs – used to expose the functionalities of individual microservices or SaaS solutions in a standardized way – allow insurers to connect and integrate a wide variety of useful systems and tools. This interoperability lets insurers effortlessly integrate new solutions with existing technology and opens a full ecosystem of tools and best practices to orchestrate, manage, monitor and control the composed solutions.

See also: Breakthrough Technologies for 2023

Artificial Intelligence

AI tools provide insurers with automated decision-making capabilities and intelligent data processing, which in turn lets them maximize their data to streamline underwriting processes, assess risks and enhance fraud detection. It’s for good reason that 49% of insurance executives say AI has helped them operate more efficiently.

Natural language processing (NLP) chatbots and other AI-powered virtual assistants, for instance, improve customer service, streamline inquiries and help resolve issues promptly. Computer vision, another AI-powered solution, automates data extraction from documents, streamlines claims processing through damage assessment, identifies fraud patterns, enhances underwriting accuracy using visual data and facilitates virtual inspections for customer support. By leveraging computer vision and keen AI-powered customer service tools, insurers can streamline operations, reduce costs, improve efficiency and enhance customer experiences.

Considering the vast amounts of data that AI tools can analyze simultaneously, insurers can use them to gain valuable insights into accurate pricing, personalized offerings and efficient claims management – these automations across the value chain allow insurers to focus on more complex and strategic activities and enhance users’ satisfaction and experience, both internally and externally. 

Predictive Analytics

Additionally, AI plays a significant role in predictive analytics, which use historical data and statistical algorithms to make predictions about future events or outcomes. AI enables these analytic solutions to parse large volumes of data, identify patterns and make accurate predictions.

Predictive analytics help insurers make data-driven decisions, identify risks and optimize their operations – advantages that have driven higher sales for 60% of insurers thus far and reduced gnawing expenses for 67% of them. 

These insights give insurers the necessary information to anticipate customer needs, identify fraudulent activities and accurately assess risks – all in real time. With them, insurers can minimize financial loss, enhance customer satisfaction and improve overall profitability. 

No-Code Development

While the use of no-code platforms still require reliance on IT and developer teams, and don’t necessarily exemplify the flexibility and agility of the end solution, no-code or low-code platforms are still uniquely able to empower insurers to build custom applications and solutions without the need for extensive programming expertise. In fact, these tools are estimated to account for 65% of application development activity by 2024.

Insurers can use these tools to create intuitive interfaces, automate workflows and develop digital solutions tailored to specific processes across various departments – claims management, policy administration, customer relationships and more. Importantly, no-code tools enable insurers to design and adapt these systems quickly to meet changing industry expectations on their own accord. 

See also: Is Going Digital Really THAT Important?

Endgame: Self-Sufficiency

When it comes to pursuing self-sufficiency, there is a case to be made for “building” solutions in-house, rather than buying. Indeed, reliance on external vendors isn’t necessarily in line with a self-sufficient ethos. But the work required to front an in-house solution can be costly, time-consuming and difficult – it’s easier said than done to build a finished product that fits seamlessly into preexisting workflows and product road maps.   

Rather, to gain real self-sufficiency without breaking the bank or stretching developers thin, insurers would do well to explore specialized solutions (or point solutions) – those that are highly configurable by non-techs, are open for extensions and use standard modern technologies. This approach ensures minimal vendor lock-in, as well as useful content already out of the box and continuing upgrades.

While each of the digital tools listed above can help improve the various checkpoints in the insurance value chain, their adoption should ultimately fortify their capacity to be more self-sufficient – a key to modern insurers’ success. 

Self-sufficiency enables traditional insurers to position themselves as agile, customer-centric organizations capable of delivering value and staying ahead in a dynamic insurance landscape. It can be achieved by first reducing reliance on third-party vendors. This will help insurers reduce external expenses for critical functions, granting them full control when responding to emerging trends, regulatory changes and customer demand. 

This flexibility provides insurers with the freedom to develop and implement unique strategies, products and services. Fortunately, there are more than enough AI-powered, low-code and predictive analytics tools insurers can experiment with and ultimately adopt to bolster their internal processes and, subsequently, their bottom lines.

Largest Life Insurance Market in the World

The United States life insurance marketplace is the largest in the world by premium (see Figure 1 below).  While there are many major US domiciled insurers, most international insurance behemoths have set up shop in the US either through acquisition or organically to grab a piece of the proverbial pie.  Giants such as Allianz, Aviva, AXA, Dai-ichi, Generali and Manulife attribute a large proportion of global life insurance sales to the US market. 

Figure 1

2021 Life Insurance Market Share and Penetration Rate by Country

Source: Swiss Re Sigma No. 4/2022

However, life insurance sales in the US have remained relative flat during the past decade.  According to the American Council of Life Insurers Fact Book 2022, the average annual growth rate for US life insurance face amount from 2011 to 2021 was only 1.7%[1].  This includes a large pandemic bump of 6.5% from 2020 to 2021.  The growth rate from 2011 to 2020 averaged a meager 1.2% annually.  Even with the incredibly low inflation rates during the same time period, life insurance sales have not nearly kept up with inflation nor population growth.  And more recently, the Life Insurance Marketing and Research Association (LIMRA) announced that premium sales were lower by 4% in the second quarter of 2023[2].  The same study showed that there was an increase in the number of policies sold, but number of policies does not drive growth.

Looking at life insurance penetration rates (premiums divided by Gross Domestic Product or GDP) by country tells a completely different story.  Using this criterion, the US lags behind Asian countries such as Hong Kong (measured separately from China), Singapore and Taiwan.  It also lags behind many European countries such as Denmark, Ireland, Finland, the UK and Switzerland[3].

So, what makes the US life insurance market so robust in terms of sales and how can the US improve its penetration rates?  One cause of a need for life insurance is to cover the cost of a mortgage in case of premature death of a breadwinner.  Depending upon the size and type of mortgage used, life insurance may actually be a prerequisite to obtaining a mortgage.  Approximately 66% of families in the US own homes whereas all other countries listed in Figure 1 have lower rates of home ownership, except for Italy[4].  Purchasing a home in the US generates much activity for life insurance sales teams.

Desire for children to be college educated is also a major expense that causes families to purchase life insurance.  Premature death of a breadwinner in the US will severely impact the ability for the children to attend college.  The US has about the same rate of college attendance as the UK and South Korea at 46%, and lags slightly behind Japan at 50%[5].  However, the US has the highest average tuition cost causing the need for greater amounts of life insurance[6].

Estate tax is also a major driver of life insurance sales.  For many Americans, the family home will be the major asset passed down to heirs.  If the heirs desire to keep the home, it may be difficult if 40% of the home valuation is due in taxes.  Many families purchase insurance to cover estate taxes, another large source of US life insurance sales.  Until recently, the US was tied with Japan for having the largest estate tax rate in the world at 55%.  It has now dropped down to fourth place with only Japan, South Korea and France ahead of it[7].

Mortgage protection, college tuition assurance and estate tax coverage are only a few reasons why the US life insurance market leads the world.  There are many other reasons.  The real question is how can the US market grow in size and penetration rate?  Perhaps looking at some of its European neighbors, the US could learn.

Family Income Rider

Even if individuals do not own a personal life insurance policy, they may be covered by their employers under a group life insurance policy in the US.  Many mid-to-large employers will offer group life cover as part of their employee benefits packages.  Typically, an employer-sponsored group life insurance program will cover individuals as a multiple of annual salary or a flat amount.  One, two- or three-times annual salary is very typical for larger insurers.  This, of course, favors the more highly compensated employees. 

According to the US Bureau of Labor statistics, the median salary in the US for the first quarter of 2023 was USD 1,100 per week or about USD 57,200 annually (without seasonal adjustment)[8].  Even with a generous corporate group life insurance policy of three-times salary, a family of the average worker would receive about a USD 170,000 benefit upon death of the worker.  With the average mortgage in the US reaching a record USD 453,000, a generous group life insurance policy would not even pay half of the mortgage[9]. 

The typical flat group life insurance plan is USD 50,000.  Those who have recently sent a child to a US university know that this would not even cover all costs for a state school.  If the death occurs while the child(ren) are young, the family will have time to invest the lump sum and hopefully achieve its goal, but this requires a financial acumen that many do not possess.

What is different in other countries and especially prevalent in Europe is a mandatory risk component for all employer-based savings plans.  These retirement vehicles are called 401k plans in the US, named after the applicable section in the Federal Tax Code, and Pillar II savings in most other countries.  This risk component would pay a percentage of the deceased worker’s salary to the family until the spouse reaches retirement age, with a reduction when the children are emancipated.  In other words, the annual salary continues minus expenses assumed to have been incurred by the worker.

Many old-timers in the US life insurance market will equate this risk element to a traditional Family Income Policy.  While still available as a rider, the Family Income Policy had a long history as a stand-alone policy in the US.  It is difficult to examine how robust sales are for this type of rider, since many companies lump riders together when generating statistics, however it is safe to say that it is not a major seller.  Otherwise, the policy would not have turned into a rider.  This does not mean, however, that it is not important.  Many European markets feel that the benefit is important enough to mandate in all occupational pension programs.

What this means for the average worker is that he or she is assured that upon premature death, a proportion of the worker’s salary will continue to the family as if the worker were still earning an income.  Younger workers would generate a greater benefit for their families in present value (their families would receive the benefits for a longer period of time) and older workers would generate a lesser benefit – exactly what is needed.  The traditional group life insurance policy seems to be counterintuitive – paying more to older and wealthier families.  This does mean that individual sales of life insurance in European countries are not as robust as in the US, but insurers receive premiums from employers to cover the risk component of Pillar II pensions, albeit “behind the scenes”.

With an estimated USD 6.3 trillion of assets in 401k plans at the end of the third quarter 2022, and an approximate average premium of 1% of assets for the risk component of European Pillar II plans (which also covers disability), that equates to an additional USD 600 billion of life insurance premium for the US life insurance market – or about double the current size[10].  The insurance penetration rate would also double yet would still be half of what it is in the leading market – Taiwan.  These, of course, are very round numbers and such a mandate may cause a decrease in current sales, but the effects would still be extremely significant. 

Even more important than premium and penetration rate growth in the US market, is the needed coverage to families.  Instead of being faced with a lump sum after the death of a breadwinner, the family would receive income in the manner that it is accustomed.  The family can continue to make mortgage payments, college tuition payments (or contributions into a college fund) and retirement savings contributions.  There are no immediate decisions that need to be made with a pile of money that the surviving spouse may not know what to do with. And, this covers gig workers in Europe as many countries require gig workers to set up a Pillar II account.

It sounds like a true win-win.  In fact, it could be a win-win-win with the final win applicable to US State Governments.  A recent Pew study found that State Governments will miss out on an estimated USD 334.3 billion in lost tax revenue and increased support programs for citizens not saving enough for retirement[11].  Requiring all 401k plans to have a risk component would certainly go a long way to filling that USD 300 billion+ gap in state budgets over the next 20 years.

Conclusion

The US Congress has made great strides for Americans with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act and SECURE Act 2.0.  Perhaps industry associations could lobby for a required risk component for all 401k plans as part of SECURE 3.0.  This, in conjunction with requiring gig workers to set up a 401k, could go a long way to providing much-needed protection for all workers.  It could also give a much-needed boost to the US life insurance market.

Covering insurance “behind the scenes” through employer-based risk plans is not going to get big headlines.  However, this is a life insurance industry that remained relatively silent while performing brilliantly during the worst terrorist attack that the nation has ever seen, surviving the great financial crisis and paying record benefits during a once-in-one-hundred-year pandemic.  And this is just in the past 25 years!

Our industry is great.  It protects families from the financial consequences of premature death or disability of a breadwinner and outliving its retirement savings.  The US market is the largest in the world but can still learn from other markets to grow even larger.  The Family Income Policy was a great mainstay of the American market.   Maybe it is time to pull it off the shelf and throw it into all retirement savings plans.  No, it is not a new product.  No, it doesn't make use of artificial intelligence.  No, there aren’t any fancy bells and whistles.  But sometimes the simplest ideas can be the best ideas.