Innovation is at the top of every CEO’s agenda. Yet — despite innovation being a burning priority — why do most innovation initiatives fail to take off?
 
Consider these findings:

54% of innovating companies struggle to bridge the gap between innovation and business strategies.[i]
83% of strategic transformation initiatives fail.[ii]
64% of global executives say a lack of skills is restricting their ability to innovate.  

While most companies want to innovate, only a few carriers know how to innovate systemically. A culture of continuous innovation requires a steady stream of ideas. Ideas you can filter, test, and implement quickly and efficiently.

However, in the real world, innovation is often treated like a project, not a process.

Often the ideas originate from a small group of people — usually senior leaders or the C-suite — and cascade down to the rest of the organization. Many leaders believe their employees will automatically rally behind the idea, do whatever it takes, and push it over the finish line.

But it doesn’t happen that way. Many of these ideas do not get implemented. Employees are either not invested in the idea, do not fully understand its importance, or feel a sense of ownership — and the initiative fails.

Other times, an idea may originate from the frontline. But with a lack of a formal process to solicit feedback, allocate resources, and get stakeholder buy-in, the idea goes nowhere.

“The value of an idea lies in the using of it.” — Thomas Edison

Supercharge innovation with an innovation accelerator

For innovation to succeed, you must bring cross-functional teams together — within and outside the organization — to share their knowledge, experience, and perspectives and approach challenges in new ways.

“Innovation thrives less on individual genius and more on tapping into and maximizing the collective knowledge of the organization.”

Only through a disciplined, repeatable, and collaborative approach can carriers get new ideas to market faster while mitigating delivery and operational risk. An innovation accelerator like OZ Ignite helps you build the proper process to mine, test, and transform your best ideas into innovation initiatives that drive profitable growth.

Three Keys to Innovation Success: Collaboration, Process, Speed

Collaboration: Bring Ideas and Teams Together

Does collaboration fuel innovation? Carriers are asking themselves the same question — and the answer is a resounding yes.  

The top-down approach, where ideas come from senior executives and percolate down, no longer works.

Innovation initiatives — like any change effort —often fail because the outcomes are "not invented here." They’re seen as “one-off ideas” from senior management or “silver bullet solutions” by people with the most influence.

In lieu of a formal process, the bottom-up approach also seldom works because the ideas have little chance of moving up and reaching the right people who can influence decisions. 

Innovation-led growth happens only when it’s embedded into your organizational DNA. That means engaging your workforce across the enterprise — including your customers, distributors, and business partners — creating a dialogue between teams across the insurance ecosystem.

“People support what they help create.” — Ty Bennett, Author of The Power of Influence

Innovation accelerators can help evolve your methodology to collaborative innovation — including methods of obtaining ideas and feedback — with other approaches to projects and development processes to expedite prototypes for review and discussion.

Process: Establish an End-to-End, Repeatable Framework

It feels almost counterintuitive that "ideas" and "structure" should go hand in hand. Most believe innovation is born of a brilliant idea, a momentary stroke of genius. Rather, when successful, it's more likely the outcome of a structured organizational process that your organization develops, cultivates, and embeds over time.

All insurance companies have the knowledge and capabilities to innovate. What they often don’t have is a process to develop these ideas from across the organization into disruptive innovations.

Organizations that do use a structured process — involving several ideation sessions — can (and do) generate ideas faster, test, iterate, and refine them into potential growth initiatives. The payoffs are significant even if only a small percentage of ideas make it through the process.

OZ Ignite recognizes that innovation thrives on order. Not only does the framework manage the entire process from idea to market, but also routinely:

• Collects, shares, routes, screens, evaluates, experiments, incubates, develops, tracks, and reports on your organization's best ideas.
• Brainstorms new ideas to fill a pipeline with customer-centric growth initiatives.
• Integrates brainstorming and design thinking into the iterative prototyping process to fill a pipeline with customer-centric growth initiatives.
• Helps envision your future — whether improving the bottom line through operational excellence, driving profitable topline revenue growth by entering new markets, or leading the industry into new horizons — define it, then design it.

Speed: Bring Ideas to Market Faster

Fast cycle times are critical in insurance. It means being able to take calculated risks even when huge payoffs aren't guaranteed.

Slow development times — from concept to implementation — can hinder innovation and profitable growth. It’s the number one obstacle to successful innovation and today’s customers won’t wait. If a company can’t organize itself to move faster, it will likely begin to fall behind its competitors.

“There is a correlation between responsiveness and revenue. Two-thirds of customers say that speed is as important as the price.” — Jay Baer

When large teams collaborate — across all departmental and functional areas — to create a shared vision, ideas are brought to market faster. Working together also builds consensus across functional areas, departments, and geographies. At the same time, a structured process helps you get more out of your teams and provides value-added solutions and business decisions that are of higher quality and designed in less time than a more traditional approach. 
With a proven process and methodology, carriers can get months of work done in a fraction of the time.

Now's the time for insurers to act, to accelerate the pace of innovation and transform their best ideas into breakthrough innovations.

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.

[i] References: MIT Sloan Management Review Report, 2021
 

[ii] Gartner study

Sponsored by ITL Partner: OZ Digital Consulting

KEY TAKEAWAYS:

--New risks include those stemming from decarbonization, which is leading to new types of cargo, such as electric vehicles and goods powered by potentially highly flammable batteries.

--Hazardous cargos are increasingly transported by larger vessels, which amplify the impact of fires.

--Labeling cargos as dangerous is expensive, so many companies try to circumvent this by labeling fireworks as toys or lithium-ion batteries as computer parts, for example. (Technology increasingly can detect the mislabeling.)

--The Russian invasion of Ukraine has led to a shadow fleet of ships that circumvent sanctions. They tend to be older and to have lower standards for maintenance, creating a hazard.

--The steep decline in shipping rates over the past year could lead more broadly to a decline in budgets for maintenance and risk management.

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Shipping transports around 90% of world trade onboard different vessels, so maritime safety is critical. Improvements have been significant over the past decade, culminating in the sector reporting a record low number of large ships lost over the past year. However, a combination of factors affecting fire risk, continuing and new threats posed by the ripple effects of the Ukraine conflict, decarbonization challenges and economic uncertainty, as well as the rising cost of marine claims, means the sector still has plenty of obstacles to navigate over the next 12 months and beyond, according to the latest Allianz Safety & Shipping Review 2023.

Shipping losses have sunk to the lowest number we have seen in the 12-year history of our annual study, reflecting safety programs, trainings, changes in ship design and regulation. While these results are gratifying, several clouds appear on the horizon. More than a year after Russia’s invasion of Ukraine, the growth of the shadow oil tanker fleet is the latest consequence to challenge shipowners, their crew and insurers. Fire safety and the problem of mis-declaration of hazardous cargo must be fixed if the industry is to benefit from the efficiency of ever-larger vessels. Inflation is pushing up the cost of hull, machinery and cargo claims.

Meanwhile, although the industry’s decarbonization efforts are progressing, this remains by far the sector’s biggest challenge. Economic pressures could put vital investments in companies’ strategies, as well as in other safety initiatives, in jeopardy.

Every year, AGCS analyzes reported shipping losses and casualties (incidents) involving ships of over 100 gross tons. During 2022, 38 total losses of vessels were reported globally, compared with 59 a year earlier. This represents a 65% decline in annual losses over 10 years (from 109 in 2013). Thirty years ago, the global fleet was losing 200-plus vessels a year. 

According to the report, there have been more than 800 total losses over the past decade (807). South China, Indochina, Indonesia and the Philippines maritime region is the global loss hotspot, both over the past year and decade (204 total losses). It accounted for one in five losses in 2022 (10), driven by factors including high levels of trade, congested ports, older fleets and extreme weather. The Arabian Gulf, British Isles and West Mediterranean waters were the second top loss locations (3). Around a quarter of vessels lost in 2022 were cargo (10). Foundered (sunk/submerged) was the main cause of total loss across all vessel types (20), accounting for over 50%. Fire/explosion ranked as the second top cause of loss (8). Vessel collision was third (4).  

While total losses declined over the past year, the number of shipping casualties or incidents reported remained consistent (3,032 in 2022, compared with 3,000 in 2021). The British Isles saw the highest number (679). Machinery damage or failure accounted for close to half of all incidents globally (1,478). There were over 200 fires reported during 2022 (209) – the highest number for a decade, making this the third top cause of incidents globally, up 17% year-on-year. 

See also: Challenges Loom for International Shipping

Hull and cargo fire risks

Several factors are increasing the risk of fires at sea and on land. Decarbonization is leading to new types of cargo being transported on vessels, such as electric vehicles (EVs) and battery-powered goods. Potentially highly flammable lithium-ion (Li-ion) batteries pose a growing risk for container shipping and car carriers. This battery market is expected to grow by over 30% annually over the next decade.

One of the main hazards of Li-ion batteries is "thermal runaway," a rapid self-heating fire that can cause an explosion. The main causes of Li-ion fires are substandard manufacturing or damaged battery cells or devices, over-charging and short-circuiting. Fires in EVs with Li-ion batteries are difficult to extinguish and capable of spontaneously reigniting. Most ships lack the suitable protection, detection and firefighting capabilities to tackle such fires at sea. Attention must focus both on pre-emptive measures and emergency plans to help mitigate this peril such as adequate crew training and access to appropriate firefighting equipment or improving early detection systems. Purpose-built vessels for transporting EVs would be advantageous.

At the same time, hazardous cargos are increasingly transported by larger vessels. Container carrying capacity has doubled in the last 20 years. The 10 largest container operators have more than 400 new vessels on order, and the majority will be larger than the ships they replace. Consequently, the impact of fires is amplified, potentially resulting in more severe losses. Fire is already one of the most frequent causes of total losses across all vessel types, with 64 ships lost in the past five years alone. Meanwhile, AGCS analysis of close to 250,000 marine insurance industry claims shows that fire was also the most expensive cause of loss, accounting for 18% of the value of all claims analyzed.

Industry reporting systems attribute around 25% of serious incidents onboard container ships to mis-declared dangerous goods, such as chemicals, batteries and charcoal, although many believe this number to be higher. Failure to properly declare, document and pack hazardous cargo can contribute to blazes or hamper firefighting efforts. Labeling a cargo as dangerous is more expensive. Therefore, some companies try to circumvent this by labeling fireworks as toys or Li-ion batteries as computer parts, for example. Several large container shipping companies have turned to technology to address this issue, using cargo screening software to detect suspicious bookings and cargo details, while large container operators are imposing penalties. “

Ukraine and oil sanctions: growth of shadow tanker fleet latest safety concern

More than a year after Russia’s invasion of Ukraine, the ripple effects for shipping continue to be felt. The threat of collateral damage on civilian shipping in or around the war risk area remains high and could stem from floating mines for example.

Oil sanctions have also resulted in Russia and its allies creating a shadow tanker fleet to transport and sell its oil. Estimates of its size vary – as many as 600 vessels. The shadow fleet is more likely to be made up of older ships, operating under flags of convenience with lower maintenance standards. The increase in their number is a worrying development, threatening the world fleet and the environment. A major incident can cause loss of life as well as uninsured damage or pollution. In May 2023, an uninsured, unladen 1997-built tanker, Pablo, exploded in Southeast Asia, reportedly killing crew. 

Decarbonization: the sector’s biggest challenge

Shipping contributes around 3% of global greenhouse gas (GHG) emissions annually and is committed to tough targets to cut these. The pace and progress of its efforts are influenced by technological developments, adoption of energy-efficient fuels, regulation and market forces. Shipping companies and cargo operators are already switching to vessels powered by liquefied natural gas and are using and testing alternative fuels such as biofuels, methanol, ammonia and hydrogen, as well as solar and battery-powered all-electric vessels, wind-assisted propulsion systems, more efficient propellers and bulbous bow designs.

Shifting away from carbon-based shipping will involve a demanding period of change and significant investment of about $1.4 trillion. A mix of fuels is likely to exist for the next five to 10 years, posing challenges for shipowners, operators and ports. From a loss perspective, the industry has not yet seen any major claims from alternative technologies or fuels. However, as these are introduced at scale, more issues may surface.

Economic pressures back on the radar

Following the post-pandemic boom in container shipping, economic and geopolitical uncertainty and falling demand have hit freight rates. The cost of shipping a container between Asia and the U.S. or Europe in April 2023 was more than 80% lower than a year earlier. The question is whether this decline, together with the prospect of an economic downturn, will affect maintenance and risk management budgets. Prior downturns have affected these, leading to losses and an uptick in machinery damage incidents. 

See also: Shipping Industry Safety Keeps Improving

Factors affecting the cost of claims

Increased commodity prices, higher labor costs and supply chain disruption have had a significant impact on marine insurance claims, in particular hull and machinery. The price of steel, a key cost driver in hull claims, increased sharply post-pandemic, as did prices for spare parts. A typical propeller or machinery claim now costs around two times more than pre-pandemic. Shortages and delays in obtaining replacement parts have also led to longer stays in repair yards, while labor shortages have also increased costs. This comes on top of the increased expense of dealing with large vessels, which face higher costs for repairs, salvage and towing. The post-pandemic boom in container shipping has also been affected. Cargo values have risen with the increase in the price of goods and raw materials.

KEY TAKEAWAYS:

--Insurance is expanding into so many new areas, which represent opportunities to bring in diverse talent. We shouldn't just focus on making "core" parts of insurance more diverse.

--When we think about the user experience, we shouldn't just focus on serving our diverse customers. We must serve our diverse employees, too.

--Technology can help, but only if it is stewarded properly. There needs to be a diverse group of individuals at the helm. You do not know bias you cannot see.

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According to McKinsey, at the entry level of the pipeline, insurance is more diverse than the average of other industries. We’ve done great work, but the diversity across the industry is not keeping pace with the diversity of the customer base. In fact, diversity decreases as the level increases, meaning the most senior levels within the insurance industry still lack diversity.

I recently spoke at Duck Creek Technologies’ Formation conference and spent an incredible amount of time with customers, partners and analysts discussing how we can build and support the diverse insurance industry we crave. We crave it because we know it serves all people with speed, intelligence and transparency and delivers better business outcomes.

Here are a handful of ways the insurance industry can be diverse by design — and build a future where people and technology work hand in hand to deliver humanized experiences that reflect the individuals whom insurance serves. 

Look beyond “core” insurance functions for diversification.

The insurance ecosystem is growing in terms of breadth of offerings and depth of functionality. The insurance value chain is extending across new functions. Insurance buyers are expanding across more generations and backgrounds than ever. These changes open doors for talent to positively influence our industry at different stages of the insurance lifecycle. 

I started my career as an attorney, focused on insurance, regulation and compliance. This led me to become a subject matter expert working alongside software development teams that build insurance products. While this is a somewhat unconventional path, it has proven viable in insurance technology, and non-traditional paths are becoming more of a norm because they dissolve the traditional barriers to entry. And the insurance ecosystem is growing, with contributors from cloud technology to payments processors, mobile app development and telematics having a more significant influence on insurance. Mine is the type of path others can — and should — follow.

Cybersecurity is another opportunity for the insurance industry to fill talent needs and benefit from diverse perspectives from women or underrepresented groups in STEM. Cybersecurity in 2023 isn’t just about executing risk mitigation functions. It is about educating, communicating, collaborating, networking and strategizing — all functions that lend themselves well to talent diversification. With IT and tech talent shortages looming, there is opportunity aplenty.

See also: How Diversity Can Stoke Innovation

Focus on the user experiences of workers within insurance, too.

Two common mistakes occur when people hear the words "user experience": 1) People default to thinking only about the end user of a product/solution, and 2) people conflate user experience with the customer experience and use them interchangeably. Suppose we are to promote diversity within the insurance industry, from product ideation to fulfilling a policy or claim. In that case, there are a broader set of user experiences to consider across the entire ecosystem. These include building, servicing, marketing and implementing solutions, and many more experiences that may need to be considered.

Here's a concrete example. We have a range of people using our solutions, including the purchasing customers, the configurators (who implement and personalize suites) and the varying individuals who work at insurance companies. There is no single user experience. Every interaction along the way is diverse, so that diversity must be reflected in how we design our technology experiences. All groups of individuals think differently, have various levels of technological acumen and have varying thought patterns and analytical processes. Building in support of these experiences starts with diversification of thought.

To ensure that insurance is an appealing and rewarding profession that diverse groups want to enter, we must make it accessible. Building the right experiences along every touchpoint in the insurance value chain is a crucial step in this evolution. We must know – and represent – the personas for which we are building.

Data shows that customers demand empathy and human experiences.

Insureds currently run the risk of dropping the ball. Yes, insurers are coming out of challenging times, but here are two numbers that should be improved AND, more importantly, at present, that represent missed opportunities for insurers — in terms of dollars and reputation.

According to our survey of over 2,000 insureds around the globe, 45%, on average, didn’t hear from their insurer over the course of a year, which is up from 34% in 2022. Furthermore, after purchasing coverage, when interacting with their insurance provider, 44% said they preferred to speak to a human, an increase of nine percentage points. So, we both demand more touchpoints (digital and physical) and demand human interaction. As much as technology is critical to insurance functionality, service and profitability, insurance is a people business.

We must diversify to better represent the people we serve. Diversity gives insurers, agents and other key insurance functions an advantage to flex empathetic muscles. Insureds who can see themselves represented within an insurer, who feel their insurer knows them or who can have their varying emotional needs met during times of despair will have a stronger brand affinity. There is an opportunity at the insurance industry's doorstep to win consumer hearts, minds and dollars.

Use technology to your advantage, but steward its use correctly.

Technology is an irreplaceable cog in advancing the insurance industry. It is our answer to supporting, empowering and elevating talent. Technology can simplify the complexity of insurance by finding new ways to automate, apply visualization and maximize reuse. Technology — and regulatory and inflation headwinds — will bring about rethinking insurance processes. As found in the survey referenced earlier, there will be an increased reliance on technology AND people in our industry’s future.

Emerging technologies such as AI, ML, automation and more will assist the world (and the world of insurance). But with the use of advanced technology comes a responsibility to study it, understand it and apply it in a way that is beneficial for all. And the only way to recognize this is to have a diverse group of individuals at the helm. You do not know bias you cannot see. You need to know personas to understand how individuals engage with or react to technology.

Our industry cannot afford to miss this generational chance to capitalize on assistive technologies. We must understand, represent and build insurance for the people who need it, how they want it and when they want it. More than 140 million millennials and Gen Zers populate the U.S., with approximately half the country now under 40 years old. We need to steward technology responsibly.

See also: Industry Still Lags on Diversity

Bonus: Rising tides lift all boats, so look intrinsically to do your part.

I don’t recall from whom or where this quote originated, but it’s worth sharing nonetheless: Words without actions are meaningless, but actions without words are confusing. Over the past few years, the insurance industry has been right to engage in dialogue around diversity – from diversifying products to its workforce and more. The stage is set for action. 

One of the best pieces of advice I can give to any organization that affects the insurance ecosystem is to make sure you do what you can to move the needle. Here are a few quick examples to inspire action on diversity:

• Establish employee resource groups (ERGs) for women and diverse populations, and think and act more globally.
• Where appropriate, leverage councils (such as DE&I or employee experience) as agenda setters.
• Host in-person or virtual events where connection, culture and community are the focal point.
• Identify a data-based hiring strategy that seeks to increase talent pools with diverse slates of candidates.

At the end of the day, we must try to break down barriers and show a commitment to embracing the insurance industry we desire. Accountability, innovation and growth will follow.

To check in on the prospects for the Internet of Things, Editor-in-Chief Paul Carroll chatted with Dave Wechsler, the insurtech lead investor with the $2 billion venture fund operated by OMERS, the pension fund of Ontario. Dave, an old friend of ITL’s, has a long history with the IoT and telematics, including as the vice president for growth initiatives at Hippo and as the leader of IoT business initiatives at Comcast.

ITL:

To set the stage, how are you thinking in general about IoT these days and about what it can do for insurance?

Dave Wechsler:

To me, it's about collecting data and using the data in real time to prevent loss. You’re driving too fast. You're not locking your door. You've got a smoke alarm battery that's dead. We gather real-time data and then coach around it, explaining to the customer why this is important. Ultimately, we underwrite against the data. Good behavior should be rewarded, and bad behavior should be penalized.

I don't necessarily think the consumer should be burdened and have to buy a lot of devices. I do think the insurer can drive a lot of technology into the business, home or auto to improve results. The economics don't really work today, but they’ll keep getting better and better.

I have a history here. I built one of the first wireless thermostats in 2000 and had thousands of Nest-like thermostats across the U.S. and Canada. They were $5,000 apiece. Now, you can go buy one that's far superior for $59. As IoT technology gets adopted, the price points will drop, and it will be very valuable for insurers.

ITL:

I'm interested in the economic argument, and you’re actually in the middle of my introduction to it. A few years ago, I had a long conversation with Notion about its water leak sensors – and you were part of the team that ran the acquisition of Notion while you were at Comcast. If you could riff a bit on the economics, that’d be great.

Wechsler:

If you could be assured that dropping one water sensor puck below your washing machine would catch all of the water leaks in your home, you’d remove the non-CAT water risk, and the economics would work. But, inevitably, that’s not how it goes, right? You get the five-puck pack from your insurer, you drop the five pucks and the place that you didn’t drop the puck is inevitably where you have a leak. If you have a whole home water shutoff, you’re going to catch more problems, but that runs you maybe $700 or $800 installed, and you’ll have a harder time justifying the expense.

Unless the customer is sticky. If the customer stays with you for 10 years, maybe because of the leak detection, then there is a very good return. But you have to balance those people against the guy who only stayed for a year or two, and you spent $800 on him.

I would argue probably that none of the products work today as an aftermarket standalone purchase on a pure dollar-to-dollar basis. So, how do you make the IoT work broadly? You probably need a new business model. Why don't we provide water loss avoidance as a service?

The carrier wouldn’t have to worry about how many devices are in the home or what they are. We'll just run a book for you, and you won't have water losses. We'll charge you per house per year. If we decide to have 100 technicians outside a house every day, that’s our business. Same if we want to gamble on a house, maybe because it’s new construction, and not put sensors in there. That could be a really innovative business model.

ITL:

We've talked a lot about water. Are there other areas that you see as having big potential?

Wechsler:

Sensors for fire are getting less expensive and may get to the point where there’s a crossover, where you can make an economic argument for installing after-market products. But I'm not sure that that is the right model because there's still a lot of user risk. I still think you probably need a new business model to get big scale going.

Lots of IoT companies see the potential. They just don’t have enough capital.

ITL:

How quickly do you think we could get to scale?

Wechsler:

I don't want to make this sound futuristic, because the technology all works today. The price point is still just a little high, and there are regulatory issues. For instance, privacy constraints may mean the carrier can only test a sensor once a year, for underwriting, and not monitor it in real time.

ITL:

I think real time is the key. If you send me a report about my driving and coach me that I did something dangerous two weeks earlier, that’s not a lot of help. But if you warn me that I’m about to cross black ice, because someone else swerved on it a minute earlier, that makes all the difference in the world.

Wechsler:

I can't wait for continuous underwriting. I can't wait for real-time data.

And there doesn’t have to be any crazy engineering any more. Sensors may get fooled initially. A whole home water shutoff valve might get nervous about the rate of flow because someone flushes the toilet after they’ve turned the shower on, but sensors figure things out, and monitoring water flow, humidity, wiring and heat is pretty straightforward. 

ITL:

Have you ever heard the name Stu Ungar? He was one of the best poker players of all time but famously careless with money. He paid his water bill in Las Vegas with cash—when he had it—and a friend finally noticed that he seemed to be carrying quite a wad. He asked Ungar what his water bill was each month. “About $3,000,” Ungar said. The friend said, “Stu, you have a leak. A big leak.”

Talk about needing a leak sensor.

Wechsler:

And the issue wasn’t just his water bill. The leak was probably doing structural damage to the house, too.

ITL:

One last thing, while I have you: Are there any other trends that are getting you excited?

Wechsler:

There are lots of new entrants in commercial auto, and they’re all starting with cameras in the cab, which will end a lot of the “he said, she said” litigation related to accidents and make the whole process smoother.

More broadly, think back to when telematics first came out, 20-plus years ago. The concept of consumers engaging with insurers was crazy. No way. Nobody’s ever going to do it. Well, a year and a half ago, I was in Florida with my dad, who was 79 at the time, and he said, “Hey, man, I just got this amazing thing from Geico. It saved me 400 bucks.” I asked what it was. “I downloaded an app, and it scores my driving,” he said. He’s a really safe driver, so he saved a lot of money, and now he’s all in on using the app.

Eventually, this flips from a reward to a penalty, right? Safe drivers don’t just pay less; unsafe drivers pay more, as they should. If you’re worried about technology penalizing you, then you’re probably admitting you have risk factors.

This, to me, is what technology is about—how risk is underwritten.

ITL:

Thanks, Dave. I’m always smarter after we talk.

KEY TAKEAWAYS:

--The use of virtual reality could transform claims, customer service, health and wellness, fraud detection and digital identity verification. 

--Related technologies could allow for dynamic pricing, improve cybersecurity, risk assessment and predictive modeling and create revenue streams for insuring assets and activities within the metaverse.

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In recent years, the concept of the metaverse has gained significant attention as a potential game-changer in the way we interact with digital content and each other. Metaverse technology is being hailed as the next frontier in the evolution of the internet, with its potential applications ranging from gaming and entertainment to education, e-commerce and even insurance. In this blog post, we will explore the concept of the metaverse, its technology and its potential future in the insurance industry.

What Is Metaverse?

Metaverse refers to a virtual space where people can interact with each other and digital content in a shared immersive environment. It is a term coined by sci-fi author Neal Stephenson in his 1992 novel "Snow Crash." The metaverse is a vision of a fully immersive virtual world where users can engage with digital content in real time and in a highly interactive manner.

What Is Metaverse Technology?

Metaverse technology is a combination of various digital technologies such as virtual reality, augmented reality, blockchain and artificial intelligence. Virtual reality technology enables users to experience a simulated environment that is immersive and interactive. Augmented reality enables users to enhance the real world with digital content. Blockchain provides a decentralized and secure platform for transactions and interactions within the metaverse. Artificial intelligence is used to create intelligent virtual agents and chatbots that can interact with users in a natural language.

Future of Metaverse in the Insurance Industry

The insurance industry could potentially benefit from metaverse technology. The metaverse could be used to create virtual insurance offices, where customers can interact with agents in a virtual environment. This could significantly reduce the need for physical offices and reduce costs. The metaverse could also be used to create immersive training simulations for insurance agents, where they can learn how to handle different situations in a virtual environment.

The metaverse could also be used to enhance the claims process. For example, a customer who has been involved in an accident could use augmented reality to capture images of the accident scene and upload them to a virtual claims office. The insurance company could then use blockchain to securely store the data and process the claim. This could significantly reduce the time and cost involved in claims.

Challenges

While the potential of the metaverse is significant, there are also several challenges that need to be addressed. One of the biggest is interoperability. There are multiple metaverse platforms being developed, and they do not necessarily work with each other. This could lead to fragmentation and limit adoption.

Another challenge is privacy and security. The metaverse involves the collection and processing of large amounts of personal data. This data needs to be protected from unauthorized access and use.

See also: Time to Start Issuing Metaverse Policies?

Here Are 10 ways the Metaverse Will Revolutionize Insurance

1. Virtual Claims Processing: The metaverse will enable insurance companies to process claims more efficiently by using virtual reality tools to inspect damages and assess the value of the claim. This will save time and reduce costs.
2. Risk Assessment: Insurance companies can use data collected in the metaverse to assess risks more accurately. This will enable them to offer more personalized insurance policies based on an individual's lifestyle and activities.
3. Improved Customer Service: The metaverse will enable insurance companies to provide personalized customer service through virtual assistants and chatbots. This will enhance the customer experience and reduce response times.
4. Fraud Detection: The metaverse can help insurance companies detect fraud by using virtual reality tools to verify claims and investigate suspicious activity.
5. Dynamic Pricing: Insurance companies can use data collected in the metaverse to adjust pricing in real time based on a person's behavior and risk profile.
6. Cybersecurity: The metaverse can be used to test and develop cybersecurity protocols to protect insurance companies from cyber attacks.
7. Health and Wellness: Insurance companies can use data collected in the metaverse to offer personalized health and wellness programs to their customers.
8. Predictive Modeling: The metaverse can be used to build predictive models that can help insurance companies anticipate events and make more informed decisions.
9. Digital Identity Verification: The metaverse can be used to verify an individual's identity through virtual reality tools, making it more secure than traditional methods.
10. New Revenue Streams: The metaverse will enable insurance companies to create revenue streams by offering virtual insurance products and services, such as virtual property insurance for digital assets and virtual travel insurance for online gaming.

Conclusion

The metaverse is a fascinating concept that has the potential to revolutionize the way we interact with digital content and each other. Metaverse technology is still in its early stages, but it is rapidly evolving and could have significant implications for various industries, including insurance. While there are challenges that need to be addressed, the future of the metaverse looks promising, and it will be interesting to see how it evolves.

Let's make some new friends....

This month, Wefox did a new round of financing at a $4.5 billion valuation. This valuation makes no sense!

At current market prices, you can buy pretty interesting insurance targets with this amount. Moreover, I doubt any investor would accept exchanging stocks in an equity-only merger with Wefox.

This nine-year-old startup, with about $1.4 billion in cumulative funding, is:

• a platform used by brokers and other intermediaries, so it should earn usage fees;
• an intermediary, so it should earn commissions on the premiums intermediated;
• an insurer, so it should make profits from the risk transfer (both underwiring profits and investment income).

The insurance arm (Wefox Insurance AG) underwrote EUR196 million in 2022 -- with a bloody 95% gross loss ratio -- and generated $30 million of underwriting losses. Premiums intermediated on their platform are at EUR2 billion.

Do you remember my doubt four years ago about whether we were dealing with unicorns in insurtech or with ponies in Halloween costumes? Or, my rant about Root's multibillion--dollar valuation?

Here we are again!

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Talking about valuations: I did my first exit a few weeks ago.

As many of you know, Andrea Battista and I promoted a special purpose acquisition company in 2018, and we acquired Net Insurance with the money raised. The combined entity did pretty well. Insurtech solutions have been used to execute the vision as planned. Long story short, Poste Italiane made a public offer on the company in September, and in the past weeks they completed the acquisition.

There was a 120% return for SPAC investors in four years! And the acquisition price of about EUR175 million is at a P/E multiple that makes sense for a good insurance company.

Andrea's unwavering dedication, strategic vision and profound expertise have guided Net Insurance's successful journey. I desire to show my gratitude for the opportunity he gave me to contribute to this adventure. This has been an unforgettable experience, a constant intellectual challenge, an honor and an extraordinary opportunity to learn from exceptional and experienced professionals, such as the board chair, Luisa Todini. 

See also: 7 Key Trends in 2023

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Let's stay on my personal experience over the last month. On May 8 in Johannesburg, I had the privilege to present at Vitality Distribution Network Annual Summit to executives from all their global partners. It was a great opportunity to discuss the evolution of the shared value approach and to hear directly the perspective of tens of different insurers from Japan, Asia, Europe, North America and South America.

After moments like this, you really understand the privilege of talking directly and spending hours with players from different markets, rather than relying only on reading articles or press releases coming from these markets. I'm blessed for these opportunities, even if to fit them into my agenda I have to sleep on planes and take showers in the lounges of airports some days each week.

At the event, I had the opportunity to enjoy the speech of Andrew Sykes.

First, he is one of the best speakers I've ever seen on an insurance stage. He has become my benchmark: I aspire to become as good as him (even with my heavy Italian accent) at some point in my journey.

Second, his speech was extremely thought-provoking. His presentation was about trust. The basics of trust are:

1. underpromise
2. overdeliver
3. document everything

The journey of the business combination between our SPAC and Net Insurance did precisely this! We declared up-front what we would do and how we wanted to use data and technology to do it. The team did a fantastic job overdelivering:

• premiums at EUR187 million (from EUR69 million at the end of 2018)
• combined operating ratio at 87%

Here, I'm documenting.

These steps are the opposite of what the first generation of insurtech startups did. Basically, they overpromised, underdelivered and periodically twisted the narrative (or documented exotic key performance indicators).

In the first edition of this newsletter -- 15 months ago -- I asked if Lemonade fans felt betrayed about overpromising and underdelivering. In the fall of 2018, we heard, "Europe, forget everything you know about insurance!" Hundreds of insurtech cheerleaders clapped their hands and celebrated the inevitable disruption of the European markets.

After four years, Lemonade has written EUR4.3 million in premiums in Europe. This is not a typo. Their current European book of business is the same size as the portfolio of that old insurance agency at the corner of your street.

The other U.S. full-stack insurtech carriers have not been more trustworthy:

• Root — how it started vs how it's going
• Hippo — how it started vs how it's going

However, now I have a new friend to play with: Wefox.

I want to sincerely congratulate your leadership team for the successful financing rounds, even in this market contingency. However, you are repeating a playbook that lacks any of the basics of trust.

In September 2022, at an event in Zurich, you presented this chart, claiming to have a "loss ratio more than 10 percentage points better than the market average." But you added an exotically adjusted benchmark, saying you were calculating based "ON THE BACK BOOK." 

See also: A Look Ahead for Insurtechs in 2023

These are the actual results of your auto insurance business ("Solvency & Financial Condition Report 2022"):

Motor vehicle liability

• premiums: EUR44 million (EUR24 million in '21)
• gross loss ratio: 102% (94% in '21)
• Net underwriting result: loss of EUR7.7 million (loss of EUR12 million in '21)

Other motor insurance

• premiums: EUR18 million (EUR15 million in '21)
• gross loss ratio: 172% (172% in '21)
• Net underwriting result: loss of EUR5.2 million (loss of EUR10.1million in '21)

With such KPIs, it would be more serious and trustable to say something like, "our loss ratio is terrible, and we are working to improve it." Instead, your statements after the financing round go even beyond overpromising.  

I hope the new generation of insurtechs will not follow this playbook, too. I hope they will promise less and deliver more... so they can proudly document everything. I hope the next generation of insurtech innovators will be trustworthy leaders who can strengthen our sector!

KEY TAKEAWAYS:

--Premium payments are people's most common interaction with their insurance company, so great care should be paid to mobile design and communication.

--Adoption of digital payments should be encouraged, and QR codes can be a great, convenient tool.

--Digital wallets are spreading fast, and the industry should start preparing now.

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In my over 25 years of experience in the insurance payments space, I have rarely seen change occur so rapidly.

In a June 2020 McKinsey survey, 73% of finance industry executives said they saw the pandemic as an opportunity for growth, but only 21% felt they had the means to pursue that opportunity. Three years later, pressure from the pandemic, coupled with customers McKinsey describes as “expect[ing] nothing less than…ease and convenience” due to digitalization in other industries, have pushed the insurance industry closer to an innovation breaking point. In their State of Digital Insurance, 2021 report, Forrester described the pandemic as having “turbocharged and changed the drivers of digital transformation in insurance.”

Driven by these industry trends, a valuable locus for this energy is continual innovation around customers’ mobile payments experience. According to a survey conducted in January 2021 by InvoiceCloud, 41% of millennials with insurance purchased their policy using their mobile device. Research from AARP, published this past January, demonstrates that 86% of seniors own smartphones, making them a potentially viable market for the ease and reliability of mobile payments, as well. And, as the oldest members of tech-native Gen Z begin driving, graduate from their parents’ life insurance policies and even purchase homes, the cohort looking for mobile insurance bill payment ease shows the potential to grow.

I expect streamlined mobile payments to be at the forefront of meeting those expectations. While it’s infrequent that an individual policyholder needs to call on their insurance company for a major payout, maintaining the policy itself is a monthly affair. This means that premium payments are many policyholders’ most common touchpoint with their insurance company. What’s more, InvoiceCloud’s October 2022 State of Online Payments Report indicated that mobile payment channels have overtaken online portals as the most used and preferred method of bill payments, with 67% of survey respondents reporting that they used a mobile device to pay a bill in the preceding 12-month period, as compared with only 63% of respondents reporting that they used an online portal to pay a bill during that same period. 

Here are some steps that I encourage your organization to take to offer policyholders across all demographics a more effective mobile payment experience. 

Mobile-Friendly Design and Communication

Despite the ubiquity of mobile devices and the rising popularity of mobile payments, in my view too many insurance organizations still fail to design their user interfaces and experiences with a mobile-first mindset. Keeping consumers satisfied requires catering to the payment methods that suit them best—and, for an increasing number of consumers, that means leveraging the digital innovation boom to streamline mobile payments. Whether consumers are managing payments in a dedicated app or via a mobile browser, creating an accessible experience is important.

Mobile bill payers can also benefit from design choices like larger text, more succinct language and other elements that make information easier to parse when presented on a smaller screen. Taking notes from a recent study conducted by the Journal of Medical Internet Research focused on design choices that facilitated better experiences for people accessing healthcare information via mobile device, the insurance industry could learn from the benefits of substituting graphics for words where possible, increasing download speeds and including a consistently accessible search function. Insurance organizations should also look to ensure that their mobile offerings fit the dimensions of a mobile screen. While computer monitors are wide, phone screens are tall, so interfaces that center important information in the middle of the screen can help reduce the amount of scrolling customers have to do to access options. While this may seem like a small consideration, it can help to reduce friction for those making mobile payments. 

The high number of mobile device users also presents a valuable opportunity for insurance companies to streamline their payments experience as a whole. Organizations can send customer communications via text, optimized for the mobile platform. Alerting customers in advance of when their payments are due and including information about, and links to, payment options can help organizations reduce delinquencies, simply by making it easier to pay a bill right then and there. InvoiceCloud’s September 2020 State of Online Payments Report showed that of the 60% of respondents who said they’d missed a bill payment, half of those respondents believed a text message reminder would’ve helped them remember to pay on time.

Collecting customer responses about what they are looking for from their payments experience is critical when deciding how to direct innovation. Insurance organizations can survey users to determine which mobile features they feel would make bill payment easier. By following these trends and responding with continued innovation, an effective payments partner will be in a better position to give organizations tools that meet customers’ most current needs.  

See also: The B2B Digital Payment Opportunity

Encouraging Digital Adoption and Augmenting the In-Person Experience with QR Codes

QR codes are a prime example of mobile-native technology and are continuing to grow in usage, according to McKinsey. As reported by eMarketer, a total of 75.8 million people scanned a QR code in the U.S. in 2021, and by 2025 they predict that 99.5 million people in the U.S. will use QR codes. This trend opens a valuable opportunity for the insurance industry. Insurance organizations that still have a high number of customers receiving paper bills should consider taking advantage of the direct route to the consumer by including a QR code on mailings. Upon scanning with a mobile device, consumers can then be prompted to follow instructions to enroll in paperless billing, meaning companies may be able to use this touchpoint to save funds by reducing paper bills. QR codes aside, encouraging paperless billing has the potential to bring an organization substantial savings—in one case, an InvoiceCloud customer saved tens of thousands of dollars on paper printing costs by driving paperless billing enrollment.

Encouraging automatic payment (AutoPay) is another important avenue for insurance organizations to explore. As automatic payments become increasingly popular for the convenience they offer customers (InvoiceCloud’s October 2022 State of Online Payments showed a 5% increase in respondents reporting that they were enrolled in AutoPay as compared with respondents surveyed in 2021), many customers will seek an expedited way to make the switch. Those customers looking for an insurance partner they can trust now and into the future may also be more attracted to an insurer that offers modern payment options like AutoPay and continually expands and improves those offerings.

While there will undoubtedly be some customers who will prefer to maintain in-person payments, particularly as pandemic-era restrictions and concerns continue to ease, there are still ways an insurance organization can incorporate mobile offerings to improve the overall customer experience. For example, insurance companies and agents could post QR codes throughout their brick-and-mortar offices to help customers more easily navigate the payment process—essentially putting instructions in the palm of their hand. Using such methods to help drive digital adoption can also help save time and resources for organizations’ employees, as the amount of time spent manually facilitating each payment can be reduced. 

In balancing this innovative, tech-centric approach, insurance organizations can also benefit from implementing security measures such as hard-to-replicate design choices recommended by Forrester, while continuing to innovate with solutions that marry security and ease.  

Streamlined Digital Wallets

JD Power’s Banking and Payments Intelligence Report found that more and more customers are using digital wallets facilitated by services such as Apple Pay, Google Pay and PayPal. McKinsey predicts that more than two-thirds of Americans will have a digital wallet within the next two years. As the country becomes more accustomed to this technology, people are likely to begin using their digital wallets for increasingly routine and important payments, such as insurance premiums. 

Once customers connect their payment information via a mobile wallet, a reminder email or text can be immediately transformed into an on-time or early payment with minimal friction. Customers can also use digital wallets to load and toggle between multiple payment methods, which McKinsey found was a preferred method of 40% of digital wallet users. This helps lower the barrier to payment that customers may face when attempting to shift between accounts to access funds or use different payment types for different policies.

See also: The Evolution of Frictionless Payments

It Pays to Understand What Customers Want Out of Mobile Payments

As I see it, providing a positive payment experience via the most common channel, mobile, is more important than ever. In 2020, 41% of insurance policyholders surveyed by PwC said they were “likely or more likely” to switch carriers, owing specifically to their current carrier’s lacking digital capabilities. A 2022 PwC study found that one in three customers will walk away from a company after just one negative experience. 

The rapid innovation of the market has made it easier for insurance customers to compare, shop for and switch carriers. At the same time, that innovation offers an opportunity: McKinsey found that insurance organizations leading the industry in digital innovation increased revenue at five times the rate of other companies.

Ultimately, insurance is a business of relationships, built on a foundation of trust and reliability. Creating ease for customers in every interaction, particularly at the most common touchpoint of payments, is an important method of building loyalty and driving business. Insurance organizations looking to retain their current customers and attract new ones should explore how improving their mobile payments experience can help them achieve both.

While you've been hit in the face for months now with articles about the importance of generative AI models like ChatGPT, and while they aren't always that helpful — "Generative AI is really important"; "Actually, it's really, really important"; "No, it's really, really, really important" — I'm going to risk another one. 

I won't get into the broad significance, which will play out over many years and which others are speculating on at great length. But I do think it's worth noting some ways that financial services firms are already taking advantage of the leap forward in AI.

Venture capital firm Andreessen Horowitz laid out the most provocative set of examples I've yet seen. The article is aimed broadly at financial services but, with just a bit of thinking, can be applied to insurance, specifically.

The article summarizes the opportunities by saying:

"We believe that the financial services sector is poised to use generative AI for five goals: personalized consumer experiences, cost-efficient operations, better compliance, improved risk management and dynamic forecasting and reporting." 

The article describes ways that conversational AI could help provide advice on credit, wealth management and taxes — which require much the same sort of counseling that insurance agents provide and that can now be enhanced. For starters, a large language model (LLM) "trained on a company’s customer chats and some additional product specification data should be able to instantly answer all questions about the company’s products," the article says

It argues that the world should head toward continuous underwriting (specifically for mortgages, but the same thinking could apply for insurance policies). The holdups are that data is siloed, that emotions complicate many financial decisions and that financial services are highly regulated. But Andreessen Horowitz says, "Generative AI will make the labor-intensive functions of pulling data from multiple locations, and understanding unstructured personalized situations and unstructured compliance laws, 1000x more efficient."

For instance, the article notes that, "at every bank [or insurance carrier], thousands of customer service agents must be painstakingly trained on the bank’s products and related compliance requirements to be able to answer customer questions. Now imagine a new customer service representative starts, and they have the benefit of having access to an LLM that’s been trained on the last 10 years of customer service calls across all departments of the bank. The rep could use the model to quickly generate the correct answer to any question and help them speak more intelligently about a wider range of products while simultaneously reducing the amount of time needed to train them."

Or, "loan officers [read, underwriters] currently pull data from nearly a dozen different systems to generate a loan file. A generative AI model could be trained on data from all of these systems, so that a loan officer could simply provide a customer name and the loan file would be instantly generated for them. A loan officer would likely still be required to ensure 100% accuracy, but their data-gathering process would be much more efficient and accurate."

Combatting fraud is another near-term opportunity. The article says, "Today, the billions of dollars currently spent on compliance is only 3% effective in stopping criminal money laundering. Compliance software is built on mostly 'hard-coded' rules. For instance, anti-money laundering systems enable compliance officers to run rules like 'flag any transactions over $10K' or scan for other predefined suspicious activity.... Now imagine a model trained on the last 10 years of Suspicious Activity Reports (SARs). Without needing to tell the model specifically what a launderer is, AI could be used to detect new patterns in the reports and create its own definitions of what constitutes a money launderer."

There's more, too, in the article, on potential operational efficiencies and on how the AI can draw on unstructured data such as news reports to automatically generate important insights on risks. So, I recommend reading and pondering the whole piece. 

I also recommend thinking hard about the long-term implications. The rule of thumb about breakthrough technologies is that they're overestimated in the short term but underestimated in the long term.

But, for now, I want to be sure we don't miss the potential short-term wins.

As I wrote back in February, I think the efforts by ChatGPT and other generative AIs in the near term should be viewed as rough drafts, not finished products. (Here is a remarkable story from last week, showing that not everyone has gotten the memo about how generative AIs can "hallucinate." A lawyer had ChatGPT do some research for him and submitted it as part of a brief, only to find that the AI had invented numerous court cases and citations. The judge is not amused.)

But I also think those rough drafts can be extremely valuable — and they'll improve remarkably fast.

In general, even a genuine technology breakthrough faces a chicken-and-egg problem initially and takes time to shake the world. The internet traces back to the 1960s but needed three decades to develop enough reach to change commerce. As revolutionary as the iPhone launch was in 2007, apps needed to be developed and telecom carriers needed to adapt before we all became addicted to our phones.

But AI, having incubated since the 1950s, is just software. Its latest, breakthrough form doesn't require you to wait for a network to develop or for thousands of companies to develop apps.

It's there, waiting to be exploited, both in the long run and even in the short run.

Cheers,

Paul

Synopsis/Summary: This executive briefing looks at the relationship between overall inflation and insurance replacement costs in six of the world’s largest insurance markets: the U.S., Canada, the U.K., the E.U., Japan and Korea.

Specifically, the briefing’s analysis focuses on P&C/non-life replacement costs for commercial and personal property and personal and commercial vehicles including construction materials, auto and auto parts and labor. The results provide correlation estimates across and within each country, organized first around property and then vehicles, identifying statistically significant and non-significant coefficients that confirm and question received expectations.

The briefing’s analysis builds on the authors’ research at the Insurance Information Institute on overall inflation and P&C replacement costs in the U.S. Applications include business strategy, planning, and maximizing underwriting performance and solvency during times of economic stress such as the current high inflation environment.

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Key insights into the relationship between inflation and insurance replacement costs as basis for P&C / Non-Life capital allocation line performance, and solvency

This executive briefing looks at the relationship between inflation and P&C/Non-Life insurance lines in the United States, Canada, the United Kingdom, the European Union, Japan and Korea. It aims to provide the reader preliminary insight into the quantitative relationship between overall inflation and insurance replacement costs within and across the covered countries. We define insurance replacement costs, as opposed to a country’s overall inflation, as the average increase in prices for specific goods and services paid by a P&C/Non-Life towards repair and rebuild costs for total losses paid.

Correlation patterns for changes in residential and commercial property replacement costs identified three distinct groups: the U.S., Canada and the E.U. were correlated to one another with different degrees of significance, while Japan and Korea showed no significant correlation to one another or any of the other countries. Personal and commercial auto correlation patterns also identified three distinct groups overlapping with those of property, though Korea showed some significant correlation with the U.K. and the E.U.

Quantifying the relationship between inflation and insurance replacement costs across national and regional P&C/Non-Life insurance markets can provide an additional framework to maximize insurance capital allocation, including reinsurance capacity, by seeking uncorrelated underlying economic fundamentals and insurance performance metrics. Further, separating correlated and uncorrelated line-specific insurance replacement costs drivers can increase the ability to forecast line-specific performance metrics and provide added guidance to industry stakeholders, including regulators, seeking to maximize liquidity and solvency during times of economic stress such as the high inflation that characterized the COVID-19 pandemic and its aftermath.

In a very preliminary manner, the correlation analysis reported in this briefing indicate that it may be possible to minimize the impact of historically high increases in P&C/Non-Life replacement costs by diversifying exposure to property and auto lines by selecting different insurance markets based on the extent of correlation between overall inflation and replacement costs across and within countries. For example, pending further research and validation, grouping the six countries we reviewed into three cohorts may reduce the drag of historically high replacement costs on individual lines’ performance metrics; these cohorts being the U.S., Canada, the U.K. and the E.U.; a stand-alone Korea; and a stand-alone Japan. 

In the U.S., the difference between increases in overall CPI versus changes in insurance replacement costs has proven to be significant. Between 2019 and 2022, increases in P&C replacement costs averaged twice that of the overall CPI. Given this spread, insurance replacement costs baskets are becoming a more precise and timely input into forward looking loss estimates and the impact of inflation on line-specific performance metrics.  

This briefing is divided into four sections. First, it introduces the distinction between overall inflation and insurance replacement cost and its relevance to our understanding of how macroeconomic fundamentals drive insurance performance. 

It then seeks to identify and quantify correlations between overall inflation and replacement costs within and across the sample countries, for property and then autos. The analysis of property and auto replacement costs, the core of this briefing, provide descriptive year-over-year and year-over-five-year inflation estimates, and correlation analysis of the relationship between price changes for each line within and across the covered countries. The last section describes the methodology including additional inflation and correlation graphs and tables.

This briefing’s scope is limited: it explores correlations between overall inflation and replacement costs for property and auto only; restricts itself to descriptive statistics rather than inference; and pairs inflation components from different national inflation metrics indices even though those may not fully overlap in their individual definitions. The methodology section expands on these insight and limitations.

This briefing’s analytical framework draws from Triple-I’s research into the relationship between overall inflation and insurance replacement cost in the United States over the last three years.  That methodology deconstructs the U.S. CPI Urban-all items into separate goods and services baskets aiming to be most representative of specific insurance lines’ “repair and rebuild” costs.

Residential and Commercial Property

The U.S. experienced the highest five-year cumulative inflation between 2018 and 2022 of the cohort. Over that period, overall U.S. inflation on a cumulative basis reached 20.7%. The U.S. was closely followed by the E.U. at 20.31%, the U.K. at 17.7%, Canada at 17.0%, Korea at 11.9%, and Japan at 3.3%. This stands against a backdrop of correlated overall inflation across the six countries. This is against a backdrop of overall inflation correlated to various significant degrees across the U.S., Canada, the U.K., and Korea, but not across those countries and Japan and the E.U.

Cumulative increases in property replacement costs were higher than overall inflation in the U.S., Canada and Japan. Conversely, overall inflation was higher than increases in property replacement costs in the U.K., the E.U. and Korea.

Over the same period and across the six countries, the U.S.  experienced the highest cumulative increases in property replacement costs at 30.4%, followed by Canada, the E.U., the U.K., Korea and Japan. Property replacement costs correlations grouped the six countries into three cohorts: the U.S., Canada, the U.K. and the E.U.; a stand-alone Japan; and a stand-alone Korea. The four countries in the first cohort show different degrees of correlation significance with one another while the second and third cohorts show no correlation with either of the other cohorts or any of the other countries. Within the first cohort, Canada is strongly correlated to the E.U. Property replacement costs in Canada are strongly correlated to the E.U.’s but weakly to U.S.’ and the U.K.’s.  

Summary rational for the above relationships include the relative weight of property cost drivers within each country’s inflation baskets, construction material sourcing, free-trade blocs and domestic credit intermediation to name a few. We suggest further review.

Personal and Commercial Auto

Looking at the relationship between auto replacement costs and inflation within each of the six countries from 2018 to 2022, replacement costs correlate with overall inflation in the U.S., Canada, the U.K., and the E.U.. However, they do not correlate with overall inflation in Japan and Korea. Cumulative increases in auto replacement costs were higher than overall inflation in the U.S., the U.K., Canada, and Japan. Conversely, overall inflation was higher in the E.U., while Korea saw auto replacement costs increase less than overall inflation.

Over the same period and across the six countries, the U.S.  experienced the highest cumulative increase in auto replacement costs at 30.4%, followed by the U.K., Canada, the E.U., Korea and Japan. Auto replacement costs correlations grouped the six countries into three cohorts: a first cohort with different degrees of significant correlation between the U.S., the U.K., the E.U., and Canada; a second cohort between Korea, the U.K., and the E.U.; and third cohort made of a stand-alone Japan.  Within the first cohort, the strongest correlations are between the E.U. and the U.K., then those two countries and the U.S., and only last yet still significant the relationship between those three countries and Canada.

Even though it is beyond this briefing’s scope to move from descriptive statistics to inference, it is worth noting that supply chain integration seems to have less impact on replacement costs than might have been otherwise expected. The weaker yet significant correlation between replacement costs in the U.S. and Canada, which arguably share a single supply chain, compared to the stronger correlation between replacement costs in the lesser chain-integrated U.S., U.K., and E.U., point to the other determining intermediary variables. We suggest further review.

Methodology and Technical Notes

Aligned with the Triple-I’s mission to provide actionable data-driven insight to the P&C industry, our replacement costs framework uses publicly available government data for the major level-1 CPI or PPI components, those just below the index itself. In its current form, the selection of basket components is based on claims patterns and major categories for repair and rebuild by line.  The recomposed line-specific baskets are weighted to qualitatively match loss patterns. We are currently using machine learning trees to optimize both the selection and the weighting of each line-specific basket. We expect to publish preliminary results of this analysis this summer.

We chose to gather data directly from national statistical reporting agencies rather than rely on international agencies or multi-laterals. This decision was based on data availability and timeliness, consistency and familiarity for economists following each country, and better control over inflation basket component selection and taxonomy. We acquired roughly thirty years of data from national statistical agencies where possible or, otherwise, as much as was available. Because there is little international uniformity in inflation reporting, we had to find approximates and equivalent data to the lines we use in constructing replacement costs estimates for individual U.S. P&C lines.

Given the constraints under which we were working, we were unable to access inflation data for specific consumer items in Canada, and instead used the generalized categories of Shelter and Transportation, which include often-volatile fuel price data. Japanese data was only available starting in 2007 and, due to reporting lags, lacked 2022—this was the most limited country in the analysis cohort. In addition, we had trouble accessing data relating to construction materials. It is worth noting that much of the data for E.U. was available, but referred to by different labels (i.e., Second-Hand Cars instead of Used Autos, or Actual Rentals for Housing instead of Shelter). This data was otherwise equivalent.

Once monthly index data was acquired, the rate of inflation for each year was calculated as the percent change from December of the previous year to December of the year in question for each data series. This is in keeping with the generally accepted practices of reporting annualized inflation. In addition to translating the raw data into the more familiar inflation rates, this also deserialized the data and made erroneous correlation less likely. To calculate inflation over several years, we calculated the product of the inflation rates of the intermittent years.

Homeowners and Auto replacement costs were calculated as the unweighted averages of housing-related inflation rates and auto-related inflation rates, respectively. With the lines of business aggregates calculated, we generated correlation matrices across-country for each line-of-business plus overall inflation, and within-country matrices across data series. Since correlation coefficients require paired data, each pairing of country was limited to the lesser of the pair. For example, since Japan had the fewest observations, its pairings were limited to 14 observations.

We also calculated the p-values of each correlation based on the t-distribution to evaluate the robustness of each correlation coefficient. (The p-value represents the probability of making a false-positive error in examining statistical measurements, thus the lower the p-value the more robust the measurement is). We labeled correlations with p-values between 0.10 and 0.01 as weak (colored light green), and correlations with p-values less than 0.01 as strong (dark green). This is consistent with regular practices in academia.

The matrices of correlation coefficients were color-coded based on coefficient robustness, providing a road map for examining the relationships between countries, input sources, and how trends in one country can cascade through supply-chains. There are some obvious limitations to relying on correlations; however, this provides a manageable survey of connections and trends, and represented the first step one would take in developing more causal links.

* * *

By Michel Leonard, PhD, CBE, Chief Economist & Data Scientist, and Riley Conlon, Research Analyst,
The Insurance Information Institute

The Insurance Information Institute reserves the right to change, improve or correct the information, materials and descriptions in this report. The information contained herein is the work of Triple-I analysts and contains information from third party sources. Triple-I gives no guarantees, undertakings, or warranties concerning the accuracy, completeness, validity, or timeliness of the information provided. Independent confirmation of the accuracy of the information contained herein is recommended. Any dated information is published as of its date only.

5.2023

About the Authors:

   Michel Léonard

   Chief Economist & Data Scientist

   The Insurance Information Institute

Dr. Michel Léonard, CBE, is the Insurance Information Institute’s Chief Economist and Data Scientist.  He brings more than twenty years of insurance experience including senior and leadership positions. In these roles, he worked closely with underwriters, brokers and risk managers to model risk exposures for property-casualty and specialty lines such as credit, political risk, business interruption and cyber. Dr. Leonard is also Adjunct Faculty in New York University’s Department of Economics. He is a member of the Insurance Research Council Advisory Board.

   Riley Conlon

   Research Analyst

   The Insurance Information Institute

Riley Conlon joined Triple-I’s Economics and Analytics Department as a Research Analyst. He is responsible for providing analysis and insight on insurance and economic conditions, and developing forward-looking statistical models. He also consults the greater Triple-I team on becoming a more data driven institution. Previous experience includes research roles with Mission Measurements, New York University Department of Economics, and Sonoma State University Department of Economics. Riley holds a Bachelor of Arts in Economics, a Bachelor of Science in Statistics and a Bachelor of Arts in Pure Mathematics from Sonoma State University, and a Master of Arts in Economics from New York University, focusing on Quantitative Economics.