ITL:

The IoT has been building momentum for years now. How far have we come?

Sean Ringsted:

The IoT is very exciting. It creates this value proposition where you can go beyond the “repair and replace” model for insurance and get to “predict and prevent” because you have so much information available to you in real time, not just after the fact.

When you think about fire, everybody knows the value of smoke alarms. Now think about water. You can use sensors to detect and manage water leaks in the same way. And they’re a major contributor of loss rate in buildings, both in frequency and in severity. It’s not just the cost, either. It’s all the headaches that go along with water damage that can be prevented. You don’t have to get new carpet, worry about mold, deal with the loss of business income. The value proposition is much less about claim payment and is much more service-driven, to prevent the loss.

You're starting to see applications for worksites. IoT devices can improve safety for workers on degree of bend and lifting heavy objects. Think about sensitive or valuable machinery that you can monitor for temperature and vibration and make sure they’re well-functioning.

Just the ability to monitor temperature fluctuations and humidity can have a significant bearing on the value of something such as marine cargo or fine art.

ITL:

In an interview a couple of years ago, you listed a number of industries where you saw potential for the IoT: financial services, education, real estate, transportation, life science, hospitals, construction and manufacturing. Would you walk us through some of those opportunities?

Ringsted:

Imagine you’re managing a property covering thousands and thousands of square feet. Someone will have to walk the property frequently, because problems happen at random times. Even if you know there’s some sort of problem, you still have to manually inspect to figure out where it originated. And maybe you have to do that in the dark. Now imagine all the work you save by having IoT sensors that not only tell you when you have a problem but tell you where it is.

We had a great example at a large public library with buildings spread through several towns. They installed our water and temperature IoT sensors on top of bookshelves, zip-tied to the boilers, pumps, hot water heaters and so on.

You know where this is going: water. Water and books are not a great combination, right? A defective sprinkler head started leaking, and of course it was in the middle of the night, so the damage would have been significant by the time anyone found the problem. But a sensor picked up the leak, sent a notification to a smartphone and got someone to the building quickly. They knew exactly where the problem was, without having needed to have someone continually inspecting every building.

And go back to what I was saying earlier. The issue isn’t just the financial aspect. Yes, they’d get the monetary value after the damage, but you may not get the books back, especially the valuable ones.

Now go to a horse racetrack. It had installed our sensors in a refrigeration unit at a restaurant that picked up temperature fluctuations that indicated the unit was failing. This time, the problem occurred on a day off, so a lot of food could have spoiled by the time anyone noticed. The sensors prevented that loss -- and headed off what could have been a big mess in the restaurant.

Another example is the roof hatches right above the pediatric unit at a hospital. Sensors detected three leaks, one of them above an electrical panel. Imagine the problems if water had gotten into electrical outlets.

We put the IoT devices in theaters on Broadway to protect high-value equipment. We put them in wine cellars.

So you start to get a real sense of the spread of potential uses – with the common thread being prevention. If you prevent something small from developing into something big, that’s fantastic.

ITL:

I’ve heard people talk for a while about what they call the Internet of Me – based on sensors on our wrists in our FitBits or Apple watches, maybe with slim cuffs that continually measure blood pressure, with perhaps contact lenses that constantly monitor blood sugar and even with sensors the size of a grain of rice that we ingest and that can measure all sorts of blood levels. Do you see much potential there?

Ringsted:

I think the promise is very cool. Look at the need and at the cost of healthcare. Anything you can do in the way of preventative health assessments is a good thing. Maybe your Apple watch picks up an irregularity in your heartbeat and you go see a doctor.

Sensors that monitor us could also encourage us to live healthier lifestyles. Maybe we insurers can provide incentives.  

For example, Chubb’s LifeBalance app is a virtual coach that is available in Korea, Thailand, Hong Kong and Indonesia. It’s up to customers to decide how to set this up and tailor it, but it provides a pretty holistic view of their health. They can track their activities, their sleep and their diet and get feedback in terms of scores and incentives. We've had a couple of examples where the app has picked up health issues, and customers have gone to get medical help.

I think IoT really can lead the way on healthcare.

ITL:

When people think about the IoT, a lot of them think about all the devices, but you have described the IoT as really an architecture. I think that’s the right way to think about it, because the devices don’t do you any good unless you have the right way to communicate from that water sensor in the library to the person in the middle of the night, or to a shutoff valve or whatever. Where are we in terms of building out the architecture, and where does it go from here?

Ringsted:

We're early days in terms of developing IoT architecture. You need interoperability between devices, networks and connection points. You also need to be able to maintain data security, especially for the sort of sensitive data we were just talking about. We spend a lot of time with our clients when we're installing these devices, making sure we're not compromising their perimeter. Any erosion of cybersecurity or privacy would damage reputations, so we have to get this right.

You have to think about how you’re going to capture the data, where you’re going to store it, how you’re going to aggregate it – and you have to be able to aggregate it at scale. So, we have a ways to go, but we’ll start small and be able to build out the IoT architecture, figuring it out along the way.

ITL:

I assume this will all get easier, certainly the ROI will increase, as more of these sensors and shutoff valves and so forth get built into buildings and machinery rather than being retrofitted. If so, how quickly do you see the economics changing?

Ringsted:

I think we’ve proven to ourselves that the ROI is already clear, and more and more of our clients are seeing that as we get more use cases to share. They don’t just prevent losses – and all the disruption that comes with them -- but save on manual inspection processes.

The argument is already compelling, and the prospects for the future are incredibly exciting.

Anyone who has purchased insurance by phone and a series of back-and-forth emails knows how slow and difficult that process can be. Indeed, 48% of insurance consumers think that the insurance industry is lagging behind on technology, and 72% still purchase offline from an agent.

Meanwhile, for the insurance companies that still rely on call centers and salespeople to get customers, the cost of doing business the old way keeps going up, while the customer experience continues to suffer.

But it doesn't have to be this way. 

The Insurance Market Is Already Perfectly Suited for Automation

The home and auto insurance landscape requires compiling a lot of data and performing many repeatable tasks. That part of the insurance buying process is much better suited to robots, but it's not just the hundreds of back-end processes that can benefit from robotic process automation. Automation can also simplify the ways consumers search for and purchase insurance.

So, why are so many insurance providers behind other service industries in digital transformation? It's because it requires carriers to rethink how their products and services are delivered.

Over the last few years, fast, contactless digital experiences have become normal when booking a trip, buying a car, watching a film or ordering clothes. It was only a matter of time before consumers realized that they don't need to deal with traditional insurance agents to get insured. That time is now.

See also: Don’t Get Left Behind

A Smarter, Faster Insurance Experience Is Possible

Online shopping platforms offer customers more options and transparency in transactions than traditional shopping does. While a typical insurance agent might only have five to 10 carriers for a customer to choose from, an online insurance shopping platform can offer customers policies from over 50 top-rated providers in minutes.

Home insurance can be frustrating to purchase over the phone. An offline insurance agent will often ask lots of questions that the customer typically doesn't have an immediate answer for, such as their home's distance to a fire hydrant or the exact shape of their roof.

It's an outdated way of doing business that is completely unnecessary. This data can be accessed from databases and pre-filled to save the customer time. Using a system that leverages the power of technology like Microsoft Azure, a customer needs to only enter their address and an automated system can populate the home data required for a quote--pulled from available information that is already online.

Algorithms can be written to recommend appropriate coverage and compare quotes from multiple carriers. Because these computer scripts are pulling from many more data points than a human can, the customer gets a much more comprehensive and cost-effective experience.

Data Is the New Currency

In a technology arms race, the company that can crunch and manage the most data wins. Advancements in programs like Power Platform enable large data sets to be analyzed quickly, so automated solutions can be delivered at scale. One of the biggest technological achievements of the last couple of years has been the sophistication of how the relationships between different data points can be realized and leveraged to benefit the end user.

Technology has flipped the script on how a modern insurance company should be structured. In the old model, an insurance company depended on an army of workers spending most of their time doing manual data entry. This model is expensive and time-consuming. It also makes operating margins slim, erasing any cost savings that could have been passed on to a customer.

In a digital-first insurance company, the data management is automated, leaving licensed agents available to deliver personalized and superior customer service to the buyer. This also improves the working conditions for the agents, of which there are over 169,000 employed in the U.S.

Driven by greater efficiency across the board, the new digital-first model of delivering insurance means over half of customers shopping for a better deal or expanded coverage will be able to get exactly the right amount of coverage they need, without any of the unnecessary phone calls and forms they don't.

What good is having access to technology if it's not being used to improve experiences for people? It's time the digital pioneers take this $1.2 trillion industry into a new age.

In part 1, we learned about the origins, motivations and decline of insurtech 1.0, which brought us to early 2022. It’s often during recessions that enduring companies are born. Scarce access to capital forces new entrants to identify compelling opportunities and strive for compelling unit economics. Amazon, PayPal, Airbnb, Slack, Square and many others grew on the heels of a recession. They stand in contrast to the previous 10 years of the place-all-bets approach during a bull market and seemingly unlimited venture funding.

Insurtech 2.0 recognizes the innovators who came before but takes a more nuanced and collaborative approach to disruption, recognizing the structural issues inherent in insurance. For example, insurtech 1.0 sought largely to disintermediate agents, whereas a core focus of insurtech 2.0 is to partner with and enable them. Similarly, insurtech 2.0 companies have gotten smarter about identifying lines of business in need of change and are building solutions that incorporate better data and processes to better underwrite them. 

Personal lines of insurance represent a massive premium pool, yet because advertising spending on personal auto alone is upward of $10 billion per year, customer acquisition costs are extremely high. insurtech 2.0 customer acquisition leans heavily on an agent channel and avoids costly GEICO-style Super Bowl advertising. Companies are focused on product and coverage innovation rather than user experience and acquisition. 

In short, insurtech 2.0 has moved along the value chain, picking up where insurtech 1.0 ends, leading us into the heart of insurance. This second wave of insurtechs have more in common than appears, bearing many similar characteristics:

• Above all, responsible underwriting. The lesson from insurtech 1.0 is clear: Poor underwriting discipline has a cost on your financial performance, reinsurance capacity and fundamental viability. Reinsurers, in particular, have wised up from 2015 , when they were happy to participate as stand-alone capacity providers. They now expect some of the upside either through warrants or an investment and for their insurtech partner to share in the downside risk.
   
• Where is the pain? Hint: Look for lines of business with sky-high loss and efficiency ratios indicating something fundamentally upside-down. Insurtech 2.0 has attacked undesirable business lines or products that have lacked investment, innovation and imagination. There is significantly more upside potential here, but it requires insider knowledge and domain expertise to identify.
   
• Be a specialist. Specialty commercial lines are unsexy to many and understood by few. By definition, these tend to be higher-ticket items and are relationship-driven. B2B/enterprise sales requires a different marketing mix, which will follow less of a playbook than B2C. Also, commercial lines are by no means homogenous, making it much easier for insurtechs to find staying power within multibillion-dollar insurance “niches.”
   
• Distribution disruption? Despite the promise of digital distribution, insurance has remained stubborn. Between 2015 and 2020, there was a marginal shift to direct channels, with 90% of P&C products sold through agents, branches or brokers. Making traditional distribution channels more efficient while cultivating novel channels of distribution (e.g., at point of sale or “embedded”) can enable new opportunities.
   
• Manage risk. The best way to mitigate losses is prophylactically, or by avoiding them in the first place. Tech can play a great role in supporting more precise risk selection, pricing and loss control. The Internet of Things (IoT) can play a significant role, but this requires a laser-focused implementation and persistent attention. At long last, the role of rebating is being reviewed by regulators, recognizing how a tech-enabled feedback loop can lead to a virtuous cycle. 
   
• Actuarial-driven R&D. Actuarial staff shouldn’t emerge from the basement fortnightly to make rate filings. With increased connectivity via IoT, we know machine variances are generally less than human behaviors. The days of waiting for five or 10 years of tabular data are unnecessary. Risk profiles are evolving too fast, and the industry is increasingly competitive; a process for modifying pricing and managing coverage forms to keep pace is a necessity. To be clear, actuarial skills need to keep pace with broader trends, but industry can only advance as regulators permit.
   
• Intimately understand the risk you insure. Gone are the days of an arms-length relationship between insured and insurer. Partner with industry to co-develop and collaborate. Underwriters, actuaries and software engineers need to become increasingly expert to help refine models and pricing.

See also: 4 Technology Trends for 2022-2023

The table below illustrates key differences between the first two generations of insurtechs. We are clearly in early innings of insurtech 2.0, but some commercial lines of business are already showing maturity. As the economy teeters on the edge of a recession, investors and business leaders continue to look for a path to profitability with less patience for vanity metrics, so it’s entirely possible we haven’t begun to see heroes emerge from the current wave of startups.

If software is eating the world, its last supper might just be insurance. The amount of insurance premium is gargantuan – about $6 trillion globally in 2021. Anyone looking to take a bite out of it is advised to bring patience–lots of it.

Expense ratios (expenses expressed as a percentage of premium) have remained constant for several generations. This either indicates that the massive investment in technology has not yet touched insurance or that technology initiatives have failed to make the bloated industry more efficient.

Either way, it’s clear why entrepreneurs and investors gravitate toward insurance, coining the term insurtech for a new breed of startup seeking to disrupt with a fresh, tech-forward approach.

Some argue the birth of insurtech was Karen Clark’s pioneering work in catastrophe modeling in the 1980s. Others say it was in the 1990s, with Progressive’s advanced use of data warehousing technologies, applying a Capital One-like approach to insurance through mass customization. Or maybe it wasn’t really born until it had a label, circa 2016. 

What probably matters more to readers is the what. To say an insurtech is any entity that uses tech in the insurance industry seems simplistic; surely legacy insurance players use technology. Maybe we can agree that insurtechs spend a greater percentage of expenses on R&D or IT and that other metrics make them more efficient. A practical consideration is, what does the insurtech do? Does this mean selling to an insurance carrier? What about being a carrier, MGA, independent agent, reinsurer, claims administrator or actuarial consultant? There is no elegant taxonomy of the landscape, nor is one needed.

The past few years have seen a surge of interest in all things insurtech: first, we saw cries of disruption, aggressive fundraising and rapid growth. VCs seeded hundreds of companies to identify opportunities across life and health, property and casualty. Investors seemingly multiplied, corporate investors and innovation groups flourished. While this all came to a screeching halt in early 2022, there is much to be written about this first wave of insurance startups. 

See also: Insurtech Success Stories: Still Waiting for Godot

Source: FT Partners Q3 2022 Quarterly Insurtech Insights, p9
 

We call the initial rise of interest in insurance technology Insurtech 1.0. While the origins may be debated, these would-be disruptors executed several common strategies with varying degrees of success. If we seek to improve on what insurtechs can be, it is critical to understand what Insurtech 1.0 strived to accomplish, where it succeeded and where it fell short. Below is a consolidated list of common misconceptions from the first wave:

• Personal lines are the low-hanging fruit. Everyone is a consumer before anything else, so it made sense that investors would initially be attracted to companies building the products they interact with. However, off-the-shelf homeowners, renters and personal auto are commoditized products that are efficiently priced, sold and backed by heavy marketing budgets and entrenched agents. In addition, these products typically become profitable only when bundled. Because monoline personal lines products are relatively low-ticket items with significant acquisition costs, the juice is only worth the squeeze if you can capture all of the customers’ needs over time. While insurtechs have made great strides in creating a buying experience that feels similar to other (non-insurance) customer experiences, this is not sufficient. They have failed to acquire customers more cheaply than incumbents and upset agents in the process– those same agents they now seek as an ironically affordable acquisition channel.
   
• The strategy should be to capture market share first and turn in profitable results later. In insurance, writing premium without regard for profitability isn’t difficult. While growth at all costs is typically rewarded in venture-backed industries, it is paradoxically a warning sign for insurers playing in efficient markets; binding too many policies at too fast of a clip usually signals an underwriting, rate or coverage issue that the market is taking advantage of. Ignoring or being naive to these signs means you can expect adverse selection and a frightening loss ratio in short order. With a short claims development tail, personal lines can improve, but this likely means churning the very customers that you just spent a pretty penny on to acquire or leaving your fate in the hands of regulators to approve significant rate changes.
   
• Disrupting insurance requires outside talent and thinking. Simply put, entering a highly regulated and nuanced industry without a key unfair advantage is challenging. While early insurtechs thought of themselves as software companies above all, the reality is that domain expertise in insurance is not only advantageous but essential. Contrary to the mantra of move fast and break things, the legacy of insurance is much the opposite. To be sure, there is a vast and largely unexplored middle ground, but ignore the experience of a 400-year-old industry at your own peril.
   
• MGA to full stack, stat! Buying a carrier is a good pitch for requiring additional investor capital and was worn as an early badge of honor that an insurtech had “made it.” But adding capital requirements, regulatory compliance and oversight have proven to be a more of a burden than anything else. While this leap is absolutely worth the cost at the right time, trailblazers seemed in a rush to grow up for the wrong reasons. In this new market environment, insurtechs will struggle to get any credit for vanity metrics.

See also: 3 Paths for Insurtechs in 2023

Some of these startups aren’t as enduring as we had hoped. In somewhat ironic fashion, over the last 18 months, the S&P 500 Insurance index has significantly outperformed the S&P 500, full stack carriers, the HPIX insurtech index and others. This is evidence that insurance can be a stubborn industry, one needing more than an infusion of technology and compelling design. It provides incumbents and a next wave of startups a well-worn playbook to define success and avoid the same mistakes.

In sum, the legacy of Insurtech 1.0 may be more enduring than the actual companies. These startups forced incumbents to recognize their intransigence, ushering in a new area of customer-centered development.

Source: Jefferies  Insurtech Weekly News Update, November 13, 2022 Jefferies LLC

The surge in traffic fatalities in the U.S. in recent years was initially blamed on distracted driving and then on habits that drivers adopted when the pandemic cleared so many cars off the road, tempting people to go recklessly fast -- but other countries face the same issues and haven't seen nearly the same problems as the U.S. has. 

While the U.S. and France, for instance, had roughly the same rate of traffic fatalities per capita in the 1990s, an American is now three times as likely as a Frenchman to die in a traffic crash. 

What's going on?

A recent New York Times article argues that, basically, Americans are thinking about the problem wrong. First, we Americans don't think about the full system. We think about the cars, first and foremost, and about the drivers a considerable  extent but don't focus nearly enough on the third component of the system: the roads. Second, we focus on the safety of the people inside the cars but spare too little thought for the people outside the cars: the pedestrians, cyclists and motorcyclists, who are being killed in far greater numbers than in the past. 

The article says:

“'We are not the only country with alcohol,' said Beth Osborne, director of the advocacy group Transportation for America. 'We’re not the only country with smartphones and distraction. We were not the only country impacted by the worldwide pandemic.' Rather, she said, other countries have designed transportation systems where human emotion and error are less likely to produce deadly results on roadways."

In particular, the article says, "Other developed countries lowered speed limits and built more protected bike lanes. They moved faster in making standard in-vehicle technology like automatic braking systems that detect pedestrians, and vehicle hoods that are less deadly to them. They designed roundabouts that reduce the danger at intersections, where fatalities disproportionately occur." The U.S., by contrast, has "a transportation system primarily designed to move cars quickly, not to move people safely."

The National Highway Traffic Safety Administration, a division of the Department of Transportation, estimates that nearly 43,000 people died in motor vehicle traffic crashes in the U.S. in 2021, up 11% from 2020 and 18% from 2019. That is the biggest two-year increase since 1946 and follows a decades-long, steady decline in fatalities that lasted until the mid-2010s. 

The NHTSA estimates that motor vehicles killed more than 7,300 pedestrians in 2021, up 13% from 2020.

The problem may even get worse. Americans continue to buy cars that are heavier and higher off the ground, which are more likely to kill any pedestrian, cyclist or motorcyclist they hit and to crunch small sedans. The switch to electric vehicles will exacerbate the problem because their massive batteries make the vehicles much heavier than their counterparts using internal combustion engines. EVs also accelerate much faster than ICEs do.

Just think of the Hummer EV, which weighs more than 9,000 pounds and can go from 0 to 60mph in roughly three seconds.

Safety technology in cars is improving rapidly and will continue to do so as sensors and software developed for autonomous cars are more widely deployed. Technology can also make drivers safer, especially as smartphones provide data about driving behavior and as insurers offer incentives for those who avoid sudden acceleration, hard braking and other often-dangerous actions.

But experts say we need to go beyond improving cars and drivers and focus on the roads and on vulnerable users, such as pedestrians, who aren't wrapped in thousands of pounds of protective metal. 

The infrastructure bill that Congress passed last year will help. It provides funds for pedestrian and cycling infrastructure and requires that states where vulnerable road users make up at least 15% of fatalities must spend at least 15% of their federal safety funds on improvements prioritizing those vulnerable users. Today, 32 states, Puerto Rico and the District of Columbia face that mandate.

Experts say cities and states should also rethink road design -- for instance, having roads narrow in areas where there is significant pedestrian or bicycle traffic, to make drivers a bit uncomfortable and signal to them that they need to slow down. 

Consumer Reports says "dozens of cities in the U.S. are completely rethinking road design with safety top of mind."

In 2014, New York adopted the Vision Zero concept, which uses big-data analysis to identify and improve dangerous streets and intersections and calls for city planners to rethink everything about roads, bike lanes and pedestrian routes, in the hopes of eliminating all vehicle-related deaths. In Seattle, officials reduced the number of traffic lanes on Rainier Avenue and subsequently reported no serious injuries or deaths on that dangerous stretch. New York City transformed Queens Boulevard into a more pedestrian-friendly road with protected bike lanes and trees and went from seeing more than seven pedestrians killed or severely injured per mile on the road to no fatalities in the two years after the redesign began in 2015.

The surge in traffic deaths in the U.S. won't be reversed easily. Too many factors are working against us. But the analysis in the Times seems smart to me: We can do a lot of good by redesigning roads and by focusing on those who aren't in cars, as well as those who are. 

Government is taking a lead role, as it should, with efforts such as those in the infrastructure bill, but the insurance industry can play a key role, too. It can marshal its enormous amounts of data on accidents and advance smart arguments at every opportunity about how to increase safety. It can also expand on the work it's already doing to offer incentives that will encourage safer behavior. 

As the industry moves toward a "predict and prevent" model and away from the traditional "repair and replace," auto safety is an area where the insurance industry can, and should, shine.

Cheers,

Paul 

Today, more cars than ever are connected, and those connected cars are creating and transmitting a lot of data. This, in turn, has created a gold rush among automobile manufacturers (aka OEMs), insurers and others to find ways to monetize that data. For personal auto insurers, the stakes are greater than ever.

Connected cars create data primarily in three ways. The first is by means of specialized computer chips (ECUs) that control, monitor or record vehicles’ systems and performance (e.g., the powertrain, steering, climate control, etc.). Second, vehicles increasingly also have telematics control units, which monitor and record typical telematics data (acceleration and braking, speed, location, etc.). Third, of course, connected cars create data through telematics apps on drivers’ mobile phones.

OEMs have something of an inside track for accessing both the general operating data from the ECUs and the telematics control unit data, by means of cellular modems that are now installed in nearly all new cars. This is important because, the more types of data are available, the greater the likelihood that data scientists can parse the data for improving pricing, underwriting and claims decisions.

OEMs can monetize that data in a number of ways that benefit themselves and the vehicle owners. For example, using data to predict potential system failures and informing the vehicle owners to take their vehicle in for preventive maintenance.

Of greatest interest to insurers are OEMs monetizing connected car data by offering insurance—either as a distributor or as a licensed insurer or MGA. There are multiple examples of manufacturers distributing insurance. For example, Ford’s licensed insurance agency, American Road Services Co., offers two telematics-based insurance programs, branded as Ford Insure and underwritten by Nationwide. Toyota’s licensed agency, Toyota Insurance Management Solutions, offers insurance through eight insurers, including Travelers, Nationwide, Mercury and Farmers.

Today, examples of OEMs getting into the risk-bearing side of insurance are much rarer. However, Tesla is reported to be offering auto policies in certain states through its own licensed insurance companies: Tesla General Insurance, Tesla Property & Casualty and Tesla General Insurance. In a 2021 press release, General Motors stated: “OnStar Insurance [is] projected to have a potential revenue opportunity of more than $6 billion annually by the end of the decade.” It is likely that a licensed insurer will be necessary to achieve that goal.

Auto insurers have a strategic imperative to not be left behind in the race to monetize connected car data. There are several ways insurers can do this.

See also: Automakers Build New Insurance Future

Source: Celent Report, “Rethinking: Will Insurers Be Connected to the Connected Car?” 

Telematics-driven improvements in pricing and underwriting are now widely understood—and being pursued by the largest personal auto insurers, and increasingly by insurers with smaller market shares.

There is also rapidly increasing interest in using connected car data to improve the claims process. These methods include automated first notice of loss (FNOL) for collisions, which can reduce claims cycle times and possibly result in more policyholders using an insurer’s direct repair program. Another promising area is the use of telematics and other connected car data (e.g. deployment of airbags) to immediately dispatch emergency services for humanitarian purposes and also to potentially mitigate personal injury losses. The same data set could also support and accelerate subrogation claims.

A “Land and Expand Connected Strategy” is possible because nearly all personal auto insurers also offer homeowner policies. Connected homes are becoming more common. An insurer can provide various sensors to a homeowner to detect smoke, leaks and intruders and to monitor apparent losses in real time. Several of the value propositions to the insurer and the homeowners are broadly similar to the connected car insurer and policyholder: more accurate (and lower) pricing, loss avoidance and mitigation.

Last, but not least, as increasing numbers of new and older vehicles are connected, the segment of auto policyholders who want to be connected for the sake of being connected will gravitate to insurers that can meet those needs. Think of policyholders who want the newest iPhone, Alexa giving answers and advice anywhere and of course the brand new Apple watch with “crash detection,” which Apple says will detect severe collisions and, if necessary, contact emergency services.

All auto insurers need a plan to be connected (in several ways) to the connected car

The top 10 auto insurers have natural advantages from scale and national presence. The next 90 or so auto insurers can stay in the game by promoting telematics apps and tapping into telematics data exchanges, by creating adjacent offerings (roadside services, connected homes), and certainly by providing a cool connected experience.

Note: This column is based on a Celent Research Report, Rethinking: Will Insurers Be Connected to the Connected Car?

The $800 billion U.S. home insurance market is being challenged by three significant market conditions. The companies that respond the best to these challenges will provide the biggest benefits to consumers and win their trust, while old-fashioned insurance agencies that fail to adapt risk becoming irrelevant very quickly.

How Inflation Affects Home Insurance

Inflation wreaks havoc on all types of consumer goods and services, and insurance is not immune. The cost of insurance goes up during periods of inflation in response to the cost of things that affect claims and premiums.

For example, the cost of repairing a home has increased this year. Materials and labor costs have gone up due to inflation and a shortage of skilled labor. As the cost to cover a claim surges, insurance providers raise their premiums. That's a costly double hit for the consumer.

For consumers who are already feeling their budgets squeezed by rising prices just about everywhere, higher insurance rates can be crippling. 

Customization of insurance coverage is key during times of high inflation. It's important for consumers to compare rates from as many companies as possible to make sure that they aren't paying more than they need to, or paying for things on their policy they don't need.

Companies that can leverage bundles while lowering overhead by keeping staffing and internal costs down are able to pass more savings on to the buyer. Times of higher inflation put a strain on everyone, but they can also reveal the insurance companies that are really working with the consumer's best interest in mind.

See also: We're Flying Blind on Climate Risk

Natural Disasters Are Increasing

Tracking data on natural disasters reveals a dramatic increase in catastrophic events, especially from 1980 to today. In the last 10 years, natural disasters have cost the U.S. $200 billion per year. As costs of repairs increase with the frequency of natural disasters, the cost of insurance premiums will follow.

In addition to homeowner's insurance premiums going up across the country, many property owners are not properly insured against catastrophic events such as floods. According to FEMA, floods are the most common and costly natural disasters in the U.S. Still, many homeowners are misinformed about flood insurance. There are several misconceptions about what flood insurance covers, how to buy it and what it should cost. It's important to consult an agent who can offer guidance on insuring a home against natural disasters. Too many homeowners discover after a flood that their policy doesn't actually include flood insurance.

Homeowners who think they are protected because they live in a desert climate that isn't listed as a flood zone should consider the recent deadly flooding that occurred in southern Nevada, including Las Vegas. In fact, 25% of all flood claims come from people living outside of high-risk flood areas.

With climate change causing an increase in catastrophic weather events across the country, the environmental impact to the insurance industry will only become more severe. It's important for consumers to understand what their policies do and do not cover when it comes to natural disasters.

This type of coverage is also a big differentiator when comparing insurance companies.

Relocations, General Anxiety and Rate Increases Trigger More Insurance Shopping

A rise in remote work opportunities encouraged many Americans to move during the height of the pandemic and continuing into 2022. The Southeast saw the biggest increase in population, as people left places like California, New York and Chicago for the warmer and less congested Southeast states such as Texas, Florida and South Carolina.

This influx of new residents offers a valuable opportunity to insurance companies that cover Southern states. Providers that can offer competitive rates and superior customer service should be able to grow despite challenging economic times.

According to a Consumer Pulse Survey conducted by Transunion in Q2 of 2022, topping the concerns of most Americans are inflation, the possibility of a recession and increased housing costs. As people reduce their spending in response to anxiety, they also take a closer look at their current expenses, including what they pay for home insurance. More consumers are likely to visit digital insurance aggregators in times of uncertainty. The ability to personally compare rates from over 50 insurance providers at once, without having to speak to a sales person, gives people a sense of control that they want, especially when facing an uncertain future.

The homeowners insurance market is very complex and still fragmented despite recent consolidations. Many insurance companies have failed to modernize their systems to the levels of customization and speed that consumers expect from service providers. That puts offline insurance companies at a huge disadvantage -- at the very same moment when more people are shopping around.

The type of insurance company that will be seen as the remedy to all of the insurance anxiety people are feeling will be one that has the best access to the data needed to deliver quotes from the most providers, offer a seamless online shopping experience and be able to ensure people that they are getting the coverage they need at the best price.

Survivors know how to turn challenges into opportunities. The home insurance landscape will reveal this truth as well as any industry heading into 2023.

It would not be an overstatement to say that the insurance industry is built on data. For decades, insurers have harnessed data and analytics to drive risk analysis decisions, and perhaps no other segment has done that better than personal lines. In particular, data has transformed underwriting, and new research paints a picture of how insurers plan to continue leveraging data's power to accelerate underwriting transformation.

SMA's new eBook, "Personal Lines Underwriting Transformation: The New Age of Data," shows that 96% of insurer executives see personal lines underwriting undergoing significant changes within five years – remarkable given the shifts that have already occurred in the segment. Data will drive much of the transformation ahead, and insurers are being strategic about where they focus time and investments. According to the eBook, 76% of insurers are implementing data pre-fill, and 64% are in the same stage with data/analytics scoring. Nine in 10 insurers also have active plans in data augmentation.

Transformational technologies will also be critical in advancing personal lines underwriting, with 81% of insurers saying they are pushing transformation forward. Digital data generated by the Internet of Things, telematics/autonomous vehicles, aerial imagery, wearables and other sources can produce new insights into risks. As a result, insurers can achieve better precision in risk evaluation and pricing, particularly when accessing these new data sources with the help of AI.

Data will continue to be the cornerstone of transformation and remains mandatory to pursue change within personal lines underwriting. But the focus should not be on one area – insurers must balance multiple initiatives and solutions that work harmoniously together to successfully move their underwriting departments into a new age.

Learn more about the current state of underwriting transformation and the path forward for the personal lines segment by reading SMA's new eBook, "Personal Lines Underwriting Transformation: The New Age of Data."

In the full realm of digital retail, where even groceries can be ordered and delivered online, Trader Joe’s stands out as a unique business. There is no web ordering, no shipping, no delivery and no plans to change to be like other grocery stores.

Someone who has not visited Trader Joe’s might wonder, “How can they buck the trend when Walmart, Whole Foods and Target are fully committed to multi-channel order and delivery?”

Trader Joe’s, however, has an intangible, powerful formula for loyalty. I should know, as it is where I go for very specific things, and I love their seasonal items — like all their pumpkin stuff last fall! They have many products you can’t get anywhere else in the friendliest retail environment on earth. They also have some seriously friendly people, who all seem to be genuinely interested in each person who comes into the store. Somehow, the culture has crossed nearly all 500-plus stores. No matter which one you walk into, your experience is likely to be the same. A person who loves their job will make you feel glad you walked in.

Insurers (fortunately or unfortunately) can’t afford to skip the digital experience. They must meet prospects and customers at the points of most-likely contact. They must pursue multi-channel experiences with every service they can muster.

However, even though digital-ready insurers can’t act like Trader Joe’s employees, the idea of friendliness isn’t that far off the mark. Can insurance processes and next-level technologies place the "friendly" back into "customer-friendly"? Can they replicate the caring and welcoming feeling by turning their data and frameworks into tools for knowing customers? Anticipating their needs?  Can insurers create touchpoints that have always been a hallmark of the traditional agent or agency?

And, can the customer experience transformation be designed to improve loyalty, retention, customer lifetime value and Net Promoter Scores?

See also: Customer Segmentation Is Key

Catching up to customer expectations with consistency

Technology says a lot about a company. Does an insurer want its customers to do the work of the business? Does it want to facilitate every customer interaction possible? Does it want to meet somewhere in the middle on the bridge to service — looking conciliatory and offering some excellent services but leaving other experiences and products back in the 2010s? This is what has happened most recently in P&C, where many insurers have made quoting and buying easier. In many cases, first notice of loss (FNOL) has been made easier. But we still have areas of difficulty, such as digital payments and dealing with complex claims scenarios such as cat events or other large losses. 

The great news is that insurers largely know that they must improve their customer-facing systems, no matter what. In a Majesco-sponsored customer experience report developed by SMA, many gaps were highlighted between the desire for customer experience transformation and fully realizing the vision of “Customer 360.”

“SMA research indicates that 94% of commercial lines carriers and 100% of personal lines carriers have a strategic initiative to improve the customer experience. Personal lines are further along in the journey, but they are still in early stages relative to other industries. Small commercial lines has a great amount of new customer-centered activity. 72% of carriers serving the small commercial market are in the strategy or initial activity phases of their customer-focused initiatives, signaling great opportunity to differentiate.”

The imperative wouldn’t be so strong had it not been for the pandemic. The pandemic accelerated the need for change. It widened the gap between customer needs and expectations, and insurer capabilities. Suddenly, insurers were faced with a population that was increasingly loyal to convenience. Changing customer demographics and the temporary avoidance of bricks and mortar relationships fast-forwarded the digital mandate. Insurers were faced with double-digit changes in customer service preferences. Research firms, such as Gartner, were putting numbers to the theories, such as 44% of millennials preferring no human interaction.

The difficulty was not so much in the acceleration of change but in the inconsistent application of digital. Insurers weren’t prepared to transform all aspects of service at once. The situation seemed (and still may seem) monumental. Insurers need to plan for a unified digital experience across all interactions in the value chain. This may require internal transformation. It may require reaching out of the organization into new ecosystems that will enable a broader customer experience. The strategy and methods will vary by insurer, but the end results should be an organization that is infinitely friendlier and far more ready for the future of insurance.

The 360-degree view of the customer. Which hurdles stand in the way?

When does a transaction officially become a great experience? It may be the moment when a customer completes a specific transaction like payment, is able to do a different one like update authorized drivers on a policy and then also gets a copy of their insurance card digitally. They realize that it was easier than normal, they did not need to go to different portals or apps to do each one, as it accomplished what they needed holistically with no hassle. In today’s world, customers want us to make their lives easier, and in doing so we become customer-friendly.  

With that notion in mind, insurers must think in terms of a 360-degree view of the customer. A true 360-degree experience will allow customers to address all of their needs in one location (across multiple channels). Rather than having different apps, portals or user interfaces for separate functions, such as quoting/sales, billing, payments, claims and policy service, the customer should be able to access all of them, plus value-added services, from a single customer engagement platform.

The idea of the 360-degree view has been around for many years, but the typical insurance customer experience is still transactional and hasn’t reached the full 360-degree potential. When looking at the common insurance system structure, it’s easy to see why only the surface has been scratched.

Figure 1: Challenges Faced by Insurers for Customer 360

The SMA Customer Experience report identifies six technology-oriented challenges that insurers must overcome before they can deliver on the Customer 360 experience:

• Digital Transformation
• Data
• System Integration
• Ecosystem Integration
• System Design
• Aggregation and Mediation

See also: How to Unlock a 'Customer 360' View

Technology Hurdles Related to the Digital Experience

It’s easy to provide a list of hurdles but much more difficult to grasp each one in the context of the full system and its need for transformation. Let’s look briefly at the hurdles and touch on their vital relationship to providing an excellent customer experience.

Digital Transformation

Core systems are vital. Though they may be supplemented with new, cloud-based core systems or have cloud supplemental systems appended to the insurance system framework, they need real work and updates to extend their value into the digital realm. Often, these systems are so complex that planning around them is a major hurdle.

Data Transformation

Customer-oriented data is a major insurance challenge. Insurers traditionally hold a wealth of data, but its integration into the transaction workflow isn’t easy. Its ability to be used in real time is a hurdle. The application of analytics on the data holds great promise but hasn’t yet reached its full potential. Insurers that have strong capabilities to capture, define, route, organize and manage data on behalf of their customers are well-positioned to move toward the Customer 360 vision.

System Integration

Insurance systems are engines of connection. They must facilitate flow, provide data security and standardize and clean information where appropriate — and they are best when they integrate easily. Modern system architecture contains features like application programming interfaces (APIs), microservices, cloud-deployment capabilities and other methods for easing common integration burdens. Customer service is at a great disadvantage when it has to contend with system silos. Transformative integrations can improve everything from the back end to the front end.

Ecosystem Integration

The new customer experience represents not only improved transactions but a new set of customers! Ecosystem integration will expand the insurance product space into embedded insurance and new channels opened by new partners. How partner-friendly and ecosystem-friendly are yesterday’s insurance frameworks? Tomorrow’s growth will be hampered by a lack of ecosystem readiness. Insurers need to prepare to give great service, not only to their direct customers but to their partners’ customers, as well.

System Design

Nearly any perspective on monolithic systems will give you an understanding of their weaknesses. They are tremendously functional, but their architectures aren’t built for flexibility or speed. Component-based architectures, including a microservices approach to building and assembling capabilities results in a more flexible, adaptable system. Modern component designs are better-suited to enable faster speed to market for new products, adding partners, adding channels and incorporating today’s advanced technologies.

Aggregation and Mediation

How does it all work together? The consistent customer experience will be tied together in clean, uniform methods for data and communication orchestration. This may be an exercise undertaken for better customer understanding, but in reality all business users will benefit from the effort. Reporting will become easier. Product development will improve. Every area that depends on data will enjoy a renewed ability to view, understand and analyze the business.

Every effort tied to the customer should end with efficiency across the entire enterprise. This is where the promise of the insurance culture can pay off. As insurers get excited about the possibilities for customer experience transformation, they will be paving the way for their own user experience to improve dramatically. The satisfaction on the inside will be shown through the experience on the outside.

Electric vehicles just might be the next ticking time bomb threatening to blow up the loss ratios of incumbent insurers. Today, their overall impact on premiums and loss ratios is masked because EVs are a small slice of the overall pie, representing only about 6% of new vehicles sold in the U.S. in 2021. But, with this number doubling every year for the past three years, we could be seeing the beginning of an exponential adoption curve. With government incentives piling up, consumer demand growing and global production capacity increasing – it seems to be a matter of when, not if, for EVs. But recent industry research points to significantly higher collision repair costs for EVs, when compared with gas vehicles.     

EVs will continue to have a growing impact on those who do not understand and plan for the insurance implications. Look at California, where insurers are already having a difficult time achieving price adequacy. It just so happens to be the largest auto insurance market in the U.S., and it has the highest concentration of EVs in the U.S.

The impact of EVs today can be felt across many different areas of the insurance value chains – EVs change the nature of the risk in ways that actuaries do not fully understand yet. Their performance capabilities are unmatched, they weigh more, they produce more data, they have more advanced driver assistance features, their drivelines are less complex but contain more expensive parts, they are made in smaller production runs often by small startup companies, they have features that haven’t existed in vehicles before, there aren’t enough parts or qualified labor to maintain or fix them…the list of issues goes on and on. 

See also: Auto Claims and Collision Repair: The Great Reset

The typical actuarial approach to address the current severity trends through incremental pricing activities might help mitigate losses in the near term but may not be sustainable over the long run. Ignoring this segment by underwriting them out will jeopardize future growth opportunities for the incumbents.    

For those who do understand the EV opportunity, it represents a chance to capture a potentially profitable slice of the pie and create sources of value in the future. But profitable EV insurance may require a totally different approach, starting with the initial risk selection and ending with a seamless claims fulfilment process. It could involve engaging owners in new ways through new channels that build brand loyalty over time and, most importantly, create more safer drivers and fewer auto accidents. Embedded usage-based insurance offered by the OEMs is one way to capture this opportunity.  

What would it look like if OEMs were able to capture the best 20% to 30% of risks in the market? Because EVs create more data than their gas counterparts, OEMs are well positioned to use this data to more accurately identify safe drivers – potentially even starting with the initial test drive. They can offer branded insurance at the time of sale as a way to lower the overall cost of ownership and build loyalty. It doesn’t end at the dealership - OEMs will have continuing access to data about how the vehicle is being used that can accurately identify better risks. For those customers who do not opt in at the time of sale, or for the growing market of used EVs entering the used car market, OEMs will have exclusive access and control of an interesting new distribution channel – the infotainment systems built into the cars - in addition to creating a hyper-personalized insurance offer that can be sent through traditional channels. 

OEMs may have a lower-cost distribution channel and an efficient way to capture the most profitable new customers. And the key thing about this model – it repels the bad risks. Just look through the Reddit forums that are filled with aggressive drivers who appreciate the fact that Tesla doesn’t share their safety score with their insurer. It is an interesting new dynamic where some OEMs know more about the driving risks than the companies that insure them.   

When it comes to usage-based insurance, EV OEMs may have the secret ingredient to enable a more attractive value proposition for the customer. Rather than having your every move tracked via location services on a smartphone app, or being scored every time you accelerate or brake harshly, imagine your insurance was priced based on the kilowatt-hour of electricity used? The drivers who choose to drive aggressively in Ludacris mode will use more electricity and have higher premiums. The drivers who minimize their electricity usage and drive in Eco mode will be earning lower premiums.

OEM insurance might also help address another major problem that EV manufacturers are facing. The cost to build EVs is significantly more per vehicle than the cost to build a gas version. This issue has been largely hidden by the fact that EV manufacturers have focused on building more expensive, higher-margin luxury models. But for widespread adoption to occur, manufacturers will need to begin building more affordable models that appeal to more of the U.S. population. That means they will need to search out other revenue opportunities to make up the difference. Rather than creating monthly subscription fees to use their heated seats, insurance premiums could become a way to drive recurring annual revenue.

With the advanced safety features and driverless technologies that exist in most of the EVs on the market, manufacturers will be required to cover the risks of failure among these systems. Insuring the driver along with the on-board technology is an obvious next step, especially as the risk from the driver is mitigated through use of the technology. There would be fewer liability disputes to figure out whether the driver, or the car, was at fault after an accident. This change should result in fewer subrogation suits and therefore lower operating costs. In addition, as these features continue to improve and have a meaningful impact on reducing accidents, the OEM insurers would be best-positioned to benefit from the savings. 

The final piece of the puzzle is integrating the supply chain after an accident. An important assumption is that additional services like insurance will help to create more loyal customers, who would be more willing to have their cars repaired at OEM shops – as customer choice after an accident will always be important. Starting with immediate notification of an accident through real-time access to car sensor data, OEMs can streamline the process from the outset. The car could be towed to the right shop, and loaner vehicles could be dispatched directly to the accident scene. Having direct access to on-board cameras and other telemetry data would enable the OEM to instantly determine fault and avoid a prolonged and costly investigation, further reducing operating costs and allowing them to capitalize on subrogation or contributory negligence opportunities that are often missed today.     

OEMs will have the power to control severity after an accident, far more than any incumbent insurer ever dreamed of. The appraisal process as we currently know it may not need to exist. With OEMs having their own networks of dealerships and repair shops, and mechanics and body workers on their payrolls, there will be fewer incentives to inflate the cost of repairs. OEMs can ensure their parts inventories are funneled to their insured vehicles to further shorten repair times and reduce costs. 

When the OEMs have incentives to make a vehicle that is less expensive to repair after an accident, we could see an endless amount of innovations in the way vehicles are designed and built -- not just moving expensive sensors from behind the front bumper covers but creating entirely new approaches such as snap-on body panels and easily swappable motors, battery packs or even entire chassis.

Cars are designed to attract a certain type of buyer. The future might involve designing cars that are not only safer and easier to repair but that are ultimately more attractive to lower-risk drivers. When the OEMs use their data to create a more sophisticated understanding of the ideal insurance customer, they can better design vehicles to attract just those customers. This could create a cycle of efficiencies and savings that would be very valuable in the grand scheme of auto insurance.

Bottom line is that as EVs emerge and become a larger part of the fleet, we may need to rethink the current insurance model. We are already seeing some interesting moves emerging that address certain parts of this equation. Will these be effective at driving the change needed to support the growing challenges? Or will an entirely new type of insurance model be required?