Let me begin by saying I am a big fan of agents, and I believe they will play a vital role in personal lines distribution for a long time to come. But, clearly, direct distribution models in personal lines, and the prominent companies that feature them, have gained traction and market share over the last two decades. The insurtech movement has now presented new options for digital distribution, such as direct digital via web/mobile. And now, all the talk is of the potential for embedded insurance that incorporates insurance at the point of sale. These new options usually (although not always) bypass the agent.

SMA asked agencies and carriers how they expect personal lines distribution will change in the next five years. Both agencies and carriers cite continued consolidation in the distributor space as the number one way the landscape will change. However, close behind are expectations that direct distribution will significantly increase, that insurtech will play a big role in reshaping distribution and that big tech companies will enter the space.

In the past, when an individual needed insurance for their car, motorcycle, home, apartment or personal property, they would reach out to their local agent. The agent may have been captive or independent, but the point is that the best path to obtaining insurance coverage was to get the advice of an agent. In the case of an independent agent, a customer would get advice on which carrier best met their needs. Thus, historically the approach for personal lines insurance has been “agent first.” Now, in today’s digital world, many digital on-ramps lead a customer to insurance. In some cases, this results in completely digital interactions, from needs analysis to policy issuance. This would be an “agent-none” scenario. However, in many cases, an agent is still involved somewhere in the process. Perhaps “agent last” is too extreme a term, but even when the buying process begins at a comparison site, digital retail site or showroom floor, the buyer may ultimately be connected to an agent to complete the transaction.

An example that brings this idea home is the recent launch of HUB International’s VIU platform. This digital platform enables individuals to compare choices and prices for auto and homeowner’s insurance – as many comparison sites do. However, the transaction is not end-to-end digital. The final purchase always ends with an agent. This approach provides agents with the opportunity to provide additional advice that may lead to cross-sell or up-sell opportunities. It also establishes an agent of record that can be available for policy services, if appropriate.

See also: Foundational Tech for Personal Lines

Many similar examples exist for other comparison sites, insurers’ mobile apps, affinity group sites and other digital on-ramps that connect prospects with insurers. Even in embedded insurance examples where the insurance is purchased as part of the automobile or home sales transaction, there may be an agent of record assigned to follow up and be a human connection point for the customer for future needs and renewals.

Will direct models and digital on-ramps spell the demise of the personal lines agent? Many have been predicting as much since the dawn of the internet and digital communications. Yet agents are surviving and thriving. They are consolidating for scale to support their own digital capabilities and enhancing their relationships and expertise to stay competitive. While there is little doubt that the percentage of personal lines insurance transactions that go completely digital will steadily increase, there will likely still be agents in the picture for the foreseeable future – even if customers don’t come to the agent first.

Agents and brokers, we want to know if your carrier partners are meeting your expectations. SMA’s new survey assesses the current state of P&C distribution, including digital sales and service capabilities, and will reveal the opportunities and strategies of today’s retail agencies. Agents who complete the survey will also be entered to win a $250 Amazon gift card.

Living in six cities in three countries on two continents in my 17 years at the Wall Street Journal, I often heard locals claim they were going to render Silicon Valley obsolete. New Yorkers were developing a Silicon Alley. Chicagoans planned a Silicon Prairie. Scots promised a Silicon Glen. But Silicon Valley barely noticed. 

Now, an announcement by one of the most prominent venture firms suggests we may finally have reached peak Silicon Valley and, more broadly, suggests we are headed toward a more decentralized model for innovation. 

The announcement from Andreessen Horowitz is that it is moving its headquarters from the very heart of Silicon Valley venture capital, on Sand Hill Road in Menlo Park, to "the cloud."

The firm says the past 2 1/2 years of operating remotely because of COVID have shown that startups can innovate and operate very effectively without having everyone in the same place, which has reduced the need for aspiring entrepreneurs around the world to pack up and move to the Bay Area. If the firms don't need to be crammed into Silicon Valley, then the VCs don't, either. 

Now, I was born at night, but not last night. There is some obvious PR behind the announcement. Andreessen Horowitz is one of the biggest backers of what it calls Web3 (known to others as the Metaverse), and it can't very well be evangelizing for a decentralized, largely disembodied universe for interactions if it makes everyone show up in a single office every day. 

Still, the shift to a virtual model for the firm seems justified. The magic of Silicon Valley has always come from its having achieved critical mass -- of entrepreneurs, of money and of engineering talent. With Stanford right there and Cal just across the bay, the talent was always abundant. Then, Hewlett-Packard and Intel hit it big in the '50s and '60s and started a modern-day gold rush of entrepreneurs who thought they could do just as well. Money, of course, followed the successful entrepreneurs. 

But with the shift to remote work, critical mass in a physical location just doesn't matter so much any more. Bloomberg reports that office vacancy rates in San Francisco were 18% in the second quarter and 15% in the larger Silicon Valley area, compared with 11% in Manhattan. Even Ben Horowitz, one of the eponymous cofounders of the firm that calls itself a16z, has moved to Las Vegas. 

That shift suggests that insurers, too, can change how they approach collaboration, in general, and innovation, in particular. Rather than thinking in terms of localized talent and collaboration, insurers can pull in people from across the organization, without the need for them to relocate, or even get on a plane. It is becoming easier, too, to incorporate people from partners, swapping them in and out as needed. With Silicon Valley's state-of-the-art practitioners heading toward a distributed approach to innovation, the rest of us can watch, learn and copy.  

To be clear: I'm not predicting the demise of Silicon Valley. Bloomberg says firms based in Silicon Valley received $52.3 billion in venture capital in the first half, or 36% of the nation's total, while Austin, Texas, seen as a rising star, got only 2.6%. (New York was second behind Silicon Valley, with 27%, while Los Angeles was in third, with 17%). And many will still value the serendipity factor--you never know who you'll see at Il Fornaio for breakfast, Buck's for lunch or the Rosemont bar for late-night drinking sessions. 

Maybe I'm just hoping that we've reached peak Silicon Valley so I can stop watching the Zillow estimate on the house we bought in Atherton in 1996 and sold in 2002, which has climbed (soared?) steadily for years and currently stands at $7.9 million. If only....

Cheers,

Paul

 

 

 

 

Very recently, I heard John Catsimatidis, owner, president, chairman and CEO of Gristedes Foods, say on a news show that someone needs to look into the spate of fires occurring at food manufacturing plants around the U.S. When I looked this subject up on the internet, I found a lot of news and speculation. The news from organizations such as Reuters and the National Fire Prevention Association (NFPA) cited statistics about fires that led them to the conclusion that the number of recent fires was not above the norm; in other words, there was nothing suspicious about them. However, there was also general speculation by other sources that there was something suspicious going on and that nefarious actors might be behind the fires.

Because the NFPA doesn’t specifically track fires at food-processing plants alone, but rather fires at agricultural, grain and livestock and refrigerated storage facilities, which could all include food processing operations, the use of these statistics to benchmark food processing plants does not seem satisfactory. And if the number of fires was not out of the norm, then why is there so much attention being placed on them now? But I will leave the numbers and probability plotting to actuaries.

With over 20 fires at food manufacturing plants or food distribution centers by mid-year, the question becomes one about how well these plants are managing their risks. Fire risk can stem from a variety of causes or hazards. The categories of causes include: 1) poor housekeeping, 2) dangerous/flawed processes, 3) equipment failure, 4) natural catastrophes and 5) human error or malfeasance.   

The role of enterprise risk management is to bring together the disparate functions in an organization to identify risks and mitigate them regardless of root cause. An “all enterprise” solution is needed to manage risks because many root causes have root causes themselves.

Consider a food processor that stores certain preservatives in refrigerated areas and away from operational activity, but when the refrigerated areas become full puts some of this material into a non-refrigerated area temporarily. The preservatives are highly combustible. The non-refrigerated area is subject to high temperatures, overcrowded conditions and high equipment traffic. A small spark sets off from the equipment and alights on the preservatives, starting a fire. 

The root cause of the fire is that these highly combustible preservatives should have been refrigerated and somewhat isolated but were not. Yet, what about the root cause of the root cause? The procurement department wanted to take advantage of good pricing and decided to increase the amount of preservatives it usually ordered without checking to see if warehousing could accommodate the bigger order appropriately. 

This example points to why a holistic approach to risk management is so necessary. Spontaneous combustion would be a high risk area for the company and should have detailed mitigation strategies in place, one of which should be joint planning and communication between procurement and warehousing.

See also: Top 2022 Global Business Risks

This scenario is not taken from any of the recent fires. Rather, it is meant to highlight the need for an enterprise approach to risk management. In determining a mitigation strategy, both engineered solutions and human behavior solutions need to be invoked. 

Engineered solutions include such things as: 1) sprinkler systems, 2 fire retardant building and storage materials, 3) site lay-out and 4) combustible materials handling protocol. Human behavior solutions include such things as: 1) management commitment to enterprise risk management, 2) worker training, 3) strong performance management by supervisory staff through daily observance, periodic inspections or audits and 4) recognition for excellent safety records. 

The protection of our food supply at every stage in the value chain is vital to the strength and security of our nation and our people. Therefore, food manufacturing needs the most robust ERM practices feasible.

Today, we can sit on the couch, in the car, or by the pool and buy anything we want online -- including insurance. The evolution of the insurance industry makes it easier than ever to get quotes, choose the right policy, file claims and get updates on claims with very little effort. Whether consumers are shopping for car insurance, supplemental benefits such as accident insurance and critical illness coverage, or medical insurance, the processes are automated. Artificial intelligence (AI), machine learning (ML), optical character recognition (OCR), chatbots, data mining and automated underwriting tools are a few examples of automated technologies that make the processes easier for consumers and insurance carriers.

Integrated and Efficient Underwriting 

Automation has introduced new efficiency to the underwriting process for insurance carriers. Tools such as FINEOS Underwrite, Optum and Workhuman allow for integration with their internal and third-party systems, automate workflow and ensure compliance with standards and requirements. As a result of automation, the carriers no longer must worry about manual, rote tasks and can instead focus on customer service and providing consistent information regardless of who the consumer is talking to within an insurance organization. 

Aids in Choosing the Right Policy

When it comes to the consumer, it can be intimidating to choose the right policy for a specific situation. Automation makes this process easier. Most carriers provide comparison tools to help people choose the right policy in both the retail arena, such as car insurance, and in employee benefits. After answering a few basic questions, they are presented with a comparison of different policy options based on their individual and family needs. Price and coverage are personalized based on the information they entered. The introduction of AI and chatbots allows for answering basic questions instantaneously without talking to an actual person or waiting for a call back after a seemingly endless climb through a phone tree.

Simplifying the Claim Filing Process 

Once coverage has been purchased, a claimant can use a computer or an app on a mobile phone to submit a claim. Filing a claim requires that sensitive information be shared with the carrier in a secure manner. These portals include the ability to upload documentation, eliminating the need to fax the documentation or figure out how to send an encrypted e-mail to try to keep the information secure.

Data mining allows automated decisions on some simple claims within just a few minutes if not a few seconds. Data mining can help insurance carriers configure their systems to identify claims that are approved a certain percentage of the time (e.g. 85%, 95% whatever the carrier is most comfortable with) and approve them based on submitted information and policy terms -- without a person ever looking at the claim.

This is good for consumers because they know immediately that their claim was approved. And it’s good for insurers because their employees don’t have to manually process routine claims, freeing them to assist where their expertise is needed. For claims that are not simple, the claimant will receive instantaneous communication informing them if their filing is complete or if additional information is needed, with the specifics of what is still missing. This gives the claimant comfort in the knowledge that the carrier has received their claim instead of being left to wait and wonder until they receive a letter in the mail days or even weeks later.

See also: Insurers Turn to Automation

Faster Claim Status and Tracking Process

Claims processing is significantly faster because of ML and OCR, and the claimant benefits. ML uses algorithms to learn what processes a human follows to automate those workflows. OCR can remove the need for a claims examiner to review the documentation to also speed up determination of a claim. The claims examiner can devote their expertise to more complex claims that require additional attention and communication with the claimant.

In addition to accelerating the determination process, digital solutions allow claimants to track their claims through a portal in real time. Digital solutions let consumers choose how they want to receive their claim status updates and communications (text message, email, potentially even a paper letter). They can see status updates like, “Your claim is with an examiner but is still pending,” or “Your claim has been approved.” Customers typically receive notifications regarding the status of their cases in near real time through prompts to log on or through an email or text message.

Smart and Fast Decisions 

Although insurance can be intimidating, automation helps take away much of the difficulty in the decision-making and claims processing for consumers. It allows insurance carriers greater speed and efficiency processing simple claims, giving claims advocates more bandwidth to care for their clients. Automation and other digital technology, often unseen by the consumer, continue to improve operations for insurers with the vision to embrace them.

Whether you are moving from a paper-based system or upgrading an existing application, you may have already realized the dire need for digital transformation within your organization. Moreover, you might have validated this decision with the requisite proof and convinced the higher-ups to give a green light to the modernization process. However, 78% of digital transformation efforts fail to drive desired results due to poor planning. In other words, insurance agencies have to chalk out a concrete plan for this ambitious venture.

Here are some steps that will ensure legacy system and technology modernization success:

Make Organizational Goals Concrete

By this point, you may have already identified the problems and pressing issues plaguing your current system. With this problem statement in mind, identify the changes that you anticipate with the introduction of modern applications and insurance technologies. The resulting objectives would serve as your organizational goals. For greater efficacy, translate these into SMART goals (specific, measurable, achievable, relevant and time-bound) so you can monitor the progress.

Evaluate the Available Options

Once you have acknowledged the persistent problems and devised possible solutions, it is time to bridge the two by seeking practical options. Here’s a quick summary of some of the most common application modernization techniques:

• Retain and Expand: Retain the legacy system and make necessary modifications to expand its scope and applicability.
• Rehost: Rehosting is a lift-and-shift approach, modernizing applications with minimal modifications.
• Replatform: Replatforming requires shifting the entire code or parts of it to a new ecosystem while retaining the core functionalities.
• Refactor: Refactoring optimizes the code and code structure to update the legacy software.
• Redesign: Redesigning involves making significant changes to the code architecture to enhance capabilities.
• Rebuild: Rebuilding entails redesigning and rewriting the application without changing the scope, specifications or capabilities.
• Replace: Replacement should be the last resort if insurance agencies can no longer justify the use of legacy systems. If you are still stuck with obsolete paper systems, replacing them with digital-age insurance software solutions would be the first option.

These 7 R's of application modernization will help you prepare a successful road map for your transformation.

See also: 4 Keys to Agency Modernization

Prioritize the Modernization

After you have decided on the technology modernization methodology, you need to weigh out its impact with regard to the workload, resource availability, downtime, risks, cost, etc. Based on these parameters, you can minimize the impact by prioritizing the activities based on their relative importance for maintaining business continuity, resilience, agility, etc.

Once again, the SMART principle can help quantify these goals and ascribe them to a timeline.

Select a Technology Partner

While the need for digital transformation and legacy modernization may stem from pressing issues requiring immediate action, insurance agencies may not be equipped to handle such a mammoth task on their own. In such a situation, it is always wise to partner with a technology enabler for the job as you focus on your core operations. Look for an organization that specializes in the digital transformation of insurance agencies so that they can cater to your specific requirements.

Test, Observe and Optimize

Digital transformation and technology modernization are continuous processes. As such, insurance businesses have to keep an eye on their status and progress during and after implementation. Test, observe and optimize the workflows.

Closing Thoughts

Even though digital transformation and application modernization may seem overwhelming, they do not have to stay that way. A well-planned and -thought-out strategy can overcome any obstacles and help your company get the most out of this process. Legacy system and application modernization will free your insurance business from IT complexities and compatibility issues. By leveraging digital-age insurance technologies, you can adapt and innovate at scale.

There has been a significant shortage of insurance professionals for years, and now the Great Resignation has hit. Jacobson Group’s recent Insurance Labor Market Study found that insurance professionals are exploring their options and taking a hard look at their current jobs.

As more employees move between jobs with greater frequency, companies are compelled to onboard workers quickly to maintain business continuity while upskilling the existing workforce to fill talent gaps and minimize any loss in productivity.

While many applications are deployed to help ease employees’ workload, they do not always make for the right transitions when it comes to learning for both new and experienced employees. There still remains a need for continuous support and feedback-driven change management for the workforce. Digital Adoption Platforms (DAPs) help address those issues and, if deployed correctly, can help employees get up to speed quickly and effectively.

What are Digital Adoption Platforms?

A digital adoption platform (DAP) is software that integrates fully with your enterprise applications. The software can then walk users through the applications step-by-step to complete role-specific tasks and navigate on their own. DAPs also feature a self-help widget with links to articles, videos and guided walkthroughs so users can effectively search and learn every aspect of the application. The software helps prevent user confusion when they are trying to understand specific tasks and lets them focus on the task at hand. 

A DAP can be used to drive digital adoption in a number of ways. One of the most effective ways is to help companies onboard and train employees on new technology. DAPs help keep employees on track and ensure they get the knowledge they need for the most essential features of their job. DAPs also teach employees how to help themselves, ensuring they know how to find the answers to their questions. Another important DAP feature is the ability for users to search for and find all relevant documentation when they need it.

See also: Opportunities Amid the Great Resignation

DAPs' Role in Onboarding

The benefits of DAPs in the insurance industry are numerous. Because insurance is driven by internal and external regulations specific to each business, region and the different types of products offered, there is a steep learning curve. And, especially with younger employees, you may have to be prepared to onboard frequently. The latest Deloitte Global 2022 Gen Z and Millennial survey found that 40% of Gen Z workers would like to leave their jobs within two years. It can take a long time for any employee to become proficient in their area, whether it be underwriting, claims or distribution. A DAP’s ability to flatten that curve is invaluable to insurance companies to onboard new employees quickly and efficiently.

Your onboarding process can be significantly improved by using DAPs to create near-real-life simulated training experiences and custom training content to make underwriters, claims and service representatives more proficient. New employees will be encouraged to lean into the flow of work. The guided walkthroughs engage users nearly every second of the training process and will also help reduce the number of errors new employees make. Leveraging AI, a DAP can identify and rectify mistakes with automated data input. 

Upskilling Experienced Workers

Upskilling is unavoidable and absolutely necessary in the insurance industry. Workers will inevitably receive added responsibilities and tasks to their current roles. This may include overseeing a new region with different regulations, processing more policies each day or working in a new cross-functional role due to staff shortages. In each case, it takes time for employees to gain the desired level of knowledge and proficiency for the applications used to perform those new duties.

Most of the workflows within legacy insurance applications are complex, making it hard for users to understand their current tasks, let alone handle any new responsibilities. DAPs integrate with existing applications to help users learn more about the important features and processes. The same step-by-step walkthroughs that benefit new employees can be used to expand the knowledge base of more experienced employees. If an employee runs into a problem regarding a certain insurance process, they can look to self-help menus and access walkthroughs to get the help they need.

DAPs enable employees to maintain productivity levels while taking on new responsibilities. One of the ways this can be achieved is through just-in-time nudges to reduce errors made in policy or claims processing. A DAP can also pre-fill or validate entries to speed certain processes and ensure data entered adheres to the correct format. Another way a DAP can help is by automating repetitive tasks, allowing employees to focus on judgment-intensive and more crucial tasks. Through the creation of on-demand content and training, insurance companies can leverage a DAP to increase employee productivity and reduce the margin of error. Smooth onboarding and seamless transitions to new roles for experienced employees can be achieved faster as they gain the power to learn more quickly on their own terms, ensuring that your organization can stay on track despite employee turnover.

Claims are frequently cited as “the moment of truth,” and FNOL (First Notice of Loss) is where all claims begin. Now, new technology through an innovative industry collaboration on a blockchain platform is being leveraged to enable FNOL data exchange between insurers – and eventually other claim ecosystem partners.

RAPID X is the trade name for RiskStream’s First Notice of Loss Data Sharing application, which has been developed with and for the property and casualty insurance industry by the RiskStream Collaborative, an industry nonprofit affiliated with The Institutes. Rapid X was introduced earlier this year, and the insurtech space has since lit up with numerous efforts to modernize the traditional process of reporting and starting an insurance claim.

The Institutes’ RiskStream Collaborative has a different approach, which focuses on creating an ecosystem within the risk management and insurance industry that leverages a scalable, enterprise-level blockchain/distributed ledger technology framework to streamline the flow and verification of data. The effort lowers operating costs, drives efficiency from improved processes and enhances the customer experience.

This capability is perfectly positioned for the next generation of advancements in claims. As the insurance industry strives to prevent and detect accidents through telematics and crash notification, these features accelerate the tempo of FNOL and claims reporting. Immediate sharing of claim notification via RAPID X will enable all stakeholders to coordinate more immediately, no longer waiting until the end of the claim process to reconcile information vital to subrogation.

Greater efficiency and less redundancy in individual processes are just a couple of benefits. Consider a minor auto accident between two drivers, where both insurance companies have separate loss intake processes, individual claims investigations and duplicated, related process steps. A common customer complaint concerns the number of times they have to describe how the accident happened, not to mention the overall confusion created from interactions with two or more carriers and their various specialized adjusters. RAPID X shares data between insurers to create a universal FNOL among carriers, setting the stage for streamlined data-sharing processes.

FNOL and Claims Process Transformation: Why It Matters

P&C insurance is going through an unparalleled period of change that has attracted exciting, record-setting insurtech investments. One of the most discussed areas is FNOL, the first step in the claims process.

Automation initiatives encompass everything from the use of sensor technology to detect damages to leveraging artificial intelligence to predict and automate intake. Still, the vast majority – some 80% of policyholders and claimants – prefer to speak with a live representative today, generally at an insurer’s contact center. 

Historically, reporting a claim can take 30 minutes or longer, through a series of questions and an iterative conversation. Each carrier has had to create their own individual FNOL record.

RAPID X allows for the creation of a single, universal FNOL record shared by all parties involved in that claim. Data changes can only be made by the information owners, ensuring that things are accurately captured. A carrier can’t change the data on another carrier’s policy holder.

Industry savings from the use of RAPID X have been conservatively estimated to range between $60 million and $120 million annually, depending on the extent of industry adoption. In any  event, the opportunity is significant.

Industry Leaders Join Forces

The Institutes' RiskStream Collaborative is an unprecedented, industry-led consortium collaborating to unlock the potential of blockchain. It is the risk management and insurance industry’s first and largest enterprise-level blockchain consortium, which is developing insurance-specific use cases via Canopy, a custom blockchain architecture. RiskStream is a network-based, nonprofit organization affiliated with The Institutes, which provides professional development, research and educational services to the insurance industry. The Institutes' board includes senior executives of companies that write a significant percentage of the U.S. personal auto market. 

The RiskStream Collaborative offers insurance solutions for personal lines, commercial lines, reinsurance and life and annuities. Members (carriers, brokers or reinsurers) lead all areas of RiskStream’s governance and activity. For example, members work with RiskStream staff to design use cases on behalf of the industry and then work with RiskStream staff and service providers to develop and test the buildout of applications. The Collaborative aims to expand its network of members and connect insurance-oriented organizations in 2022 to create greater efficiencies and achieve growth opportunities through additional blockchain innovations.

See also: How IoT May Revolutionize Claims

How It Works

RAPID X is built on an underlying blockchain technology similar to that which powers Bitcoin and other cryptocurrencies to share, confirm and verify transactions without a centralized authority. The key distinction is that RiskStream’s platform is not public. Instead, it’s a private, permissioned platform called Canopy, which was designed by the industry through RiskStream Collaborative technology governance. The Canopy platform is SOC2-certified and meets industry ISO standards. It provides the ability to safely and securely share information, saving time and effort while maintaining individual control. 

Each company has a node on the private decentralized network, on which it can create, update, reconcile and share loss records. Simple liability determination and agreement can also be input and tracked. FNOL is just the beginning, with a number of other use cases up next; proof of insurance, claim verification, investigation, evaluation, settlement and total loss determination and salvage title processing, to name a few.

The Bigger Picture: Blockchain as Ecosystem Enabler

RAPID X is only the beginning. Integration among carriers and other claims ecosystem partners is the future of efficient claims processing and will significantly benefit all stakeholders, including claimants. 

The future vision and development road map for the Canopy blockchain platform leverages the technology and active carrier support to create a multi-party platform that will support the broader insurance industry ecosystem, including service providers and partners. Essentially, RiskStream is “laying the plumbing” for data exchanges between entities and facilitating network collaboration and coordination, as well. This is neither easy nor simple, but RiskStream CollaboratIve is uniquely qualified to accomplish such a feat both privately and securely.

To learn more, please reach out to RiskstreamCollaborative@theinstitutes.org.

We have seen the evaluations of the listed insurtech startups falling more and more over the past year. The HSCM Public InsurTech Index (HPIX) presented to the market 14 months ago is down by almost 65% from its maximum.

This has led some incumbents to doubt their insurtech efforts and the priority (and budget) assigned to the innovation initiatives. I've felt this speaking to insurance executives at conferences, and you can check how the tone has changed on many earning calls and in analyst presentations by insurance incumbents over the past six months.

This is why I take extremely seriously the following statement from venture capitalist Marc Andreessen: "The minute tech stocks get hit, a lot of big companies basically say, “Oh, thank God, we don’t have to take this stuff as seriously”.

Please, my fellow insurers don't make this mistake!

1) The market has NOT turned its back on insurtech. 

The drop in the valuations is not about insurtech, it is about tech.

Let's compare the insurtech index with Global X FinTech ETF (FINX), ARK Innovation ETF (ARKK), and iShares U.S. Technology ETF (IYW). 

Revenue multiples for tech companies tell the same story. Here is the reference.

As Rob Moffat says: "Reports of insurtech’s death are greatly exaggerated…"

2) Insurtech investments are paying off.

Incumbent insurers have always been evaluated for their growth and their profitability. Well, there is great news for all my friends working on innovation in their insurance company: Innovation delivers higher growth and better combined ratios!

This has been clearly shown by AM Best's deep and robust analysis of the performance of the best innovators (innovators), the average (moderate) and not innovative (minimal) in the insurance property and casualty sector.

These two charts should be hung on the walls of any P&C carrier. Instead, these figures haven't yet had the deserved attention since their publication three months ago. 

3) Some Insurtech initiatives have kept the promise.

• The Allstate Group had over 2.5 million telematics policies among all programs and companies at of the end of 2021.
• The Allstate branded telematics programs represent already a penetration above 20% on portfolios in the states where at least one telematics program is offered.
• In these states, this penetration ranges from 30% in the exclusive agent channel to 40% for business sold through the call center and over 50% for online business. 
• 30% of Drivewise customers use and engage with the app monthly, and the percentage grows to over 50% for the Milewise portfolio.
• Customers who connect and sign up for a telematics program tend to have anywhere between five and 15 percentage points higher retention rates relative to those who have chosen to not enroll into a program.
• Allstate’s Arity found there is a 4X difference in the lifetime value between the top-quartile best drivers and the bottom-quartile worst drivers.
• Customers who are active within the Allstate rewards program tend to have both retention and loss ratio benefits in the range of one to two percentage points. These customers also have 26% higher likelihood of recommending Allstate.

The Allstate case history described in the article shows the real impact already generated by using telematics data and the progressive development of the foundations for the next steps of this multi-year journey.

See also: 5 Questions for Matteo Carbone on Smart Homes

Let's move to another IoT-based insurance journey, by Kinetic and Nationwide. Below you can find some thoughts I exchanged with Haytham Elhawary and Brian Anderson.

Matteo: Haytham, we discussed your risk mitigation approach in workers' compensation in front of a cup of coffee in Manhattan exactly 12 months ago. This May, you also presented it at the last plenary session of the IoT Insurance Observatory. I would like to ask you to share your IoT approach and something about the collaboration with Nationwide.

Haytham: Workers’ comp is mandatory, and traditionally transactional – you have an injury, we pay your costs. Our offering is different, it doesn’t just pay claims, it also provides safety technology that can help prevent those claims from happening in the first place.

While there’s been a lot of emphasis on worker productivity recently, the emphasis on safety hasn’t kept pace. Workers aren’t properly trained to avoid injury, and safety technology hasn’t changed in decades. So, injury rates are huge, especially among front line and industrial workers. Half are strain- and sprain-related, which have the largest impact on cost ($60 billion annually), time out of work and productivity.

We believe the best and most scalable way to help workers avoid injury is with a tech-based, real-time solution. So we developed a wearable device, with sensors that measure worker biomechanics, that gives real-time feedback when a high-risk movement is performed, like an awkward twist, bend or overreach. And we’re including this safety tech for free in our workers’ comp policies for the industrial workforce.

Our offering reduces injuries among these workers by changing their behavior and by providing managers with actionable data about risk. So, the policyholder can lower injuries, which leads to fewer claims, lower costs and an eventual reduction in premiums. It’s a preventative approach to workers’ comp that leverages state-of-the art tech.

To accomplish this, we’ve formed an MGA, in partnership with Nationwide. Kinetic distributes through agencies and does the underwriting and device deployment. Nationwide does the claims, billing and compliance. By collaborating, we can write policies in all states, on A+-rated paper, while providing proven safety technology at no extra cost.

Matteo: Looking at the different initiatives you supported, can you share some quantitative insight about the results achieved, on one side, directly with real-time risk mitigation (the real-time feedback to front line employees) and, on the other side, indirectly with the behavior-change programs (sharing insights with operational managers or loss control teams, providing incentives to workers, ...)

Haytham: To get a clear picture of the impact of our wearable device, we partnered with an actuarial consulting firm, Perr&Knight. They looked at our operational data from users in various industries and verified the device supports improvement in injury reduction, lost work days and claims costs. Their report found the Kinetic wearable reduces strain and sprain injury frequency by 50% to 60% and lost work days by 72%.

When looking at the high-risk-movement data our tech can collect across an entire workforce, we’ve found that a reduction in high-risk movements is directly correlated to a reduction in injury rates. For example, in a 1,000-unit deployment on a company’s drivers and warehouse workers, data showed that for a 30% reduction in high-risk movements, we saw a 50% reduction in injury rates 12 months later. And when Frito-Lay deployed our wearables on thousands of manufacturing workers, they experienced a 26% reduction in high-risk movements and a 20% reduction in injury rates after six months. We’re providing a leading indicator that correlates strongly to claims reduction.

Policyholders can access all of their workforce’s high-risk-movement data on a web dashboard, where they can see what specifically is driving risk, like a job type or individual, a day of week or hour and more. Then they can make improvements to enhance safety, such as focused trainings and workstation or process redesigns. As an example, at one Frito-Lay plant, management was able to identify times of risk, such as when taking weight samples or during ingredient changeovers. They used this data to drive purchasing decisions, retrofit equipment and modify workspace setups to reduce risk. Another example: A machinist at a construction machinery and equipment company had to regularly bend and twist to place parts from a table into a machine. When data showed he was performing an average of 97 high-risk movements each day, the company modified the work process by adding a raised platform to the table. The redesign reduced the employee’s risky movements by 64%.

Matteo: This approach uses IoT data to prevent a risky situation and avoid a claim. I've always considered these smart actions an extraordinary opportunity for insurers because they affect the core of the portfolio's technical profitability. Brian, what is your perspective as the investor?

Brian: Wearables have always had a lot of promise. The biggest challenge has always been where and how do they fit or, to put a fine point on it, can they seamlessly (i.e. in the background) create behavior change. Kinetic’s real-time machine learning-enabled vibration reminders are the gentle nudge that workers are accepting of because the vast majority of people in the workforce don’t want to be injured when they’re bending, lifting or twisting in a way that may hurt them. Having a short, small vibration make the nudge versus someone’s manager is far more palatable feedback, too. These very nuanced elements culminate in real sustainable profitability improvements, not just at a point in time, but over the long haul, which is a compelling economic moat for both the company and for the investor. 

Ultimately, Kinetic is exactly why MGAs actually should exist:

1. They differentiated strong distribution strategies that others lack.
2. The profit profile of the business they generate is better than others and is non-replicable, all things good fintech investors should be keenly tuned into looking for.

Matteo: One of the biggest historical success stories in the past of the P&C U.S. market has been characterized by the strategy to grow as fast as possible at a target (healthy) combined ratio. Instead, we have seen many full-stack insurtech carriers focusing only on the growth and running portfolios with terrible loss ratios. I'm starting to hear founders in the market talking about the ambition to have more modest growth and sustainable portfolios. I'd love to hear the thoughts of both of you?

Brian: The last decade in public and private markets has been about three things - growth, growth and growth. The success of tech sector economics and winner-take-all strategies has rewarded this. But over the last year or so, the public and downstream private markets have shown that prioritizing growth without the context of contribution margin and capital intensity is not going to work with rising interest rates, tighter credit markets and dramatically fewer capital markets willing to fund fully verticalized *anything* models.

Haytham: In the private markets, though, you are serving two masters:

1. The carrier partner that provides balance sheet capital capacity and lets you write premium and wants slow, profitable and predictable growth.
2. Investors are often hard-wired to prize growth in premium to substantiate high valuation multiplesm which are still based on revenue.

For example, in commercial lines like workers’ comp, understanding the actual developed losses of a book of business can take years. In the absence of reliable loss data, we’ve seen that the emphasis tends to shift to growth, which can be more easily controlled, and perhaps some proxy of losses. So it's a tricky situation, and finding the more nuanced investors who understand that it can often be better to have more moderate, but profitable growth has not been easy.

We like to think of Kinetic as the next wave of insurtech, or insurtech 2.0. We’re focused on risk reduction, using technology and data to help reduce losses and improve underwriting, which in turn will lead to more profitable policies. In this context, growth and profitability should be more compatible than they have typically been in the first wave of insurtech.

 

Please, my fellow insurers, don't stop investing in innovation! It’s unthinkable for an insurance company today not to pose the question of how to evolve its own model by thinking of which modules within their value chain should be transformed or reinvented via technology and data usage

I believe all the players in the insurance arena will be insurtech, meaning organizations where technology will prevail as the key enabler of the achievement of their strategic goals.

 

The cybersecurity insurance market (“Cyber Market”) has experienced rapid premium growth in recent years. Our analysis of NAIC Annual Statement data through year-end 2021 suggests the direct written premium (“DWP”) for the NAIC Cyber Market grew to approximately $4.8 billion in 2021, up 74% from $2.8 billion in 2020. The corresponding NAIC Cyber Market growth rates in 2020 and 2019 were 23% and 12%, respectively. Additionally, our analysis of Lloyd’s of London (“Lloyds”) data through year-end 2021 suggests the ultimate signed premium for the Lloyds Cyber Market will grow to $1.4 billion in underwriting year 2021, up 40% from the $1 billion estimated for underwriting year 2020. The corresponding Lloyds Cyber Market growth rates in underwriting years 2020 and 2019 are estimated to be 13% and 27%, respectively.

The Cyber Market’s recent growth follows deteriorating insurance results in preceding years. Specifically, the NAIC Cyber Market’s reported calendar year incurred loss and defense and cost containment expense (“DCCE”) ratios on Stand-Alone cyber policies have increased from 43% in 2016 to 73% in 2020. During this time, reported claim frequency increased 172%. Future calendar year results will provide insights as to whether companies have fully reserved for the increased cyber frequency. Further, our projected ultimate loss and DCCE ratio estimates for the Lloyds Cyber Market increased from a low of 37% in underwriting year 2015 to a high of 129% in underwriting year 2019.

Unfortunately, working from home due to COVID has led to increased Cyber incidents. According to Cloudwards, the rate of cyber crime increased by 600% during the COVID pandemic. The number of Cyber complaints reported to the FBI increased from 250,000 a year during the 2008 to 2018 years to over 750,000 a year in 2020 and 2021. 

Despite the increase in Cyber incidents, insurance results improved in 2021. The NAIC Cyber Market’s calendar year 2021 incurred loss and DCCE ratio decreased to 65%, and our projected ultimate loss and DCCE ratios for the Lloyds Cyber Market decreased to 91% and 59% in underwriting years 2020 and 2021, respectively. However, the Lloyds results are highly uncertain due to the immaturity of the underwriting years as of year-end 2021. 

We attribute this recent improvement to the combined effect of decreased frequency, increased rate levels and constrained capacity (e.g., increased deductibles, lower limits, refined policy terms, etc.). Specifically, within the 2021 NAIC Cyber Market, reported claim frequency decreased 14%, while large risks commonly experienced 100% to 150% rate increases, with the middle market often experiencing even larger increases. Considering DWP per policy has grown at a much slower pace than rates alone would suggest, we estimate the effective coverage per policy has decreased significantly.  

All things considered; the results of our analysis suggest an improved Cyber Market in 2021. A significant question relates to the adequacy of prior accident year reserves.

The following sections detail the results of our analysis.

Cyber Market Growth

As illustrated in Chart 1 below, the NAIC Cyber Market has experienced significant growth in DWP since 2015:

Chart 1: NAIC Cyber Market Change in DWP by Calendar Year

The DWP displayed in Chart 1 is composed of cyber premium stemming from Stand-Alone cyber policies (i.e., those policies designed specifically to cover cyber risks) and Package cyber policies (i.e., those policies where cyber coverage is offered in addition to other coverages). The NAIC Annual Statement requires companies to list cyber premium stemming from Package cyber policies as either “Quantified” or “Estimated.” We display this bifurcation in Table 1 below, along with DWP growth specific to Stand-Alone and Package cyber policies:

Table 1: NAIC Cyber Market Change in DWP by Calendar Year and Policy Type ($Millions)

As Table 1 displays, “Quantified” cyber DWP has generally represented approximately 90% of the displayed DWP stemming from Package cyber policies since 2017. Table 1 also shows the DWP growth for Stand-Alone policies has recently outpaced the growth for Package policies, especially in 2021. We expect the demand for Stand-Alone cyber policies to continue to grow as the need for tailored coverage specific to cyber risks is becoming apparent among insureds, especially in light of war exclusions commonly listed, or generally accepted to apply, to Package policies.

As illustrated in Chart 2 below, the Lloyds Cyber Market has also experienced significant growth in premium in recent years:

Chart 2: Lloyds Cyber Market Ultimate Signed Premium by Underwriting Year ($Millions)

The DWP displayed in Chart 2 is composed of actual and projected signed premium. Our analysis of the Lloyds data suggests actual signed premium is at an ultimate level for underwriting years 2019 and prior, is near the estimated ultimate level for underwriting year 2020 and is less than half the estimated ultimate level for underwriting year 2021. As such, there is considerable uncertainty around the ultimate growth rate for underwriting year 2021. That being said, the 40% growth estimate does not seem unreasonable considering the $625 million of signed premium for underwriting year 2021, as of Dec. 31, is 43% higher than the corresponding signed premium of $437 million for underwriting year 2020, as of Dec. 31, 2020.

See also: Why Hasn't Cyber Security Advanced?

Cyber Market Insurance Results

As illustrated in Chart 3 below, the NAIC Cyber Market insurance results deteriorated between calendar years 2018 and 2020, but improved in 2021:

Chart 3: US Cyber Market Incurred Loss & DCCE Ratios by Calendar Year – Stand-Alone Policies Only

As illustrated in Table 2 below, the Lloyds Cyber Market has also experienced a period of deteriorating insurance results with improved trends recently:

Table 2: Lloyds Cyber Market Reported Loss and DCCE Ratios by Underwriting Year

The Table 2 values shaded in grey represent our projected estimates based on our analysis of available information. The results for underwriting year 2021 are particularly uncertain given the year is still in the earning period. That being said, early evidence suggests the results for underwriting year 2021 could be significantly lower than 2019, which follows the apparent momentum of improved results in 2020.

A graphical depiction of the development of the Lloyds Cyber Market reported loss and DCCE ratios by underwriting year is displayed in Chart 4 below:

Chart 4: Lloyds Cyber Market Reported Loss and DCCE Ratios by Underwriting Year*

*Dotted lines represent our estimates of the development of reported loss and DCCE ratios to ultimate value.

Cyber Market Diagnostics / Discussion

The deterioration of NAIC Cyber Market insurance results between calendar years 2018 and 2020 follows a period of increased reported claim frequency between 2016 and 2019, as illustrated in Chart 5 below:

Chart 5: NAIC Relative Reported Claims per Policy – 2016 Base Period

There is an apparent lagged relationship between increased reported claim frequency and increased booked loss and DCCE ratios. Specifically, the increased 2018 and 2019 reported claim frequency measures displayed in Chart 5 above don’t appear to manifest as increased incurred loss and DCCE ratios until 2019 and 2020. This lagged relationship suggests initial booked reserves have likely been inadequate. 

Also of concern is that the reported claim trends displayed in Chart 5 above imply the calendar year 2019 through 2021 incurred loss and DCCE ratios would be significantly higher than reported. That is, if the calendar year 2016 incurred loss and DCCE ratio of 43% was trended forward to 2019, 2020 and 2021 using only the reported claim trends displayed in Chart 5 the resulting incurred loss and DCCE ratios would be 118%, 118%, and 101%, respectively. These trended results do not account for recent rate increases, but are nonetheless significantly higher than the corresponding reported ratios of 47%, 73%, and 65%, respectively.

The significant reduction in reported claim frequency in 2021 may be explained by increased awareness of cyber threats among the general population, along with improved security protocols and more robust education on the risk by corporations. The trend toward higher deductibles may also contribute to the lower reported claim frequency recently.

The average NAIC DWP per in force Stand-Alone cyber policy increased to $12,161 in 2021 from $8,306 in 2020, an increase of 46%. Chart 6 below displays these average premiums back to 2015 for both Stand-Alone and Package cyber policies:

Chart 6: Average NAIC DWP per In-Force Policy

Considering average U.S. cyber rates were estimated by many parties to increase by 100% in 2021, the implication is coverage was significantly reduced likely due to a combination of increased deductibles and reduced policy limits.

Recent Claim Department Responses

The increase in ransomware and data breach events have led to more changes in claim departments:

1. Insurers continue to add claims technical staff and reimagine business process and vendor relationships to improve efficiency and reduce loss and DCCE. There is evidence of insurers building incident response technical teams as these costs fluctuate with demand.
2. Talent shortages have begun to show in claim teams, law firms and vendors.
3. There is a lack of surge capacity in the vendor marketplace. 
4. The COVID-19 pandemic exposed the heavy reliance of insurers on third-party professionals to render response services where there are now growing questions of surge capacity. Insurers may be left exposed for lack of timeliness in responding or subject to higher costs.
5. Brokers are left to assist clients that have recently uninsured or that have significant retentions. Enhanced broker services are being developed to fill the services gap.
6. The speed of cyber incident response continues to quicken, and the demand and cost for specialized claims services continues to increase.
7. Data breach class action litigation continues to rise.
8. Claim handling data gathering and the use of analytics is growing. 
9. There is more focus on planning for incidence response surges, suggesting that insurers nourish service development and competition. Specifically, law firms specialized in incident response, forensics, e-discovery, call centers and identity theft and fraud monitoring and restoration provider.

Ransomware losses, which began to affect portfolios heavily commencing in 2019, are quicker to settle than data breaches, which are more prominent in prior years’ losses. Despite the purported lower latency, there is an increase in case reserves. 

Brokers likewise are taking a more active role in vendor due diligence and selection for their clients and looking specifically for improved services for identity monitoring that go beyond credit monitoring to include health data, social media profiles and services for minors and high wealth individuals. Expanded services offerings are expected and needed to avoid or mitigate the potential for litigation and maintain goodwill with consumers.   

See also: Excess & Surplus Lines Market Hardens Further

Concluding Remarks

While the Cyber Market has significantly improved in 2021, increases to prior coverage year reserves may create a significant drag on earnings. Also, the instability caused by the Russian invasion of Ukraine and the potential for a cyber catastrophe creates a very uncertain future. 

All NAIC data referenced in this article was provided by S&P Global Market Intelligence, unless otherwise noted. All Lloyds data referenced in this article was provided by Xchanging, unless otherwise noted. 

For further information, please reach out to the authors.