Many insurance companies are realizing a one-size-fits-all approach to customer needs is out of date. 

Call it the Amazon effect. Customers need speed, service and selection—all at once. Spurred by the pandemic, consumers are rethinking how they spend their time. Inflation, too, has people scrutinizing their spending. 

Today’s insurance companies must deliver the efficiency of technology and the personalization of human interaction. It’s no secret that many insurers need to improve their customer experiences. But often, they don’t know where to start.

Digital transformation can be the key to keeping customers satisfied. 

Digital Transformation: A Billion-Dollar Opportunity

According to Accenture, the insurance “switching economy” – revenue up for grabs due to consumer spending patterns and switching rates – is booming. Accenture estimates that nearly $500 billion in life insurance and property and casualty insurance premiums are in play “as a result of declining customer loyalty and the perceived commoditization of products.” 

McKinsey found that a large, established insurance company could double its profits in five years by digitizing its business. Companies that fail to embrace digital transformation risk turning their offerings into commodities. 

In an industry where hundreds of billions of dollars are up for grabs, investing in digital innovation is not optional. 

New Table Stakes: What Insurance Customers Expect

Active Digital and Harris Poll found that 88% of customers value an insurance carrier that customizes communications. Eighty-six percent want to interact with their insurance company through all digital channels. Additionally, 79% of customers agree that having a person available to help them online or through an app would make them choose one insurance company over another.  

According to IBM, three key steps that marry technology with personalization can help deepen the company-customer relationship. These include leveraging data to personalize customer experiences, using AI throughout the customer journey and interacting with customers at the right time and place through contextualized content. 

What Today’s Best-In-Class CX Looks Like

More insurance companies are turning to digital-driven, customer-centric models that focus on customer experience (CX). According to IBM, 85% of insurers use CX initiatives throughout the customer journey, and 90% of companies have a C-suite position dedicated to the consumer experience.

Focusing on CX helps insurers compete on more than just price. McKinsey found that better CX can promote sustainable growth and drive profits faster than raising advertising spending or lowering prices. 

Further, McKinsey found that car insurance companies offering best-in-class CX doubled and even quadrupled new signup volume and saw profits 30% higher than those that didn’t. Satisfied customers are 80% more likely to renew their policies than unsatisfied customers. 

Employee Engagement Builds Customer Loyalty 

Employees are a crucial ingredient in your customer-centric digital transformation. Employee enablement and customer experience are two sides of the same coin. 

Insurance Innovation Reporter found a strong inverse relationship between employee turnover and employee satisfaction and productivity. The more stable your talent roster, the better your customer experience. 

The connection between employee engagement and customer experience is more crucial in the insurance industry than any other. Engaged employees deliver better customer experiences. Happier customers have a higher lifetime value due to their willingness to buy more, their tendency to refer more and their generally lower service cost. 

See also: The Rules of Digital Transformation

Meet Employee Needs and Enhance CX with Digital Transformation 

How can digital transformation improve customer experience and promote employee enablement? Here are some tips for approaching digitization with the customer in mind. 

Tip 1: Make Your Company More Available to Customers

Insurance companies must meet customers where they are – even if it’s a new venue for the company. These include social media platforms like Twitter, Instagram and TikTok or messaging platforms like Facebook Messenger, SMS, WhatsApp and Telegram. 

Not sure where to begin? Focus on personal connection and integrating existing channels. Improve transparency with automated updates on processes and payouts via email, SMS or messaging. 

Expanding self-service options can improve customer satisfaction while freeing employee bandwidth. For example, invest in help content or publish resources such as a list of approved vendors to help customers get the answers they need faster. 

Use technology to classify customer needs and requests. Consider implementing "rules" that organize and rank all incoming claims. For instance, customers appreciate it when simple claims are solved quickly. 

Tip 2: Mix Technology With Personal Touch

By combining the efficiency of self-service with the warmth of personalization, insurance companies can increase productivity and cement customer loyalty. 

How? Digitally minded insurance companies must streamline the quote, claims and signup processes. Automation can reduce the cost of the claims journey by 30%. Adding online claims reporting lets you streamline the process by asking fewer questions and leveraging technology that delivers dynamic adjustments. 

But you also must ensure customers have a reliable way to access a human. Maintain a robust online presence but have real, informed agents behind each profile, ready to address questions and complaints.

Tip 3: Seek Feedback, Stay Flexible

Customer-centric digital transformation is dynamic. It’s not something you do once and then stop thinking about. Instead, it is an iterative process that improves with continuous assessment and feedback from employees and customers. 

Insurance companies pursuing digital transformation must provide more touches over the customer lifecycle. When insurance companies initiate contact outside the standard signup and renewal conversations, it signals to customers that their insurance company is active, available and on top of things. 

Insurance companies should provide talent with training and development opportunities. This shows employees that their employer is committed to helping them succeed. 

Technology can do things people can't and vice versa. When insurance companies embrace digital transformation while centering customers, they can unlock unprecedented levels of loyalty and longevity.

At the beginning of the Ukraine conflict, ransomware gang Conti issued a statement threatening to deliver "retaliatory measures in case the Western warmongers attempt to target critical infrastructure in Russia." A few months later, a separate hacker group launched an attack with the following message for its victim: "You're the most widely used payment application in Russia, so the reason we've selected you for targeting should only be obvious.... Your files have been encrypted, you can thank Conti for that... If you're looking for someone to blame for your current situation, look no further than Vladimir Putin."

In light of the current Ukraine conflict, more and more ransomware gangs are beginning to issue political statements alongside their demands. This may create some issues for both the hackers and their victims, as these messages run an increased risk of triggering the "war exclusion" contained within all cyber insurance policies. A typical war exclusion will read as follows:

"Alleging, based upon, arising out of, directly or indirectly caused by, resulting from, or in connection with war (whether declared or not), invasions, hostilities, civil war, strikes or similar labor actions, acts of foreign enemies, terrorism, hijacking, warlike operations, rebellion, revolution, insurrection...".

Attacks issued with political statements are more likely to be perceived by insurers as hostile or warlike actions indirectly caused by, resulting from or in connection with the war. Remember, often "war" does not need to be declared. If these statements do trigger the war exclusion within the victim's cyber insurance policy, it could make it more difficult for a ransomware gang to collect their ransom, given that their target may be more reluctant to reach into their own corporate pocket to pay any extortion demand.

So why are groups making such statements? While it may be an oversight, or they may not realize the potential insurance implications in doing so, that's unlikely. Hackers are well-versed and have been known to specifically target companies that maintain cyber insurance. It's more likely that these new attacks are simply motivated more by political/ideological interests versus purely economic gain. The statement being made is the primary goal, with the monetary reward secondary. In addition to political retaliation, some of these statements may also be the result of feuding hacker groups, with their victims being caught in the crosshairs.

There may be an even more sinister explanation. It's also possible that the hacker groups understand that such statements have the potential of negating insurance coverage. Launching an attack and attempting to force the targeted organization to personally pay the demand, more effectively strikes at the hearts of their victims.

Regardless of the reason, such statements would appear to indicate this new wave of attacks is being driven by politically motived cyber mercenaries seeking retaliation and revenge. The bigger question is, if this is indicative of more aggressive impending attacks, or a precursor to a full-fledged cyber war.

There may be some hope. Most cyber insurance policies contain carvebacks, excepting (to the policy exclusion) acts of "cyber terrorism." A typical carveback may read as follows: "cyber terrorism means, use or threatened use of disruptive activities against the insured's computer system committed with the intent to further stated social, ideological, religious, economic or political objectives."

See also: Ransomware Grows More Pernicious

Insurers have been fairly reluctant to cite the war exclusion, but a surge of attacks could make them reconsider. The question is, will these statements be enough to justify the attacks as acts of "war" (and excluded by the policy), given that they are hostile and warlike actions in support of the war? Or will they be perceived acts of "cyber terrorism" (and covered by the policy), given that the hackers appear to be using disruptive activities to further their stated political/ideological objectives?

This is something the courts may ultimately have to grapple with, but the decision may come down to the exact phrasing of the statement itself. In the example of the statement issued by Conti, they clearly state "retaliation against attacks by western warmongers." Such phrasing may be more likely to be deemed a retaliatory act of "war." The specific ransomware gang itself may also play a role. Attacks launched by suspected state-sponsored actors with ties to a foreign government (such as Cozy Bear and Lazarus) are more likely to trigger the war exclusion, especially when their attacks are accompanied by political or warlike statements.

In the interest of maximizing insurance coverage for retaliatory ransomware, there are a few steps companies should take. In addition to implementing advanced security measures and implementing comprehensive policies and procedures, the C-suite should also perform a careful assessment of its cyber insurance policy, ensuring its terms and conditions pertaining to cyber extortion are as broad as possible. Additionally policyholders should pay special attention to the "war exclusion," given that all policies contain different versions -- some more problematic than others. In the meantime, hackers can do themselves and their victims a favor by refraining from such statements when making extortion demands.

ITL:

It has always seemed to me that marketing is a tough thing for agents and brokers. Customers can be told what the products are and what brands the agents are representing, but how can you communicate, believably, what level of service you’ll provide, and how can the customer know whether they’ll click with the agent?

Joel Zwicker:

People choose an independent agency for two reasons: It is your expertise, and it is the relationship. That’s how agencies need to market themselves.

Far too many agencies forget that they have a whole book of business leads right in front of them. You have an acre of diamonds. Many agencies you talk to will say, well, we have two policies per client, so we've done a really good job because the industry average is around 1.62. But think about it: My family and I have five or six policies. If my insurance agent only has two policies with me, he's left well over half my business on the table. If you’re an established agency, you have more than enough opportunity sitting right in front of you.

Agencies need to remember they are in the renewal business. They should have a strategic communication plan to continually share their expertise, building deeper relationships that will maximize their book of business.

You also need to have niches. Too many agencies want to sell to anybody. The sexiest thing in the world is new business. But you’re just not going to wind up with more quotes than you could ever imagine. An agency needs to take a step back and truly understand who their ideal client is, then focus on that type of client.

ITL:

Let’s start with niches. It's fairly easy in commercial to think, Okay, I'm going to be the guy on landscaping businesses or pizza parlors, but it sounded like you were saying that the niche idea goes even beyond commercial. What would some niches in personal lines look like?

Zwicker:

Here’s one from personal experience. When I worked at an agency, we didn’t focus on traditional home and auto. Our niche was toys, things like cruiser motorcycles, classic cars, boats, snow machines and, off-road vehicles. So, we had expertise – and if someone has the disposable income to have a nice boat or a cruiser motorcycle or a classic car, chances are they have some nice properties and other things they want to insure, as well.

Another common one would be to take a private client-type approach, focusing on higher-end neighborhoods in your area or higher-end clientele.

Another niche is not necessarily the product that you're selling but the client experience. I can think of a client of ours whose niche is that the experience is all digital, through email, text and video. Everything is done in multi-step sequences that incorporate video so you can see, say, how to file an auto claim.

ITL:

Once you’ve picked your niche, how do you make sure the world knows you have that expertise?

Zwicker:

Here’s a commercial example, from my friend and our client whose niche is laundromats. If you were making a list of the top 10 niches that you're going to make money on like gangbusters, laundromats wouldn’t be on that list. But he knows them better than anybody. Why? Because he spent 20 years working with them, and that's what he's focused on. When he talks at events, when he writes white papers or posts on his website or blog, when he's doing an email, he demonstrates his expertise and stays focused on his niche.

Some people focus on contractors, but that’s a broad area. Specifically, do you do roofing contractors? Okay, let’s go deeper. Just commercial asphalt, or are we talking about hot tar?

Too many agencies try to be too broad with their expertise. Be specific. Find that area where you're really an expert. Then share stories about claims experiences or coverages you should be leery of, maybe highlight some other vendors that may partner with you.

ITL:

Now that you’ve identified your niche and demonstrated your expertise, how do you build the relationship so you generate more and more business from those clients?

Zwicker:

The vast majority of agencies have an incredible database of leads. It’s just being able to target them. It’s understanding when someone has commercial general liability but no cyber, property but no personalized home or auto, no umbrella… whatever the example is. You also keep in mind that there are other opportunities, too, in life insurance and annuities and financial planning if you nurture the relationship.

Simply remember why these people chose you in the first place: your expertise and your relationship with them. Then continue to share your and your staff’s expertise.

Here’s an obvious one that’s often the toughest thing to do: You ask for the business. Simply ask for the chance to discuss those other lines of business.

A lot of agents are afraid of annoying clients, or assume that everybody knows that you offer all these services. Assume nothing. Agents fear that, if I start asking, I’ll trigger them to maybe shop their insurances or go elsewhere. And I have to say that that is maybe one of the most ridiculous thoughts you should have in your head. If you think for a moment that an email, a text, print or a phone call from you, on a quarterly basis, asking about other business is going to trigger that person to shop elsewhere…. They’re already getting any number of imprints in their mind about what to buy, minute by minute, hour by hour, day by day, just by turning on the TV, listening to the radio or going online. Why would a simple request from you trigger them?

And here’s a powerful, easy way to talk to your clients: Ask them to assign you a Net Promoter Score. You see who really values you, and you know who would be most likely to respond if you ask for additional business. Combine that information with the data points in your management system about

what additional policies those customers might buy from you, and you have an awful lot of low-hanging fruit.

ITL:

Great stuff. Thanks, Joel.

Joel Zwicker is insurance evangelist at Agency Revolution Suite and formerly an insurance agent at one of Canada's largest independent insurance agencies. He now works to provide independent insurance agents the best marketing tools for their unique needs.

The personal lines segment is known for leading the charge with innovations and technologies – a reputation that only strengthened during the pandemic. From digital underwriting submissions and virtual inspections to digital first notice of loss (FNOL) and other capabilities, personal line insurers were poised to meet the new digital needs of customers and employees when other industries struggled to adapt to the virtual era. However, in enhancing processes and workflows to adjust to the pandemic's demands, insurers also uncovered gaps in their digital capabilities, forcing them to reexamine their existing projects and identify new opportunities.

A recent SMA study shows that 41% of personal lines insurers are revisiting their digital transformation strategies in 2022, a significant jump from 19% in 2021. This heightened activity indicates the acceleration of the digital projects identified in SMA's new research report, "Digital Transformation in Personal Lines: Project Priorities for 2022 and Beyond."

Unsurprisingly, personal lines insurers are most focused on expanding policyholders' self-service capabilities. With the pandemic creating the essential need for capabilities such as obtaining a policy, paying a bill or filing a claim online, customers now expect sophisticated systems that allow them to interact with their insurers when and how they want. Half of all insurers focused on personal lines are also implementing digital platforms. Because digital platforms leverage application programming interfaces (APIs) and low- and no-code technologies that allow for connectivity from various channels, SMA is seeing more and more insurers of all sizes shifting from portals to platform technology. Other projects aimed at leveraging emerging technologies are also rising on the priority lists of personal lines insurers as they complete their upgrades of more foundational technologies.

See also: Foundational Tech for Personal Lines

Although signs point to continued digital transformation acceleration across personal lines in the coming years, competition will only grow fiercer as progress gains momentum. Insurers that pause their digital projects for too long risk falling behind peers, losing distribution partners and being dismissed by current or potential customers. To stand out in the saturated personal lines market, insurers must commit to modernizing capabilities to serve agents, policyholders and employees and push forward in their digital transformation journeys.

Talent has been a front-and-center topic in boardrooms across the U.S. amid the pandemic, widespread resignations, a labor shortage and other trends challenging the recruitment and retention of employees. Yet, through the adversity, companies across the insurance ecosystem have adapted remarkably well, including the vendors that serve the industry.

Recently, SMA surveyed insurance professionals to understand how companies are approaching talent in 2022 and beyond. As a follow-up to SMA's research report focused on insurers' talent objectives, SMA has released a report that offers a fresh view of how technology/software vendors and services solution providers are shaping their talent strategies this year.

The technology sector has long attracted young professionals looking to jumpstart their careers. In fact, a study by Glassdoor found that most Gen Z job seekers are applying for tech-related positions. But when jobs are in high demand for both employers and prospective employees, it creates a hyper-competitive job market that requires a strategic approach. So, it is no surprise that insurance vendors consider attracting new talent as their No. 1 talent objective in 2022.

SMA's study shows that vendors have found new ways to recruit talent since the pandemic's start. Sixty percent of vendors reported recruiting from broader geographic areas as the primary change in their recruitment strategies in the past two years. This is a significant finding when considering that many technology/software vendors were ahead of the remote-worker trend when they employed personnel in various geographic regions pre-pandemic.

Another 40% of vendors stated they are using social media or are partnering with universities and associations to reach talent pools that may have previously gone untapped. But it is not enough to simply set new talent strategies – leaders at vendor companies must ensure their organizations are allocating resources, setting clearly defined goals and holding themselves accountable to be truly successful in their talent acquisition.

See also: In Competition for Top Talent, Innovation Matters

With the current competitive talent market expected to continue into 2023, it is critically important that vendors rethink their recruitment strategies in 2022 and the roles and skills needed to deliver products and services to the industry. There is now an opportunity to reevaluate traditional processes and redefine roles to provide a quicker onboarding experience and improve the organization's technology talent. The key will be achieving balance within teams as the industry is driven to expand its talent search well beyond the boundaries of insurance.

For more information on insurance vendors' talent strategies for 2022 and beyond, read SMA's recently published research report, "How P&C Insurance Vendors are Responding to the Battle for Talent.”  

As an accountant looking at the uncertain economy, I can’t help but say, “It’s an accrual world.” Joking aside, certified public accountants (CPAs) and insurers should do more to help clients in this economy, and, as a CPA, I know how insurance can help individuals and families. 

Whether following the loss of a loved one or a financial loss, life insurance is a lifesaver—truly. But if an insurance agent doesn’t have a chance to make this point, if he doesn’t know who needs help, a CPA can fill the gap. 

For example, if I tell a client he should buy life insurance to protect his family or lower his tax burden, I am not selling him anything. I am telling him what he should do, because it is right and because I don’t have a conflict of interest. CPAs who take a similar approach are why 86% of small business owners say their most trusted adviser is their accountant.

If I refer a client to an agent, it’s because of a specific policy an agent offers.

If I don’t know how a policy works, or don’t understand what an agent says about the workings of a policy, I will recommend a different policy or agent. The point is, I want to help my clients, and I know insurance can be a valuable form of help. But I must first communicate with my clients, which is why I read news and books to expand my knowledge.

In turn, insurance agents must communicate with CPAs, too.

Collaboration is everything. That is, if an agent emphasizes the tax benefits of a policy, he should encourage clients to consult with a CPA. If the benefits are clear, let a CPA say the same; if the terms are reasonable, let a CPA come to the same conclusion.

The more agents and CPAs collaborate, the better. 

See also: Ready for New Accounting Standard?

If collaboration improves communication, making it easier for everyone to explain or understand the importance of insurance, society will be better off.

Insurers must take the initiative, however.

As a whole, the insurance industry needs to contact and build relationships with CPAs.

The relationship is mutually beneficial, because it increases a CPA’s network of potential referrals. This network also allows CPAs to call on insurance agents. The result is a network of trust, for the good of clients and agents and CPAs alike.

Creating this network is not expensive, thanks to industry directories, social media, existing contacts and the internet in general.

The only thing necessary to create this network is action.

CPAs and insurers need to act, even if the act is nothing more than a phone call or letter (via email) of introduction. This act alone may be enough to establish a  conversation; and something—something positive—is better than nothing.

This network can help clients prepare for or protect themselves from the uncertainties of the economy.

Whether the economy worsens or inflation rises, no matter how bad things get, CPAs and insurers can plan for—and avoid—the worst.

Working together, both industries can be models of collaboration and communication.

The two can inspire more industries to follow their example, putting CPAs and insurers at the forefront of innovation.

2022 has been another roller coaster ride. Inflation hit a 40-year high in February, and, according to the World Bank, global growth in 2022 is expected to decelerate from 5.5% to 4.1%. We can blame continued COVID-19 disruptions, supply chain bottlenecks and anticipated higher food, gasoline and energy prices, combined with worker shortages and recent geopolitical issues related to the Russia/Ukraine conflict. 

But before we talk about what this means for auto insurers in the second half of the year, we need to go a bit deeper into the causes of the current inflation crisis.

First, supply shortages caused by the ripple effect of COVID shutdowns on manufacturing and distribution centers in multiple geographies have affected nearly every industry. For instance, I recently looked into buying furniture and learned that, not only would it take up to four months to arrive, but I’d also have to pay 20% more than I’d have had to pay last year. 

The auto industry is no different. Parts shortages are so severe that Ford had to shut down its Flat Rock assembly plant for more than a week because it could not secure enough chips. If manufacturers can’t get parts, the situation is going to be at least as severe for repair and body shops. For auto insurers, this means they should expect higher claims costs in the second half of the year and longer wait times for damaged vehicles to be repaired and returned to their owners. Prices for auto parts will definitely continue to rise, given manufacturing shortages and distribution delays. 

Auto repair costs 

What’s more, auto body and repair shops are facing the same labor shortages and increasing wage pressures that every other business is experiencing, further increasing costs for repair. In response to the labor shortage and other factors fueling inflation, the Federal Reserve voted to raise rates by half a point in May, the largest increase in more than two decades -- then three-quarter point in June. But the increases will take time to have an effect and are unlikely to temper auto claims costs much in the next six months.

Another factor to consider is how companies entice the last of the pandemic’s workforce dropouts to jump back into the job market. According to JP Morgan Chase, continued strong demand for labor should attract those workers, but demographic trends may still drive a long-term worker shortage. Moreover, even a return to pre-pandemic labor market participation rates and higher wages won’t reverse the aging of the American workforce or the slowing of immigration flows. As a result, businesses will need to invest in technologies that allow smaller teams to be more productive. 

Thankfully, used-car prices have begun to decline from the eye-popping heights they reached last year. Cox Automotive reports that used vehicle prices declined 1% in April over March, marking the third straight month of declines. But prices are still close to twice what they were over the previous decade. So while auto insurers may see a bit of relief in the second half of the year in the cost of replacing a totaled vehicle, costs will still remain historically high.

See also: What to Do About Rising Inflation?

Roadside assistance

But these are not the only costs that insurance carriers should expect to rise. Roadside assistance claims may not be a large share of total claims by amount, but they are by far the most common claims by volume. And inflation is having a large impact on the towing and roadside industry. 

After auto usage and road volume declined to unprecedented lows in 2020 due to the pandemic, motorists have significantly increased how often they drive and even changed their driving behavior now as public health measures have loosened. According to the U.S. Federal Highway Commission, traffic volume in November 2021 was up 11% year over year and is continuing to climb in 2022. 

A recent survey we conducted of tow providers found that 22% have more work than they can handle, which has led to dispatching delays and longer wait times for motorists stranded on the side of the road in some areas. Continued worker shortages, equipment shortages, higher fuel costs, higher maintenance costs, pandemic-related issues and inflation may affect high-performing towing and roadside program performance metrics, service-level agreements (SLAs) and pricing moving forward. As a result, towing and roadside rates in H2 2022 will continue to rise, with rates increasing across the US.

Additionally, conditions have prompted nearly three-quarters (73%) of tow providers to prioritize work. And while one might expect that their top priority would be to jump on the most lucrative jobs or contractual obligations, their No. 1 choice was to do the closest jobs first. In this way, tow providers can spend less on fuel, and each truck can complete more jobs per day, increasing both revenue and profit.

When service providers have more work than they can handle, that results in longer wait times for stranded motorists. Unfortunately, longer customer wait times lead to unhappiness, which has a domino effect by lowering net promoter scores (NPS). Since the return of pre-pandemic driving patterns, traditional motor clubs and other roadside providers have started to struggle to meet the demands of their clients, while those who rely on algorithmic systems that find the nearest provider have been able to protect their NPS ratings and, consequently, the customer satisfaction scores of their insurance partners.

The Outlook for H2 2022

The next six months will prove challenging for auto insurers when it comes to costs. The economy will have to overcome current downside risks, including simultaneous Omicron-driven economic disruptions, further supply bottlenecks, a de-anchoring of inflation expectations, financial stress, climate-related disasters, geopolitical conflicts and a weakening of long-term growth drivers. If this doesn’t happen, unfortunately, inflation will continue to drive up prices for all services.

A few positive signs are on the horizon. The measures taken by the Fed and the trending decline in used car prices point to some possible relief from inflation in 2023.

In the meantime, carriers will need to take measures to control costs and increase efficiencies.

The principal reserving challenge today is the opportunity cost of inefficiencies, primarily caused by the ineffectual use of human capital. This inefficiency makes it hard to redeploy more resources for continuous development and drains talent from reserving teams. The reporting process itself and supporting activities are far too onerous and consume too much human capital resource.

Given this strain on resources and the continuous compromises made due to deficiencies, why has there been so little innovation to date? And why do we think things are going to change?

Uniquely complex

The reporting process is uniquely challenging due to its very different objectives, constraints and timescales compared with typical modeling processes. The governance controls and audit requirements are much more onerous. This adds significantly to the difficulty of maintaining the process - let alone considering innovative techniques and new approaches.

For example, in some markets there is a requirement to print out information on the model parameters and the models used with enough detail for someone to independently recreate the results, which then becomes even more challenging when you start to add complexity to the models involved.

The reserving process itself is an optimization exercise. We recognize that there are a range of reasonable best estimates at any given valuation date; the challenge is in optimizing the selection of our best estimates to meet reserving objectives over time. This is a non-trivial process control problem, and real progress can only be made with a step change in how we think about and perform reserving.

There is, of course, more to reserving than the reporting process. But until we address the fundamental issues here, there is little opportunity for growth. There has been a common perception that reserving is a statutory requirement and nothing more, but reserving is a critical part of business intelligence.

What has changed

The difference now is that advancements in technology provide the tools and resources necessary for a step change in capabilities. For example, workflow management solutions enable the production of much more decision support material in a shorter time, while maintaining and improving governance and controls. And the leaders in this space reduce the need for ad hoc analysis, have more data-driven analysis to support decision making and free up time to embed further capabilities.

Tools provide a powerful solution for integrating software and systems in an end-to-end process, supporting a best-in-class approach to the architecture. This allows much more flexibility to use the best tool for a particular job in an end-to-end process.

The availability of cheap computing power is opening up possibilities to leverage data assets. For example: Robotic process automation is being used to produce more for less with increasing granularity; interpretation techniques are helping decision makers identify the pertinent information and prevent this being lost in large volumes of analytical output; and machine learning is being leveraged to unlock value from unstructured data.

The architecture possibilities enabled by the capability to integrate a diverse range of systems and applications into a coherent process has really expanded the possibilities, not just within reserving but across the organization. For this reason, real change in reserving practices appears feasible in the near future.

See also: How Machine Learning Halts Data Breaches

Impact of machine learning

The role of machine learning should be limited primarily as an enabler for targeted elements of the reserving solution, rather than as a one-stop remedy. Further, machine learning needs to be considered in the context of a wider road map to a future target operating model. Investing in the right development at the wrong time is probably the biggest pitfall when it comes to machine learning and reserving.

Besides operational efficiency and process control, the main benefit of machine learning for reserving is improved insights, and at its core it is designed to tackle the problem of optimization. We are effectively running an optimization to hit a moving target, with the objective of considering the cost of being wrong to provide meaningful outputs. This is very different from machine learning techniques where supervised learning methods are typically used with a well-defined response to simply minimize the error in fitting to historic data.

In pricing and risk modeling, for example, an insurer can assume that the risk differentials in their recent historic policy and claims data are representative of experience in the near future. This is a reasonable assumption in practice.

The difficulty in reserving is three-fold. First, the information necessary to inform the answer far in the future may not be in the historic data. So, building a predictive model of historic data is not going to provide the answer. Second, the estimates will change over time as the insurer generates more information on what the outcome will be. Finally, the reserving process and the way the insurer communicates results are going to be very different from today. This will require many more visualizations. Back testing diagnostics, for example, will be essential. This is why the road map is so important for placing developments in the right order to get where they need to be.

In terms of a single machine learning method that is going to magically solve all the problems in reserving, there is no silver bullet. Indeed, some developments will simply exacerbate existing problems if the right parts of the wider solution are not in place beforehand.

We are seeing a gradual move toward the use of machine learning in projection of ultimate losses. In considering the end goal for machine learning in reserving processes, there is a useful analogy in process control applications in robotics. Consider an exercise of programming a quadcopter to fly through a hoop that is thrown through the air at random. The quadcopter needs to monitor the data feed from sensors tracking the position of the quadcopter and the hoop to determine adjustments to the speed and direction the quadcopter should make.

How the hoop is thrown, how the wind blows during flight and numerous other variables mean that the quadcopter cannot know where that hoop will be when it eventually flies through it. The algorithms optimize a decision, given all information available at the time, to minimize the probability of missing the target at that point in time, and repeat this at regular intervals until the target is reached. In reserving, we cannot know what the ultimate loss for any given cohort will be, any more than the quadcopter can know where the hoop will be. But we can optimize the output from our reserving processes to acknowledge that we're on a journey and minimize the cost of being wrong at any given time.

See also: The Risks of AI and Machine Learning

Road map to unlock reserving capabilities

Insurers that have had the greatest success so far in improving their reserving capabilities are those that have made the most progress on the journey toward their defined future operating model. Strategic planning on developments and clear objectives for these exercises up front is a key differentiator for market leaders. There is a lot that can be done to realize the benefits of operational efficiency and process control before resorting to machine learning. It has its place, but it's not the complete solution.

Embedding a workflow management solution in the reserving processes, such as WTW’s Unify technology, is a critical enabler for the journey. The step change in automation capabilities will enable insurers to produce significantly more decision support material, while mitigating the problems of maintaining the governance, controls and audit, in addition to freeing resources for development activities. This tooling is essential to have in place to enable any real growth in data-driven analytics as well as supporting reserving without expenses spiraling out of control. Insurers will have the capabilities to readily integrate new tooling into the environment, with improvements in governance, control and audit. Robotic process automation will then complement these capabilities by producing increasingly sophisticated data-driven analysis and output in a timely manner for the same headcount.

While commercial insurance is still a very paper-based industry, the issuance and tracking of certificates of insurance (COI) is ripe for innovation. A COI is a document that provides proof of a business's insurance coverage and can be shared with clients and vendors.

COIs are often shared as paper documents or email attachments, which means they can quickly become outdated. They must be checked, re-checked and verified constantly to make sure the information is still valid. This is a time-consuming and inefficient process.

That's where smart COIs come into play. A smart COI is a living, breathing document that contains policies available for real-time monitoring. It uses dynamic data to ensure businesses always have continuous, compliant insurance coverage. Smart COIs are created by agents and remain current as a result of direct connections, via application programming interface (API), with agency management systems. This connection allows for seamless, real-time data sharing.

Thus, COIs move from being static, paper documents, providing a number of benefits for both businesses and insurance agents.

Businesses know their suppliers' current coverage at all times via continuous feeds from their agents' systems, thus reducing risk. This provides several crucial new benefits. For example, businesses can trigger action when suppliers are non-compliant by denying access to systems or buildings, stopping a payment or canceling an order. Businesses can receive notifications when suppliers' insurance coverage lapses, is canceled or is reduced below required limits.

Businesses using smart COIs to share coverage with clients makes them more attractive to do business with. Their clients know that the organization is up to date in its coverage and can check on any particulars in the policy at any time. There is also less manual, paper-based work for internal employees, which leads to greater operational efficiency.

For an insurance agent or broker, smart COIs make their lives much easier and allow them to work more efficiently. Agents know that, if any situation arises, they have the most accurate data available on the COI. They don't have to spend time digging through paperwork or checking and double checking policy information. They can quickly respond to requests and do so digitally, without any cumbersome paperwork. Smart COIs also provide agents with real-time alerts that let them know when their clients may need more insurance coverage and how much.

From a risk management perspective, the current COI process without a smart COI is flawed at the foundation. Time and money go into the review of static COIs, and they are only accurate for 24 hours at most. Is one day of compliance even worth all the headache? The process needs to be transformed, and smart COIs have proven to be the answer.

See also: COI Is a 4-Letter Word; Tech Is the Solution

We often compare smart COIs to smart home security systems. The traditional COI simply renders point-in-time information, like taking a photo of your front porch. It tells you if in that exact moment there was someone at your door. Within seconds, that photo is out of date. Smart COIs, like smart home security systems, can use monitoring to show you who was at the door and when they were there and can track their history and alert you or a third party.

McKinsey says, "For a long time, the traditional insurance business model has proved to be remarkably resilient. But it too is beginning to feel the digital effect. It is changing how products and services are delivered, and increasingly it will change the nature of those products and services and even the business model itself. We firmly believe that opportunities abound for incumbent insurance companies in this new world."

Insurance is not often thought of as an overly innovative industry. Every aspect of the insurance process can't be transformed overnight, but there are areas where digital innovation can immediately begin to provide value. Smart COIs are one such area. They eliminate risk, ensure compliance and reduce costs for every stakeholder in the COI process.

During the COVID pandemic, demonstrations against restrictions and mandates have taken place regularly across the world. While they may have been in response to a series of unprecedented events, the protests played out in a context of growing civil unrest globally. Political polarization increased in the years following the global financial crisis of 2008, and according to the Global Peace Index, demonstrations, strikes and riots surged by 244% between 2011 and 2019. 

The results are inevitably disruptive. Earlier this year, unrest in Paris and in Wellington, New Zealand, saw convoys of vehicles create disruption in protest at government coronavirus restrictions. The protests were inspired by events in Canada, where a "freedom convoy" had brought the capital, Ottawa, to a standstill.

Economic and insured losses from previous protests have been significant. In 2018, the "yellow vest" movement in France rallied to protest fuel prices and economic inequality, with French retailers losing $1.1 billion in revenue in just a few weeks. A year later in Chile, large-scale demonstrations were sparked by an increase in subway fares, leading to insured losses of $3 billion. In the U.S., the 2020 protests over the death of George Floyd in police custody are estimated to have resulted in over $2 billion insured losses, while the South African riots of July 2021 caused damage totaling $1.7 billion.

Protests set to increase around the world

According to the Verisk Civil Unrest Index Projections, 75 countries will likely see an increase in protests by late 2022. The unifying and galvanizing effect of social media on such protests is not a particularly recent phenomenon, but during the COVID crisis it combined with other potentially inflammatory factors to create a perfect storm of discontent.

The largely unregulated nature of social media allowed misinformation to spread unchecked, providing a platform for conspiracy theorists and an outlet for resentments. These grievances were centered on three main areas: anti-vaccination sentiment and civil liberties; mistrust in government and concern about government overreach; and economic hardship.

Although the political right were most likely to resent restrictions, the protests blurred traditional allegiances and united people across the economic and political spectrum behind specific topics. Geography was less of a barrier, too. Those with like-minded views were able to share views more easily and mobilize in greater numbers more quickly and effectively. In a world where trust in both government and media has fallen sharply, misinformation could take hold and partisan grievances be intensified and exploited.

See also: COVID-19 Trio Tops Global Business Risks

Platforms could be used with impunity

The 2022 Edelman Trust Barometer found concern over fake news being used as a weapon had risen to 76% among its global respondents. With confidence in traditional sources of information and leadership so undermined, social media gave a platform to powerful individuals who could use it with impunity and without legal consequences. When political leaders such as Donald Trump in the U.S. or Jair Bolsonaro of Brazil appeared to downplay the severity of the pandemic, social media warriors were emboldened. If they could attract the right audience, almost anyone with a social media account could become a politician, journalist or opinion leader. The pandemic disproportionately hit certain industries and ethnic groups harder than others, so where there already existed a sense of injustice, there also opened up the possibility for radicalization.

The COVID crisis shone a light on divided societies and increased the gulfs that already existed in some populations. A lack of social-media regulation in stable democracies led to misinformation that threatened to destabilize social norms and cohesion, while hostile states arguably used the lack of regulation in these democracies to gain ground with their own destabilizing messages.

Risk management and insurance

The circumstances surrounding the COVID crisis may have been unique, but social media’s influence is likely to play a role in fueling civil unrest for the foreseeable future. Unrest carries a risk of material damage to buildings and assets, business interruption, denial of access or loss of attraction. Targets or casualties could include government buildings, transport infrastructure, supply chains, retail premises, foreign-owned enterprises, petrol stations, distribution centers for critical goods and tourism or hospitality businesses.

Companies should review their insurance policies in the event of increasing local activity and update their business contingency plans if necessary, taking into account their supply chain vulnerabilities. Property policies may cover political claims in some cases, but insurers offer specialist coverage to mitigate the impact of strikes, riots and civil commotion (SRCC).

Civil unrest increasingly represents a more critical exposure for companies than terrorism. The nature of the threat is evolving, as some democracies become unstable and certain autocracies crack down on dissenters. Unrest can occur simultaneously in multiple locations, as social media now facilitates the rapid mobilization of protestors. This means large retail chains, for example, could suffer multiple losses in one event.

Where we currently stand, I do not expect incidences of social unrest to abate any time soon, given the after-shocks of COVID-19, the looming cost-of-living crisis and the ideological rifts that continue to divide societies around the world. At AGCS, we’re seeing rising interest from risk managers in specialist cover for political violence, as some traditional property and casualty insurers have stepped back from the exposures associated with SRCC insurance. The standalone market is also having a rethink on war-like perils, as well as the coverage extensions that were offered freely only a few months ago.