Despite a meteoric increase in cloud adoption, executives at many insurance companies are still reluctant to make the move. Even as leaders within these organizations grapple with the imperative to modernize and innovate, many proceed with extreme caution.

That's understandable, but for insurance leaders aiming to build competitive advantage, that sense of caution should be counterbalanced with a healthy measure of realistic optimism. In reality, cloud migration is probably not a question of "if" but "when." Evidence of the cloud's inherent strengths continues to accumulate, just as the perceived drawbacks and limitations of cloud technology are waning.

Here are the five objections you're likely to encounter as you are championing innovation in your organization, along with some arguments for overcoming them:

Overstated Security Concerns

When CIOs think about cloud migration, many envision a landscape rife with security risks that cannot be fully controlled. After all, cloud migration entails outsourcing the security of critical systems and data to a large organization that is subject to constant threats from the outside.

In reality, most insurers currently operate on a highly fragmented technology infrastructure, with thousands of potential entry points. Security teams, more often than not, fall one or two steps behind the bad guys in terms of their defense posture. Cloud providers, in contrast, employ large, expert teams whose only job is to stay ahead of the attackers.

Where the cloud was once perceived as the riskier option, perhaps correctly, today that situation has reversed. In the new reality, traditional computing infrastructures tend to be substantially less secure than the cloud.

See also: The Case for Cloud Computing

The Perceived Talent Gap

Many insurance carriers believe they simply don't have the talent necessary to follow through effectively with cloud-based initiatives. The supply of top-tier developers and cloud specialists is limited, after all, and demand is high. Many insurance carriers feel that they don't have the budget to compete for that talent and retain high performers.

In fact, carriers should also be mindful of an offsetting trend. Most insurers' IT systems may soon be relegated to the category of "legacy technology" (if they haven't already been labeled as such). As mainframe shops know quite well, the market for legacy talent grows increasingly competitive over time, as a wave of experienced personnel retires from the workforce. Meanwhile, new college graduates gravitate toward the latest technology instead.

With the transition to the cloud, managed service providers (MSPs) can solve insurers' resource challenges with staffing, training and personnel management. The right MSP can deliver talent augmentation for design, development, testing, deployment and maintenance. This not only mitigates the risk of a talent drain but also allows for the acceleration of projects at any time, without hiring to address transient business demands.

The Boondoggle Objection

Many critics will claim that cloud migration is just another wasteful IT boondoggle. Unfortunately, large-scale IT initiatives have long had a reputation for costing two or three times original estimates and for taking considerably longer than projected. Combine this with the perception that IT departments are wont to chase every shiny object that comes along, and it's easy to understand the skepticism.

In fact, cloud migration is a joint decision between business and IT, driven by both technical and bottom-line impact. There are important strategic benefits, but if those aren't clearly articulated, the boondoggle objection remains.

As with so many endeavors, planning and preparation are critically important. By investing time up front in design and planning, fully assessing system dependencies and selecting migration partners carefully, you can keep budgets and timelines intact, with the promised results delivered successfully. Preparation is everything.

Resistance to Change

The complexity and scope of cloud migration projects often prompts stakeholders to express a broad-brush resistance to change. Carrier IT infrastructure is typically extensive and fragmented, making migration seem like an impossible undertaking. This is usually accompanied by an assertion that because current systems are working reasonably well, it makes little sense to disrupt the status quo.

Cloud migration may indeed seem like a daunting task, but ultimately this is a question of mindset. With a thorough assessment, planning and design process, it is achievable, even for the largest and most complex systems in the world.

If one begins with the premise that things like agility and scalability matter, then change becomes imperative. Viewed in this context, legacy on-premise systems present barriers to success. Over time, they will become increasingly cost-prohibitive.

Perceived Immaturity of Cloud Apps for Insurance

Finally, there is the perception that cloud applications, especially for insurance carriers, lack the maturity and track record of legacy systems.

Numerous enterprise applications are already running successfully in the cloud, including mission-critical ERP systems, CRM and related business applications. Mainframe shops have been very successful in migrating complex systems to the cloud. Large-scale application environments like Facebook, Google and Amazon have proven beyond any doubt that cloud-native technology is robust, resilient and scalable.

Ultimately, on the question of whether to move to the cloud, the answer has to be "yes." The timeline for that transition may vary greatly from one organization to the next, depending on the complexity of current systems, strategic priorities and budgetary constraints. Nevertheless, the five barriers to cloud adoption will increasingly lose their hold on insurance carriers as more and more companies embrace the imperative of innovation.

As first published in Digital Insurance.

While a lot has been written about embedded insurance over the past few years, one question remains largely unaddressed: Will the trend be good for agents and brokers or bad for them?

I'd say the answer is... yes. 

The move toward embedded insurance can be good for those who prepare themselves for the transition but could leave the unprepared stranded. 

I'll explain.

Embedded insurance, which I believe is an unstoppable force, will provide a connection to customers that doesn't begin with the agent. That connection will begin with the jeweler who says, Now that you've bought that engagement ring, do you want to insure it? Or with the car dealer who offers to make a connection to an insurer for the vehicle that someone just bought, with the realtor who makes a suggestion about a way to quickly line up insurance for that new home, and so on.  

The question, then, is: Can agents and brokers earn a role in what happens next? The answer is surely yes, at least in most circumstances, for those who position themselves right. The keys, it seems to me, are convenience and relationships. 

Someone wanting to insure that jewelry or that car is being presented with a highly convenient offer -- basically, just click here, and you're done, because all the relevant information about the jewelry and car and even the applicant is already in the computer system. An agent likely begins with an advantage on the jewelry, because that prospective customer probably has homeowners or renters insurance that can just be modified to incorporate the ring. An agent likely has an advantage on that car insurance, too, if they have an established relationship on car insurance with the customer.  

But how big an advantage? Big enough to overcome complete convenience and a persuasive sales person who perhaps gets a commission for steering the customer to a particular insurer?  

To maintain the advantage of incumbency, agents and brokers will need to make themselves absolutely as convenient as possible. That will mean navigating the world of application programming interfaces (APIs), so the jewelry store or car dealer can instantly share all the details that are needed for a policy, so the agent can offer any necessary counsel and so the agent can then connect to insurers and present the customer with a nearly instant quote. 

Agents and brokers will also need to foster all sorts of relationships to make sure they are embedded, if you will, into the process. That issue is as big as all outdoors, so it will have to be approached strategically, but agents and brokers will want to connect with as many businesses as possible that sell jewelry, cars and anything else that a customer might want to buy insurance for as part of the purchase. They will also want to deepen relationships with clients, so the agent is top of mind when someone suggests insurance. Among other things, that will mean finding reasons to communicate with clients beyond today's emails or letters about annual renewals -- reasons that the clients will welcome, rather than find intrusive. 

There will be a lot more beyond those initial thoughts about convenience and relationships. The move toward embedded insurance is a profound change that will take years to sort out. But there's no time like the present to start preparing.

Cheers,

Paul

P.S. If you're interested in reading more about the embedded insurance trend, here are some of the best recent articles we've published on the topic: "Embedded Insurance: The New Hot Topic", "The Recipe for Embedded Insurance", "Embedded Insurance -- Both Old and New", and "The Big Aha From InsureTech Connect."

Here are the six articles I'd like to highlight this month for agents and brokers:

HOW AGENTS CAN USE GAMIFICATION

Digital games activate our brains’ reward pathways. Agents can use them to help customers learn about insurance and make each lesson stick.

PART 1: INSURTECH 1.0: A POST-MORTEM

The legacy of Insurtech 1.0 may be more enduring than the actual companies. They forced incumbents to recognize their intransigence, producing a new focus on customer experience.

PART 2: THE (RE)RISE OF INSURTECH

Insurtech 2.0 recognizes the innovators who came before but takes a more nuanced and collaborative approach, recognizing the structural issues inherent in insurance.

PERSONAL LINES CHANNEL STRATEGIES

Given how quickly the landscape is evolving, we will likely have a very different channel environment in five years than the one we have today.

WHAT'S IN STORE FOR US IN 2023

A few trends stand out, from the impact of the 2022 election to the continuing roles of inflation and COVID-19, and even green energy’s impact. 

HOW VIDEO FAST-TRACKS UNDERWRITING, CLAIMS

50% of small business owners trust their carriers more than they did pre-pandemic. That number jumps to 80% when the business owner has filed a claim.

It seems obvious: Increasing customer health and wellness is a good thing for life insurers. Improved policyholder longevity equals fewer claims, right? Not so fast.  

Insurers are quick to realize that just because something may help people live longer doesn't necessarily mean that it's a good investment. What about the costs involved? 

That's the question many are facing when it comes to health and wellness engagement programs. Do the benefits of engaging with customers on health and wellness outweigh the costs of launching and running the program? 

As a global reinsurer, we've had many conversations with leading life insurers that recognize the potential value of health and wellness engagement programs but still question whether they can generate a positive return on investment. After all, the costs of such programs clearly add up: buying or building the platform, paying for attractive rewards to keep customers engaged, training distribution and educating customers on how the program works – the list goes on.

That's why we decided to put the business model to the test. Our actuarial teams looked at various health and wellness engagement programs globally and developed our own set of assumptions to feed into a cost-benefit analysis. 

The result? U.S. insurers that run successful health and wellness engagement programs on a fully underwritten life product may see an aggregate mortality and lapse experience reduction of up to 3% to 4% and achieve a positive ROI. In short, it's worth it. 

Health and wellness engagement programs have the potential to create a trifecta of shared value: Policyholders lead longer, healthier lives and have access to more attractive products; insurers and reinsurers can improve their mortality and lapse experience and sustain a positive ROI; and society as a whole benefits when people are healthier and better financially protected. 

So how can you help your health and wellness engagement program succeed?

Maximize take-up and engagement rates

The percentage of policyholders who sign up and regularly participate in the health and wellness engagement program will dramatically affect the program's ROI. Life insurers should aim for at least 10% (and ideally at least 25%) of users to engage with the program on a regular basis.

To achieve these seemingly high engagement rates, insurers should have a clear target customer base, a plan for reaching those customers and a compelling program design that will keep people coming back day after day. Distributors need to be able to convey the benefits of the program; the sign-up process should be seamless; and the program should include relevant goals and challenges and provide the opportunity for users to connect with family or a wider community of users. 

See also: How Digital Health, Insurtech Are Adapting

Focus on achieving meaningful behavior changes

To help customers live healthier and live longer, the health and wellness program needs to encourage healthy lifestyle habits and sustained behavior change. This requires not just financial incentives and rewards for meeting certain fitness thresholds but also a deep understanding of the customer base and what truly motivates them. 

Behavior science shows that to create lasting change, it's best to focus your efforts on helping policyholders make small lifestyle changes. For example, rather than running a 5K once a year, get someone who sits on the couch after dinner to instead take a regular evening walk around the block.

Look for ways to grow with new and existing customers

With the growing acceptance of health apps and wearables, consumers are willing to share their data if they see the value in doing so. Based on our recent global study, we found two-thirds of consumers are open to sharing personal data or health results in return for a benefit (e.g., personalized health advice, faster application process, discounts). This presents an opportunity for insurers to offer consumers more relevant products at the right price point. 

The bottom line

It's no secret the life insurance industry is evolving fast. The modern consumer demands greater personalization, and seemingly every day insurers are presented with an opportunity for innovation. 

While certainly not every new opportunity is worth pursuing, insurers would be wise to consider implementing a health and wellness engagement program for their policyholders. With the right design, such programs can generate significant value for insurers and insureds, making them a very worthwhile investment.

As a reader of this newsletter, you may have seen me refer from time to time to what I call the Laws of Zero, which are driving certain costs toward zero at an exponential rate and which will have profound implications for insurers. The "law" most relevant for insurers says that, in the foreseeable future, all information about everything will be available instantly and at zero cost. 

I admit that there's considerable hand-waving going on there. I'm really saying that almost all information about almost everything will be available almost instantly and at almost zero cost when compared with today. That last qualification refers to the fact that having, say, computer memory prices plunge from $300,000 per gigabyte in the 1980s to a fraction of a penny makes today's prices look awfully close to free from that earlier vantage point — and shows how free(ish) future prices will look by comparison with today.

Now, a prominent futurist, Peter Diamandis, has issued a report with some eye-popping nuggets about how rapidly costs are heading toward zero for computers, communication devices and sensors and are driving us toward nearly infinite information at nearly zero cost. 

Diamandis — the founder of the X Prize Foundation, cofounder of Singularity University and coauthor of best-seller "Abundance: The Future Is Better Than You Think" — has made his full report available here. But I'll call out some of the high points:

• "In the realm of ground-based cellular networks, by 2025 there will be 2.8 billion humans connected on ubiquitous 5G [which can be 100x faster than 4G]. At the same time, 6G is also under development, which will be 100x faster" than 5G.
• "A number of multi-thousand-satellite networks (Starlink, E-Space, Kuiper, etc.) are being deployed that will ultimately cover every square meter of the Earth. Thus far, Starlink is the largest orbiting network with 3,000+ operational satellites, heading toward a goal of [42.000]. Starlink today offers speeds over 100 megabits/second" and is developing laser technology that would increase that speed by a factor of 100.
• "We are birthing a 'trillion-sensor economy' in which everything is being monitored, imaged and listened to at all times." That economy will involve: "sensors in orbit above Earth imaging the planet... sensors on fleets of drones in our skies... sensors on our autonomous cars and eVTOLs [electric planes capable of vertical takeoffs and landings], visualizing our cities... sensors on our bodies and in our bodies measuring our physiology 24x7... sensors in your home listening/watching, providing security and support... [and] industrial sensors monitoring and optimizing manufacturing."

Diamandis says there are already 260 million smart homes worldwide and expects that number to soar. He also quotes a survey by Deloitte that found that "86% of manufacturers believe that smart factory initiatives will be the main driver of manufacturing competitiveness in the next five years."

I'd add that sensors and cameras can actually be just about anywhere someone chooses to put one. Not only have the sensors and cameras become incredibly tiny and cheap, but improvements in solar power and batteries liberate them from having to be connected to the electric grid, and the ubiquity of Wi-Fi and cellular and satellite networks means there is always a communications network to hook into. Just combine a tiny antenna and a bit of solar power to a sensor or camera and put it wherever you want. 

As Diamandis says, if you want to spot fashion trends, you can just put a few cameras on city streets you see as trend-setters and have AI alert you to changes (having anonymized all data, including by blurring faces, of course). If you're a farmer, you can "know the moisture content in both the sky and the soil [and] pinpoint water for healthier crops and bigger yields—while reducing water waste. Drones and robots [will] image crops for disease and inform the robots when the crops are ripe for picking."

Based on what he sees as the connection of 8 billion people and trillions of sensors, he predicts "a world of ubiquitous and abundant knowledge" where "you’ll be able to connect to anyone and anything, any time, anywhere."

Perhaps most inspiring: "Because innovation is a function of the number of humans connected to each other, enabled by tools and powered by knowledge, as these numbers all steadily increase, we’re about to witness perhaps the most historic acceleration of technological innovation ever experienced by humanity."

Like all companies, insurers will benefit from the opportunities to increase communication and collaboration, as well as the ability to tap into new talent pools around the world. But the insurance industry should gain even more than others, because we're in the business of understanding the world's risks, and in a hyper-wired world all that information will be available at essentially no cost. It was also be available (almost) instantly, which will allow for new business models.

Why focus on crunching years- or decades-old data to see what auto or life claims used to be, when you can know what's happening now? And why wait to pay for a claim after the fact when you know so much in real time that you can alert a client and maybe prevent that car crash or stop that water leak before it can do any damage?

Cheers,

Paul

P.S. The points about connectivity and sensors are just two of 20 megatrends that Diamandis describes in his report, so I encourage you to check out the whole piece. And, if you're interested in learning more about what my colleagues Chunka Mui and Tim Andrews and I have written about the Laws of Zero, you can read an excerpt from our recent book (or, of course, order one) here.

Let's start with the surprises from Lemonade's investor day, before they released their Q3 results. You have heard my frequent ranting about the combined operating ratio (COR) being the insurtech kryptonite. During the investor day, Lemonade's CEO mentioned it not one time, but two times!

However, they have not found the time to represent the value of their COR in the first nine months of 2022. It's 160%.

For each dollar of premium sold, $1.60 is paid out. (AGAIN!)

Let's move to the second thing we learned. In the Q&A at the end of the day, a participant asked to comment on the current churn rate of between 30% and 40%. CEO Daniel Schreiber pushed back, claiming the rate is lower, but in a filing in California, at least, it is above 40%.

Schreiber adds that when a customer churns, you have not lost a customer; instead you created an ALUMNUS.

Steve Anderson and I acknowledged Lemonade's unique Art of Communication in the article: Finally, An Insurance Company Proud of Its Human Agents. One more time, they have demonstrated their mastery.

In one of the past editions of this newsletter, I discussed the nonsense of the "seasoned policies" narrative. In this last release of the earning call, Lemonade moved on and didn't mention it. However, Daniel has not moved on; he still believes (or wants his investors to believe) that a policyholder has some claims to submit as soon as he buys a policy but that claims diminish as the policies "season." 

The harsh reality is that a portfolio gets better with pruning: you underwrote a portfolio, then you realize part of it is worse than you supposed … and you start to reprice / twist terms and conditions / cancel policies.

It seems that in California a third of the churn on homeowner insurance policies has been "Canceled by Lemonade." And, as the chief business officer explained, there has been repricing!

Last surprise: the charity giveback, the flagship feature used to win the hearts of many insurance insurance executives and analysts back in 2016 and that was five cents on each dollar of premiums written in 2021. The giveback received 60 seconds at the investor day. (I have already shared my thoughts on the giveback in the first edition of this newsletter: "The insurance professionals who fell in love with their disruptive storytelling over the past six years should feel a little betrayed.") 

The European markets that Lemonade entered some time ago (Germany, France and the Netherlands) were not even mentioned during the day.

See also: Lemonade: No Sign of Disruption Yet

Facts & figures about their business

The shareholder letter opens with pretty enthusiastic words: "We're very happy to report on another strong quarter, with both top and bottom lines coming in ahead of our expectations."

Lemonade's top line was 2.4 times what it was in Q3 '20 -- but net losses were three times the Q3 '20 figure. Moreover, the loss ratio was 94%.

During the investor day, the CFO shared the evolution of the loss ratio by business line, including guidance for the next quarter:

The actual data looks pretty bad. Let's see if they produce this renter improvement expected in Q4.

There were no facts, no figures specific to the auto business, where the Metromile portfolio has a three-digit loss ratio. It does seem Lemonade has understood that telematics-based proactive first notification of loss is good, and I agree with them. (There! I said it!)

Here, you can see my recent speech in London about the use of telematics for reinventing the auto claim process.

Ambitions

The CFO also shared their ambitions for the next five years:

• Profitable from the half of 2026
• Growing by 20% a year

He also shared a "what if" scenario that basically massages the numbers to send Lemonade to the moon.

As of mid-November, 7,329 wildfires have been recorded in the U.S. this year, totaling 362,403 acres, destroying 772 structures and damaging 104. With the American Southwest seeing rising temperatures and drier conditions as climate change takes its toll, all but three of the 20 largest fires on record in California have occurred since 2000, with most of those happening in the last three years. This increase in destruction has led to skyrocketing insurance premiums, and many Americans feel they can no longer afford insurance protection.

Currently, 54% of Californians cannot afford disaster debt, and the state needs a solution. In response to this protection gap, Gov. Gavin Newsom has signed a bill requiring insurers to provide premium discounts for consumers who mitigate against wildfire risks.

These new insurance pricing regulations are the first in the nation to give homeowners incentives to take action against wildfire risks. Carriers are legally bound to provide discounts to consumers who follow the Safer from Wildfires framework, developed by the California Department of Insurance, alongside other state disaster prevention agencies.

However, the legislation leaves many insurers wondering how safety measures at the individual level can help them manage risk. Fortunately, the technology is out there to help insurers keep tabs on the safety measures their customers are taking and be better-positioned to mitigate risk and retain profitable underwriting despite mandatory discounts on premiums.

See also: Property Underwriting for Extreme Weather

Combining artificial intelligence with aerial imagery can allow for the creation of 3D property insights and make risk identification quicker and more efficient. With accurate, rich and reliable data, insurers can gain a competitive advantage by accurately assessing wildfire risks and reducing their claim losses by double-digit percentages across the board. These carriers also can more easily work out replacement costs if a loss does occur.

The new legislation will focus on the buffer zones between trees and a property, which are critical for halting the spread of wildfires, and the distance between vegetation and a property can be identified using artificial intelligence and aerial imagery. A property intelligence data supplier can provide up-to-date information about the evolution of risks, with a quarterly update about a property’s risk score. Underwriting profitably will become easier, and premiums can be more personalized and fair.

Customers will not only be compensated for taking safety measures, as stipulated by the new laws, but can be provided specific recommendations about how to protect themselves from wildfires. This could not only make insurers more competitive but could save significant costs. For example, an insurer can know whether a property has vegetation within 15 feet of its walls and automatically contact the owner to inform them of their increased wildfire risk and offer suggestions to reduce it. When the carrier and the customer work in tandem, both benefit from the lower chance of getting stung financially.

The customer will feel that their relationship goes beyond transaction, creating an emotional bond that is a powerful retention tool. 

Insurers are already starting to provide cheaper premiums to low-risk customers. This provides a welcome outlier as premiums increase on average. 

With around 3,700 new third-party sellers emerging every day on Amazon alone, e-commerce continues to make significant gains, even as the pandemic wanes. But while the phenomenon may be impressive, the lifespans of individual e-commerce businesses can often be anything but: 20% of e-commerce start-ups end in failure within their first year, often due to the razor-thin operating margins that regularly hinder digital businesses.

In such businesses, insurance can be the difference between a manageable setback and total collapse. There's just one underlying problem: Traditional insurance companies do not offer the coverage options e-commerce retailers need to protect themselves against emerging risks.

An insurer's main objective is to analyze the nature of a business, identify the risks it faces and provide coverage accordingly. But when it comes to offering coverage plans for e-commerce retailers, the tools carriers have to assess the risk are often insufficient. Instead, many continue to sport outdated classification models and rarely consider the ever-changing digital landscape these businesses occupy. Retailers may have to pay unnecessarily high fees yet have insufficient coverage, while insurance carriers may face unexpected losses due to unanticipated risks or be incapable of offering coverage at all.

For the $10 trillion [and growing] global e-commerce industry, insurers have nothing to lose and everything to gain by leveraging market data to better address the specific risks digital businesses face on a daily basis.

Risky Business

Existing insurance protections such as general liability, product liability and transit insurance, to name a few, have evolved to cover most digital retailer needs, but not at the pace e-commerce-specific risks are proliferating.

Digital retailers don't need to anticipate the same slip-and-fall accidents or damages to property that most brick-and-mortars do, but that doesn't mean they are immune to other perils.

The ever-changing digital economy brings its own unique set of risks -- liabilities such as third-party bodily injuries, physical damages from products, cyber-attacks, shipping delays, account suspensions, IP infringements, unexpected refunds, list hijacking and downtime events. With e-commerce businesses often enjoying only the tiniest financial wiggle room, any one of these risks can at best create significant headaches and, at worst, be insurmountable.

See also: Underwriting Enters a New Age of Data

Missing Data

Insurance coverage is conventionally based on tangible factors like a retailer's size, operating history and sales volume, and is completed following an assessment of risk exposure. Naturally, the greater the risk, the more comprehensive the insurance will need to be, and the pricier the policy.

Yet many traditional insurers lack the requisite data and tools to accurately assess the emergent risks tied to e-commerce -- a data gap that is widening. Many retailers end up paying for overpriced, static coverage that ultimately underserves them. In fact, approximately 30% of e-commerce businesses are unable to acquire the coverage they need.

Such coverage gaps will only multiply as the evolution of risks continues to outpace mitigation solutions. Take suspension, a nightmare scenario for digital businesses. Solutions that can minimize the risk of unjustified account termination while providing financial stability as they're reinstated can have huge impacts on businesses, especially SMBs.

Seize the Opportunity

Offering online businesses insurance options that cover any combination of current or emerging risks is complicated. Regardless of the type of insurance, costs hinge on the severity and frequency of the risks in question.

That said, in this digital age, e-commerce businesses should not have to struggle to find appropriate, comprehensive coverage that addresses the risks that so often plague them.

Aligning e-commerce needs with financial services and traditional insurance offerings may be an enormous challenge for insurers, but it is certainly also an opportunity. As the e-commerce market continues to boom, the insurance providers that recognize and capitalize on its largely untapped potential first will be the primary beneficiaries.

We have all been living through a period of intense uncertainty for almost three years, and the pace of disruption shows few signs of slowing; instead, it is morphing.  

The degree to which the post-COVID world in which the property & casualty insurance industry operates has changed, and how quickly, cannot be overstated. The impact has been pervasive and has affected the entire social, economic and political world in which we live and work. Nothing and no one have been spared.

Inflation, both social and economic, emerged suddenly this year and has driven up insurance claim costs and severity with no end in sight, causing insurers to play “catch up” through double-digit premium increases and extreme overhead reductions, including downsizing of both physical facilities and workforce while simultaneously struggling to find talent for open positions.

Workforce Transformation

The American workplace is also in extreme flux. Work from home (WFH), originally a rational response to COVID lockdowns, permanently changed perceptions of how work can get done. For many workers, that necessity has become a preference and a whole new lifestyle. Even today, workplace occupancy is approximately 50% of pre-pandemic level. Between 2019 and 2021, the number of Americans primarily working from home tripled from 5.7% (roughly 9 million) to 18% (27.6 million), according to a 2021 American Community Survey (ACS) estimate released by the U.S. Census Bureau.

Add to this the impact of the Great Resignation, in which employees have voluntarily resigned from their jobs en masse, beginning in early 2021 in the wake of the COVID-19 pandemic. Among the most cited reasons for resigning are wage stagnation amid rising cost of living, limited opportunities for career advancement, hostile work environments, lack of benefits, inflexible remote-work policies and long-lasting job dissatisfaction. The reduced need for relocation removes a barrier, adding to the list of reasons for job switching.

At least half of the U.S. workforce is “quiet quitting,” according to Gallup. These workers are still fulfilling their basic job duties—but they’re no longer willing to put in extra (unpaid) hours, take on new duties or “step up" for the team.

Insurance claims organizations are facing high turnover rates while losing seasoned talent as the workforce ages. This talent drain is affecting claims across the board and has had a disproportionate impact on more complex claims, such as injury and attorney-represented cases. Insurers are prioritizing meaningful loss cost containment to offset these major headwinds.

See also: 5 Key Trends at ITC

Outsourcing 2.0 to the Rescue

Property & casualty insurers are reassessing their operational strategies, especially around cost management and workforce reductions and shortages, both voluntary and involuntary. Digitization and automation of claims processes is somewhat a modality of outsourcing, where customer self-services replace claim adjuster functions. Photo inspection and estimating with AI is just one, albeit significant, example. 

While technology and automation efforts are showing progress, there has not been enough to address increasing service demand. Outsourcing is a viable operational solution, but not in the way that we may remember it. Outsourcing is nothing new in the insurance industry. In fact, insurance has led the way in many respects, adopting and relying on vendor partners to address a wide variety of business tasks, processes and claim-related customer services over the past 20 years or more. These have included professional, IT, project, process and operational outsourcing, as well.

Whether you call it contracting or parceling out, subcontracting, consigning, relegating or handing over, a new paradigm, “Outsourcing 2.0” has suddenly become opportune for P&C carriers seeking to address the impact of all of these “new world” realities. Outsourcing 2.0 is deeper and broader reliance on a combination of technology and vendor partners spanning more sophisticated incumbents, newer and start-up companies alike. Today’s insurance ecosystem has advanced to deliver capabilities such as shared responsibility for managing loss costs via partnerships, which has traditionally been considered off limits or only performed with significant oversight by carriers. Outsourcing 2.0 is inspired by:

• The push toward automation of underwriting and claims processes, touchless, straight-through-processing
• Insurtech influences, in which insurance models are birthed digitally and thus offer digital native claims experiences but also rely on outsourced support
• A shift from protect-and-pay insurance to avoid, detect and resolve models, which are increasing demand for outsourced services
• The overall recognition of a need to make simpler, minor claims as easy as possible and a conscious choice to trade indemnity spending to curtail loss-adjustment expenses

Furthermore, insurance organizations that possess specific expertise in specific operational areas and that have learned the “secret” of attracting and retaining highly skilled talent in the face of the workforce transformation have realized the opportunity to offer these services to the marketplace as a new revenue center in an outsourcing model.

Leading Areas of Outsourcing Opportunity 

There are several specific areas of interest from carriers seeking to quickly lower operating costs while improving claim outcomes, including policyholder satisfaction across the entire claim process:

• Loss Intake; Apps, on-line tools, external contact centers, partner vendors (detect and report)
• Investigation; External SIU, records and clinical management, forensic data providers
• Evaluation; Virtual inspection tools, photo analysis, medical management, geospatial data and imagery, managed repair providers
• Negotiation; Litigation support services, vendor partner granted authority
• Finalization; Digital payments, external subrogation firms

Other forms of outsourcing include training and upskilling typically sourced and managed internally by carriers. And, on the cutting edge are examples such as digital claim platform providers, essentially managing all or most of the claim on behalf of carriers. While outsourcing of these core areas is not entirely new, the degree, scope and external reliance is expanding rapidly and is reshaping claim adjusting, especially in personal lines.

See also: What Drives Claims Outsourcing

Vendor Partner Selection

Selecting and managing vendors has always been an important decision for any carrier. Today, vendors are often viewed as partners, especially when it comes to security and privacy management or developing future-forward road maps. It’s no longer a buy-and-supply relationship for many providers and carriers alike. Forging partnerships have become a critically important strategy in business in general and specifically in effective cost containment, making partner selection more critical than ever.   

Changing Vendor Partner Marketplace

In addition to the shift from a vendor to partner relationship, the vendor space is changing, as well.  Venture capital-backed consolidation, advances in technology investments and growth due to carrier outsourcing are most pronounced.

Within the injury claim investigation and evaluation space there is consolidation among records management, investigation firms and medical management companies while many remain regional and state-specific.

Meanwhile, carriers are increasing their appetite to outsource, automate and provide more tools to adjusters. This coincides with the claim adjuster talent war and acceleration of retirements during the Great Resignation. However, insurers demand efficiency without sacrifice to claims management quality, namely the ability to manage loss costs effectively. Vendors capable of offering national or multi-regional coverage is a must have when competing for a carrier’s attendant geographic claim footprint. Procurement experts are focused on partnering with firms that match these priorities.

With advances in technology come the need for tighter controls, security and privacy. Vendors manage an array of private, personal identifiable information and sensitive data when it comes to legal, medical and claim investigation materials. The vendor partner of today must meet stringent compliance, cyber risk protection and business recovery requirements to compete. With new vendors, this stage of compliance can take months to review and satisfy.

Outsourcing has moved front and center as the industry transforms to manage today’s new realities. Partnerships with fully integrated national service and technology providers possessing deep expertise in claims management, training, contact center operations, medical, record and investigation management bolstered by powerful new technologies will be the hallmark of the insurance market leaders of the future.

Flooding is a global issue made worse continuously by climate change. Even areas that are seeing increased droughts caused by rising temperatures can see more flood risk because of reduced ground permeability.

Urbanization exacerbates the problem because the vast amounts of concrete used for roads, parking lots and developments greatly reduce permeable surface area, putting drainage infrastructure under significant strain.

Flooding is one of the most difficult natural disasters when it comes to making damage predictions, and damages are typically very high. Global flood losses reached $20 billion in 2021.

With just one inch of floodwater potentially causing up to $25,000 in damage, flood damages are generally not included in homeowners' insurance plans. Unfortunately, rather than an increase in the number of specialized flood insurance policies, there has been a 9% decline in FEMA policies over the last year from 5 million. This is due to an increase in the cost of insurance premiums for the millions living in potential flood zones, despite FEMA providing what was previously considered the low-cost alternative. 

With such significant opt-out rates for FEMA insurance policies, insurance companies are faced with a large number of uninsured potential customers, but they must be able to calculate risk accurately so that some properties can have reduced premiums.

An effective approach is to use AI to extract high-definition 3D property data from aerial imagery.

In the last decade, AI has become vital in the insurance sector. AI models are becoming increasingly effective in analyzing and processing insurance claims, especially in the case of natural catastrophes. 3D modeling of high-resolution aerial imagery gives the insurer rich and accurate data at scale. Visual data can accelerate the process of inspection, underwriting and claims, while simultaneously helping with risk prediction and preparedness. In some cases, due to the speed of automated analysis, it may be possible to identify risks and pre-emptively warn property owners so damage can be avoided entirely.

See also: Top Causes of Business Insurance Loss

Many insurers are using aerial imagery to support the underwriting process, especially when determining the condition of the roof, scanning for any potentially hazardous debris nearby or measuring the elevation of the ground around the property. In this way, they become more efficient, trim costs and are more able to offer affordable flood premiums.

Finding individual images of a specific property and analyzing them in person takes time and can limit the number of properties that can accurately be insured with up-to-date information. Therefore, implementing AI recognition with aerial imagery can significantly reduce the time required to create insurance products and vastly increase the number of properties that can be surveyed. With computer vision and machine learning, insurers can identify risk factors in all the images across a database and automatically categorize properties by their risk level. This is particularly useful given the high number of properties that are insured and reinsured for flood insurance. 

With AI taking the industry by storm, new aerial imaging capabilities are constantly being developed in the P&C space, meaning predicting and preventing loss is more accessible than ever. By using 3D property intelligence derived from aerial imagery, insurers can obtain more data points for more commercial and residential properties nationwide – for example by pinpointing impermeable urban areas in flood risk zones. Considering the complexity of the underwriting process, any company that still relies solely on governmental property records instead of using AI-derived property databases is significantly increasing the risk of using outdated information and making incorrect risk management decisions. From a cost-saving and a risk-averse perspective, using AI-derived  databases of aerial imagery is one of the best options for insurance companies to stay strong in high-risk markets like flood.

With the steeply increasing environmental pressures, insurers need to better protect their customers, improve business performance and differentiate by adding value beyond product. With the industry experiencing a rapid digital transformation, innovation is now cherished by insurers. Climate change may be outside the industry's control, but failure to respond to climate challenges and subsequent catastrophes like flooding is partly a result of the current insurance model. The solution is clear: The insurance industry needs to keep pace with the digitization of other industries. Additionally, insurance providers should take full advantage of the technologies that enable them to pinpoint complex risks, reducing the number of causalities and inevitably strengthening business performance.

The costs of long-term care (LTC) have skyrocketed in recent years, leaving much of the aging population unprepared to fund care or age at home. The average annual cost of a semi-private nursing home room is now over $93,000, and home health aides are upward of $50,000. When planning for retirement and aging, in general, it’s critical to expect the unexpected and factor in these costs or ways around it, like LTC insurance. 

When we think about aging at home, most people think about their kids being around to help or acting as caregivers. Except now, those kids aren’t having kids – 56% of Americans aged 18 to 49 don’t want to have children. As a result, as these generations age, there will be fewer caregiver options. It’s estimated that 50% of older adults will need long-term care at some point in their lives, yet only 7% of adults over 50 have an LTC policy. By investing in LTC insurance at a younger age, people have security available - no matter what level of support they may have as they age. That being said, finding an accessible insurance solution is not always easy.

Insurance is complex, and LTC insurance is no exception. Many pre-existing conditions like anxiety can disqualify people from consideration even if a person is otherwise healthy, so it’s important to look into programs that can help those individuals qualify for coverage down the road via preventative care. We have far more knowledge today about the significance of wellness as we age – knowledge that can paint a more accurate picture of the state of someone’s overall health beyond just one pre-existing condition.

For example, we now know that hearing loss can affect the chances of a person suffering from dementia later in life. We also better understand the importance of mobility, nutrition and cognition support as we age. What deems a person healthy and “low risk” has changed on the clinical side, but we have yet to find a way to properly incorporate that new information into insurance policies.

See also: We Need to Care for the Caregivers

On the carrier side, there is a wealth of unused data on aging populations that would make LTC coverage less risky and expensive to provide. Too often, the aging population is treated as a monolith; insurers don't look at the needs of different aging cohorts. The needs of a 90-year-old person in 2022 are vastly different from the needs of a 70-year-old, and the risk signals are, too. This perspective has contributed to a cycle that has made LTC extremely undesirable for carriers; there is not enough information about the populations being insured, so every policy issued has more risk than it needs to. 

Traditional risk signals such as death of a spouse and change of address combined with supplementary data like a person’s level of familial support, ability to use grocery or meal delivery services, access to online banking and more would help insurers better understand true risk. Having that holistic, 360-degree picture of health is important, especially as we age; those factors are often highly predictive of the likelihood someone will file a claim and the general success they would have aging in place. Giving carriers better insight into the changing needs of their policyholders means everyone wins. 

Aging has become financially unsustainable for all parties; life expectancy is getting higher, but care is getting more expensive. In an industry where everyone is currently losing, there’s a clear need for solutions that get to the root of the problem. Prioritizing wellness and properly using data offer myriad benefits for individuals and insurance providers. With the right tools, more people can enjoy the benefits of healthy aging.