ITL:

When I was preparing for this month’s ITL Focus on robotic process automation (RPA) and the broader possibilities of automation, I went back and looked and saw that two of the five most popular articles we’ve ever published on the topic were ones you’d written. I thought, I haven’t talked to Nigel in a while, not since your move to Google, so I decided to give you a try and am delighted to get to chat a bit. 

Maybe we can start here: When you were writing these pieces a few years ago, it seemed that automation had great promise. Now that we’re some years on, how has that promise played out?

Nigel Walsh:

I think things have played out quite well. Division by division, process by process, things have steadily progressed. Adoption of automation within the insurance industry has increased, without question, and there are still plenty of processes left to automate.    

I always talk about evolutionary and revolutionary steps. I think RPA falls categorically into the evolutionary mode. We can make everything better than it was. In the cycling world, people will know this as marginal gains. Break it all down, improve it by 1% and rebuild it all.

ITL:

What would revolution look like? And is that possible?

Walsh:

Revolution would ask, Why are we doing this in the first place? Why do we need it? Can we remove it entirely?

If you're automating a process, you’re grabbing data to fill out a form that was always used. Maybe 20 years ago that was a form on paper for an agent or broker or customer. But why automate that old form? I would challenge us to ask, “Why can't we skip the form and automate the whole process, end to end?”      

Artificial intelligence has helped us understand our workflows. Think about your phone with all the shortcuts. Artificial intelligence (AI) says, actually, Paul, based on your location and the time of day and these three other factors, I know what you want to do, and I’ll get you right to it. Our ability to learn and predict quickly has improved exponentially. 

ITL:

So, you can go straight from whatever is going on to whatever the result ought to be.

Walsh:

The initial achievement of automation was to make the machine go faster and be more efficient. But what if there's a new and better way to do things? I’m not sure we pause enough and ask or challenge this. You can argue that automation is still horizon one thinking when we could be looking at horizon two or three.

ITL:

Do you know the name Mike Hammer? He was an MIT professor who pioneered reengineering in the 1980s and 1990s. He used to caution against paving the cow paths because he lived with the problems that were created in Boston when city officials did just that.  In the 1900s, city officials started just paving roads where cows had created paths over the centuries. He said we have to imagine the new – the superhighways or air travel or whatever – rather than just do a better job of what we’ve always done.

Walsh:

Exactly that. Otherwise, all we've done is make faster horses. As Henry Ford said, if we had asked people what they wanted, that’s what we’d have ended up with.

ITL:

Just the other day, the U.S. National Highway Transportation Safety Administration ruled that a car no longer had to have a steering wheel, gas pedal, brake pedal, etc. to meet safety criteria. So, now, we can have cars that don’t just look like they always did, without someone in the driver’s seat, but can reinvent the interior of cars entirely. 

Do you have an example or two of how the more revolutionary approach might work in insurance, of what could be entirely done away with rather than simply automated?

Walsh:

We’ve been talking for years about how you move from reactive to proactive. I think we are at that point now when we have the tools and the datasets available to make that shift. 

When you think about the whole process of insurance in the first place, it's the collection of data to assess risk, assign a price to it and return the assessment to the customer. But, even with all the information that is available, the orchestration is still being assigned to a human, even if it could be automated. A good example is parametric insurance. If we’re in a commodity world and there is an outage or breakage, you can automatically restore the customer to the pre-loss condition.

You can also change the business model of insurance. Look at folks like Laka, which sells insurance for cyclists. They set a cap on your premiums, but, if there are no claims or lower claims than expected, you pay less.  Why don't more companies do this?

ITL:

In terms of automation of the evolutionary variety, are there particular areas where you've seen successes or have seen failures?

Walsh:

I think you can apply automation to just about any area and see benefits. It’s not hard to take your 10-stage process and automate elements of it. But automation of just the arms and legs is unlikely to give you the benefits or outcomes you really need. 

ITL:

A few years ago now, I helped three senior partners at a big consulting firm write a book on how to innovate on strategy, and one of the major points they made was that operational efficiency can generate strategic advantage, even though it tends to be treated as separate from strategy discussions. They said they thought insurers should be able to take out 50% of their operating costs and rather quickly. Does that sound realistic? And, if so, how far along do you think insurance is on that trip?

Walsh:

Using Google Cloud, Ki Insurance built a Lloyd’s syndicate driven by algorithms. That’s a business traditionally grown by experienced executives, but Ki generated some $400 million in premium in its first year. A lot is possible when technology is an integral part of the business strategy.      

ITL:

Thanks, Nigel. Always great talking with you.

The constraints of insurers' legacy technology have become more obvious in the days of digital transformation. These systems can no longer support customers’ demands for speed of change and omnichannel experiences. 

Enter the era of ecosystem transformation. 

Legacy systems create siloed processes, multi-generational technology landscapes, limited point-to-point external integration and the lack of a comprehensive customer view across various solution offerings. But, within a broader partner ecosystem, technologies such as cloud, software-as-a-service (SaaS) and low-code allow carriers of all sizes to be more efficient, productive and modern and – ultimately – move closer to customers.

When technology and business operations are closely integrated across the entire insurance value chain, carriers can innovate in ways that matter most to their customers.

Connecting Emerging Technologies 

In an increasingly crowded space like insurance, and with the growing speed of digitization changing customer expectations, carriers need to constantly reassess customers’ needs and rethink the value they can bring. 

In the recent past, carriers have begun to diversify their lines of business and to leverage new technologies such as SaaS, artificial intelligence (AI) and machine learning (ML) to streamline the underwriting and claims processes. 

SaaS is reshaping how carriers deliver their services. From infrastructure, to solution offerings, to services and support, SaaS’ real-time nature allows IT teams to work more efficiently, building and testing rapidly and iterating faster than ever before, building a more nimble environment for insurance carriers. As a result, customers can get the latest capabilities and solution updates in a fraction of the time. 

In fact, in our Driving the New Standard of Insurance global benchmark survey conducted last year, over one-third of respondents told us high operating costs are the biggest obstacle to profitable growth for insurance businesses. 

Carriers that take this ecosystem approach will find themselves moving away from needing to upgrade constantly. This helps reduce technical debt and minimize both technology expense and burden. The configurability and malleability of SaaS brings speed, and it streamlines processes and workflows to benefit carriers in the long run. 

Speed, Speed, Speed! – Rewriting the Rules of Insurance Operations

Insurance has always been about data. We now have a lot more of it, placing a premium on analytical capabilities. This has strained technology systems – and, eventually, when the data dictates required changes to product, it can be a struggle to achieve desired product development outcomes with outdated systems. 

To address this challenge, carriers of all shapes and sizes are beginning to make substantial investments in SaaS-enabled ecosystems, enabling operational agility and efficiency in the product development and deployment cycles. 

How could this be done? An insurance ecosystem brings together a close integration of analytics, computing, data, mobile and security from different sources and partners, allowing even small and medium-sized carriers to benefit from the nimble infrastructure and emerging technologies. This gives them a leg up to compete in the fierce insurance marketplace, especially in the lines of personal auto, homeowners and small commercial.

When built into carriers’ core systems, this approach supports carriers’ business strategy with the ability to enter new markets, and deliver new products more effectively and efficiently. This allows insurance CIOs and IT professionals to focus on the overall business operations and concentrate the resources on product innovations to address customers’ evolving needs.

See also: Designing a Digital Insurance Ecosystem

2022 Keywords in Insurance – The Experience Economy and Personalization

Customer expectations have changed drastically in the past two years. An omnichannel experience is a key driver in customers making insurance purchase decisions. Fast-paced insurtechs and startups offer digital customer experiences and convenience that many carriers aspire to.

The delivery of experiences includes multiple layers – from data and technology to partners and ecosystem. Getting this right requires aligning these different layers to determine how they can be optimized for customers.  

When it comes to data and technology, insurance is at a unique position where customer data is readily available through claims history and the underwriting processes. How data is used is arguably the most critical factor in how well a carrier meets customer expectations and improves the overall process. Data management and analytics tools  can help carriers take advantage of new customer touchpoints and make sense of what customer data is telling them.

Partners and ecosystems, on the other hand, help fill the gaps of insurance offerings. By leveraging the innovative products and services from partners and external resources, insurance companies are able to improve claim accuracy and reduce processing time. This helps improve the customer experience.

However, the increased need for digital engagements doesn’t mean that the role of traditional agents is eliminated. Agents, carriers and partners work seamlessly together as a team with each being a critical element of the insurance ecosystem. 

Final Words

The ecosystem model is the way forward for the insurance industry. 

It empowers technology departments by getting them closer to the end customers, positioning them as supporters of business strategy as carriers enter new markets or reach new customers. The model also enables technology departments to play an integral role in the efficient and effective delivery of new products, allowing companies to move with incredible speed and agility in this crowded space.

On Feb, 24, Russian armed forces attacked Ukraine. The invasion is first and foremost a human tragedy, and Allianz has been clear in its opposition to this unprovoked attack. As a secondary topic after the humanitarian concerns, the invasion poses a complex threat to the operations of financial services companies and has some enormous consequences for the financial markets in the short term. 

Immediately after the invasion, there was a panicked reaction in the capital markets, particularly European banking stocks. Banks from Italy and France are most exposed to Russia, together accounting for more than 40% of the total exposure of foreign banks in Russia at $25.3 billion and $25.2 billion, respectively. However, these numbers only account for very low single-digit percentages of their total foreign claims. Banks with large Eastern European activities also saw stock prices declining materially. 

Stocks of Russian banks saw massive declines, and interest rates on (expected to default) Russian and Ukrainian sovereign debt, as well as the cost for credit default swaps, went through the roof. Europe’s Single Resolution Board took action on Russia’s Sberbank subsidiaries in Croatia and Slovenia to avoid failure.

The macroeconomic impact and increasingly higher inflation expectations are being fueled by elevated commodity prices. In Europe, the risk of stagflation has increased, and markets are closely watching the next steps central banks around the world are taking. Increasing inflation, together with low economic growth, may lead to lower profit generation for banks and hurt the results derived from retail operations.

When it comes to U.S.-based financial institutions, some asset managers and banks do have physical assets exposure to Russia and Ukraine. However, the evidence seems to suggest that such direct assets exposure (whether these are leased airplanes, real estate, equity investments, Russian and Ukrainian debt/bond investments denominated in USD/Russian rubles/Ukrainian hryvnia, etc.) and other related exposure is in low-single-digit percentages. 

Underwriters expect U.S.-based financial institutions to conduct full write-downs of their investments in Russia and Ukraine during fiscal 2022 and possibly later, as the ultimate outcome of the conflict remains uncertain. It is also likely that the U.S. assets in Russia will be nationalized in response to the U.S.-imposed sanctions, ruling out any possibilities of future recoveries.

A number of U.S. asset managers have highlighted that sanctioned Russian nationals are limited partners in their funds and that they are working to buy back their interests in these private funds to cease the affiliation with these limited partners. 

At the same time, certain U.S. hedge funds are buying up Russian and Ukrainian bonds at cents on the dollar, perhaps betting on an early resolution of the conflict. The Ukrainian bonds are currently trading at higher prices given the pledged financial support of Ukraine by the U.S. and the European Union. While doing so is somewhat of a common practice by hedge funds, aiming to profit from the current unprecedented situation in Eastern Europe may be viewed as an environmental, social and governance (ESG) issue by the investment community and the regulators.

See also: Ukraine: How Exposed Are Insurers?

Cyber and ESG issues

Alongside the human toll, the invasion of Ukraine provides a salient reminder of the omnipresent danger of state-sponsored cyber-attacks that aim to disrupt and disable IT systems. Banks and financial institutions are on alert for an escalation in hacking attempts and Russian reprisal cyber-attacks after the imposing of sanctions by Western nations, resulting in a number of the country’s lenders being kicked off the global payments messaging system SWIFT.  

This comes at a time when risk managers have never been more aware of the hazards posed by cyber criminals. Recent high-profile cyber-attacks have shown a worrying trend, where hackers target technology or software supply chains. AGCS analysis of more than 7,500 insurance claims involving financial services companies over the past five years (worth $1 billion-plus) show that cyber incidents are already the top cause of loss. IT outages, service disruptions or cyber-attacks can result in significant business interruption costs and greater operating expenses from a variety of causes, such as customer redress, consultancy costs, loss of income and regulatory fines. Brand reputation and, ultimately, a company’s stock price can also be harmed, while management can also be held responsible for lack of preparedness.

It is unsurprising then that cyber incidents was ranked as the top risk for the financial services sector by 51% of the 872 respondents who participated in the Allianz Risk Barometer 2022. For companies, and their senior management, this ultimately requires them to maintain an active role in steering the information and communications technology (ICT) risk management framework, including assigning clear roles and responsibilities for all functions and appropriate allocation of investments and training. Companies need to operationalize their response to regulation and privacy rights and not just look at cyber security.

At the same time, the broader ESG impact is being felt by asset managers assessing the impact these developments have on the sustainability of their investments post widespread sanctions, on a country that already scored relatively low in terms of governance and social matters. No doubt some asset managers will consider divesting Russian assets based on ESG considerations. Companies’ boards are re-evaluating presence and activities in the country due to concern over reputational damage.

What makes a true digital payment experience in insurance? Although the past few years have been characterized by rapid digital payment options, the game-changer has been the focus of market leaders to embrace the transformation of the actual payment experience – both for premium and claim payments.

In SMA’s new research report, "The Race Toward True Digital Payment Experiences: The Digital Transformation of Premium and Claim Payments in 2022 and Beyond," SMA explains the current state of premium (inbound) and claim (outbound) payments. Although there is a strong effort by insurers to provide true digital payment experiences, many continue to operate with outdated processes that don't meet the needs of today's consumers.

New preferences brought on by the pandemic and a more digital-connected world demand that insurers reimagine the payment experience. Within premium payments, this means offering policyholders the ability to manage how they interact with their insurers and control payment management and notifications. The goal should be to expand payment types and access options to give policyholders greater control of their experience.

On the claims side, while it is more challenging to establish a fundamental digital interaction, insurers have a tremendous opportunity to improve operational efficiencies and reduce costs. This includes establishing digital interactions that go beyond payout delivery for claimants, agents, claims adjusters, vendors and other third parties.

See also: Seeing Through Digital Glasses

For both premium and claim payments, speed and convenience are paramount. The acceptance and delivery of payments must be in real time, and capabilities must give customers the power to create tailored digital payment experiences that fit their needs best, from how they want to transact to how they want to communicate with their insurers.

Retail agencies and brokers are rethinking their channel partner strategies just as carriers and others across the distribution landscape do the same. Although carriers will always remain underwriting partners, more agencies are exploring new channel partners in the distribution ecosystem to ultimately reach customers and connect with carriers. New research from SMA finds that as options for channel relationships continue to expand, distributors across the personal and commercial lines segments are divided on the best approach for their businesses.

In 2022, agencies and brokers are not only turning to traditional partnerships, such as aggregators and banks or financial institutions, but are also exploring up-and-coming channels, such as insurtechs and digital agencies. The recent SMA research report, "Channel Strategies and Plans for P&C Agencies: A View of Commercial and Personal Lines Segments in 2022,” shows that very few agencies expect insurtechs to have a limited impact on their business. It follows that 52% of agents in the small commercial segment and 48% of agencies in personal lines fear the possibility of insurtechs encroaching on their business spaces. Thirty-two percent of agencies in mid/large commercial lines feel similarly. 

While many agencies partner with insurtechs as solution providers, very few are currently planning to use digital agencies as channel partners within the next three years. Rather, most see them as competitors. However, SMA advises that insurtech will increasingly become a force, especially in mid/large commercial lines, as technology advancements make these risks more viable targets while also improving the systems and processes within this segment. This year and beyond, agencies will fiercely focus on channel expansion and assess their current partnerships. At the same time, insurers should also take a step back to review their agency partners and prioritize key relationships by understanding their growth plans and vital industry segments. In today’s quickly changing distribution landscape, insurers must stay abreast of new agency channel partnership opportunities and the benefits they offer.

See also: 2-Speed Strategy: Optimize and Innovate

Insurance agencies across the globe are embracing software solutions that transform the filing and settling of claims into a quick and satisfying experience. In this blog, we will explore the typical lifecycle of a claim and how claims management software can streamline it. 

The Lifecycle of Insurance Claims

The insurance claims process usually involves five key stages, starting from first notice of loss (FNOL) to resolution. 

• Claims creation or FNOL
• Validation of the claim
• Review and evaluation
• Adjustment
• Cancellation or payment 

How Claims Software Can Streamline the Lifecycle 

Integrating automation into the claims process benefits all types and sizes of insurance agencies. It allows them to introduce efficiencies and shorten the lifecycle of the process, providing numerous benefits: 

1. Process Standardization

Manual workflows tend to get complicated, as several employees and partners may be involved. Each has a unique approach, which can lead to inconsistencies. Claims software offers a shortcut to process standardization, meaning more compliance and ensuring that no crucial steps are overlooked.

2. Efficient Collaboration

Nowadays, the most efficient insurance agencies are the ones that have digitized, streamlining their day-to-day processes and encouraging collaboration among previously siloed departments. Claims management software lets you send updates and notify the concerned departments, teams or individuals on coming tasks and activities. The software reduces the scope for miscommunication and enables claims handlers to coordinate better with customers. 

3. Higher Efficiency

The automation means users do not have to consistently check whether the process is advancing; the software keeps track for you. Likewise, the software, powered by machine learning and artificial intelligence, recognizes and address mistakes or bottlenecks.  

4. Regulatory Compliance

Regulations keep changing, making it challenging for agencies to ensure compliance as they strain to improve operations and meet the needs of customers. Failing to meet compliance norms can bring expensive, as well as inconvenient, consequences. 

But claims software helps with compliance. Automating the process means you are continually recording key information, producing a database that comes in handy during audit and compliance reviews. 

5. Data Security

Paper-based records are vulnerable to theft and can be destroyed in accidents and natural disasters, but digitizing processes and storing the data electronically keeps the information safe and easily accessible. Insurance claims software includes advanced security measures, such as multi-factor authentication. 

See also: How to Resist Sexy Analytics Software

6. Cost Optimization

Claims management software supports end-to-end processes, from registration to resolution, and accelerates the everyday work of claims handlers, producing efficiencies and saving on costs.

7. Increased Accuracy

Irrespective of how skilled or prepared the staff is, errors will undoubtedly occur occasionally, but automating the claims processes drastically lowers the probability of slip-ups or redundancies. 

8. Faster Resolution

Insurance processes can be tedious and lengthy, but customers want quick resolutions and frequent updates -- and automation can shorten the settlement process while helping spot fraud.

Final Words

Insurance claims software lets agencies reduce fraud, shorten the claims lifecycle, optimize costs, improve efficiency and a lot more.

Medical debt totals at least $140 billion nationally and is the most common type of past-due bill for which consumers report being contacted by debt collections. The pandemic only increased the debt load for many Americans, despite insurer cost-sharing wavers. And, given that more than three in five adults struggle to pay medical bills even with insurance, it's clear that insurance alone does not provide adequate protection against medical debt.

New solutions and approaches are needed, and insurers have an important role to play. Existing strategies addressing medical debt - such as stopping lawsuits, negotiating repayment terms, removing it from credit reports and even charity buyouts of debt — are important but do little to actually prevent debt.

A new series of reports from the Financial Health Network, the nation's leading authority on financial health, and the Robert Wood Johnson Foundation finds that healthcare system actors, including hospitals, insurers and employers, can all intervene earlier to curb the risk of debilitating medical debt.

Medical Debt is a Social Determinant of Health

Medical debt forces tradeoffs in basic needs, such as choosing between food and paying off debt, disrupts physical and mental health and often leads to litigation, property seizure, wage garnishments, reduced credit scores and even bankruptcy. The financial implications are far-reaching, limiting consumers' ability to buy homes, pay for education, advance careers, build savings and pay off other debts, such as credit cards and student loans. Individuals with medical debt have triple the incidence of mental health conditions such as anxiety, stress and depression. And those with medical debt are more likely to forgo necessary care due to costs, potentially exacerbating health conditions and increasing healthcare costs down the line.

Worse, the burden of medical debt and its adverse implications disproportionately affect those with lower incomes, those who experience chronic illness and disabilities and Black, Latinx and indigenous households. For instance, 28% of Black and 21% of Hispanic households have medical debt, compared with 17% of white households. This creates a spiral wherein those least able to manage debt continue to incur more of it in their pursuit of medical treatment.

See also: Why Financial Wellness Is Elusive

Insurers as the First Line of Defense

Health insurers play an important role in stopping medical debt before it starts. This is especially true among the commercially insured, because the way in which members understand, use and experience their insurance can lead to unexpected medical debt.

Unfortunately, most members do not fully understand insurance terms, and lower health insurance literacy -- the ability to understand, select and use insurance -- is associated with higher medical debt. In fact, more than one in four Americans report forgoing care because they are unsure what is covered by their health plan.

Further, members can be caught in the middle or left with excessive medical bills when providers and insurers do not settle disputed claims quickly. Even worse, more than a quarter of adults in employer-sponsored plans are now considered underinsured.

Not only does acting to prevent medical debt fit under insurers' efforts to address the social drivers of health, but it can help to improve overall health and health equity. Our research found four key actions insurers can take to curb medical debt, improving the health of their members and the larger healthcare ecosystem:

1. Aid members in plan selection, and ensure members understand key health insurance terms. Insurers need to support members in selecting plans based on their particular health and financial circumstances with decision support tools, and ensure members understand health insurance terms.
2. Inform members of out-of-pocket expectations and how to navigate lower-cost options through effective price transparency resources. Insurers have a responsibility to support member decision-making by providing user-friendly, accessible and plain-language explanations of out-of-pocket expenses so members can plan for and navigate these costs. Knowing the cost of care in advance allows members to better budget for those payments.
3. Encourage primary and preventive care services by reducing or eliminating associated out-of-pocket expenses. This can prevent the need for unnecessary or costly care that puts members at risk for medical debt. This is particularly important for members with chronic conditions who tend to require more frequent and sometimes more customized care to manage their conditions. The same may be true for members experiencing long COVID symptoms.
4. Improve claims adjustment and prior authorization processes. Insurers should coordinate with providers to ensure disputed claims are settled quickly. Insurers should also streamline prior authorization, which can often be burdensome for members and providers and create delays in care.

These actions can lower members' risk of medical debt and should be part of insurers efforts to create more responsive, member-driven care. Doing so can improve member experiences, improve health and health equity, prevent members from catapulting into financial ruin, drive use of higher-value and lower-cost care and even help insurers build a competitive advantage.

You can read the full Insurance-focused report, as well as the other reports in this series on medical debt as a social determinant of health, here.

A favorite line among technophiles is that “the future is here; it’s just not evenly distributed.” Every once in a while, we get a glimpse of the future in the here and now, in a way that can help us prepare for when that technology or way of life will become pervasive.

And I believe that the exceptionally quick, vivid and detailed coverage of the Russian invasion of Ukraine shows us what a truly connected world will look like – a world that all businesses, including insurers, are moving into, whether they like it or not.

We talk a lot about living in a connected world, with the IoT, telematics and so on, but we’re actually still in a pretty primitive state. I’d say the world of business is connected in much the way the world of communication was connected for the coverage of the Gulf War in 1991 – some crackly video, often days after it was shot; audio reports from correspondents while the TV showed a map; reports from military headquarters, etc. But the world of business is moving toward the world of unlimited communication and cameras and sensors everywhere that is giving us almost instant understanding of what’s happening on the front lines in Ukraine. The implications will be profound.

Think back to early this year, as Russia massed troops on the Ukrainian border -- and satellites let everyone see what was happening. While Saddam Hussein had managed to surprise the world with his invasion of Kuwait in 1990, even a cable-TV audience today could watch what Putin was doing. He insisted that he intended no harm, and some commentators bought the line, but then the satellites saw medical units being moved up to the border, including supplies of blood -- a pretty clear sign that he intended to attack.

He did, on Feb. 24, and all sorts of other cameras came into play. While few TV cameras were in Saudi Arabia in 1991, and transmission via satellite was spotty as the U.S. and allies geared up to retake Kuwait and then attacked, cameras are everywhere in Ukraine. Living on the U.S. West Coast, 10 hours behind Kyiv, I could turn my TV on at 9 every night, see the scenes from cities across the country and assure myself that Ukraine still stood.

That sort of coverage helped Ukraine President Volodymyr Zelenskyy rally support from the international community and turn some initial victories into a resounding defeat of the overwhelming Russian forces in the northern part of Ukraine. The availability of cameras and high-bandwidth connections has also let Zelenskyy boost morale by showing himself daily and even to address the U.S. Congress and the E.U. Parliament.

The ubiquitous cameras in people's phones have captured video of Russian atrocities, like a tank veering from its path to run over a car with an old man in it (miraculously, he survived) and like all the bombings of civilian targets, including a maternity hospital. The cameras also broadcast the remarkable courage of the Ukrainians, such as someone popping out from behind a tree to fire a Javelin missile and blow up a Russian tank at the head of the convoy, making the whole convoy a stationary target, or such as the intrepid farmers who hitched up tractors to tanks and hauled them away if they were briefly left behind because of a mechanical problem or because they ran out of gas.

In the Gulf War, you'd get some action footage, but not at this level of intimacy, not this quickly and not from the very front lines. (I have pictures of myself from 1991 standing in a Russian tank whose top had been blown off, but I assure you that no combatants were anywhere in the vicinity.) Russia has banned journalists from entering Mariupol, to hide the hardships that its siege is inflicting on residents, but satellite images let us count just how many desperate people are standing in line outside supermarkets. Today, satellites can see the front lines or even beyond, even when journalists can't get there. 

The adage says that the first casualty of war is truth, but satellites have even pushed back there. When the Russians pulled back from Kyiv over the weekend, they claimed that the hundreds of dead civilians left behind had actually been killed by Ukraine or that the scenes had been staged. But, as this New York Times article documents, satellite images showed that the bodies had been in the streets of Bucha for weeks, while the Russians controlled the area. 

Thomas Friedman of the New York Times refers to the invasion of Ukraine as World War Wired because of all the digital aspects to it. He writes: 

"Anyone with a smartphone and a credit card can aid strangers in Ukraine, through Airbnb, by just reserving a night at their home and not using it. Teenagers anywhere can create apps on Twitter to track Russian oligarchs and their yachts. 

"Meanwhile, Ukraine’s government has been able to tap a whole new source of funding — raising more than $70 million worth of cryptocurrencies from individuals around the world after appealing on social media for donations." 

What happens to insurance when the future becomes more evenly distributed and a Ukraine war-level of connection takes hold broadly? We can already see pieces of that future.

Telematics, while progressing slowly over the past two decades-plus, is nonetheless offering real-time observation of drivers. Cameras on the rearview mirror will increase that monitoring -- then autonomous cars will change the game entirely. 

The ever-present cameras in our phones are already being used to take pictures of car accidents and damage to homes, to speed the filing and processing of claims and to lower costs. Those cameras are also being used increasingly for do-it-yourself home inspections. Drones are being used to inspect rooftops, especially after major storms. All of those trends will continue.

And I think the satellites that are playing such a role in Ukraine will become increasingly important. If you can count people standing outside a supermarket in Mariupol, why can't you routinely check on the homes you insure to warn of risks -- perhaps a problem with a roof or the growing potential for flooding or a mudslide -- or make sure a home is properly insured after the owner installs a pool or a trampoline? At a macro level, satellites will make it increasingly possible to monitor the effects of climate change -- erosion, the effects of increased heat on water supplies, etc.

Cameras will also feed social media. Just as the images out of Ukraine are touching people's hearts, consumers will increasingly use images and videos to document and share their interactions with companies. In my experience, I'm sorry to say, consumers are much more likely to share complaints than to offer praise, so I'd say insurers should be prepared to deal with unhappy customers who tell compelling "stories" on social media using visuals designed to make a company look bad. 

Finally, while the issue doesn't relate to what's happening in Ukraine, I'd say insurers also need to be increasingly prepared for unhappy customers to start producing audio recordings of their interactions with agents and other representatives. Those smartphones don't just contain cameras; they're all recording devices, too. Disputes about guidance may no longer be, he-said, he-said; they may be, he-said-and-he-has-the-recording-to-prove-it.

War drives innovation to the extreme because so many lives are at stake, and it'll take insurance a while to catch up to the cutting-edge uses of technology happening in Ukraine. But we'll get there, and we can start preparing for the implications now.

Cheers,

Paul

I've spent the last six years bragging about insurtech's potential in improving the insurance business, for instance in the 2016 article My Four P's of Insurtech and, at the end of 2017, the book All the Insurance Players Will Be Insurtech. One of the insurtech topics I have talked most about has been telematics (usage-based insurance for my U.S. friends), such as in The Past, Present and Future of Telematics and UBI

But, since its inception, Root's auto insurance book has not performed well. For each dollar of premium paid by the client, their risk transfer approach has always cost more than $1.35 (Lemonade has done worse.)

So we have an insurer that in 2017 underwrote $4 million in premiums and -- in just four calendar years -- has scaled to more than $700 million. Root obtained a $3.6 billion evaluation at the halfway point of this journey.

As of March 25, that valuation had tumbled to slightly above $500 million. Something has not gone as they expected.

In recent weeks, we've read about Root reducing marketing and other expenses:

• "Cutting marketing spend by 62% in Q4 and run-rate fixed expenses by roughly $48 million annually from peak 2021 levels"
• Root layoffs 

However, these cuts don't seem to compensate for the main problem: the amount of claims compared with the premiums.

For reference, this is the historical series of U.S. auto insurance key performance indicators (KPIs)...

...and the evolution of the loss ratios in 2021:

Here we have the key point: the book of business' (un)profitability and the role of insurtech (usage of telematics data).

How it started

Root started its journey in 2015 and the following year began to transfer risks using telematics:

• "Root takes into account the driver's habits, which it uses to offer low-cost insurance to safe drivers"
• “The worst 15 to 20 percent of drivers are really causing the majority of accidents," he said, and the rest of consumers pay for that. “We give good drivers the rates they deserve.”
• "We only insure good drivers. And by eliminating the other drivers—the people who cut you off in traffic, swerve through lanes, and tailgate—we save a lot on claims"
• "Simply let the insurance company watch you drive for a little bit and come up with a quote based on that actual recent driving history [...] After a two-week initial trial period, out pops an insurance premium and then the user no longer needs to keep the app running."

I like this idea of using telematics data for providing the first quotation. Even Progressive has liked it (this probably is even more indicative that it makes really sense) and introduced Snapshot Road Test in 2020.

See also: 5 Tips to Ensure an Insurtech Fails

How it's going

Root's loss ratio has been really, really bad for the new policies, and not too bad for the ones they have renewed.

From Root's Form S-1: "As of June 30, 2020, our term one and term two policy retention rates, excluding policies that do not make it through the underwriting period and company-initiated rescissions, were 84% and 75%, respectively. Over time, retention rates may improve as we build deep relationships with our customers, and already we are seeing an improvement in retention with bundled offerings. Our retention rates include customers that retain through the first day of the subsequent term and exclude policies that do not make it through the underwriting period, as defined by state law, and company-initiated rescissions. Adjusting for these customers reduces one- and two-term policy retention by 33% and 10%, respectively."

From an oversimplified, outside-in perspective, Root's usage of telematics data for insuring only good drivers (eliminating the other drivers) and charging them an adequate price is not performing well at all: the first period of coverage has an awful loss ratio!

The company needs to prune the portfolio at each renewal.

Even Lemonade has started to play with telematics data and acquired Metromile (the pay-per-use insurance icon). I recently spoke about this situation in Business Reporter's Future of Insurance, claiming that insurance professionals have chosen the wrong insurtech idols!

Root is not using telematics data well for pricing and risk selection. Moreover, they have even denied the usage of telematics data for claim management and for changing driver behaviors.

But there are many different startups and incumbents’ initiatives out there that are showing great returns on their telematics investment and can be used as inspiration.

One great example comes from one of the members of my IoT Insurance Observatory: Discovery Insure. I fell in love with this telematics approach in 2013 when I saw their brochure for the first time (below) and I started studying their behavioral change approach. My recent exchange (below) with their CEO Anton Ossip shows the potential of telematics data in the auto insurance business.

This is a great example of Insurtech as the superpower for assessing, managing and transferring risks.

Matteo: We have known each other for almost 10 years, and I have enjoyed discussing with you the sequence of innovation cycles you and the Discovery Insure team have implemented. How has telematics been relevant in this journey?

Anton: Our business began in June 2011. The simple premise was whether we could create a business that encouraged and rewarded people for being better drivers. This was especially relevant in a South African context, where we had the third-highest road deaths per annum in the world. We had the benefit of 20 years of shared-value insurance that Discovery had pioneered globally through the Vitality program that encourages people to live healthier lives. We believed we could leverage off this science and know-how to achieve this. That is how Vitality Drive, our behavioral-based incentive program, came to be. When we first started the business, the use of telematics technology in the insurance industry was not common, but it enabled us to offer a highly differentiated value proposition to an otherwise saturated market. Through vehicle telematics, we are able to accurately measure a client’s driving behavior from how and when they drive to whether they use their cellphones while driving. By doing this, we’ve been able to collect over 14 billion kilometers of driving data, which has allowed us to risk-differentiate and offer more accurate premiums as well as provide exceptional rewards to our clients who drive well. Our telematics technology also allows us to provide unique safety features to our clients, such as Impact Alert, where we can detect if a driver has been in an accident and send emergency assistance without them having to call us.

Vitality Drive has proven to be an extremely successful value proposition, not just for our business but for our clients, who receive significant value. Over the last 11 years, we have grown to be one of the larger insurers in our market, growing at double digits, profitable and demonstrating constantly improving actuarial dynamics. We recently spoke about our journey since inception, which I have linked here.

Matteo: I’ve always admired Discovery’s capability to track the innovation initiative impact. Could you share the main economic benefits achieved through the usage of telematics?

Anton: As a business with lots of actuaries, measuring every aspect of the business is part of who we are. From day 1, we saw the incredible correlation between driving ability as we measure it and claims frequency and severity. In our experience, there is so much value you can get from telematics, but it’s not just the data that achieves this. It is ultimately how it’s used. The Vitality Drive program engages customers throughout their journey with us, and through this we have been able to achieve the goals we set out for ourselves, including:

• Attracting the best drivers. We found that drivers who joined Vitality Drive were on average more than 27% better drivers than the general population.
• Improving their driving behavior. On average, clients who install a telematics device have a 15% improvement in driving behavior within 30 days.
• Improving our loss ratio and passing these savings back on to clients. We found that our best drivers have on average a 54% lower loss ratio than our worst drivers. This allows us to reward these drivers with over 70% of their premium in rewards.
• Retaining the best drivers by offering them greater rewards. We find that our drivers with a Gold or Diamond Vitality Drive status have an 84% lower lapse rate than drivers with a Blue Vitality Drive status. Over time, this decreases our overall loss ratio and lapse rate.
• Getting to our clients the fastest and offering valuable safety features. For instance, in the last half of 2021, we reached out to over 36 000 clients when our data detected in real time that they might have been in an accident.

The data we’ve gotten from our telematics devices has also given us the ability to innovate and adapt our model over time so that we are able to offer the most relevant benefits to clients"

Matteo: Is it possible to change policyholder behaviors? This is a question I had to address in many of the workshops with the IoT Insurance Observatory members for the last six years in Europe and North America. Could you share something about the lessons learned and achieved results?

Anton: Yes, through Vitality Drive, we have seen that it is possible to positively change behaviors. We have seen that the Vitality drive program achieves behavior change quickly, where we see an incredible improvement in the driving behavior of our clients as a result of installing a telematics device. On average, drivers have a 15% improvement in driving behavior within the first 30 days.

But we’ve also put the mechanisms in place to sustain this over time. Most drivers know that some of the things they do when driving are not ultimately good for them or those around them. As an example, it’s no surprise that texting while driving is a very dangerous thing to do. This is where the concept of goal setting comes in. Merely educating clients driving well does not encourage behavior change, even though people will often recognize the importance of such behaviors. By setting challenging yet attainable goals and providing explicit rewards for achieving the result, people increase their effort to improve the relevant behavior. Vitality Drive offers weekly rewards for meeting your drive goal, and we’ve seen that people who meet their goals every week improve their driving behavior 15 times more than drivers who only achieve their goal once a month. So, without the correct nudges offered in the right way, most people don’t change their behavior.

See also: Time to 'Flip the Bird' on Insurtech

By combining our telematics data with our claims data, we are able to more accurately predict accident risk. We see that clients who drive better (as indicated by their driving scores) are less likely to get into an accident. Clients who improve their driving behavior score by more than 300 points in one year have a 24% reduction in their motor accident frequency, again showcasing the efficacy of the model.

Matteo: Looking to Discovery Insure’s journey, I have seen a focus on innovating commercial auto over the last few years. Would you like to share any facts and figures about these new offers?

Anton: The transport sector contributes significantly to GDP, with 76% of freight in South Africa being transported by road. Three and a half years ago, we extended this to business customers and now have a growing base of commercial fleet drivers on the Vitality Drive for Business program. Our commercial presence is growing quickly, with the size of book doubling annually over the past two years. Discovery Business Insurance is a natural extension of Discovery Insure and is committed to creating better businesses by sharing value through incentives. Even during this early stage of our Vitality Drive for Business program, we have seen encouraging results from Vitality Drive for Business that show that vehicles driven by better drivers have a lower loss ratio. Our driving data shows that vehicles that have the best drivers have a loss ratio that is 87% lower than those vehicles that are not on the Vitality Drive for Business program.

We have also extended the Vitality Drive program through partnerships with Covea in the U.K. (Vitality Car) and in the Saudi market as (Tawuniya Drive). Both of these businesses show favorable dynamics and provide the opportunity to make a significant impact to drivers in those markets. We expect such partnerships to continue to develop over the next few years. We haven’t stopped at developing a program for personal lines clients.

As FloodFlash CEO, my focus gravitates toward certain news items as they float across my personal ticker. So far this year I’ve been drawn to the events industry re-opening and how we will finally be able to meet the brokers we work with across the U.K. and overseas, and then to the Met Office as the weather forecasts showed the first warnings that ultimately became Storms Dudley, Eunice and Franklin, all of which struck the U.K. in February.

These storms filled my newsfeed as wind, rain and snow pummeled the U.K., eventually leading to widespread floods. FloodFlash claims are almost entirely automated, so having that heads-up two days in advance has little impact. We have removed loss adjustment from the process, so there’s no need to mobilize early or book support functions. Nonetheless, I keep an eye on the events and trends that will affect FloodFlash in the coming hours, months and decades.

A career quantifying the probability of "black swan" events has taught me that the world is full of randomness. I sympathize with the unknowableness espoused by Nassim Taleb rather than the idea of pre-written destiny found in the world of Hollywood (although the latter makes for a better movie). However, trends sit below the randomness. The confluence of these trends has the power to steer products, companies and markets.

One such market, that of catastrophe insurance, plays host to two sets of unstoppable macro trends. Climate change, population growth and urbanization are all driving up annual catastrophe damages. And increasing computer power and the proliferation of IoT networks mean that mass-market parametric insurance is possible for the first time. These trends will shape the catastrophe insurance market for years to come. They are also why Ian and I started FloodFlash.

Those macro trends explain why parametric insurance has started to take hold. In this article, I want to explore three smaller but significant trends that are accelerating parametric growth. Together, they explain why parametric insurance has gone from a conference buzzword to form award-winning coverage used by clients worldwide.

#1: For the first time, all businesses understand what they need to survive a catastrophe

Catastrophes kill businesses. The U.S. Federal Emergency Management Agency (FEMA) says “90% of smaller companies fail within a year unless they can resume operations within five days.” COVID created a world in which every business is alert to the threat of being closed.

The best way to steady a business whose source of income is in crisis is to provide cash fast. This is where the gap between traditional and parametric insurance products begins to emerge.

Traditional claims employ an arduous loss-adjustment processes. Catastrophic flood claims take months to resolve. That’s months in which a business might have no source of income but plenty of debt in the form of mortgages, rent, staff wages or tax liabilities. When protecting a business’s balance sheet, you sacrifice time at the altar of perfect indemnity. Not just time waiting for the final settlement, but staff resource managing and chasing the claim, too. And, as FEMA says, time is the one thing businesses can’t afford to lose.

Parametric insurance uses pre-defined values for claims. That means insurers remove the value of damage from the underwriting equation, and with it the requirement for claim adjustment. Parametric claims happen in hours, not the months it can take traditional catastrophe coverage to pay out. FloodFlash paid a Storm Franklin claim in under six hours. In the wake of COVID, that’s what businesses demand, and need, to survive.

It’s a relief to think that you don’t have to bother with chasing insurance companies. Most businesses with any sort of business interruption spend so much time trying to sort out the claim[…] It does involve the individual running the firm, and usually the top person within the firm. To take away that worry so the people running it can just get on with their business is a hell of a relief -- Clive Steggel, whose business, CRS Consultants, flooded during Storm Christoph in January 2021.

See also: Parametric Insurance: 12 Firms to Know

#2: Hard markets drive insurance innovation

Like any other market, insurance has the dynamics of supply and demand. On one hand, there are people looking to buy insurance coverage for their risks. On the other are those with capital looking for a return by covering that risk. When there is plenty of money in the system, supply of capital is plentiful. That means lower insurance premiums and looser policy wordings: a "soft market."

When money flows out of the insurance market – typically due to paying out claims from one or a series of catastrophe events – the supply of capital tightens. There is less capital to insure the same amount of risk. Premiums rise, and risks are harder to cover. We are experiencing a “hard market” right now.

Insurance prices have risen consistently over the last few years, and COVID-19 has made capital and capacity even harder to come by. According to the Marsh Market Index, global property insurance pricing increased by 17% in Q1 2021, with U.S. prices increasing by 14% in the same period, capping off many months of increases.

One of the first casualties in a hard market is catastrophe coverage. When the supply of capital runs dry, insurers are more reserved about the business they write. Policy wordings tighten, prices increase and exclusions start to creep in. This is where parametric insurance comes into its own.

Parametric insurance is attractive in hard markets for two reasons. The first is the lack of uncertainty: Using pre-defined values for a claim means the insurer is exposed to fewer variables. Insurers pass that benefit on to clients as lower premiums.

The second reason comes down to how parametric covers are structured. If a client sees an unattractive price, they can adjust the parameters of the coverage to suit their budget. They might not get penny-perfect indemnification, but they have coverage in place to protect their cash flow and survive.

The adage that "necessity is the mother of invention" holds true in the insurance market. Previous recessions have hosted the creation of some of the world's most successful technologies. Necessity is now driving the demands for parametric covers. As a specialist parametric broker told me recently: “It has gone crazy since Christmas.”

#3: The word is out

I’m not the only person recognizing these trends. Venture capitalists concerned with what the world looks like in 10 years have also cottoned on. Renowned VC and early Facebook executive Chamath Palihapitiya announced his latest venture at the beginning of last year: OTT Risk, a platform for pricing and trading parametric business interruption coverage. Descartes Underwriting, Parsyl and Arbol have all announced big equity raises from VC funds in recent years. Not to mention the FloodFlash Series A raise announced earlier this year.

Fueled by this interest, new and exciting applications of parametric insurance principles are emerging and growing faster than ever. Clients, brokers, insurers and investors have woken up to the possibilities of simpler, faster catastrophe insurance, and they are already experiencing the benefits. The capital pouring into parametric insurance firms will fuel this growth.

These parametric insurance trends mean movement is accelerating every day. Based on the trends on my news ticker, 2022 is set to be a landmark year. By December, more livelihoods and more businesses in more markets will be protected – and survive – because of parametric insurance.