As the world winds down for the holidays and eases into the New Year, I thought I'd give us all a break and look beyond all the challenges that the world faces today and that will continue to dog us in 2023, to focus on the good things that occurred in 2022. And there were many. 

I'll start with a few on the geopolitical front, because they were the most dramatic, then get to some developments in our world of insurance:

No. 1 for me is embodied in the epic line from Ukrainian President Volodymyr Zelenskyy, who was offered a chance to be airlifted out of the country in the early days of the Russian invasion and responded: "I need ammunition, not a ride."

That's the kind of line a scriptwriter might have put in the mouth of Dirty Harry, not what you expect out of the untested leader of a country in Russia's shadow, and the remarkable performance by Ukraine's military gives me hope both that the mythology built around Putin will crumble and that China might even rethink what seem to be its plans to invade Taiwan.

(If you, like me, want to geek out on the technological underpinnings for Ukraine's surprising successes against Russia, I recommend this column by David Ignatius in the Washington Post. His on-the-ground reporting out of Kyiv shows that Ukraine is benefiting from Western technology and can wage "algorithmic warfare." Ukraine is amalgamating information from a vast array of satellites, drones and other sources on a single screen that lets its armed forces pinpoint targets rapidly and direct fire there, while Russia can't gather or process information nearly as quickly. If nothing else, the column by the always-interesting Ignatius dramatizes the power of real-time data analytics.)

No. 2 for me are two developments that push the frontiers of science far, far out into the universe and deep into molecular physics. 

The new tool for understanding the universe is the $10 billion James Webb Telescope, which was launched a year ago and which began sending images back to us in July like the one below. It shows a formation known as the Pillars of Creation in the Eagle Nebula that is more than 6,500 light years from Earth and that gets its name because the clouds are giving birth to stars.

How cool is that?!

The Webb telescope has six times the light-collection area as the Hubble telescope, itself a remarkable achievement when it was launched in 1990. The Webb telescope has been placed in an orbit around the sun nearly 1 million miles from Earth (vs. 340 miles away for the Hubble telescope) and collects light in a different frequency, one that will provide a whole new look at the universe around us.

The development in molecular physics was the recent announcement that the Lawrence Livermore National Laboratory had achieved "ignition" in fusion — releasing more energy than was used in the lasers that blasted a pellet of hydrogen and produced a self-sustaining thermonuclear reaction like what happens in our sun. I've followed developments in fusion for decades and had subscribed to the line that our ability to produce energy from fusion was "30 years away... and always will be." The recent announcement marks the first time I've thought that the "and always will be" can be removed from that projection. 

Making fusion practical will still take a very long time. Setting up a huge apparatus to create a reaction in one pellet is a far cry from being able to handle a steady stream of millions and millions of pellets, especially because thermonuclear reactions are notoriously unstable. But the announcement still marks a milestone on the march to what could be unlimited, clean energy. In the meantime, the development shows that the U.S. has a way to thoroughly test and maintain its arsenal of nuclear weapons even though the U.S. hasn't set one off in 30 years, as part of international efforts to ban "explosive tests." 

No. 3 for me will be a bit controversial, because a lot of people got hurt, but I believe that the bursting of the cryptocurrency bubble has chased a lot of the craziness out of the market and set up the possibility for rational progress from here. I'm still not convinced that Web3, as many are calling the next iteration of the internet, requires cryptocurrency, rather than a radically more efficient way of handling fiat currencies such as the dollar, but at least we can now evaluate the alternative paths without the burden of all the speculative fervor.

No. 4 is the remarkable progress in what's called generative artificial intelligence — AI that can produce new content rather than simply analyze data and other existing content. I've written occasionally about the topic, including a piece back in May on capabilities for generating images based on brief text descriptions. But the progress didn't stop there. In particular, ChatGPT — a so-called large language model — has raised all sorts of possibilities for gathering and synthesizing information. Why get a bunch of Google hits about individual pieces of data when you can pose a question like I did — "Why is 'The Brothers Karamazov' the greatest novel ever written?" — and get this response, which I reproduce verbatim:

"The Brothers Karamazov is a classic novel written by the Russian author Fyodor Dostoevsky in the late 1800s. It is considered by many to be one of the greatest novels ever written and is often studied in literature classes around the world. The novel tells the story of the three Karamazov brothers and their tumultuous relationship with their father, as well as the impact of their relationships on their lives and the lives of those around them. The Brothers Karamazov is noted for its complex characters, philosophical themes, and exploration of deep, universal questions about faith, morality, and the human condition. It is a thought-provoking and moving work that has stood the test of time and continues to be widely read and admired by readers around the world. However, as with all art, opinions on the novel will vary and it is ultimately up to individual readers to decide whether they believe it is the 'best' novel ever written."

If you like, you can try your own questions here. You can then ponder, among other things, why many think college essays will soon go by the boards. I generally did well on college essays, but how do you top that for a summary?

Turning to insurance, my favorite development of the year is how advances in technology and innovative thinking by insurers has moved us more toward a "predict and prevent" model and beyond the traditional "repair and replace" approach. How much better off will we be if insurers can use their data, including that gathered from sensors in real time, and combine it with the industry's immense analytical power to keep many losses from ever occurring? 

Here is an interview I did with Sean Ringsted, chief digital business officer at Chubb, that explores the possibilities. And you'll be hearing much more from me, and others at The Institutes, on the topic in the New Year. 

Second for me is what I see as the more mature use of AI. Some day, AI may well make it possible to underwrite risks nearly perfectly and in real time. In the meantime, an awful lot was done this year by using AI to tackle more mundane issues: speeding the handling of claims, making underwriters far more efficient by gathering all relevant information and flagging issues before they even open a file, helping agents manage their schedules, letting workers' comp carriers triage cases and spot potential complications from the get-go, etc. That feels like real progress to me. 

Finally, I'll applaud the progress on embedded insurance. It has always felt like a natural approach to me. Why make clients come to us to buy a product they often don't understand and maybe even resent having to buy, when we can make insurance a natural part of another purchase — of a car, a house, a piece of jewelry, etc.? We've published quite a bit on the topic, including this column, and you can be sure you'll see much more on the topic in 2023. 

Yes, there are loads of challenges in front of us — still-high inflation, a possible recession, geopolitical uncertainty and on and on. But let's set those worries aside for now and try to appreciate the progress we made in 2022 despite plenty of similar obstacles that appeared in our way.

Enjoy the holidays!

Paul

P.S. Please share thoughts on what I missed in terms of progress in 2022, especially on the insurance front.  

Inefficiency and ineffectiveness in an insurance claims department are a bit like a boat at sea that has a hole in the hull and is taking on water. The skipper is trying to move forward, but the leak keeps slowing it down.

An insurance claim may get off to a great start, but time constraints and complex processes can bog down the most experienced claims adjuster. Timing is of the essence. When adjusters cannot be agile, claims take longer and get more expensive. Before you know it, the costs of a claim are much larger than anticipated, resulting in claims leakage.

Technology can reduce claims leakage, saving insurance companies billions of dollars each year with the help of what we call digital coworkers. 

When a claim comes in, a claims adjuster’s first task is to gather all relevant information. Then, they need to project how much the insurance company will need to pay for the claim. When the final numbers come in, the insurance company compares the initial projection of costs to the amount ultimately paid. 

Claims leakage occurs when the actual cost is higher than the projected cost – hurting, sometimes disastrously, a company’s bottom line. Claims leakage represents roughly 6% of total claim payments across the industry, costing $67 billion a year for U.S.-based insurance companies alone.

Based on data from 2021-2022, claims costs are increasing by $18 billion year-on-year. This figure suggests the hole in the hull of the boat will only be getting larger.

There are two main reasons claims leakage occurs within claims departments – inefficiency and ineffectiveness.

Inefficiencies are often created when a claims adjuster knows they need to take action on a pressing matter but cannot address it quickly enough.

Think of a workers’ compensation claim where an injured worker’s doctor is asking for an independent medical examination. The doctor has requested approval for the procedure from the claims adjuster and said they will proceed with the examination in five days if they don’t hear otherwise. The adjuster was wrapped up in a series of complex litigation events on other claims and missed this request, so the Insurance company is on the hook for paying for a procedure that might be unwarranted.

Ineffectiveness is also all too common in the claims process. In a perfect world, an insurance adjuster would have all the information they need to process a claim on the first call. In reality, data dribbles in during multiple interactions. Not having all the right information up front can cause a claims department to underestimate how much it will cost to resolve a claim.

For example, say a homeowner stated they had water backing up into the basement. Because this is a common loss, the claim was assigned to a junior adjuster, who went through the usual steps. As it turned out, the actual cause of loss was surface water that seeped into the basement following days of rain. This is considered flooding and is not a covered loss under the policy. The time the junior adjuster spent working on the claim was lost.

In both examples, the company suffered claims leakage.

See also: Premium Leakage Due to Legacy Systems

Narrowing Down the Problem of Claims Leakage

The examples show that there are two distinct problems with claims leakage – people and processes.

There is a 10% vacancy rate for hiring in the insurance industry. There are around 430,000 more jobs than workers to fill them. Many of those jobs are in claims departments. When insurers cannot fill positions, claims adjusters have to increase their pending claims counts and potentially slow the resolution of claims.

The lack of time and staff contributes to errors and slow processing. Both issues highlight the need for coaching and training, but there is no time available for that, either.

The second problem with claims leakage has to do with how technology works to manage the flow of a claim.

A claims department that runs like a well-oiled machine has the right people working on claims at the right moments. While technology has come a long way, only a human has the expertise to handle certain tasks.

What insurance companies could do better is restructure their processes so a single claims adjuster is not wholly responsible for a claim. Rather, a team of claims professionals works together to solve problems. As part of the team, each has a part to play, and the group is collectively responsible for the outcome. Digital coworkers can be a part of the team that improves efficiency and effectiveness.

Overall, the problem with people has to do with having enough staffing capacity. The problem with processes is in having better technology to streamline the claims process. Digital coworkers tackle both problems. 

Digital Coworkers: A Better Solution

A digital coworker works behind the scenes to take on all those tasks that do not require the heavy degree of intellect that humans have. They are effective in large part because, when it comes to insurance processes, thinking can be highly predictable in many situations.

Things could have worked out differently if a digital coworker had been deployed in the two claims examples described above.

In the case of the workers’ compensation claim, the digital coworker would have asked a few more automated questions to determine if an independent medical examination was warranted. Depending on the answers, the digital coworker would have flagged the matter to a claims adjuster for immediate attention. Armed with more facts, the adjuster could more quickly approve or deny the request. 

Regarding the water backup claim, a digital coworker might have asked more questions at the time the claim was filed and determined at that point that it was a noncovered flooding issue rather than a covered water backup claim. 

Digital coworkers can also manage basic communications, while learning from the data and making even better decisions going forward. It all works like clockwork. The end result is greater efficiency, improved effectiveness and a reduction in claims leakage for insurance companies.

Digital coworkers are revolutionizing the insurance industry. Just one can do the work of four to eight human employees, improving the capacity of a claims department and enabling an insurer to process claims better and faster. 

In April 2021, UIPath went public, and robotic process automation (RPA) was ushered in as the next great class of business software. At the time, NASDAQ: PATH was the third-largest IPO in software history (behind Snowflake and Qualtrace). Eighteen months later, what have we learned?

Four observations:

• RPA wins tend to be tactical, not strategic. RPA automates rote tasks in primarily finance, HR and legal: support functions, not areas of differentiation for your business--unless your business is finance, HR or legal
• RPA tends to add--not remove--cost. Bots tend to run alongside humans rather than replacing them, and license and support costs are not inconsiderable
• Automation centers of excellence (CoEs) tend to plateau at +/- 200 bots. There are several reasons for the plateau, including stakeholder misalignment on goals and measures of success, inability to demonstrate ROI and validate outcomes, lack of process understanding and standardization and, last but not least, difficulty identifying the right root causes of the business problem(s) being addressed
• “Automate first” is a suboptimal approach to automation. You buy the software, find the low-hanging fruit (or what appears as such) in, for example, source to pay and quickly spin up some bots. The problem with this approach is that tasks appearing simple and discrete are often linked to, or nested within, larger processes that are more dynamic, nuanced and complex 

None of this is a knock on UIPath or RPA software as a class. To the contrary, these are powerful tools that get better and smarter with every product release. 

The challenges to date have been mainly with human software. Line workers are understandably reluctant to embrace technologies threatening to make their jobs redundant, and, as a result, leaders and managers have been reluctant to pursue automation as a strategic imperative. 

See also: Future of Digital Insurance Claims

In the aftermath of COVID, with labor shortages and global inflation, out of necessity leadership minds are changing fast. There is a growing sense of urgency. Looking ahead, we see three guiding trends: 

• Tactical automations are being aggregated. Startups such as Thoughtful+ and Goodlegal (founded by UIPath’s lead counsel) are offering purpose-built automations in finance, HR and legal, with an eye toward building out end-to-end (E2E) automation platforms in these areas. The classic build v. buy debate emerges: Why invest resources today in tactical bots when E2E automation platforms will likely be available tomorrow?
•  “Automate last” is the way. There are three non-negotiable steps in strategic automation: 1) process discovery, 2) process standardization and 3) automation deployment and control. Working through the three steps in sequence not only yields better automation results, it also imposes new organizational rigor, yielding efficiency gains funding the larger automation effort  
• Automation is itself automating. To date, the critical first step in strategic automation--process discovery--has been a manual exercise composed of humans interviewing humans and documenting work activity. A new class of process intelligence tools (e.g., skan.AI) automate this step. Such tools go so far as to financially value and triage key processes and recommend process fixes and automation paths   

Given the rapid innovation in all three steps of the automation lifecycle, procrastination may not seem like a bad strategy, like waiting three months to buy a TV.  

But what’s happened in telematics offers a cautionary tale. Progressive embraced telematics early on, investing in capabilities and expertise ahead of the market. GEICO, by contrast, waited. The result? Per Ajit Jain, GEICO’s vice chairman, “There’s no question that recently Progressive has done a much better job than GEICO, both in terms of margins and in terms of growth. There are a number of causes for that, but I think the biggest culprit as far as GEICO is concerned is telematics.” 

Jain said he expects it will take GEICO “one to two years to catch up” to Progressive in telematics, and GEICO’s financial results will “suffer comparatively” in the meantime. 

What is telematics but the strategic automation of underwriting and rating? If “following fast” is your strategy as it relates to automation, be aware that, as GEICO teaches us, “fast” is measured in years. You can’t buy your way quickly up to speed.   

Strategic automation isn’t a magic pill or fad diet, it’s a lifestyle change. Automated operations delivering speed, precision and stability, reducing customer churn and acquisition costs, require several quarters of prudent, patient investment to build. A new mindset, working customer-back and not technology-forward, can and should prevail today. 

Fortune favors the bold. Firms that are clear and candid about their automation ambitions will do better than those that hedge. The older and more established the firm, the stronger the downward gravitational pull of the status quo. If automating half of your underwriting function is, for example, the goal, then say it in no uncertain terms, making automation part of the mission, including automation targets in employee evaluations and financial compensation.

This year, Haven Life conducted its second annual Q4 Survey, focusing on consumer understanding of employer-sponsored life insurance, as well as consumer thoughts about discussing life insurance during the holiday season. Amid growing concerns about a recession, Haven Life found that consumers are focused on saving, with 55% of survey respondents indicating they do not want an expensive gift from their partner this year but would prefer that money be put into their savings account or their child’s 529 account.

However, despite the looming recession making consumers extra thoughtful about their finances, this year’s findings highlight a large gap in knowledge surrounding life insurance and its role in building a financially secure household. Life insurance can be an important element of feeling financially prepared in today’s economy, highlighting the necessity for coverage providers to bridge this gap.

Financially Insecure Individuals May Avoid Life Insurance Conversations

According to our survey, 30% of working individuals revealed they have only “somewhat” or “no” understanding of the life insurance benefits their company provides. This result echoes the 2022 Insurance Barometer Study by Life Insurance Marketing and Research Association (LIMRA) and Life Happens, showing that of those respondents who did not feel knowledgeable about life insurance, only 17% actually had coverage in place. Consumers who feel uncomfortable or uninformed about life insurance are likely to avoid the subject altogether, missing a crucial building block in establishing their household’s financial security. A lack of preparation by consumers is not always their fault; employers typically do not offer detailed assistance, financial advisers are not always accessible and people are simply too busy to find time to sit and weigh their options.

This is a ripe opportunity for providers to pivot from usual messaging and lead generation to instead meet consumers where they are. Performing extra legwork to find underserved consumers is especially important in a period as urgent as open enrollment, which comes frustratingly close to the holidays, where time and energy may be promised elsewhere. If individuals must decide on coverage in a short time while still focusing on their daily lives, information must be made simple and accessible.

See also: Selling the Urgency of Life Insurance

Addressing Emotional Topics Head-On Will Empower More People

The “elephant in the room” inherent to any life insurance discussion is that considering one’s own death is an emotional topic that often clouds people’s capacity to gauge what their loved ones will want or need when they’re gone. However, the 2022 Insurance Barometer found that 44% of U.S. households would feel financial insecurity within six months of their primary wage earner’s death. 

The average employee-sponsored policy payout is typically one year of salary, yet 85% of respondents to the Haven Life survey want a payout beyond that. While our survey’s largest respondent group indicated they would like three to five years of payout, nearly 20% indicated they would want 15 years or more. This reveals a serious disconnect between what consumers want from their coverage and what they would actually get.

Last year, our survey found that 75% of individuals believe they would be unable to sustain their standard of living if they were unable to work, demonstrating how important it is to have life insurance to help mitigate the loss of a person’s income should they die. Life insurance can also be used to shield loved ones from debt upon passing, to provide a down payment on a house or to leave a legacy for the next generation. 

Regardless of how it is used, a common thread resonates: Sufficient life insurance delivers peace of mind that loved ones will be protected. From employers’ perspective, reducing stress and financial concerns among their employees will always improve productivity and overall emotional satisfaction. Taking one step further to guide employees to life insurance options such as gap coverage will further cement company loyalty.

This Year’s Holiday Conversations Can Be Different Than Last Year’s 

The holidays provide an especially opportune moment for consumers to have meaningful, in-person conversations with their loved ones about their future. According to this year’s Haven Life Q4 survey, “family milestones” and “travel plans” are again the conversation topics people are most excited to have, with more than half of survey respondents placing these conversation topics at the top of their list. However, unlike last year, when “health and wellness” took the third spot, this year the pandemic is in the rear-view mirror, with 2022 respondents eager to discuss employment opportunities; “career” is cited as the third most popular topic.

The holidays are a great time to get together with family and to share love and joy. But it’s also time to have conversations around financial planning and end-of-life care. After all, thinking well is wise; planning well is wiser. As concern about the pandemic wanes, this year’s respondents also seem to have a reduced sense of urgency. Only 30% of those surveyed have spoken to their loved ones about necessary life insurance and financial planning needs in the last six months, compared with 57% of respondents in 2021. A surprising 15% of respondents have never spoken to their loved ones about this topic at all.

Nevertheless, when respondents were asked how they would feel if given a life insurance policy over the holidays, the top three responses were “surprising,” “thoughtful” and “well-intentioned” – also the top three results from 2021. With 85% of respondents to this year’s survey indicating they are “very” or “somewhat” concerned about an impending recession, consumers continue to recognize the value of planning for the future.

Spotlight on Accessibility and Simplicity

With 17% of this year’s respondents admitting they do not fully understand the difference between life insurance and health insurance, we believe it is more important than ever to provide accessible, easy-to-understand options for the majority of Americans who do not work with a financial adviser. We believe that when providers make the options simple and easy to understand, consumers can make decisions with confidence.

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.