Insurance companies have traditionally lagged in modernizing their core applications. Most CIOs want to have a modern system, but they often cite a number challenges to core transformation:

Logic behind sticking with the legacy system 

1. If It's Not Broken, Why Fix It?

Most insurance companies would state this logic: Why should we replace the old system; what’s the problem?

The fundamental concept companies must understand is the way they measure problems. If you measure problems only with broken status, then maybe a system can still work until it is fully broken. But market dynamics depend on many other factors, like competition, speed to market, operational cost, goodwill, etc., and each company should evaluate the definition of "broken" and then evaluate the legacy system.

If you are not improving your core parameters like sales, market share and reduced operations costs on a quarter-on-quarter basis, your systems may be broken.

2. It’s Too Costly

Of course, there is a cost involved. Core admin systems are assets of your organization, so the investment is inevitable. The questions to ask are: What’s the benefit? How long will it take to get up and running? Can the overall transformation process be predicted?

It is important for the insurance company to get some help with transformations rather than try to do everything by themselves. It is critical to see if the vendor has done such transformations. Do they have any strategy to stick around to support the system? How are they investing themselves in building value-added solutions?

See also: Core Systems: Starting a Whole New Game?

3. It’s Risky to Replace

The insurance industry knows that there is risk everywhere, but the question is how we manage and mitigate it. Risks associated with such replacements are:

• Cultural Risk – As part of transformation, companies should plan for a cultural shift, not only within the organization but also with all the stakeholders, such as agents, partners and finally the customers.
• Fit Risk – Will the new system fit into the unique way of working in your organization? An essential point to remember here is that the more you try to be unique, the more it will be difficult to upgrade. Too much differentiation will make your new system a legacy in a few years, as it will not be able to upgrade easily.
• Scope/Time/Cost Risk – These are linked and should be monitored closely. Working with experts who are known for managing large transformation programs could mitigate this risk. Different management and contract styles have shown different results. For example, a large and complex program is best managed as an agile project. 

Companies get slightly confused about the legacy platform. Should they think about whether to replace systems based on resources or on whether there is a problem with the system's fundamental architecture? The architecture of the application should support faster speed to market and better and faster customer service, and it should be central to the organization's digital strategy. Don’t focus on skill availability; concentrate on the application's capability.

Choosing the approach

Core modernization is no longer optional, but choosing an approach can be classified into four buckets depending on: a) how unusual your requirements are and b) the quality of the existing system. While deciding the approach, one should always keep in mind the big picture of organizational growth strategy and changes in customer expectations in the digital world.

Decision Chart: Core Admin Evaluation chart.

High Quality - Unique Process (Modify): Companies that have acquired or developed an application recently with modern architecture should stick with the existing platform. However, they should continuously try to add functional as well as technical features to the system to keep it current.

Low Quality - Unique Process (Rewrite): One of the predominant reasons for rewriting or custom-building applications is the lack of commercial off-the-shelf (COTS) products available to support the unique needs of the insurer. We still suggest looking for a specialty risk product in the market, but rewriting a sleek application is also an option. The key benefit of rewriting is that we can reuse some key assets, like business rules and data sets. Before deciding to rewrite into a better architecture, there are two points to consider–

• Is it worth sticking to existing processes or will it be better to move toward standardization with some deviation, i.e. some customization to existing COTS products?
• Do we intend to solve a single core admin system problem or to support the entire IT ecosystem?

High Quality - Standard Process (Upgrade): Companies already having a COTS product should plan for regular upgrades of the application. While insurers purchase standard products and configure them to their needs, they normally don’t plan for an upgrade as additional time and budget. This leads to the challenge of an unsupported version. Companies should not only plan for application upgrades but also infrastructure upgrades. Most insurance COTS products come with major and minor upgrades. Minor upgrades will provide bug fixes and security enhancements, but all major upgrades will require adoption of new features and functionality, training of staff and technological adoption based on industry standards. Enterprise applications, unlike mobile apps, require a bit of handholding before we can upgrade. So here is a serious suggestion: Budget for upgrades. If you don’t, one day you will require a transformation budget.

Low Quality - Standard Process (Transform): Many insurance companies are stuck with the old core admin system, which is difficult to change, and have adopted "modify" as a strategy. Lack of documentation, skilled resources and technological compatibility make these applications painful to maintain. They pose some serious operational challenges and restrict the growth of the organization. The insurance industry is full of niche software providers and many COTS products that provide some great applications and lots of in-built standard processes. One should perform a full-blown search to find such players for a long-term solution. Companies should do a better fit gap analysis for their long-term needs before selecting a core application. They have the choice to select best-of-the breed applications or the full suite for their core needs.

See also: Finding Success in Core Systems

Conclusion

Customer expectations are changing rapidly. To keep up with the competition, insurance companies should regularly evaluate the capabilities of their core admin system to support business growth. They should use the matrix mentioned above to categorize each application into the four buckets. CIOs should do this evaluation every three to six months to ensure that IT is always ready to support the growth and service demands of the business.

The premium volume generated by what A.M. Best calls “delegated underwriting authority enterprises” (DUAEs) has doubled in the last decade. The DUAE label encompasses managing general agents (MGAs), managing general underwriters (MGUs), program administrators and other entities that write on behalf of risk capacity providers such as insurance carriers and reinsurers. 

MGAs are the largest piece of the DUAE segment, and they have been a part of the insurance landscape for more than a century. Originally a mechanism for insurance carriers to expand into new regions, many MGAs today focus on industry groups and lines of business requiring specialized underwriting expertise and carefully cultivated distribution systems. Insurers typically turn to MGAs to access profitable segments that would be too difficult or too expensive for them to reach using their existing agent and broker channels and their own underwriters. Through MGAs, they can access desirable business without significant investments.

DUAEs are “capacity seekers” and typically rely on insurance carriers and reinsurers for risk capacity. MGAs and other capacity seekers scour the market to find providers that have an appetite for their business and that have the experience, resources and systems to manage a partnership effectively. Carriers and other capacity providers look for reliable DUAEs they can trust to produce a portfolio of well-underwritten business that fits within their risk appetite and underwriting parameters.

The traditional mating dance between capacity seekers and providers is inefficient and prone to producing unhappy marriages. Identifying and connecting with potential partners often relies on personal relationships and extended networks. An MGA looking for capacity typically will call all relevant carrier contacts and get in front of as many carriers as possible without any initial filtering. Neither MGAs nor carriers have a clear, complete and unbiased view of the marketplace. Finding a good fit is often a matter of chance.

Capacity seekers and providers also tend to interact using outmoded technologies. This can slow and complicate identifying partners and negotiating deals and impede many subsequent essential interactions. The insurance industry has been slow to embrace new technologies, and the resulting inefficiencies are rarely more apparent than in this realm, where efficient communication and coordination among unaffiliated entities is essential for success.

Carriers and reinsurers are the traditional providers of risk capacity, but they are not the only ones. A market for insurance-linked securities (ILS) emerged in the mid-1990s as a mechanism to tap the global capital markets for an alternative source of risk capacity. Insurance-linked securities are catastrophe bonds and other financial instruments whose values are driven by loss events. They use offshore special purpose vehicles—essentially dedicated insurance or reinsurance entities—to fund losses resulting from, typically, a specific peril affecting a defined pool of risks. The ILS market has grown rapidly: According to the Artemis Deal Directory, in 2021, cat bond and ILS issuance reached $14 billion. However, its potential has not been reached, in part, because of difficulties in matching ILS capacity with DUAEs. More so than in the traditional capacity marketplace, capacity seekers struggle to establish a toehold within the highly specialized ILS market and therefore are not fully benefiting from the largest and most liquid source of risk capacity.

Closely allied to the DUAE market is the rapidly growing embedded insurance segment. Embedded insurance is coverage packaged with a product or service and purchased at the point of sale of that product or service. Embedded insurance isn’t new—some types, such as auto insurance purchased with a car rental, have been around for many years. However, embedded insurance has become more prevalent in recent years as customer expectations have changed and technology makes instantaneous underwriting and policy issuance at the point of sale a largely friction-free process. According to a report by InsurTech London, the embedded insurance market is forecast to grow to $722 billion—six times its current size—by 2030.

See also: How to Embrace Insurtech Culture

The challenges involved with matching third-party distributors (usually product or service providers in various sectors) looking to offer embedded insurance products with insurance carriers willing and able to offer such products are similar to matching MGAs with carriers. Insurance companies that offer embedded insurance products often struggle to identify and reach distribution partners. At the same time, manufacturers, retailers and service providers often lack contacts within the insurance industry and may have little understanding of insurance business processes. This inefficient process is ripe for a digital makeover.

The DUAE and embedded insurance markets are growing rapidly, but they could be expanding faster and more efficiently with better long-term outcomes if the marketplace was more transparent, processes were streamlined and simplified and technology was used better. A 360-degree view of the market enables capacity seekers to understand their capacity sourcing options better. Computer algorithms can efficiently match capacity seekers with capacity providers. Better communication technologies can improve the due diligence process, speed negotiations and provide a framework for information exchanges. The outcome should be increased efficiencies throughout capacity-sourcing processes; accelerated speed to market for MGA and similar programs; a better alignment of values, objectives and priorities among partners; enhanced communications throughout the lifecycle of the partnership; and overall greater satisfaction with the process by all parties.

Today, the know-how and technologies to transform outdated and inefficient capacity-sourcing processes are available. Change is already occurring and will accelerate sharply as a critical mass of capacity-seekers and capacity-providers recognize the benefits of an organized digital marketplace with an efficient electronic infrastructure. With the addition of third-party administrators and other players in the insurance value chain to the digital ecosystem surrounding the delegated underwriting model, the entire marketplace will be more efficient, which will accelerate growth and enable the market to reach its potential.

Many discussions about disruption and innovation in life insurance have focused on the distribution channel and improving the customer experience. Others have directed attention to adding efficiencies in the underwriting process to shorten issuance times. The challenges, particularly against the headwinds of COVID-19, have been a priority of life insurance carriers and reinsurers. Predictive modeling has been their primary tool, with an emphasis on its integration with other elements of the underwriting process.

What is predictive modeling?

Predictive modeling is the statistical process of using historical data and machine learning techniques to analyze patterns and predict possible future outcomes or probabilities. It is widely used in many industries. In the insurance industry, its leading uses are to increase automation levels, improve the accuracy of pricing models and fine-tune marketing initiatives.

In life insurance, predictive modeling is used for a variety of applications to benefit the industry and the consumer alike. For example, predictive models build underwriting programs that accelerate the application process and improve the overall customer experience. In the past, an application would take weeks and sometimes even months to complete, as bodily fluid tests were usually required. Thanks to predictive modeling for accelerated underwriting programs, the process can be shortened to just a few days. Often, fluid tests can be waived if the carrier can obtain favorable data from applicants, such as their prescription drug history. It’s a win-win for the insurer and the consumer.

See also: Predictive Analytics: Now You See It....

Pandemic effects

The pandemic has heightened the need to improve efficiencies in life insurance. A tight labor market has led to shortages of medical personnel, and higher volumes of patient visits have created stress in the system, meaning that the test results underwriters need may take longer to obtain. This leads to frustrations for insurance companies, insurance agents and ultimately the applicant, as the time to issue a policy has increased.

One positive outcome of COVID for many life insurance companies has been the push to digitalize as traditional face-to-face selling and paper-based applications are no longer the industry norm. The acceleration of digitalization has allowed more historical data to become available for predictive modeling.

As an increasing number of life insurance companies implement data digitalization, predictive modeling should become more widely used. As more advanced machine learning techniques are developed, the predictive models should continue to become more refined.

Accelerated underwriting programs mean that predictive models will mostly handle the straightforward and repetitive cases, and human underwriters can focus their review on more complex cases. A concrete example is the removal of fluid-test requirements for policies with lower face value. These innovations will lead to faster adoption of predictive modeling.

Using artificial intelligence with integrity

As predictive modeling becomes increasingly prevalent in the life insurance industry, a legal and regulatory framework is emerging to govern its use. For example, the National Association of Insurance Commissioners (NAIC) has adopted five key tenets in its guidance on the use of artificial intelligence (AI). Known as “FACTS,” the acronym stands for fair (and ethical), accountable, compliant, transparent and secure (safe and robust). It is important that the industry embraces the NAIC's AI principles, taking social responsibility into account when building predictive models. What is chosen to use in the model is as important as how the model is used. 

Quite often, underwriters will develop a hypothesis that is then tested against available data. As the industry continues to accumulate data related to the near- and long-term impacts of COVID, this approach will allow for more accurate forecasting of how to underwrite and price life insurance. And this work is not being done in a silo; it intersects with other initiatives that the life insurance industry is undertaking to improve the customer experience and the efficiency and effectiveness of the underwriting process.

See also: ITL FOCUS: Life Insurance

The ultimate goal is to integrate the underwriting process with evolving predictive analytics capabilities. To accomplish this objective involves correlating details from a variety of evidence sources, including prescription history, criminal history and digital electronic health record (EHR) databases, with information collected on the policy application to provide underwriting recommendations in real time.

Some view the increasing use of data analytics by insurance companies with concern. However, the thoughtful and responsible use of predictive modeling benefits a variety of stakeholders. With the power of predictive modeling and its resulting efficiencies, life insurance companies can simplify the underwriting process, reducing both time and complexity. This is significant as it enables broader reach, allowing insurance companies to target underserved demographic segments such as the middle market, which is important to the industry and society at large. Ultimately, the longstanding life insurance protection gap should narrow.  

Life insurance companies need to embrace these technology-driven solutions to stay relevant and better serve their customers ― which will ensure their ability to not just survive but thrive.

If current investment figures are any indication, global markets have a great appetite for computer vision, with $21.1 billion of funding received by over 900 companies. And the market for this technology is expected to grow by another 7.8% to $17.4 billion in 2024.

Computer vision makes for a highly compelling case where artificial intelligence (AI) acts as an enabler for the human workforce. It is a branch of AI that helps systems extract actionable information from visuals, such as images and videos. It acts as the "eyes" through which a computer understands and assesses an image. 

In retail, a planogram report that can manually cost around $72 can be done for just $8 using this technology. After working at a data science company, I have learned that the computer vision and visual AI tech used to design supply chain workflows, identify defects or diseases in agricultural produce or research images in pharma drug discovery can all be leveraged to improve the vehicle insurance market. 

Here are ways that AI technology can help insurance companies produce higher accuracy regarding damage detection and claims assessment processes. 

Damage Detection

Already, AI, robotics, IoT and drones have merged with geospatial AI techniques to improve the quality of harvests and prevent crop damage and have redefined the agricultural industry. The connection between controller and data bus ensures that alerts from sensors get communicated to the controller. It generates snapshots and summary reports that go to central information servers and are stored in the cloud. These successes can also be translated to the insurance industry. 

Imagine an insured vehicle has an accident, and the user reports this incident to their insurance company. Through using AI and a computer vision-based model, a drone can be dispatched to the vehicle to get images of the damage from all sides. This accurate estimation can help the insurance provider establish the insurance value even after a car has been used for years. 

These images can be quickly analyzed to check the degree of damage and whether there is a need for repair or replacement. Drones have also been proven to not only bring accurate images but also reduce the risk of any harm to surveyors when the accident site is dangerous to access. 

Detecting Fraud 

Species detection, computer vision, machine learning (ML) and deep learning software use algorithms and statistical models to train computer systems to classify and identify images. I know from working with conservation organizations that you need to have sufficient data of images to train ML models to detect species, which is the same process for detecting fraud in the vehicle industry. 

Video streams from drones can eventually identify damages and understand if the accident is real or staged. The automated assessment of photos and the speedy claim description of the insured party also benefits the insurer: Quick assessments result in less consequential damage and less opportunity for fraud. 

If it is concluded that it was a real accident, the insurance company can look at the level of damage based on conventional data fed into the computer vision-based model. For example, can the bumper be replaced or repaired if it is broken? If there is a scratch, can it be painted or patched up?

See also: 3 Digital Customer Service Strategies for 2022

Claims Estimation

Across life, health and travel insurance industries, AI and ML make it possible to spot anomalies and make claims estimations more accurate. 

Insurance companies can experience better productivity with AI systems as they use automated decision science to quickly analyze accident images, assess damages and identify repair costs in real time. This can accelerate the decision-making and claims process, which used to be done by surveyors in the field. 

AI verifies various intricacies of observing an accident, such as who reported the accident and who was present in the car. This way, computer vision can also check if the consumer has complied with the policy requirements before paying any claim.

The aforementioned scenarios are just the tip of the iceberg of what computer vision can do for the insurance sector. The convergence of computer vision technology with high-quality data analytics tools can provide a competitive edge, especially because global business related to AI in the insurance segment will touch $4.5 billion in 2026. But to see fast innovation and growth, industries must share their learnings, accept there is overlap and cross-reference.

Many employers experience the problem of workers who cycle between their workers’ compensation and short-term disability programs. It’s an issue and a hard one to catch and fix when human resources and risk management don’t talk.

The issue points to the need to build a better bridge between these different sides of the house to make the common ground between them – the employee’s health – more accessible and better managed. A more holistic approach to addressing the crossover can result in smarter interventions, improved productivity and a healthier workforce overall.

What is Short-Term Disability?

Short-term disability falls under the purview of employee benefits and is frequently offered as a voluntary benefit. It allows workers suffering from injuries or illnesses that occurred while off the job to receive income replacement while they are going through treatment and recovery through the disability insurance that falls under the company’s employee benefit plan.

Short-Term Disability Characteristics

• It pays benefits at a lower percentage of the employee’s salary than workers’ comp (usually about 60%).
• Benefits may be taxable, depending on how the plan is set up.
• The employee is responsible for out-of-pocket healthcare plan deductible costs.

What is Workers' Compensation?

Workers’ compensation, on the other hand, is the employer’s responsibility and a risk management issue. Through workers’ comp insurance, employers must pay the medical bills and lost wages for employees injured on the job.

Workers' Compensation Characteristics

• This program also pays out more money – typically about two-thirds of the worker’s salary.
• It is not taxable.
• The employee is not responsible for out-of-pocket healthcare plan deductible costs related to the on-the-job injury.

What is the difference between workers' compensation and short-term disability?

When people know how both systems work, inevitably there’s crossover and shuffling between the two. It’s not that employees are trying to scam the system, but they are trying to maximize their benefits. Take the office worker who’s been experiencing some back issues off the job – she goes into work, lifts a box of files and her back goes out completely.

Even if the original problem was unrelated to her job, she may find a way to file a workers’ comp claim and get a better deal than under short-term disability – assuming she even has the insurance offered through her benefits package. If she did have short-term disability, though, she might have gone out earlier on that program for treatment and avoided the workers’ comp claim. 

Why Is Encouraging Better Integration Good for the Employee and the Employer?

For the employee, it can lead to development of programs to stave off the negative effects of extended leaves from work, no matter which umbrella they fall under. The toll is largely emotional. The longer the leave, the more likely it is that depression will set in as employees start to question their self-worth without the anchor of the job. Many won’t return to work at all.

The employer ultimately pays on various fronts, including losses of productivity and the individual’s institutional knowledge. There’s a tangible dollars-and-cents impact, too.

Benefits of Better Integration Between Workers Compensation and Short Term Disability

A study of three years of claims data from four large employers by the Integrated Benefits Institute uncovered a significant pattern: Thirty percent of those filing for workers’ comp for back pain and 22% for sprains later filed a short-term disability claim for the same diagnosis.

The average disability claim costs ran $4,200 for sprains and $7,000 for back pain. The costs of the same diagnoses in the workers’ comp system? $21,000 and $46,000, respectively. The workers’ comp claims costs are more expensive because workers’ comp pays lost time benefits at a higher rate than short-term disability does and covers all of the employee’s medical treatment.

Ultimately, this underscores the need for a more concerted effort by employers to keep employees engaged in the workplace as much as possible after injuries to stave off recurring issues and claims. And that is best accomplished when HR and risk management come together to create strategies that work.

When I got involved with ITL, going on nine years ago, because I saw insurance as a target-rich environment for innovation, my outsider perspective made me wonder whether many of the traditional lines of demarcation in the industry weren't artificial. 

Why were personal lines and commercial lines such discrete entities, when so many people were starting to operate businesses from their homes or at least mingle their personal lives and their small businesses? Why was life insurance treated as so separate from wealth management, when life insurance could be such an important financial asset? Why did people have so many different pieces of health insurance -- perhaps a group health policy, a personal policy for long-term disability, workers' comp, a piece in auto insurance, etc.? Why did I have to assemble all the pieces myself; why couldn't insurers put together a policy that I could just call Me?

Well, a recent announcement of collaboration between John Hancock and Allstate suggests that some are starting to think about how they might break down those artificial barriers. 

This is just a baby step, mind you, but the companies announced that policyholders participating in Hancock's wellness-incentive program, Vitality Plus, can receive “Vitality Points” for safe driving—as certified by participation in Allstate’s Drivewise telematics program. Basically, the companies are combining their insights into customers to produce a joint risk assessment that can lead to lower prices for customers.

Hancock, which monitors their activity via wearables and usage data from a meditation app, is now also incorporating data from Allstate, which accesses data from smartphones for acceleration, deacceleration, speed, locations, etc. to evaluate how safely people drive. Based on the risk assessment, Hancock offers discounts as high as 25%. Allstate policyholders can receive as much as 10% cash back on enrolling in the Drivewise program and as much as 25% cash back at the end of each policy period. 

Donald Light, a director in Celent's North America insurance practice, describes some of the potential for what he calls "the great cross-over" in this provocative piece. 

For me, it's hard to see that there's lots of utility here. Auto insurers have had a hard enough time interpreting telematics data to better price auto policies, so I don't imagine that data about driving behavior will provide a breakthrough in understanding people's health risks. 

But I certainly see marketing opportunities for Hancock and Allstate to jointly reach people who are focused on their safety, broadly defined, and who are thus good risks. 

I also like that Hancock and Allstate are setting an example and perhaps spurring other companies to look for alliances that cross traditional lines, where all sorts of opportunities surely lie.

As I've said before -- and will no doubt say again -- when businesses go digital, they get stripped down to their essences, which can then be recombined in any number of surprising, new ways. Once photography became digital, with cameras in every smartphone, just about all the traditional fixtures went away -- stand-alone cameras, film, paper, the related chemicals, the one-hour-photo shops and kiosks and so on. But the essence of photography, the image, actually became far more prevalent and even enabled whole new types of businesses that were far more valuable than Kodak ever was -- try to imagine Facebook, Instagram, TikTok and any number of other businesses without digital images. 

Insurance's traditional role in making people whole after a loss is on its way to being stripped down to its essence, which is three things. There is a customer/contract. There is an adjudication mechanism that decides whether a payment should be made and how large it should be. And there is capital. That's it. 

Those three elements are currently organized into distribution networks of agents, underwriting departments, claims departments, etc. Insurers are organized by line of business (auto, health, life, workers' comp, etc.). And there are demarcations between insurers, reinsurers and the capital markets. 

But those traditional divisions don't have to be there, just because they always have. We're already seeing insurance offerings be embedded into sales of autos and homes. We're seeing diversification of capital sources. And now we see a glimmer of what it might be like if companies cooperate across lines of business in creative ways, as the Hancock wellness program and Allstate telematics program combine data to try to better understand and market to customers. 

Progress may take a while to really show up, but I'm optimistic.

Cheers, 

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FROM THE EDITOR While blockchain has been an intriguing topic for some time now, interest has skyrocketed in recent months.  Facebook said late last year that it believes so much in the "metaverse" that it was changing its name to Meta. Microsoft followed quickly with its own vision of how technology could enable a whole new sort of world, where our selves are disembodied and our interactions occur via virtual reality. Venture capital firms such as Andreessen Horowitz are all over the investment opportunities in the metaverse, sometimes referred to as Web 3.0. And pundits are making bold proclamations about how life as we know it is about to change forever.  At the center of all this fuss? Blockchain, plus cryptocurrencies such as bitcoin.  Blockchain is expected to serve as the record-keeping technology, providing access to a centralized, trusted, public data base, while cryptocurrencies are to be the basis of the financial system.  Now,  I'm on record  as saying the metaverse is a bunch of hooey.  But, in terms of the impetus the hype provides for blockchain, it doesn't matter whether the proponents are right or whether I am. (I'm right. But you knew that. 🙂 ) What matters is that all sorts of investment will flow into blockchain because of the hype, speeding blockchain's progress. Look at Tesla. It has such fans that it has an $850 billion market value, 12 times that of General Motors, even though Tesla has only about 1% of the global car market. Tesla may or may not grow into that market cap with an extended stretch of extraordinary growth, but, whatever happens to Tesla, the market for electric vehicles is going to get a massive boost because so many Tesla wannabes are flooding the market with EVs and because the excitement has helped convince the federal government to invest billions of dollars in charging stations. In insurance, blockchain has been making steady progress, as you'll see from this month's interview and from the articles I've selected. I hope you'll spend some time with them. And then get ready to see those efforts get turbocharged as the metaverse/Web 3.0 enthusiasm reinforces what our industry has been doing. Cheers, Paul   INTERVIEW WITH SANJEEV CHAUDHRY As part of this month's ITL Focus on blockchain, we spoke with Sanjeev Chaudhry, founder and CEO of Gigaforce, about how far blockchain has already progressed as a force in the insurance industry and about where it can go from here.  "We are hearing more buzz in the market than we ever heard before. People want to hear about it and want to talk about it. They’re ready." -Sanjeev Chaudhry Read the Full Interview READ MORE The Opportunities in Blockchain It is estimated that roughly one-third of blockchain use cases are in the insurance industry. Here are the leading examples. Read More Blockchain's Future in Insurance In the short term, blockchain can be applied to data exchange and storage, P2P electronic payments and smart contracts. Read More Blockchain in Insurance: 3 Use Cases Many blockchain insurance projects are lingering at the proof of concept stage, but three trailblazing applications are emerging. Read More Blockchain, Privacy and Regulation The discussion on blockchain needs to be fully integrated within the context of existing and anticipated regulatory compliance requirements. Read More Where Blockchain Shines Right Now The seafood supply chain, for instance, can become transparent and trustworthy, while blockchain automates location updates. Read More Blockchain: Seizing the Opportunities Here’s where blockchain stands today — plus how to see the inherent risks and opportunities of using this exciting technology in insurance. Read More FEATURED THOUGHT LEADERS Yael Tamar An Wang Ivan Kot Mark Webb Tom Hammond This Month Sponsored by: Gigaforce  Gigaforce Inc. is an Insurtech provider of a SaaS-based, blockchain-optimized, claims platform that combines artificial intelligence (AI)-driven predictive models, specialized expertise, and customized services to expedite subrogation, recovery, and salvage processing for insurance ecosystems, including insurers, law firms, and third-party adjusters (TPAs). For more information, please visit www.gigaforce.io.   View all ITL FOCUS topics Share Share Tweet

As 2022 unfolds, consumer expectations are higher than ever. The insurance industry is amid a major digital shift, making quality customer service top of mind, and the COVID-19 pandemic means insurance providers will face the daunting task of maintaining personal customer connections without the in-person interactions the industry once relied on. 

For instance, 29% of life insurance purchasers bought their policy online in 2020, up from 21% in 2016. Given the rise of digital customer service in recent years, we can only expect this number to increase across all commercial and consumer insurance offerings. The demand for digital experiences isn’t going anywhere, and, with an updated customer service strategy, insurance providers can maximize client retention and expand into new markets, all while saving themselves time and money. 

Unlock brand loyalty with these three digital customer service strategies 

Despite the pandemic expediting digital transformation for most businesses, many insurance companies have been slow to adapt. Policy Advice reports that 68% of young insurance agents think the digital transformation of insurance companies is too slow. But the industry is not immune to the heightened customer expectations for a fast, personalized customer experience. In fact, 88% of consumers demand more personalized insurance products.

To make matters even more challenging, despite call volumes continuing to soar for all businesses, insurance businesses are dealing with leaner customer service teams and tightened budgets. This makes efficiency more important than ever. 2022 is the year for insurance brands to invest in digital customer service technologies to streamline internal and external communications while providing the instant gratification that consumers crave. To retain long-term customers while attracting new ones, here are some of the most important strategies for brands in 2022:

1) Simplify agent workflows and enable easy channel switching

Digital contact center agents will continue to face a flood of incoming questions. Research shows that over the next two years, 73% of brands expect the number of inbound channels to rise, while 53% believe the same for outbound channels. Now more than ever, consumers want to communicate with their insurance agencies across a multitude of digital channels. In fact, 62% of customers prefer engaging on platforms, including email, SMS messaging and social media. However, this means that internal teams must be able to seamlessly view all previous interactions and points of the customer’s journey to avoid redundancy. 

The best way to simplify agent workflows and increase customer satisfaction is to integrate all of your channels into a single-view platform to provide omnichannel support. Rather than making consumers repeat their queries, agents can use a simplified dashboard to get caught up before interacting with the policyholder, regardless of which channel they used before. 

For instance, the customer should be able to submit a claim online but be able to follow up via digital channels such as instant chat or social media without having to provide background context to the agent. By moving to a user-first, omnichannel approach, your contact center can bolster its effectiveness and cut costs. 

See also: Seeing Through Digital Glasses

2) Enable digital self-service options to speed customer support without the need for a live agent

Traditionally, call center and claims agents spent the bulk of their time answering the same commonly asked questions, contributing to sky-high call volumes and lengthy wait times. With nationwide agent shortages, digital self-service tools are the missing key to agent efficiency. What’s more, self-service offerings are proven to reduce agent attrition, which can be anywhere from 45% to 90% annually. Digital self-service options allow insurance companies to provide the personalized, one-on-one interactions that customers expect, without sacrificing performance. 

To empower policyholders to find solutions to their own problems, consider investing in AI-powered messaging and online brand communities. Advancements in AI mean chatbots can now tackle everyday requests like checking on a claim status or setting up online payments. Chatbots optimize customer and agent experience by tackling commonly asked questions and escalating high-priority queries that need the help of a live agent. When questions repeat again and again, AI-powered omnichannel analytics solutions can recognize a potential pain point in the customer journey to help your team resolve it quickly. The same technology can also analyze customer sentiment to gauge not just what customers are saying but how they truly feel about your business.

When leveraging AI, it’s important to consider containment rate, which tracks the number of users who reached a solution via an automated service, thus not needing to speak to a human agent. Even if the containment rate is low for an interaction, automation might have made that interaction more efficient, allowing agents to deal with higher-priority issues.

On top of AI-powered messaging, an online brand community is also an excellent way to encourage policyholders to answer each other’s questions, so your agents don’t have to. These self-service platforms are a hub for your company’s most loyal, informed followers that can give other customers the help they need without relying on a brand representative. In turn, online communities will not only strengthen brand loyalty but result in higher satisfaction in your policyholders. 

3) Use a customer experience insights solution to gauge customer sentiment

Given the digital transformation that is in store for 2022 and beyond, it’s vital to use a customer experience (CX) insights platform to track customer sentiment and feedback, especially regarding new digital offerings. This technology offers a comprehensive but easy-to-understand view of all customer communications across channels, allowing your brand to visualize data from a high level down to individual interactions. By understanding what questions are repeatedly coming up with policyholders, the insurance industry can tweak and revamp its digital self-service offerings to anticipate the repetitive questions before they emerge. For instance, a CX Insights tool can help gather real-time data regarding all client-related processes such as submitting online claims or purchasing a new policy via digital channels and, in turn, understand customers’ insurance needs and address them better. 

See also: Good, Bad and Ugly of Going Digital

Start with a top-notch digital customer service strategy 

No company will go untouched by digitization in 2022. By revamping their digital customer service strategy and providing a world-class customer experience, insurance companies are bound to strengthen customer retention and expand into new markets. The financial services industry is an ever-changing landscape, and the brands that can put themselves at the forefront of innovation will be the ones to prosper.

Great opportunities often arise in times of great change, and that is certainly the case for the auto insurance market.

Used cars are suddenly worth more instead of less - an inversion of the normal depreciation curve is imploding claim reserves at both primary carriers and reinsurers. The price index for used cars has climbed recently at about 70% above the run rate for the last 10 years. The result is that, for claims in progress, there's a significantly higher payout for fixing and replacing cars.

In just the last six quarters, the normal and expected phenomenon of a car getting cheaper as it gets older has been flipped on its head. Data from J. D. Power tracks used car prices in a value index for the fleet on the street under eight years old. Consumers typically secure full insurance coverage for such cars, which are also the kind still under a loan or just recently paid off. We have not seen this extreme price inversion in this century, so actuarial and predictive analytics models have not been trained for this event. Even a portfolio stress test for auto property damage would not expect a 50% to 70% increase in severity.

Many companies are rapidly filing rate increases; more will likely join them. At the same time, many advertising channels are "going dark" so they don't drive sales of a product with high loss likelihood. It may take several underwriting cycles for rate and risk to again reach equilibrium.

The only silver lining is that newer and better VIN data sources have come to market recently at scale. These detailed configuration and specification data permit VIN-personalization where the actual price new and the current street price can reflect the individual build data per VIN. The only way to accurately set total insured value now is to re-value your portfolio/fleet by VIN to see the magnitude of where you already know the direction of the possible loss ratio.

See also: The End of Auto Insurance

For a fleet of 1 million vehicles, append 1 million current prices. Check your TIV. Check your total loss calculator. Check your open reserves. Check your intrinsic diminished value subrogation if that is on your radar. At least when things age for a while, you will have actual data to show your board of directors, the audit committee and the solvency inspector from the DOI. If you are signing your own name to the reserve opinion this year and next, you may feel smart with a frequent append of VIN-to-price for your fleet in each of the next months and quarters. An opinion of magnitude is better with street pricing of actual cash value -- at least until simpler times of downward-trending depreciation returns.

One of the many takeaways from J.D. Power's quarterly auto insurance shopping report is that consumers are seeking value when buying insurance and are open to methods that allow for personalization of policies. Now, it's up to insurers themselves to take advantage of this dynamic and better align their practices to meet the needs and preferences of these consumers while also making sure their own foundation is strong.

NFTs are creating a buzz in the art world. Touted as an innovative way for digital artists to get paid for their work, non-fungible tokens, or NFTs, offer a proof of ownership for things that by definition are intangible. NFTs also represent a whole new world of risk, and with risk comes insurance. 

In some ways, the risks introduced by NFTs are novel, but in other ways they are as old as the insurance industry. And, while there aren’t yet a slew of policies stepping into the breach to cover NFTs, a new class of policies is emerging to manage risk for this developing market. 

Basics of NFTs

An NFT is a nonfungible token. Something that is fungible can be traded for something exactly comparable. A $20 bill is fungible. A Picasso isn’t. 

NFTs are pieces of computer code. They are made up of URLs that point to something in the world – typically a piece of digital art hosted on a server somewhere, along with a metadata description of the thing the NFT represents. 

If someone draws a character on an iPad and then hosts that character on a server, that artist can create an NFT linked to that digital art and then sell it, transferring ownership in a verifiable way. NFTs are tracked through a blockchain ledger, creating a publicly validated chain of ownership. 

The owner of the NFT can store it in their digital crypto wallet and has the right to sell it to anyone else down the line. 

A common confusion is that many people see NFTs as the art itself, but it is better thought of as a “digital deed of ownership.” Just like a deed represents ownership of your home, an NFT represents ownership of something else. While NFTs are often used for digital art, they can be associated with just about anything, even real-world art, baseball cards or real estate. 

See also: The Opportunities in Blockchain

NFT Insurance

Insuring an NFT depends on what in particular you are looking to protect. 

NFT policies can protect the digital asset itself, just like a homeowner’s insurance policy can protect an oil painting. If the art is destroyed, the policy could pay out. 

But that is not the only place where NFT insurance comes into play. The digital NFT – the computer code – could also be insured in case the URL or the metadata is somehow corrupted. 

When an NFT is minted, it comes with both a public key and a private key. The public key is what moves through the blockchain ledger. The private key is your proof of ownership, just like the private key to cryptocurrency, and is necessary to validate ownership or sell it to someone else. 

If that private key is lost, ownership is essentially lost, so an insurance policy can cover this. 

If a hacker gets that private key, they can transfer ownership, essentially stealing ownership of the art, and that possibility, too, can be insured. 

Finally, the ability to transfer the NFT to an heir after death could be insured. 

Most insurers aren’t offering NFT policies at this point. There is a policy offered by Coincover. Some auction houses may also be able to connect high-end buyers with other specialty lines, such as Lloyds.  

NFT best practices

Because of its novelty, there are some unique challenges inherent to NFTs. 

First, setting valuation is difficult. Because the art or property an NFT represents isn’t fungible, there is no market price to establish valuation the way a cryptocurrency can be valued. 

There is also a challenge when it comes to copyright around NFTs. Because NFTs aren’t the art, but rather a proof of ownership of that art, if someone mints a fraudulent NFT it isn’t completely clear who is the crime victim. The artist wouldn’t necessarily have a copyright claim because the art itself wasn’t reproduced. 

The person who bought the bogus NFT could have a fraud claim. It is akin to someone making a fraudulent deed to their neighbor’s house. They can sell that fraudulent deed, but that doesn’t transfer ownership, so the homeowner isn’t necessarily the victim — the person who bought the bad deed is the victim. Now, if someone with a bad deed tries to move in, then the homeowner has a claim, but it isn’t necessarily against the person who sold the deed, but instead against the person trying to move in and take ownership. Needless to say, things can get complicated fast.  

Fraudulent NFTs have been a high-profile problem on some of the public art markets, with fraudsters and even bots minting bogus NFTs and then selling them on the exchanges, as recently reported in insuranceQuotes.com’s 2022 guide to protecting non-fungible tokens. 

So, beyond the question of insurance, there is a large element of buyer beware where prospective buyers need to validate that they are buying something the other person has a right to sell in the first place.

NFT owners also must practice good crypto habits – protect their wallets, protect their private keys and use a custodian to ensure that, if the owner loses the private key, it can still be recovered. 

It is also essential to back up the digital asset in as many ways as possible – on-site, on the cloud, or even through more complex solutions, such as a distributed file system, in case the original is damaged. 

See also: The Defining Issue for Financial Markets

Conclusion

NFTs seem exotic, but protecting art and assets falls squarely within the constraints of typical insurance policies. Even protecting a deed could fall into the realm of title insurance. So, while NFTs themselves are new, the issues are all solvable. 

As the NFT market matures, billions of dollars are expected to flow into this market, so more insurance policies will inevitably emerge. 

But, while those factors fall into place, NFTs will remain an area of huge potential, and potential risk, that will inevitably shake out.