The last year has proved to be one of the most difficult that the insurance industry has ever faced, but the challenging times are not over yet. In addition to the increase of regulatory challenges, as well as competitive and customer disruptions, insurers continue to endure the unanticipated effects of a global pandemic. Insurers’ technologies are stretched to the max, and employees now work from home offices in an effort to accommodate social distancing guidelines.
Customers have also been confronted by this environment and expect even more from their insurance providers. Between fluctuating stay-at-home orders and other restrictions, along with continuing concerns posed by the current climate, the need for insurance has never seemed so significant. However, for insurers to overcome the added pressures and deliver the exceptional service customers expect, they will need to make a fundamental shift in their operational model.
The key to resiliency is in operational changes and business reinvention
Insurers need to adapt to ensure that the effects of disruption – whether caused by an unexpected event, such as a pandemic, or a new regulation – do not hinder the experience their customers receive. Insurers must reinvent their business so that the services and products they provide are both appropriate for customers now and capable of withstanding future upheaval.
This might sound like a huge undertaking, but it is possible to achieve these goals through the use of technology, which will allow insurers to consolidate, analyze and use data-driven insights. Data is at the heart of the solution.
Better data improves visibility that, in conjunction with accurate scenario-based modeling and planning, will assist in the development of a more agile organization. This is especially important at a time when some insurers have had to grapple with the added challenge of doing business with a lower headcount. Data can also be useful in anticipating when customer service functions might be affected by local lockdowns or increased restrictions.
Use data to better tailor products to customers’ needs
Better data can drive artificial intelligence that can be applied to how products and services evolve for customers. They want insurance that instills them with confidence during difficult times, but insurers need to balance their coverage to avoid overexposing themselves to events that could appear out of nowhere.
You can’t predict the unpredictable, but you can plan for it
To survive this climate or any other challenging situation, insurers must be able to plan, model and predict the likelihood and impact of possible events. By using technology – and, more specifically, data – insurance providers can ensure that customer expectations are met and that businesses are prepared for the future.
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Adam Bimson is director and co-founder of Vuealta. Vuealta is a global provider of scenario planning and forecasting solutions for supply chain, finance and operations.
While the repercussions of the pandemic and subsequent economic paralysis touched many industries, changes within the life insurance sector are among the most widespread. Some changes were underway prior to the events of 2020, yet the pandemic and its economic consequences accelerated an industry-wide transformation. Regardless, life insurance is shaping up to look vastly different in 2021.
New Administration and Best Interest Regulation
Under the incoming administration, the focus on consumer protection regulation will rise for financial services, including insurance. Much of this has been done at the state level already, but we’re seeing increased appetite among federal regulators to extend certain requirements.
New York’s 2019 amendment to Regulation 187 is a perfect example. The rule requiring insurers to act in the best interest of the consumer will likely become the standard for the U.S. life and annuity insurance industry over the next few years. The rule demands more simplicity and transparency within the annuity and life insurance sales experience to prevent what some call “consumer financial exploitation.”
The last four years revealed trends toward a “consumer-only mindset” that’s rooted in transparency. For the life and annuity sector, this means digital product comparison will be necessary. Carriers and distributors with a strategic growth agenda should seek to align with this trend rather than ignore it.
Annuity and life insurance sales have traditionally relied on in-person relationships and meetings; with COVID-19 forcing the industry into virtual selling, regulators will want more auditability and transparency over how consumers are treated during the virtual sales process.
Consumers Demand More Control Over Virtual Experiences
Consumers are also experiencing a transformation of their own. With the majority of lives moving toward virtual experiences and the increased demand for instant answers or services online, consumers have little to no patience for a traditional, paper-based sales process.
This is one of the main reasons that life insurance sales haven’t kept pace with general population growth. Younger generations demand seamless, often-personalized digital experiences with the ability to compare policy options dynamically and interactively in real time. Moreover, most Americans now rely on smartphones and broadband technology to do everything from banking to tracking the status of the COVID vaccine, according to Pew Research. This heightened reliance on digital experiences has affected consumer interest in life insurance and the ability to effectively sell it.
Creating an interactive visual life insurance experience is increasingly popular among carriers and distributors. Virtual sales meetings are also increasing. More and more, consumers don’t want to feel pressured to attend a one-on-one, in-person sales meeting and want more flexibility in the sales experience.
Additionally, for better or for worse, we’ve all come to expect immediate gratification and a quick transaction. This same expectation carries into insurance, especially when it comes to term life. We expect the growing shift to “instant issue” capabilities will continue at a compounding rate in 2021. We also believe many innovators will seek to apply the instant issue model to select product classes and target audiences in the permanent life space.
2020 also exposed the risks for remaining uninsured or underinsured in America. Years of shifting cultural priorities along with outdated digital experiences have left many Americans without adequate life insurance. Unfortunately, this past year has given a glimpse of how dangerous that can be.
Americans now realize how vulnerable they and their families are without sufficient savings or insurance. With new insuretech platforms simplifying the purchase of life insurance, we expect an accelerated shift in tech adoption. For example, we saw a 155% rise in virtual life and annuity insurance sales meetings last spring, and that trend only increased throughout the year. Consequently, financial professionals, insurance carriers and distributors are investing in technology platforms to deliver a “hybrid” sales approach where the adviser or agent blends expertise with a consumer-oriented digital experience.
Overall, while 2020 was a transformative and challenging year, it also propelled the insurance industry forward at an accelerated pace. Regulations that reflect our new reality and cultural shifts will continue shaping the industry into 2021 and beyond. Carriers and distributors that aren’t moving toward digital transformation now will fall further behind in 2021. Despite the rollout of COVID-19 vaccines, experts agree that “normal” life is unlikely to return in the first half of the year, making these major trends a new part of the life insurance selling experience at least for the foreseeable future.
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Bill Unrue is the CEO of Ensight and has been with the company since 2014.
6 Questions for John Sviokla
"The world is becoming more “computable” all the time. As the world becomes more computable, it is possible to trade not only money but anything worth anything, as long as there is a good syntax and semantics about what is being traded and there is a power to “enforce” the trade."
As part of this month's ITL FOCUS on blockchain, we spoke with John Sviokla, strategic adviser at Manifold and former senior partner and chief marketing officer of PwC, about the future impacts and strategic implications of blockchain.
You've made a career out of identifying the strategic possibilities of technology -- going back at least to the seminal piece about e-commerce that you co-wrote in Harvard Business Review in the early 1990s, before most of us had even heard of an internet browser. How revolutionary do you think blockchain will be?
I think blockchains are going to be a big deal for at least three things: trading, in general; supply chains; and identity, in particular.
Let’s start with trading. You have an intriguing idea about “computability” – about how more of what happens in the world can be recorded and turned into data that can be analyzed and manipulated by computers. In insurance terms, I think, for example, of how AI increasingly lets companies turn “unstructured data” into structured forms that can inform decisions on claims and underwriting, but your concept relates to a far broader set of transactions.
The world is becoming more “computable” all the time. As the world becomes more computable, it is possible to trade not only money but anything worth anything, as long as there is a good syntax and semantics about what is being traded and there is a power to “enforce” the trade.
Think of these emerging markets as being like commodity markets, where you can get real corn and where you can also trade corn futures. Derivative markets trade orders of magnitude more volume than markets in the underlying commodity do. I think the corn futures market trades more than the whole annual corn crop — daily.
Imagine this sort of derivative trading happening with every part of the economy that has become computable and contractable.
That would be quite something. You remind me of a piece you wrote for me some 20 years ago, where you said people would be able to use the internet to basically list for rent or sale everything they own, all the time. If I’d thought more deeply about what you wrote, maybe I’d have started Uber or AirBnB, rather than just being a consumer.
Will these blockchain-based trades have to happen in markets, or can they be between individuals and between companies?
Some of these trades will happen in “markets.” Many others will happen over the counter, and over-the-counter markets can grow very fast if there is a way to trade, reliably, with anonymous parties. Let’s do a thought experiment. The global economy is about $80 trillion, give or take. Let’s say that 10% of the global economy is illegal. (I think the percentage is bigger). If the illegal economy is $8 trillion, that’s about three times the size of the French economy. Blockchain has got to be more efficient for many illegal transactions than other means are, so the illegal market, just by itself, will be big for blockchain. On the legal side, there’s tons of over-the-counter trades that can be enabled, generating massive new volumes in the “futures” of anything.
How about your second point: changes to the supply chain because of blockchain?
Any complex supply chain runs across many parties. Think of blockchain as being like container shipping. Container shipping allows for someone to pack something in Sri Lanka, and it gets sealed until it reaches Dubuque, IA. If you read the book “The Box: How the Shipping Container Made the World Smaller and the Economy Bigger,” by Marc Levinson, you find out that simply standardizing the container had vast implications for costs, control, trade, etc. Blockchain can provide that kind of standard structure for payments.
And for identity?
I think deep fakes, etc., are only beginning. [Deep fakes are sophisticated forgeries of images, even videos, that purport to show something that never happened.]
A researcher at Carnegie Mellon, by the name of Rita Singh, has worked on using human voice to create a profile of people and locations. With a 30-second sample of my voice, she created a 3D profile of me that was pretty accurate – my age within two years, my blood pressure within 10 points, my weight within five pounds, a personality profile, the type of room I was in and even the fact that I had something askew with my skeleton. (I had a knee replacement five years ago.) When the deep fakes come along, I’d like some of my interactions to draw on her technology, which can tag me convincingly to a specific location, date and time. (For instance, if I’m in my car, it will sound different than yours.) I think of what she’s doing as a blockchain-enabled identity vector that brings my reality in space time into my needs to establish my identity. What she’s providing would be very hard to fake, and I want one. Blockchain is a supporting technology.
When we were partners at Diamond Management & Technology Consultants (now part of PwC) back in the 1990s, we interviewed Ronald Coase, the economist who came up with the notion of transaction costs, for the cover of the magazine I edited for the firm. He said the internet would take out a whole layer of transaction costs and reshape commerce, and he was right. Will blockchain do the same?
Coase was right — any time you change transaction costs, organizations change a lot. Google sucked many individual classified ads from the market into one giant company because Google has lower transaction costs than the market for individual ads did. Etsy likewise created a marketplace of supply because its transaction costs were lower for individuals who make and sell craft items. Blockchain will have an effect similar to what happened with Google and Etsy.
Many people predicted, especially in the early days of the internet, that a decline in transaction costs would “flatten” markets and give everyone a similar opportunity to compete, but lower costs actually let companies differentiate themselves and let some achieve enormous scale – like Amazon’s AWS cloud computing service. Blockchain, by lowering costs, will enable lots of new transactions. But I bet the scale will go to large, over-the-counter, distributed markets facilitated by the existing giants (Facebook?) or by new ones.
Blockchain’s lower costs will start all fun and decentralized but then grow into the mega-companies we use every day (which should be regulated and broken up, in this man’s opinion.)
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Dr. John Sviokla has almost 30 years of experience researching, writing and speaking about digital transformation — making it a reality in companies large and small. He has over 100 publications in many journals, including Sloan Management Review, WSJ and the Financial Times.
Insurance Thought Leadership (ITL) delivers engaging, informative articles from our global network of thought leaders and decision makers. Their insights are transforming the insurance and risk management marketplace through knowledge sharing, big ideas on a wide variety of topics, and lessons learned through real-life applications of innovative technology.
We also connect our network of authors and readers in ways that help them uncover opportunities and that lead to innovation and strategic advantage.
When it comes to AI, machine learning and advanced analytics, there is one undeniable conclusion: You need to get there now. The biggest risk in AI today is not implementing AI.
Data can stream from devices, channels, exchanges and other points of origin (e.g., phones, drones, homes, vehicles, inspectors, adjusters, etc.) both continuously and on demand.
This makes AI more of a pipeline than a product. Data pours into the pipes and forms streams of information via data identification, transformation, verification and authentication and is combined with additional data to permit decisions across the insurance value chain.
Sometimes, a process can be fully digital and self-serviced. Sometimes, an AI assist happens. Other times, a human is brought into the loop. Often, the human in the loop is also assisted with AI and analytics. New ways to let a customer do tasks remotely are expedited by AI.
Most companies today seem to implement AI solutions across their organizational chart use cases with three strategies: buy before build, collaborate with vendors and customize and invest in internal AI building efforts. Leading-edge companies have progressed from pilots and experimentation sandboxes all the way through the analytics operations pipeline journey — where data and AI operations engineers route data streams to fusion engines, then decision engines, then user endpoint actions in real time.
But many companies are struggling with ”early days” issues: data governance, privacy, security, cloud management, upskilling, model risk management and AI operations lifecycle management. This is a natural consequence of viewing AI initiatives as small projects rather than a product requiring continuing maintenance and long-term investments.
Getting AI from the sandbox to production means upping the readiness of IT teams to provision, stream, protect and operate AI systems as they move from an analytic project and proof of concept into a product. Steady governance and a cultural maturity for data-driven decisions will help you become successful and remain successful. Sunsetting “project-ism” is the new call to action for AI and emerges as essential to exceptional experiences with data-driven decision making.
Long before the COVID-19 pandemic, insurers were investing in digital transformation, spurred by the rise of startups. Those investments took on new urgency as the pandemic forced businesses across industries to move to digital operations to stay afloat.
Over the long term, no technology will prove as vital to insurers’ agility and success as artificial intelligence, whose far-reaching impact will define the next wave of insurtech innovation.
Legacy players and nascent startups alike will leverage AI and machine learning to enhance customer service, speed claims processing and improve the accuracy of underwriting – enabling insurers to match customers to the right products, operate with greater efficiency and achieve better results.
Though insurance is often cast as slow to embrace technology and innovation, in a certain respect AI is very much within the industry’s wheelhouse. Since the first actuaries began their work in the 17th century, insurance has relied heavily on data – and as AI empowers insurers to do even more with vast swaths of data, the benefits will redound to providers and policyholders alike.
Bringing Customer Service to the Next Level
In today’s digital economy, personalization is all the rage. Customers crave tailored, relevant experiences, offers and promotions that reflect their unique backgrounds, needs and interests – and they increasingly expect businesses to deliver these experiences as a basic standard of service.
While personalization is often discussed in the context of sectors like e-commerce, the insurance industry is no exception to this trend. According to an Accenture survey, 80% of customers expect their insurance providers to customize offers, pricing and recommendations.
Of course, delivering bespoke experiences requires an abundance of customer data – and customers are more than willing to provide it in exchange for personalized service; 77% told Accenture that they’d share their data to receive lower premiums, quicker claims settlement or better coverage recommendations.
Because personalization can only deliver on its promise if it’s holistic and omnichannel, the most successful insurers will be those that don’t view personalized engagements as one-offs – a tailored email here, a promotion there – but that consistently provide personalization at every stage of the customer journey.
What will that look like in practice? AI chatbots will become a lot more “chat” and a lot less “bot,” not only providing 24/7 customer service but also using cutting-edge methods like natural language processing (NLP) to better understand what customers actually need and to conduct more natural, intuitive conversations. Underwriting will become much more precise as machines crunch massive sets of data – reams of usage and behavioral data generated by customers and their IoT devices, as well as relevant geographic, historic and other information – to create customized policies that reflect a policyholder’s true level of risk.
Harnessing the power of AI, insurers can also streamline claims processing as part of a comprehensive digital strategy. Forward-thinking providers will increasingly integrate automated customer service apps into their offerings. These apps will handle most policyholder interactions through voice and text, directly following self-learning scripts that will be designed to interface with the claims, fraud, medical service and policy systems.
As a McKinsey analysis noted, with automated claims processing, the turnaround time for settlement and claims resolution will start to be measured in minutes rather than days or weeks. Meanwhile, human claims management associates will be free to shift their focus to more complicated claims, where their insights, experience and expertise are truly needed.
These transformative applications of AI will unlock revenue opportunities, improve risk management and help insurers deliver a new level of personalized customer service. But if AI will act as the great enabler, what will enable AI itself?
The answer lies in a robust digital core, which is vital to facilitating efficient business processes, maintaining resilience in an unpredictable world and supporting the rollout of new products and business offerings. Whether insurers manage to achieve that kind of digital agility will determine their ability to survive and thrive in a landscape that’s shifting faster than ever.
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Colleen Wells is responsible for product strategy for Sapiens North America P&C, as well as Sapiens' digital product suite globally.
Six Things Newsletter | February 2, 2021
In this week's Six Things, Paul Carroll considers the next revolution in transportation. Plus, how CFOs can enable innovation; insurance-as-a-service 2021; insurtech 2021: reset vs. resume; and more.
In this week's Six Things, Paul Carroll considers the next revolution in transportation. Plus, how CFOs can enable innovation; insurance-as-a-service 2021; insurtech 2021: reset vs. resume; and more.
While we wait for the autonomous vehicle revolution to kick in, we can’t take our eye off a development that is already disrupting the car market and will ripple through numerous insurance lines. I refer to electric vehicles (EVs), which currently only account for about 2% of car sales in the U.S. but which will see sales increase rapidly — a trend highlighted by General Motors’ announcement last week that it aims to sell only electric cars and trucks by 2035.
Market forecasts currently call for more than 11% of new cars to be electric in the U.S. by 2035, an enormous increase that would produce major changes in auto service and repair, in the wiring of homes and potentially in a host of other areas.
And the transition to EVs could well be faster and broader, based on announcements such as GM’s... continue reading >
If you think insurers have issues with their mishmash of legacy technology platforms, take a look at the rat’s nest of letters, emails and other documents that languish in an array of systems and formats. Learn how organizations can overcome the challenge of transforming communications by combining AI-powered approaches and best practices.
While the pandemic has greatly accelerated the digitization of the insurance industry — turning years into months — it has also shown us how very far we still have to go. As a rule of thumb, I’ve heard consultants say that 50% of the operating costs need to be driven out of the industry in the next five years.
Blockchain has held out this promise for some time now. It’s lost a bit of its shine because it’s been identified as a hot technology of the year for so many years in a row. But it may be coming into its own, with some uses starting to move into production.
Insurance Thought Leadership (ITL) delivers engaging, informative articles from our global network of thought leaders and decision makers. Their insights are transforming the insurance and risk management marketplace through knowledge sharing, big ideas on a wide variety of topics, and lessons learned through real-life applications of innovative technology.
We also connect our network of authors and readers in ways that help them uncover opportunities and that lead to innovation and strategic advantage.
In 2021, the increasing effects of climate change and the response from U.S. insurance regulators will create both challenges and opportunities for insurers.
U.S. insurance regulators will increase scrutiny of insurers' disclosures regarding efforts to manage potential climate change risks. Such risks range from unprecedented losses from climate-related natural disasters to concerns about hits to insurers' investments in certain asset classes (such as fossil fuels as the shift to alternate energy sources proceeds in coming years).
In 2021, U.S. insurance regulators will continue undertaking various actions designed to encourage insurers' climate change risk management.
At the same time, U.S. regulators will likely increase their demands on insurers to accommodate the needs of insureds who are already being hurt by climate change. For example, the California Insurance Department's mandatory one-year moratorium on insurers not renewing or canceling residential property insurance policies for policyholders living near a declared wildfire disaster may serve as a model for other U.S. insurance regulators seeking to retain the availability of insurance coverages for policyholders hit by climate change effects -- coverages that might not otherwise be commercially sensible for insurers.
U.S. regulators will also increasingly facilitate the development of innovative products to mitigate the risk of climate change for prospective insureds. For example, some regulators may follow an approach similar to that of the New York Department of Financial Services. It recently entered into a memorandum of understanding with the New York State Energy Research and Development Authority whereby the two agencies will cooperate to spur the development of new insurance and financial products "with the potential to de-risk and accelerate the development and deployment of key low-carbon technologies."
Whatever the future holds in terms of climate change impacts, we are confident that U.S. states will look to retain insurance coverage options for their insureds and try to attract and nurture the growth of new insurance products that could help address the impact of climate change in their jurisdictions.
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Jared Wilner is senior counsel at Clyde & Co. He focuses his practice on advising domestic, foreign and alien insurers, reinsurers, insurance intermediaries and other insurance industry participants.
Vikram Sidhu is a partner at Clyde & Co. His practice covers a broad range of corporate and regulatory matters with a focus on the insurance and reinsurance industry.
Achieving innovation in an industry that is heavily regulated can be challenging. First of all, regulation by definition imposes restrictions on what is allowed — for good reason, in many cases. Additionally, there are direct costs associated with regulation, and spending more on achieving compliance may mean fewer resources are available to invest in innovation. Regulation may also foster a way of thinking and culture that are counterproductive to truly revolutionary innovation.
The Impetus for Change
The COVID-19 pandemic has accelerated the digitization agenda for insurance companies. There are real challenges with applying traditional means for executing a sale, performing initial underwriting or assessing a claim in an era of social distancing. As individuals and companies have done their best to adhere to necessary precautions, the need for insurers to accelerate their digitization journey has emerged.
The long-term impacts of the COVID-19 pandemic on customer expectations are still unknown, but an important trend to date is an uptick in e-commerce. This trend is unlikely to dissipate — at least in the short term — so insurers need to find ways to respond to changing customer behaviors and expectations. This is a good time for insurers to take a step back and think about how best to set themselves up to achieve their innovation goals.
Insurance regulation is broad. For example, it mandates that insurers are appropriately set up and licensed, that the products sold are appropriate and that insurers maintain an appropriate level of financial health.
Regulation builds public confidence, which is critical for an industry that essentially sells a promise to fulfill a future obligation. Without public confidence, we simply don’t have an industry.
Some argue that insurers have fallen behind most other industries when it comes to achieving digital transformation. Even compared with other financial services that have accelerated their digitization transformation — such as banking, personal savings and investments — the insurance industry has lagged. The banking and investment sectors have sought to rethink how they do business and how they engage with their customers, and they have implemented end-to-end integrated solutions that ensure a seamless customer experience.
For the most part, insurance companies have focused on moving what they currently do to a digital platform, as opposed to rethinking what they currently do and how they do it. (There are, of course, challenges given the personal and emotional nature of buying insurance, particularly life insurance.
Types of Innovation
Broadly speaking, innovation can be divided into two categories:
Incremental. As the name suggests, incremental innovation is a gradual build-up of little improvements that result in better, faster and cheaper performance.
Breakthrough. This category is revolutionary and often disrupts the industry. Breakthrough innovation involves a complete reimagining of what is possible.
Insurers should consider taking different approaches to achieve their objectives for incremental innovation and breakthrough innovation, but, for both, it’s important to create an innovation strategy that is aligned to the broader company strategy and risk appetite. As an example, to the extent that an insurer’s competitive advantage is its underwriting capabilities, then perhaps that should be the focus for its innovation strategy. The company might double down on the future of underwriting — generating a move from initial underwriting to continuous underwriting, fluid-free underwriting and so on.
Incremental innovation is best achieved through internal efforts because making gradual improvements to existing practices often requires a deep understanding and appreciation of existing practice — what we do, how we do it and why we do it the way we do. Effective collaboration among internal research and development (R&D) teams and the business can generate appropriate returns on incremental innovation.
An internally led effort does not mean the absence of external resources, however. To the contrary, external resources can complement internally led efforts and may provide much-needed subject-matter expertise or offer skills or experience that may not be available internally. External resources also can be used to provide necessary bandwidth that may not exist on the internal team.
Incremental innovation often is done within the constraints of existing regulation. Gains from this form of innovation are generally moderate at best, but the burden of regulation doesn’t tend to overly inhibit progress.
Breakthrough innovation, on the other hand, is best achieved through externally led efforts. This is particularly true for industries that are heavily regulated, given that the culture can counterproductive for revolutionary innovation.
The emergence of insurtech firms, which are often led by individuals from other industries, provides a breath of fresh air. These companies and individuals can help traditional insurance carriers reimagine what is possible, because they are not inhibited by years of insurance industry knowledge and experience of how things have always been done. They are free to think of an ideal future state and use that as a starting point for a new solution.
One of the challenges of breakthrough innovation is that regulations often must be changed. That means demonstrating a benefit to policyholders, improving the stability of an insurance company or providing a benefit to the industry as a whole. And that takes time. Companies committing to breakthrough innovation may be committing to a notable investment that requires partnering with insurtech firms or leveraging innovations from other industries.
The first wave of insurtech firms was a source of dread for incumbent insurers. However, what could be termed “Insurtech 2.0” today is largely the exploration of partnerships between insurtech firms and incumbents.
Another example of breakthrough innovation being achieved through externally led efforts is in the form of industry groups or collaborations. A good example is the Blockchain Insurance Industry Initiative (B3i) consortium that is owned by a group of more than 40 (re)insurers. This consortium tries to help deliver better solutions for consumers through faster access to insurance with less administrative cost.
Opportunities exist to explore breakthrough innovation for the insurance industry as a whole through further collaboration. Innovations developed through industry groups may be more effective at getting regulatory buy-in, especially where tweaks to existing regulation are needed.
Expanding the Role of the Actuary
Keeping the consumer in mind should be at the heart of any breakthrough innovation strategy. Technological advances and new sources of data make new customer engagement models possible. Actuaries working in traditional roles at insurers often have been far removed from the end consumer and mostly focused on back- or middle-office activities. However, technological advances can blur the lines between front- and middle-office activities. For example, moving from initial underwriting models that most insurers use today to a continuous underwriting model will blur these lines. There are opportunities for actuaries at insurance companies to get closer to the end consumer and expand their role.
Tesla’s approach to innovation includes having engineers front and center in the design process. Its engineers work closely with the design team to develop an appropriate product for the consumer, instead of the traditional approach of using an iterative process where the designers create something only to later test it with the engineers for feasibility. Tesla found its approach, often referred to as “design thinking,” to be a more effective process.
One can think of actuaries as the engineers of an insurance company, and we can be more involved in the design process when the end consumer is being considered. This expands the role of the actuary to front-office activities, which in turn can increase the speed of innovation in the industry.
The challenges to achieving innovation in a heavily regulated industry like insurance can be overcome by identifying the different types of innovation and establishing the appropriate strategy for each. Incremental innovation is best achieved through internally led efforts, while breakthrough innovation is best achieved through externally led efforts. Externally led efforts for insurers may occur through partnerships with insurtech firms and industrywide collaborations. But remember, any innovation strategy must be aligned with a company’s overall strategy and risk appetite.
This is an exciting era for insurance, and actuaries have an opportunity to expand and redefine their roles at an insurer in these changing times.
This article first appeared in The Actuary magazine online, January 2021
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While we wait for the autonomous vehicle revolution to kick in, we can't take our eye off a development that is already disrupting the car market and will ripple through numerous insurance lines. I refer to electric vehicles (EVs), which currently only account for about 2% of car sales in the U.S. but which will see sales increase rapidly -- a trend highlighted by General Motors' announcement last week that it aims to sell only electric cars and trucks by 2035.
Market forecasts currently call for more than 11% of new cars to be electric in the U.S. by 2035, an enormous increase that would produce major changes in auto service and repair, in the wiring of homes and potentially in a host of other areas.
And the transition to EVs could well be faster and broader, based on announcements such as GM's and such as the executive order signed by the governor of California in September, requiring that all new passenger vehicles sold in the state be zero-emission by 2035. GM accounts for 17% of vehicle sales in the U.S., and California has 12% of the population, so their announcements alone, if they stand, would mean that EVs would surge from a 2% share today to more than 27% in less than 15 years.
The shift may happen even faster in other countries. Many, including the U.K., France and Sweden, have announced plans to ban the sale of new fossil fuel vehicles by 2040, at the latest. In China, the world's biggest market for EVs, sales of EVs, plug-in hybrids and hydrogen-powered vehicles are expected to soar from today's 5% share to 20% by just four years from now -- and that's actually below the government goal of 25% share.
While the high sales price for EVs has held back adoption to this point, unless governments have offered significant subsidies, we're nearing a tipping point. Some calculations suggest that EVs are now less expensive than ICEs over the lifetime of a car, without subsidies, because electricity costs some 60% less to power a car than gasoline does and because EVs require much less maintenance.
The ripple effects begin there, with maintenance, because EVs are far simpler than their ICE (internal combustion engine) counterparts. EVs don't have sparkplugs and don't need oil, for instance, so you never need to replace sparkplugs and change the oil. EVs don't require all that machinery to transfer power from the engine -- an electric motor can be placed right next to a wheel -- so there are fewer parts to break down. All that means less work for the Midases of the world.
Many repairs following collisions may, however, continue to become more expensive, because cars will continue to add sophisticated electronics (made possible by all that new battery power). The switch from ICEs to EVs could also create dislocation as tools, parts and parts suppliers change -- Tesla has certainly had some issues that have delayed repairs and made the whole process more expensive.
In other words, the new world of car service and repairs will take a while to sort out -- with plenty of implications for insurers.
The change will extend into homes, where many owners of EVs will install high-voltage systems to charge their cars faster than is possible using normal power outlets. Doing so could facilitate increased use of solar power and a general decline in reliance on the electric grid. The theory is that a car battery, along with similar sorts of batteries that Tesla has begun selling for installation on walls, would absorb enough solar power during daylight hours to power a household all day long, with little or no need to tap into the grid.
Doing away with ICEs will cut back on pollution in cities, improving health. (The full benefit won't happen until utilities cut back on or even stop burning coal and gas to generate the electricity for EVs, but the switch to solar, wind and other nonpolluting sources is well underway.)
Moving to EVs in volume will also pave the way for the even more radical move to autonomous vehicles, all of which will be EVs because of the electricity needed to power all the sensors and computers.
The switch could also create opportunities for new sorts of businesses, along the lines of the convenience stores that are part of almost every gas station these days. While charging times continue to shrink for EVs, "filling" a battery takes considerably longer than filling a tank. Drivers will do something with that extra time. Perhaps that just means more attention to Twitter and TikTok, but entrepreneurs may find something more tempting for people who are just standing around.
Because electric motors are so simple, they could even open up new, inexpensive forms of transportation, once the infrastructure for charging gets built out. In many retirement communities, residents already go to the store or visit neighbors in their electric golf carts (whose speed is limited only by a governor, to keep people from bombing around on the golf course, not by any intrinsic limitation to the motor). Why not have one- or two-person vehicles that are fully enclosed, to protect against weather, and that would be able to keep up with other sorts of cars on everything short of freeways?
Such a car, made by Wuling, costs just $4,300 and is the biggest-selling EV in China. And Nidec, a Japanese maker of electric motors, predicts that such a car will soon be available for less than $3,000.
Imagine how different the world will look, including for insurers, if we have a few million of these little cars bombing around on the roads in the next decade.
Stay safe.
Paul
P.S. Here are the six articles I'd like to highlight from the past week:
Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.
The lasting impact of COVID‑19 on commerce and trading is an issue for the future. While old routines may quickly resume as restrictions lift, there may be lasting changes to the ways we get things done.
The pandemic showed the importance of remote access to get information and to conduct transactions differently. Customers became self-servers using automated solutions that replicated or replaced some face-to-face interactions.
It’s hard to imagine a lockdown without online and do-it-yourself services enabled by technology solutions. The experience we’ve had as an industry has helped businesses understand what tech solutions work well or less well. Meanwhile, one outcome is that newly enfranchised consumers may prefer to remain empowered. Chatbots have been around for a while, so could this be their moment? And if so, what does this technology offer and can more insurers benefit?
Spixii is a technology company providing this type of customer-facing, automated-insurance solution to life/health and P&C insurance companies. To find out more, I spoke with Spixii founder and CEO Renaud Million.
RC: How does a chatbot operate?
RM: A chatbot is essentially a software program with a conversational interface that is usable by either a voice or by typing using a keyboard. A chatbot works best when it has a defined goal and can guide a user toward reaching this target.
RC: What makes a chatbot “intelligent”?
RM: With a chatbot, and systems with AI solutions more generally, intelligence refers to the ability to achieve these goals. The goals are defined by the chatbot owner, and the machine’s ability to achieve them is based on anything from a simple set of rules to highly complex algorithms.
RC: What type of advanced analytics and conversation insights make a successful chatbot?
RM: Chatbots generate a lot of data, much more than traditional digital tools -- such as web forms, which rarely capture the user interaction between screens separated by the “next” and “submit” buttons. The data generated by chatbots are related to the execution of the underlying process and how likely it is going to reach the defined goal. More granular data is generated for the conversation itself, such as where people are stuck, at what point they drop the conversation, on which questions people edit their answers, where more information might be needed and where questions are not clear.
RC: What are the prerequisites of an enterprise-ready chatbot?
RM: An organization just embarking on digital transformation starts with the desire to improve a single process, or even to create one from scratch. Once settled on a process, the chatbot needs to be integrated into middle- and back-office systems. This is a prerequisite for an enterprise-ready chatbot to deliver value. Capturing, validating and transmitting the data in a secure way to core insurance systems will deliver savings and efficiencies at enterprise level.
RC: Where in their processes can life and health insurers deploy chatbot technology effectively, and what is the business case for doing so?
RM: A chatbot can assist with many processes; for example, quote and buy, policy administration, submitting a claim or asking for a pre-authorization in a health product. The process of buying is complex and, as a result, often carried out over the phone. While these analogue conversations are great, they’re just not scalable. Online digital web forms are too rigid and lack the conversational aspect. Additionally, despite existing tools becoming less effective and the ever-increasing costs of expanding call-center capacity, the focus is always on the top line. This may explain why some insurers struggle with digital transformation by not prioritizing it in the short term. Chatbots are helping solve this conundrum from both a technical and regulatory perspective because they can be deployed rapidly and audited.
RC: Do you think people’s response of embracing remoteness during the pandemic furthers the argument for using chatbots?
RM: People were already accustomed to doing things by self-serving online. Pandemic restrictions simply accelerated this -- across all industries. Remote working also forced more people to go online for their insurance needs. As more people travel less, the need to physically meet with an agent is disappearing. Consumers are trying first to see if they can do what they need online and then call an agent. On the other hand, while insurers want to do more and be more efficient, remote working doesn’t automatically equate with service resilience if a surge in demand occurs. Offering digital-first communication tools -- such as a chatbot -- can bring both efficiency and resiliency.
RC: What is the next technical development for your chatbot technology?
RM: We have already helped several companies integrate chatbot technologies to their quote and buy, policy administration and claims submission processes. We are now refining these for specific lines of business to help them to grow their portfolios. We also realize that business reporting is critically needed for various departments -- ranging from IT, marketing and distribution to operations and claims -- but the precise data needs vary for each one. So we built an automated reporting function to bring the relevant data to the correct operational area at the right time. We believe this helps individual units make better-informed decisions for the whole business. From a tech perspective, we aim to extend the front-end integration of our chatbot, including more channels and platforms, making the configuration of the chatbot even more accessible and friendly. Also, Spixii has achieved accredited ISO 27001 certification for information security, and our work has been recognized by analysts from Gartner, Forrester and Business Insider.
RC: Will you share some working examples?
RM: We have worked with Zurich Insurance group in the U.K. since 2018, and, together, we automated the first notice of loss for home and motor insurance, helping them to win the British Claims Awards in 2018 for best use of technology. We also worked on the quote and buy processes with both the U.K. Post Office on travel insurance and Bupa’s private medical insurance. To be honest, it is an honor to work on processes that bring a better customer experience and generate a positive impact on operations.
RC: Finally, what is the next step for chatbot technology in your opinion?
RM: Although adoption started some years back, many implementations are yet to come. A lot of companies recognized the operational limitations of call centers, but only a few companies recognized the limitation of web forms. The ones that did recognize these two points also understood that these two channels should be supported by a third one that keeps the conversational aspect and yet manages to codify it in a digital way. We see a strong appetite for serving the customer better with the digital experience they expect. Digital functions are gaining more authority within insurance companies.
Both forces should lead to more and more successful use cases for chatbots to support the digital transformation of insurance companies. From the technological perspective, chatbots are needed for growing more sophisticated in the analysis of data collected -- with a particular focus on psychometric and customer behavior analysis -- but also they need to build a stronger understanding of obligations and duties to keep data protected and anonymized, which is an intriguing challenge for this new wave of data collection.
You can find this article originally published on Genre.com.
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