Organizations in every corner of the economy are focusing with renewed intensity on innovating to anticipate and meet new customer expectations accelerated by and arising from the pandemic. We are not going back to the way things were pre-2020. The pressure is on to transform business models from top to bottom and acknowledge that innovation, far from being "cool stuff" or an off-to-the-side, not-always-measurable set of activities, is core to any business's strategy in this rapidly changing, unpredictable world.

CFOs, by virtue of their role in an organization, their platform and their relationship to the board, the CEO, and their C-suite colleagues, are uniquely positioned to enable innovation. Their ability to lead at this moment may be vital to their business's future.

This article presents recommendations on what they can do to enable the innovation agenda and how to ensure their actions translate into results.

Defining "innovation" — a word that sparks admiration and controversy

The word "innovation" can be polarizing. It conjures up coolness and threat, inevitability and unpredictability, attraction and avoidance. Few will debate that innovation is essential — yet attempts fail more often than they succeed and can be easily derailed by the status quo.

Innovations are viable new offerings that solve people's real problems; ie, they:

• Can be executed and delivered — technically, legally, ethically, financially, operationally, etc.
• May be new to a segment, geography, industry sector or even the world.
• May be incremental — enhancing an existing business, product, service, experience, etc. — or game-changing.
• Address actual needs of the people a business wants to serve, whether the business has a business-to-business or business-to-consumer focus.
• Exist in many forms as illustrated by the 10 Types of Innovation model created by the Doblin Group. In its research, Doblin has found that innovations tend to be least effective when focused solely on product and most effective when combining five or more of the 10 types. For example, consider how Ikea has combined innovating the brand, customer experience, product, business model and processes, or how Zappos innovates the brand, customer experience, channel, product assortment and business model — in both cases creating unique positions in the market and in the minds of their customers.

Where is the CFO's leverage to enable innovation?

The CFO can accelerate innovation progress, energize the organization and signal culture change by taking action in three areas:

Ensure that adequate resources are allocated to innovation

Innovations don't generally happen within the confines of the annual planning cycle. Innovation can feel messy relative to the structures most businesses follow around budgeting, forecasting and planning. It's driven by the marketplace, by customers' expectations and, as the world experienced last year, by events beyond our control.

Consider good practices that create flexibility and support financial management requirements for innovation. For example:

• Challenge teams coming forward with innovation proposals to see themselves as founders, who self-fund the very first steps before seeking outside capital. Good founders gather qualitative, directionally meaningful customer feedback and develop rough prototypes for proof-of-concept purposes on shoestring budgets.
• Borrow from the startup playbook by funding early-stage concept development in incremental tranches, investing relatively small amounts of capital as milestones are met. Plan a research and development line into the budget so that these investments are accounted for, and anticipate larger investments when it is time to scale.
• Value and consider each innovation initiative as an item in the investment portfolio the business is creating to ensure the company's future. Each investment will have a different degree of risk and reward and likelihood of success and will pay off at a different time. We know that a balanced portfolio mitigates risk and also bakes in the reality that not all portfolio items will succeed or succeed to the same degree or at the same time. Expect that many projects will yield learning and fail to reach commercial success but create value insofar as they can inform future efforts or may be "version 1.0" renditions that require further iteration or time, so should not be discarded. Mapping the portfolio initiatives on a matrix will help confirm whether the mix is right, too aggressive or too conservative relative to the company's strategy and goals.

See also: How to Understand Shopping Behaviors

Develop policies and processes that facilitate innovation

Some years back, my team wanted to run a test in partnership with a startup company whose advanced technology could enable exceptional delivery of critical elements of the customer experience, overcoming a significant barrier that business-as-usual solutions had not addressed.

The project manager set off through the standard approval process, starting with contacting the procurement team. I received a call one day from the procurement specialist, who told me, "We cannot work with this vendor because, according to their [Dun & Bradstreet] report, they lose money."

No kidding. This was an early-stage startup (which, incidentally, ended up with a $300 million-plus exit a few years later that we never could have foreseen). As is typical of early-stage businesses, this startup was losing money — capital had been invested in building a world-class platform, and the sales pipeline was not close to maturing.

By the standards of a scale business operating in a highly regulated sector, integrating a capability from a money-losing provider would not be acceptable. But in the case of a low-volume test of a new capability whose functionality is not core to the safety and soundness of the enterprise, the risks are different, and so are the mitigation strategies. In this case, we articulated up-front a clear exit plan, including what we would communicate to customers involved in the pilot; acknowledged that the pilot investment would be written off; and had a clear plan to account for a write-off in our financials.

Applying policies and processes that work well for a scale operation can be overkill for a nascent concept. Innovation requires a different approach with rigor appropriate to the task, risk and capital involved.

What can the CFO do to cultivate innovation-appropriate policies and processes?

• Help C-suite colleagues and the finance team focus on asking the question, "What is the problem we are trying to solve?" in assessing next steps for a new concept.
• Ensure relevant processes are in place to assess and approve innovation vendors and other strategic decisions that both enable experimentation and address the need to protect the enterprise.

Adopt relevant metrics

Early in my corporate career, when I was on a team seeking seed funding for a new concept, an executive offered valuable advice that has stuck with me. In a presentation to this particular executive, the team shared copious financial analyses, including five years' worth of P&Ls carried out to the penny. He waved aside our spreadsheets and, laughing, told us, "Don't seek a level of precision that cannot be possible when you are looking at something so new."

Instead, the CFO can lead the adoption of common-sense approaches to ensure discipline — the right kind of discipline — for evaluating and monitoring emerging business models.

When measuring innovation effectiveness, what is most important is to ask the right questions, be confident in relying on judgment where facts simply do not exist, seek metaphors from other sectors or markets and accept good enough data that can be refined along the way.

Smart questions answered in fast test-and-learn cycles can help a team to derive the relevant metrics and keep innovation projects moving closer to success, or to the set-aside pile.

There is comfort in hard data. It is reassuring to see numbers in organized columns and rows with optimistic trends demonstrating success. But innovation is messy, and it's vital to explore, listen and dig into qualitative insights that could be important signals that are just too raw to quantify.

What can the CFO do to succeed as an innovation enabler?

The CFO role is evolving, and, for people pursuing careers that include even a stint in the finance function, this is an exciting time to make an expanded contribution to their company, leveraging the unique positioning and attributes of their roles. Address these four priorities to support this evolution:

• Step up to the broader role, acknowledging the opportunities beyond traditional reporting, budgeting and forecasting responsibilities and how critical this scope is to the business's future.
• Update the talent strategy for the finance function, in particular by recruiting diverse team members and encouraging the strengthening of skills in customer insight, data analytics and trend analysis that will enable them to be productive and highly valued thought partners to colleagues working on innovation initiatives.
• Assess and augment the capabilities the function needs to perform effectively now, particularly technology capabilities that allow ready access to useable data and support the team's ability to get from data to insight to action.
• Find the right balance between shareholder requirements and those of the other stakeholders to the business — customers, vendors, partners, employees, regulators and the broader community.

CFOs must embrace the reality that, to be an innovation enabler, they will need to make "and" decisions, not "either/or" choices. They will be faced with polarities. To identify, shape, test, launch and scale innovations requires financial management approaches that may feel at odds with traditional ways of operating. But the adoption of fit-for-innovation methods is essential to nurturing ideas and allowing them to grow into commercial successes.

The pros and cons of appointing a chief innovation officer

As a two-time former corporate chief innovation officer, I am often asked, "Is it a good idea to have a chief innovation officer?" Here's the not-so-simple answer:

• Innovation happens with skills, leadership and a mindset that are quite different from those that drive a mature business at scale. The benefits of a C-suite innovation executive with the authority to hire and lead a small team are that this team, properly built, can seed those complementary skills and capabilities, and the role can be a powerful signal to the organization that innovation is a priority.
• The downside is that innovation does not happen in a silo and will benefit from the capabilities and institutional knowledge of the organization at large. A separate team can send a false signal to the rest of the organization that the accountability rests in the team, when in fact everyone should feel they have skin in the innovation game.

The CFO is well-positioned to advocate for innovation governance that engages the entire C-suite and:

• Holds business unit heads and functional experts accountable for contributing to the innovation team's success;
• Encourages collaboration and pooling of expertise needed to advance concepts before they warrant dedicated staffing; and
• Helps ensure that innovation priorities and corporate strategy are connected.

See also: Tapping Cloud’s Ability to Drive Innovation

What to ask first

Top questions for establishing innovation metrics for early-stage concepts include:

• How big is the addressable market?
• What would you have to believe for this to be a concept worth pursuing? In the absence of a rear-view mirror's worth of history, it's better to look forward and envision market, customer, operational and other basics that would need to exist for a concept to appear reasonable.
• What appear to be the likely key drivers of revenue, expenses and the balance sheet?
• What is the unit profit model, and what is the potential to scale?

FEBRUARY 2021 FOCUS OF THE MONTH
Blockchain

 

FROM THE EDITOR

 

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.

 

We'll still have to handle the mountains of information that come with assessing the risk for billions of policies and processing and paying all the claims. But what if we could use a lot less paper and if the handoffs could happen automatically, rather than requiring a game of phone tag, a string of emails or even having someone walk a file to another part of the building?

 

Blockchain has held out that 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. The RiskStream consortium (with which I've done a series of webinars, available here [link]) has, for instance, an implementation for first notice of loss for car accidents that lets all parties contribute to a permanent record, captured in a blockchain, and avoid all the calling for details and manual sharing of records that occurs now.

 

We've collected our thought leaders' latest thinking below. Please keep an eye out for updates, as this will be a hot topic for us for a long time to come.

 

 

- Paul Carroll, ITL's Editor-in-Chief

 

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6 QUESTIONS FOR JOHN SVIOKLA

As part of this month’s ITL FOCUS, 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."

Read the Full Interview

 

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WHAT TO WATCH

The Future of Blockchain Series Blockchain has incredible potential to streamline business functions and open up opportunities for a wide range of innovations. Check out the first two episodes in our series, where we cover personal and commercial lines, and stay tuned for our final episode, releasing February 8th, where we discuss blockchain usage in Life & Annuities. Watch Now

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WHAT TO READ

	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
	Where Blockchain Shines Right Now The seafood supply chain, for instance, can become transparent and trustworthy, while blockchain automates location updates. Read More
	Blockchain: Golden Opportunity in LatAm Blockchain provides a golden opportunity for real, tangible operating efficiencies in Latin America and for transforming the region's image. Read More
	COVID-19’s Effect on P&C: Opportunity for Tech? Whether via IoT, AI, blockchain or other technology, firms that have made progress have more room to withstand the economic downturn’s effects. Read More
	How Technology Is Changing Warranty Technology is changing the warranty experience for consumers, providers and retailers -- even small to midsize ones. Read More
	Blockchain: A Hammer Looking for a Nail? Why does netting of subrogation payments continue to be seen as a problem that needs to be solved when costs have plunged? Read More

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WHO TO KNOW

Get to know this month's FOCUS article authors:

Ivan Kot	Colin McQueen	Patrick Schmid
Steve Davidson	Kevin May

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Learn More about ITL Focus

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Interested in sponsoring ITL Focus or learning about other promotional opportunities? Contact us

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Insurance carriers have a long history of tweaking their field organizations and compensation plans to make the captive agent channel more effective and efficient. But the stakes have become higher and the moves bolder in the last several years. Faced with stagnant agent counts, declining agent productivity and elevated expense ratios relative to direct players, carriers are taking sweeping action to ensure the continued viability of the agent channel. From Allstate to Farmers to numerous regional carriers, timid steps have given way to massive reorganizations and wholesale redesigns of compensation programs.

As we advise executives at national and regional carriers active in the agent channel, the most frequent question they pose to us is: “How do we know if it’s time to go big (or go home)?” Although good agents tend to welcome change that makes a carrier more competitive in the marketplace, others may resist it. For the insurance distribution executive, agency transformation is difficult, time-consuming, risky and potentially controversial.

We’ve laid out a set of diagnostic questions that executives can ask themselves to determine whether the juice is worth the squeeze and whether the time for real transformation has arrived.

To gauge whether a large-scale reorganization is worth pursuing, ask
yourself the following six questions:

1. Do your field leaders have multi-channel or multiproduct responsibility?

If they don’t, you are behind the times. Other carriers are aggressively breaking down channel and product silos in their field leadership. Whereas previously only top agency executives were responsible for decision-making across channels and products, more recently middle management such as directors and AVPs are being deployed across multiple channels (e.g., exclusive agent, independent agent and retail) and products (e.g., auto, home, life, commercial and financial services).

This deployment is not only more efficient but also more effective. It increases channel and product coordination, allows field leaders to optimize across channel and product efforts and eliminates counterproductive competition for agent attention. It also provides an abundance of career path options for leaders on the rise.

2. Are your district or agency managers able to focus on coaching and sales performance management?

The days of “jack-of-all-trades” district and agency managers are numbered. Historically, these managers were expected to recruit agents, train them, provide them with marketing support and coach them on sales. In an optimized field organization, these managers are liberated from lower-value recruiting, training and marketing duties so they can focus on their core competency of sales management and sales coaching. This shift is enabled by centralizing recruiting, training and marketing functions at home office through centers of excellence that support the field.

3. Are your spans of control current relative to best practice?

The rules of thumb are changing. While carriers used to assign one agency manager for every 20 to 30 captive agents, new guidance is 40 or even more. This evolution is based on analytics that reveal a lack of correlation between coverage and productivity: Fewer agents per manager doesn’t necessarily lead to more production.

We are aware of carriers pushing the envelope even further, such that the average manager span of control will grow significantly over the next two years. Increasing familiarity with video-based technology and virtual meetings in the context of COVID-19 will only accelerate this trend as “windshield time” constraints become less relevant.

The move toward larger spans is happening at the director and AVP levels, too. In lockstep with their increasingly cross-channel and multi-product approaches, carriers are rolling up more and more premium and agent count to these field leaders.

See also: 4 Keys to Agency Modernization

4. Is your field leader compensation sufficiently variable and tailored geographically?

The emerging best practice is for nearly half of field leader compensation (for director roles and above) to be variable. Those with a significantly smaller variable portion may fall into maintenance mode rather than gunning for growth.

Ideally, variable compensation is paid through periodic (e.g., quarterly) bonuses based on the performance of the field leader’s geography relative to targets. Avoid making field leader bonuses a function of individual agent outcomes, lest they spend too much time catering to low performers.

Target-setting for bonus purposes should be driven by an analytically savvy team at the home office and should reflect differences between growth markets vs. mature markets in the weighting of various criteria in the bonus formula.

5. Are there more than three or four layers separating your top distribution executive from your agents?

More organizational distance between your top distribution executive and your agents generally means less clarity of field roles, less accountability for outcomes, slower issue escalation and resolution and reduced visibility for top field leaders.

The ideal number of layers in your field organization depends on how many channels you have – you can imagine a carrier with EA, IA, retail and direct requiring more layers compared with a carrier that is agent-only. It depends, too, on the geographic scope and amount of premium overseen by the distribution function, with smaller, regional carriers often requiring one less layer relative to large, national players.

Right-sizing layers is a powerful reorganizational tool that not only reduces unnecessary expense but also streamlines field effectiveness when done right.

6. Are your field management roles consistent across your geographic footprint?

Some carriers have extensive geographic variation in field roles across states or regions. This can result from mergers of carriers with different field structures, or from a well-intentioned effort to empower local leadership to experiment with new or modified roles. In the long run, though, this variability muddies the waters and harms field effectiveness by undercutting role clarity and accountability.

Field reorganizations represent an opportunity to clean up the proliferation and inconsistency of roles by standing up an optimal set of standardized roles in all geographies. Although the allocation of time to various activities within the role description (and, by extension, the relative weighting of criteria for bonus determinations) may rightly vary to reflect geographic nuances, the roles themselves should be uniform in all locations.

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If you answered “no” to at least two of the previous questions, you are likely to unlock significant value from a larger-scale transformation of your agency management structure. If you answered “no” to three or more, it’s definitely time for change. Like going to the dentist, the longer you wait, the more painful it will be.

Even if you answered “yes” to every question, your work is not done. Leading carriers regularly revisit these topics and perform at least bi-annual check-ins of field structure effectiveness in the spirit of continuous improvement. They do the organizational equivalent of flossing, brushing and occasionally undergoing a corrective procedure to keep things healthy.

Pivoting to agency compensation, consider the following four questions to find out how much room you have to improve your agent compensation plans:

1. Are your agent retention and agent productivity on par with competitors?

These key performance indicators vary dramatically. Agent retention after 18 months can be as high as 90% and as low as 35%. Average monthly agent policy production ranges from two to 25 for auto and from one to 15 for home. Similar gaps apply to commercial and life production. If you’re trailing the rest of the pack in these key metrics, it’s likely that your agent compensation plan is a big part of the problem.

Modern compensation plans use an aggressive pay-for-performance approach to create significant dispersion between top and bottom performers. Carriers can choose to vary commissions based on growth (and other factors), or to use a large variable bonus to create the spread of agent compensation outcomes. Either way, the idea is to maximize the incentive for agents to grow, while minimizing the amount of enterprise resources directed to agents who aren’t producing (many of whom should probably exit the agency force).

Contemporary compensation plans enable a variety of entry points for different types of recruits and match compensation mechanics to their cash flow realities to boost retention. For example, the proper plan design is quite different for an agent with no experience than for a well-capitalized experienced producer who is switching carriers.

2. Are your agents cross-selling effectively?

Many carriers have a shockingly low rate of cross-sell, even when their business models are based on the premise of increasing account density among acquired customers. Cross-sell must be a foundational element, not just an add-on, in a modern compensation plan. This means building cross-sell requirements into the core of a compensation plan (e.g., a variable commissions grid or bonus schedule).

Importantly, carrier comp plans should be agnostic to how their agents achieve their cross-sell ambitions. Agents should be rewarded for cross-sell whether they do it themselves, enlist specialist sub-producers or engage the assistance of line of business specialists in a team-based selling model.

3. Are tenured agents still growing rather than plateauing?

Some carriers allow tenured agents to “dial it in” regardless of whether their agencies are growing or shrinking. Even if a carrier has rolled out an improved, pay-for-performance compensation plan, it may have grandfathered long-time agents on outdated plans. Growth-oriented carriers avoid these practices.

See also: Crowdsourcing 6 Themes for 2021

4. Have you enabled economic interest for your agents to foster the business owner’s mindset?

Numerous carriers provide a payout to departing agents that is calculated as some multiple of renewal commissions over the prior 12 months. The concept has different names at different carriers (e.g., fallback, termination benefit, contract value) and may be tied to different requirements (e.g., non-compete or non-solicit clauses), but the core function is the same: to make running an agency more like owning a business by growing long-term economic value alongside the growth of the operation.

A handful of carriers have gone even further, enabling agents to sell renewal commission rights to third parties, subject to approval by the carrier. Farmers, Allstate, Auto Club Group and Horace Mann are among those that have enabled this enhanced form of economic interest; several other carriers are considering doing so or are working on their programs.

We consider this enhanced economic interest a win-win for agents and carriers. Agents are likely to find an external buyer willing to pay more than the enterprise’s fallback amount. It is not uncommon to see transactions close at multiples of two to three times prior 12-month renewal commissions. Carriers, for their part, get the benefits of more motivated agents, sophisticated and well-capitalized buyers joining the agency force and lower enterprise payouts due to third-party sales. In addition, carriers may find that enabling enhanced economic interest is a popular “win” for agents that aids change management efforts during a broader revamp of the agency compensation plan.

Some misconceptions have kept more carriers from embracing this concept. As more carriers understand that enhanced economic interest does not cede enterprise ownership of customer relationships or eviscerate any non-competition or non-solicit constraints, we expect a rising tide of adoption.

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If you answered “no” to two or more of these on agency compensation, it is probably worth pursuing a significant overhaul of agency compensation.

Agency transformation work is not for the faint-hearted. It can be tempting to defer meaningful change to field organizations and agency compensation plans in the interests of avoiding disruptions and maintaining harmony. However, if the exercise outlined above suggests a significant gap between your current state and best practice, your agent channel is unlikely to remain viable against direct channel competitors. Ultimately, all parties are better off when carriers fearlessly tackle transformation and find ways to enhance both efficiency and efficacy.

Fraud in social benefit programs causes much more than economic damage. It can lead to patient deaths and harm from poor-quality healthcare. Fraud also facilitates and masks deeper issues such as substance abuse disorders (SUD), domestic violence and elder abuse. States should invest more resources in detecting and investigating social benefits fraud to limit these negative effects.

Not surprisingly, a state's or agency's commitment to fighting fraud can vary. Some have a zero tolerance for fraud, while others see fighting fraud as simply bashing the poor. I argue that not pursuing fraud detection means losing insights that can help detect other problems and may increase the risk of negative outcomes. Here is why:

One of the most tragic repercussions of Medicaid fraud is the poor quality of care and lack of concern for patient safety that can come as an unintended byproduct. In Ohio, three nurses billed for services they did not provide for months, resulting in the death of a 14-year-old girl with cerebral palsy. At the time of her death, Mikayla Norman was covered in bedsores and weighed only 28 pounds. Care coordinators often do not see patients; they rely on the medical records and billed services to track care delivery and assess further service authorizations. They believe services are being provided because services were billed, even if billed fraudulently. The system failed Mikayla Norman, and the Medicaid fraud helped mask what was happening.

Another example comes from Dr. Farid Fata, a Michigan oncologist, who was found guilty of $34 million of healthcare fraud. He billed Medicare and other payers for services not rendered and diagnosed healthy patients with cancer. His medically unnecessary treatments caused severe harm to his patients, including death.

Examining information and data around family behaviors can provide insights to help discover families in crisis. As a case manager, after looking at a report card, I once asked a recipient why her kindergartner was absent or tardy dozens of times. The conversation started with "I have trouble getting up in the morning" and finished with "I need some help. Can you get me into a treatment facility?" This person completed treatment, earned an education, entered a training plan and got a job. That one odd data point changed the trajectory of this person's life and the family, but only because the data was examined.

During my government service working in social benefits fraud, we noticed law enforcement officers talking about drug dealers found with Supplemental Nutritional Assistance Program (SNAP) electronic benefit transaction (EBT) cards. Maine is one of several states working to address this issue, but trafficking and abuse occur in every state. State investigators monitoring SNAP retailers also reported shop owners trafficking SNAP EBT benefits for alcohol, drugs and even guns. By not examining SNAP EBT fraud closely, states may be turning a blind eye to these other behaviors.

See also: COVID-19 Risk and Buyers’ Psychology

SNAP retailers who traffic EBT benefits prey on recipients. If a recipient sells his or her monthly benefit once, it is often for an urgent need. Did the state or county office tell SNAP recipients there are programs to help with emergency needs like a car battery or rent assistance? Does the program operate quickly enough to actually meet emergency needs? For recipients who consistently traffic SNAP EBT benefits, is intervention and treatment needed? Are there children in this home who are now at further risk of going hungry or being neglected?

Government coffers are just the first "victims" of healthcare and benefits fraud. Maybe fraudsters don't consider the patients and citizens who are collateral damage in their schemes. Maybe they don't care. But states must.

Governments need to make fraud detection a greater priority. States must identify and remove more SNAP retailers who traffic benefits and take advantage of recipients. Government fraud fighters must punish more providers that put patients at risk -- not just to end their financial schemes but to improve population health and patient outcomes.

Combatting fraud is usually talked about as a way to reduce costs. And it is! Billions of dollars of spending are avoided or recovered every year through government fraud fighters. But, too often, fraud leads to some people paying the greatest price of all.

Many of you have been in insurance for quite some time, and it might sound amazing to even ask you to consider the possibility that core systems will take a backseat to digital projects.

Because of the pandemic, there was a real pause back in March to reassess what the priorities were. How would core systems need to interact? How would we keep pursuing core systems – as replacements, enhancements, in new roles, etc.? In this digital age, we feel tugs and pulls from the many different priorities that we have. Are we trying to cut some costs? Are we really focused on all of the digital engagement initiatives that we have underway? And where does core sit in all of this?

Well, I would suggest that the idea of the core taking a backseat is a myth: Core systems are not necessarily the drivers of digital projects, but they are the enablers. They are the core – the hub of many of the interactions with data from both internal resources and external resources. The facilitation of transactions connected via APIs is now the critical enabler for digital engagement.

When we look to our internal operations, how effective are our resources, our underwriters, our billing staff or our claims staff? Is the core system enabling them to move forward with their tasks in the most efficient and effective way? How open and interactive is your core system with bot technologies or robotic process automation (RPA)?

We must enable the balance between the digital workforce and the human workforce to be the most efficient that it can be.

There is a plethora of different technologies and initiatives out there focused on external digital projects. We now have digital platforms. We have new user interface (UI) initiatives. We have a whole new way of looking at our interactions with customers and agents.

How does your core system help enable the transactions? Is it open? Does it have access to the APIs? Is it efficient? Can it perform? Can it live in the new world?

We know empirically from our research this past year that core, because of the type of expense it is and because of its criticality to organizations, continues to push forward as a key initiative.

Whether you're sourcing a new system, in initial deployment or in rollout, remember that core initiatives do not take place in a short time. They are significant investments.

We are balancing a new world of digitally engaged platforms with the enterprise core system needs that we have today. There is a fit and purpose for every type of solution out there. Some are meant to expedite product innovation, and others are meant to handle the thrust and bulk of transactions and the volume of significant blocks of business. The important thing is to make sure your core system is working cohesively within your digital structure and enabling you to move forward with the digital projects that you have underway.

See also: Cloud Computing Wins in COVID-19 World

Call to Action:

To counteract the myth that core systems will take a backseat to digital projects, my call to action is to really make sure you’re using a core system that has and can expose their capabilities via APIs – because the core system is going to have to live within the new ecosystems in and of itself.

It is not the entire ecosystem, and it is not the only solution that you're going to have in play. This digital landscape requires much more from core systems from an interaction standpoint. Core systems must be able to interoperate with other technologies and enable interactions, and they must be as open as they possibly can be. We have to open up these systems to make them much more collaborative, available and accessible so we can capitalize on the gains made with cloud deployments, which will enable improved scalability and versatility.

Mass individualization. Is it an oxymoron? Or a new perspective when attracting customers? With a growing number of connected cars on the road and 74% of new vehicles featuring advanced driver assistance systems (ADAS), it's becoming easier to see the differences between policyholders. Increasingly, insurance carriers can understand how and when people drive, as well as the ways vehicles themselves interact with the road and their drivers. The growing variety of advanced safety features affect driving patterns, adding a layer of complexity as carriers navigate pricing, claim frequency and severity. So, how do insurers attract and retain customers when faced with so many new variables, while at the same time delivering a personalized experience to meet growing customer expectations? 

In a word -- telematics. Telematics can unlock an insurer's ability to:

1. Better identify and reach high-intent customers
2. Offer consumers new experiences that meet their expectations
3. Deliver superior customer service in a way that ensures prospective customers feel confident in making a decision

Leveraging Telematics Data to Reach the Right Customers

High-intent customers can arise from common scenarios, such as the purchase of a vehicle in a state where securing insurance is legally required. In fact, for 29% of customers, a new car is what prompts insurance policy research to begin.

To catch consumers’ attention during this critical point, carriers can gain valuable, personalized insights from connected cars, given that the latest vehicle models can chart and share data at every turn (not to mention each brake, acceleration and more). Equipped with this data, carriers can better determine which customers to target and what incentives to offer them up-front, helping customers increase confidence in their decisions and potentially improving carriers' bottom line. 

Going a step further, by having this information readily available at the time of quote, carriers can offer competitive pricing personalized to how an individual drives and to the vehicle the person is driving. This eliminates the need to first educate the prospective buyer about the plus side of usage-based insurance (UBI) and then make the buyer wait weeks or months to learn what discount he or she is being offered. Accessible connected car data can help carriers stand out from the competition, win a customer and simultaneously reduce marketing costs. Because about one-quarter of insurer marketing/customer engagement departments spend all of their marketing budget and time on customer acquisition, these cost savings are critical. 

Offering New Experiences to Attract New Drivers

Today, most consumers navigate a variety of services digitally without a second thought -- from filling prescriptions to buying groceries to banking -- and have come to expect a seamless interaction with almost every brand. The insurance industry is no exception. In fact, according to McKinsey, customers cite convenience as the second-most-common reason for switching brands. As a result, insurance providers may want to adapt to meet customer expectations. The good news is that more than half (51%) of auto insurance marketing professionals list "designing new customer experiences" as their top priority, behind acquiring customers and improving the claims experience.

While driving may be down over the past year, accidents are still occurring, and have actually gone up in severity, possibly because less traffic encourages faster driving. By using telematics, carriers are not only able to detect a crash and provide on-the-scene assistance, but can help resolve a claim faster. These are the types of services consumers are looking for. In fact, 47% of consumers said access to telematics-enabled claims submissions would make them more likely to purchase usage-based insurance. Intuitive, personalized experiences drive so many of our daily interactions; the same should be true for submitting a claim. 

See also: Telematics Consumers Are Ready to Roll

Going Beyond Digital to On-Demand

Just as it has in other industries, digital adoption has allowed insurers to speed and improve existing processes, enabling inspections, appraisals and repair estimates virtually. Beyond this, AI is creating dynamic experiences such as near-immediate total loss vs. repair decisions, repair vs. replace-parts decisions and injury prediction. AI also helps underwriters identify risk at the point of quote. The evolution of data analytics and AI guiding the estimating process will only accelerate efficiencies in operations and customer satisfaction, allowing policyholders to participate in the claims estimating process. Research shows that 36% of customers are dissatisfied with the initial claim filing process, highlighting the significant opportunity for improvement.

For example, by using telematics data that detects an accident, the carrier can reach out to the driver in the way the person prefers -- via text, in-app or through a phone call. The consumer can then decide when and how to respond. From there, the driver receives a link so her or she can take photos of the damage, upload the data, send it back to the carrier, receive a list of nearby repair shops and talk to a live person if there are questions. These improvements expedite the claims process and create a better customer experience: one that is on-demand and mimics interactions consumers have come to expect from other industries.  

Research already shows that 90% of current UBI customers are satisfied with their program, but carriers can take it a step further by using gamification to offer discounts while maximizing the convenience of app resources and more. This concept has shown success in a wide range of industries, helping companies achieve goals for creating awareness, increasing sales, simplifying complex processes and more. The interest, and opportunity, to expand to meet customer needs clearly exists, but to truly take advantage of UBI beyond pricing it is key that carriers differentiate to attract and retain customers. 

Carriers can begin to develop a strategy that allows them to innovate, reimagine the way customers see them and, most importantly, make offerings more personal and more appealing. The typical auto insurance customer requests three carrier quotes during the buying process. When the decision day comes and you’re among those three carrier options, these strategies can help your quotes stand out.

And, now that you’re more attuned to your customers' expectations and their specific needs, you’re putting yourself in a position not just to win on decision day but to increase the likelihood of retention, creating brand advocates who may remain loyal for a lifetime.

2020 was a year like no other, so it should come as no surprise that we aren’t just going to be able to pick up where we left off as the pandemic eases. That is even truer with regard to the high-risk, high-reward world of investing in insurtechs. To use a football metaphor, 2020 was a year full of “broken plays.” Now that conditions are beginning to settle, we need to look at 2021 as a “rebuilding” year; more of a reset than a resumption of what was.

Narrowing Focus; Fewer, Larger Checks

Crunchbase data shows that there were almost 60 insurtech funding rounds in the final quarter of 2020, lower than the 65 transactions in the same period in 2019 but much higher than the paltry 36 transactions in the second quarter of 2020. Equally revealing is that almost half of the rounds in the last quarter of 2020 were for $10 million or more, reinforcing a longer-term trend toward fewer startups receiving higher amounts in a confusing and uncertain business environment. 

In markets like these, investors will become even more pragmatic and disciplined, narrowing their focus to more mature insurtechs displaying measurable traction and to those whose products and services are higher on the insurance industry’s adoption curve. 

Favored Technologies 

According to S&P, the industry faces a combined ratio over 100 in 2001 – the first time in three years – because of the impact of the COVID-19 epidemic. In response, carriers will focus on insurtech that is relatively easy to deploy, that can reduce expenses and that boosts productivity and efficiency. Carriers will increasingly invest in, and acquire, these innovative companies to guarantee prioritization of attention to their needs while also keeping these valuable innovations out of the hands of competitors. Some insurers are reducing pilot program exploration in less certain technologies to maintain their focus on those with shorter-term potential payback.

Favored target technologies include: 

• big data aggregation, analytics and processing 
• no code/low code, which provides access to information management directly to line of business heads
• artificial intelligence, including robotics process automation, computer vision, machine learning and natural language processing
• AI-enabled chatbots
• technologies and platforms that accelerate carrier-broker information exchanges and expand distribution channels to drive business product sales. 
• end-to-end digital claim platforms and ecosystems
• digital claim payment solutions for policyholders, providers and vendors, which are seeing unprecedented uptake across all P&C lines as faster, lower-cost and contactless market demands continue to swell
• telematics programs, which are enjoying broader-based adoption in both personal and commercial lines as new and more compelling business models beyond just pricing discounts are enabling carriers to expand into new demographic segments and increase profitability by reducing customer acquisition, risk and claim costs.    

See also: 11 Insurtech Predictions for 2021

Less Favored Technologies

Insurtechs that are likely to find it more difficult to attract investment in 2021 will be those that require greater implementation effort, create more organizational disruption and carry longer payback periods. These include:

• AI voice
• augmented and virtual reality
• blockchain
• smart assistants
• wearables.

Creative Exit Strategies

Some of the more mature insurtechs may find their investors seeking exits, especially those funded by venture capital firms, which have traditionally had five- to seven-year investment horizons. We should expect to see more strategic acquisitions of these companies by insurance companies, some of which were also early investors through their corporate venture capital arms. 

Recent transactions of this nature include:

• American Family’s acquisition of Bold Penguin (which had recently itself acquired xagent and RiskGenius)
• Aon’s acquisition of small business commercial quoting platform CoverWallet
• Brown & Brown’s acquisition of CoverHound, a digital property/casualty insurance marketplace, and CyberPolicy, CoverHound’s small business subsidiary
• National General’s acquisition of Syndeste, an insurance technology company focused on the flood insurance market using comprehensive data and analytics, before being itself acquired by Allstate
• Prudential Financial acquisition of direct-to-consumer platform Assurance IQ
• and, in two “turnabout is fair play” transactions, insurtech Hippo acquired insurance carrier Spinnaker, and newly minted SPAC Porch acquired insurer Homeowners of America 

Other effective exit strategies for insurtechs will be IPOs (initial public offerings) so long as the stock market remains frothy and investors value future projections more than recent results. Beneficiaries of this channel in 2019 include Lemonade and Root. Hippo is rumored to be exploring the public market, as is Metromile, which is planning to do so through the newly popular SPAC (special purpose acquisition company) vehicle. A type of “blank check company," a SPAC is created specifically to pool funds to finance a merger or acquisition opportunity within a set timeframe. Many investors have been exhibiting extremely irrational exuberance for the SPAC phenomenon, which now includes some specializing in re/insurance and insurtech opportunities. 

See also: Has Pandemic Shifted Arc of Insurtech?

In fact, investment firm Cohen & Co. launched its first SPAC with a specific insurance, reinsurance and insurtech remit in early 2019. Its second re/insurance SPAC has entered into a planned combination with insurtech Metromile, which will effectively take that company public. As is evident, the insurtech species will continue to thrive in 2021 in spite of and because of the pandemic, just with several differences. As in nature, adaptation is essential to survival.

Australia is home to a well-developed workers’ compensation system. Each state determines the design of its scheme, with some being privately underwritten by insurers and others being state-run. Claims across territories vary by industry, injury and complexity. As such, insurers need systems that can enable quality, efficient handling of claims to facilitate the health of injured parties and can get them back to work as quickly as possible.

Approximately three years ago, QBE’s Australia Pacific division, like many other insurers, was running what we would describe as a “process-compliant business” when it came to workers’ comp claims. Leadership wanted to do more to eliminate manual processes and take advantage of claims adjusters’ expertise to get the best result for customers and their employees. They knew technology was the key.

Three Core Issues

QBE had long valued the principle of getting the right claim to the right adjuster based on areas of expertise. But to spot complexities early, claims teams engaged in what I refer to as our manual triage system. Expert adjusters did a cursory look at claims as soon as they were lodged, to identify potential risks based on very simple criteria — in particular, was the employee missing work? Simply put, we needed a better way to get claims routed and assessed from the earliest stages.

Our leadership team also wanted to figure out how to lighten adjuster caseload. As is common across the industry, adjusters may handle as many as 70 to 80 claims at a time. With this volume, it was incredibly difficult to spot the more complex or problematic claims, the ones that require the most attention. QBE was seeking a tool that could surface this information quickly and easily.

Additionally, the team was committed to identifying a better way to conduct quality reviews. Instead of manually selecting which claims to examine, which is very time-consuming, we wanted to add artificial intelligence to the mix.

AI Intrigue

As QBE prepared to set its strategic initiatives for the next few years, data analytics was prioritized. With more detailed information, adjusters and leadership could make better decisions about how to route claims, what required attention and how to ensure efficient, positive resolution.

We considered building a solution in-house but quickly realized that it would take a considerable amount of time and staff resources to construct a system that mapped to our priorities. We started engaging with many of the big data and analytics consultancies, hopeful that they would be able to help. They didn’t fit the bill, either.

See also: COVID-19’s Impact on Delivery of Care

In the summer of 2017, I ran across an article about how CLARA Analytics applied machine learning to workers’ comp claims. The approach, which leveraged artificial intelligence (AI) to identify claim issues and keep them from escalating while helping to close simple claims faster, made sense. As I examined how the models worked and how the software visualizes workload allocation, I recognized that it was the way we wanted to run our business and that CLARA had a sizeable lead over what QBE could build internally.

Clear Benefits

Once we started to get past people’s reluctance to use AI, they began to understand how an AI system could make their jobs easier -- the models not only saved countless hours of manual work but their accuracy made decision-making significantly easier.

The financial benefits associated with an adoption of such software have been significant. The initial reports estimate that product integration will easily deliver a 5:1 return on investment, and that could turn out to be conservative, given that the savings will extend across QBE’s entire workers’ comp portfolio.

QBE has been able to implement a more focused approach to quality assurance. Gone are the random selections of claims. Instead, we take the lead from this new system, which provides a much higher level of confidence that the review team is looking into the claims that need it most.

We believe that quality assurance shouldn’t be driven by art; it should be driven by analytics, which is exactly what we’ve been able to accomplish.

In addition to the new-found efficiencies and claim insights, we have enjoyed the competitive differentiation provided to our sales team. They love being able to showcase how QBE uses industry-leading technology to improve claims operations at multiple levels.

See also: An AI Road Map to the Future of Insurance

Continuing Collaboration

Our partnership has allowed us to enhance the software’s capabilities to create significant advancements for our industry. For example, several months ago, both QBE and CLARA started collecting perception data from each injured person’s claim, such as how they feel about their recovery. Today, we are able to collect and analyze that information at scale.

People have been talking about psychosocial flags for injury recovery for more than 20 years, and no one has solved the problem. But taking in extra data points and using them in a different way or thinking about a problem from another perspective has let us make better decisions about how to route claims, what required attention and how to ensure an efficient, positive resolution.

A ‘Touch and Go’ Moment for the Industry Paul Carroll, Editor-in-Chief of ITL Sean Kevelighan, CEO of the Insurance Information Institute, said there was a moment in 2020 that was “touch and go” for the industry, in the face of the pandemic. He and I were talking in advance of Thursday’s Joint Industry Forum, the III conference that is the first big event of the year and that sets an agenda for the industry (more on the forum in a bit), when he described how close the industry had come to being whacked with potentially hundreds of billions of dollars of business interruption claims. BI claims were obviously a potentially big deal, even though it was clear early on that few policies in the U.S. covered them, and I have seen that the issue faded, but I didn’t realize quite what a close call the industry had. “The industry collaborated more than I’ve ever seen us do,” Kevelighan said. “Everyone has shown that the industry can come together and lead in a very disruptive time.”... continue reading > New Agent Report January 21st | 1:00 PM CT New 2021 agent report shows why agents make mistakes Read Now SIX THINGS 20 Issues to Watch in 2021 by Kimberly George and Mark Walls Presumptions for COVID-19 show how the line between workers’ comp and group health continues to blur. Read More Crowdsourcing 6 Themes for 2021 by Matthew Grant Trust in insurance has been dealt a double blow in 2020 -- and resolving that must be a priority in 2021. Read More Despite COVID, Tech Investment Continues by Matthew Josefowicz and Harry Huberty Interest remains high in technologies like artificial intelligence and big data. Read More Did Biden Just Kill Wellness Programs? by Al Lewis Advisers need to be aware that many if not most clinical wellness programs now expose clients to employee EEOC actions. Read More What 2020 Taught Us on Selling Insurance by Tal Daskal Insurance policies that are sold online need to be packaged and priced differently than those that rely on face-to-face sales. Read More Home Insurance for Those Needing It Most by Rick Huckstep Sugar, a startup in South Africa, provides home insurance even for shacks costing a few hundred dollars, and without a street address. Read More MORE FROM ITL How AI Can Transform Insurance Correspondence Complimentary On Demand Webinar, sponsored by Messagepoint Join Kaspar Roos, CEO and founder of Aspire, and Patrick Kehoe, EVP Product Management at Messagepoint, to learn how organizations can overcome the challenge of transforming communications by combining best practices and AI-powered approaches. Watch Now January's Topic: Commercial Insurance Much of the focus on innovation has related to personal lines and that makes some sense: Policies tend to be more cookie-cutter than in commercial lines, and individuals, spoiled by online resources like Amazon, have demanded a better experience from insurers.  But don’t sleep on commercial lines. As businesses see what’s changing in personal lines, they aren’t going to be left behind. Businesses are demanding simpler interactions and more understandable policies, as well as better prices. Take Me There GET INVOLVED Write for Us Our authors are what set Insurance Thought Leadership apart. Get Started Partner with Us We’d love to talk to you about how we can improve your marketing ROI. Learn More SPREAD THE WORD Share Share Tweet SUBSCRIBE TO SIX THINGS

To assess whether digital transformation is stalled because of the pandemic, we really need to think about transformation from past investments, the current state in the context of the pandemic and the strategies planned for 2021.   

Well, 2020 was quite a year! I want to make two key points that we've learned during the pandemic. One: The insurance industry is financially strong. It is weathering the pandemic, just like we've weathered other natural and manmade disasters over the years. And we should all realize how blessed we are to work in such an amazing industry! The second: The pandemic has brought real clarity to digital engagement and digital enablement across personal and business life. It has highlighted where insurers have made great investments in the past and where our gaps are. The gaps came into sharp focus the minute we went into lockdown and everyone started to work virtually. We saw all the paper: the paper checks, the correspondence and the forms still coming into the organization – along with a lot of paper and paper checks going out of the organization. We also saw a lot of manual workflows, mainframes requiring people in the data centers and our lack of providing digital experiences for our policyholders, agents, brokers, claimants and employees.  

And so, as we look forward into 2021 and consider the statement “digital transformation has stalled due to the pandemic,” we can see that it is a myth. The reality is that almost all insurers believe that digital transformation is essential. It is critical to all business strategies and plans. And this belief has only been reinforced by the pandemic. In fact, our experience in 2020 has actually accelerated plans and strategies for digital transformation. The difference is that the strategies and plans are being reshaped and reprioritized as a result of the revealed gaps. Most insurers now have a new list of projects: digital payments, improved self-service capabilities and updating the overall portals for starters. If anything, the list of projects has increased. Another thing that affects our digital strategies is the new clarity around operational efficiency and the customer experience. And so, as we look into 2021, digital transformation strategies are really going to be more about growth in operational excellence, optimizing operations and improving the customer experience, and less about innovation and transformation. So, it hasn’t stalled. We are going full steam ahead into 2021.  

See also: The Rules of Digital Transformation

Call to Action: 

The call to action for digital transformation is to ensure that your digital strategies are reshaped in response to your gaps and needs, and that they are all-encompassing in terms of optimizing operations and customer experience. Digital transformation needs to be part of your overall business strategy and should be integrated with culture change, customer experience and operational excellence. And priorities should be set using multi-pronged approaches, with both outside-in and inside-out perspectives. 

For more information, watch our 30-minute on-demand webinar, Myth or Reality: Strategies for Insurers in 2021.