Innovations will not be discovered, developed and scaled by groups of like-minded people of similar background. Solutions will demand diversity and inclusion leapfrogs. Leaders will have to take a fresh look at how they:

1. Define what diversity means for their organization, redesigning processes and metrics to manage progress,
2. Act and engage personally to create a more inclusive culture, with clear incentives to motivate change, and
3. See and leverage the linkages between a diverse and inclusive culture and innovation.

Too many conversations about innovation prioritize technology as the major driver. Technology is one element of the complex innovation execution puzzle. Technology is abundant. Diversity (of thought and perspective, not simply gender and racial representation) and inclusion )the culture and environment where all members feel respected, valued and heard) are core to building and sustaining an effective innovation pipeline. Diversity and inclusion must be created and nurtured organically.

Diversity Must Be Broadly Defined, Sought and Measured

Reality is that while increasing gender and racial representation are essential, these are insufficient drivers of diversity. A gender and racially diverse organization will not be assured of innovation success. Also required in the composite profile: diverse life experiences and education backgrounds, and people who bring different perspectives and knowledge to problem-solving. An organization embracing this definition is set up to make brisk headway on innovation priorities.

Executives Must Personally Engage

Korn Ferry has identified five qualities of the inclusive leader. They:

  1.  Are open and aware, and able to adapt their behaviors to the needs of others
  2.  Advocate for diversity
  3.  Create a psychologically safe environment
  4.  Leverage differences, seeing difference as a source of greater insight
  5.  Drive results by fostering a diverse and inclusive environment

What else is required to build an inclusive culture? Especially for cultures in transition, being inclusive means rooting out and showing zero tolerance for exclusionary behaviors and rewarding inclusive behaviors that support the target culture. It means, for many organizations, innovating how diversity and inclusion efforts are designed and led.

See also: The New Shape of Innovation

Recognize the Linkages Between Diversity and Inclusion, and Innovation

It is unlikely any of us can name a CEO who will say he or she is not customer-centric. But many organizations fall short. Why? Only organizations that are diverse and inclusive can maximize their abilities to:

• Understand customers as human beings
• Develop empathy to build enduring and mutually valuable relationships
•  Anticipate customer needs with speed and depth of insight
• Address diversity risks, e.g., the loss of mid-career women with children or aging parents, emerging as a consequence of the pandemic.

We all see the severity of the challenges arising this year, many of them with long-tail effects. As leaders, innovators and change makers, it is up to all of us to advance diversity and inclusion in whatever organizations we lead or influence. It's the morally right thing to do, and it's the only commercially smart answer.

There is a great deal of activity afoot in the P&C distribution space. New models are being explored. Old models are being upgraded for the digital era. In a recent SMA research report, I identified eight different models or options for insurers to consider. However, even though I positioned this as a revolution and an explosion of new activity, it is fair to ask if these distribution models are really new. About 3,000 years ago, it was probably King Solomon of Israel who said, “There is nothing new under the sun.” But the thought still holds true: The ideas remain the same; they just get reinvented and modernized.

This is very much the case in insurance distribution. Let me explain.

The new models to consider include: establishing digital brands, new affinity relationships, bundling insurance with the underlying product, digital marketplaces, worksite marketing for P&C, selling through new ecosystem partners and insurtech distributors. Although these certainly provide some interesting and important options for insurers seeking to expand distribution, it is not wholly accurate to say that they are new. In fact, (and now I’m dating myself) I distinctly remember being part of an industry research study in 1995 identifying scenarios for the future of insurance where we discussed options like bundling, affinity, worksite and selling through non-traditional partners in other industries. So, the logical question becomes – what’s different? Why are these types of options becoming popular and part of the strategy picture for many insurers?

There are some fundamental reasons why this whole range of channel options are important now.

• The digital connected world: The world is undergoing a rapid digital transformation, which drives customers’ expectations. Every other industry is reaching customers via digital and mobile channels and technology have advanced to the point where it is relatively easy to do so.  
• The API revolution: Connecting with new partners is significantly easier than in the past due to APIs being built into virtually every software solution. The ability to “plug and play” to connect to new partners for information exchange and transactions enables more dynamic partnering.
• New competitive pressures: Insurers are seeking new ways to reach specific customer segments. As more insurers expand their channel options, they exert pressure on those that stick purely to traditional channels.

Thus far in the blog, I have not said the words agent or broker. But it would be a grave error to think that all the new channels will dominate and leave human intermediaries with a dwindling market share. In fact, agents, brokers, MGAs and other traditional distribution partners are leveraging advanced technologies. Insurers are providing many digital options for intermediaries to conduct business with them. And tech companies are providing innovative solutions for the agent/broker market. In addition, these traditional distribution players are also leveraging some of the other channel options to create hybrid models. Some are creating their own digital brands. Others are expanding their distribution through new affinity relationships, partnering with or acquiring insurtechs or connecting to customers through non-traditional partners.

See also: P&C Distribution: Blending Models

All the participants in the insurance distribution area enjoy many options. Thus, it comes down to selecting the channel mix that best aligns to business strategies and customer segments. The most important consideration is finding the right blend of the old and new. And it is evident that labeling some of the channels as old is a misnomer, given the innovation that is occurring across all the channel options.

In addition to the new SMA Research report, you can find more insights on P&C distribution in our Digital Distribution Virtual Experience on Dec. 16. This event is part of our Insights to Solutions Series.

The insurance industry has long been suspended in a paradoxical state whereby state-of-the-art risk assessment actuarial models are used to project future losses, while being supported by notoriously lagging infrastructure and shared services. The need to leverage the ever-improving efficiencies offered by new technologies has become increasingly urgent, as have the variety and efficacy of those new technologies. Nevertheless, rapid innovation has been hard to achieve in the industry, and, while digital transformation has been happening in certain areas, the pace has historically been slow and reactive.

The 2020 COVID pandemic has served as a watershed moment for the industry. Prior to the COVID era, many carriers focused their digital transformation efforts on back-office areas:

• Automating processing and servicing activities; including document ingestion, intrafirm data flows, insured notice generation and mailing, etc.
• Modernizing the tech stack to facilitate internal operations; building workflows to connect distribution teams to underwriters, underwriters to support teams and so on. Additionally, underwriting platforms have been fit into multiple carriers’ process flows to get underwriters more existing risk details from brokers up-front, and the corresponding model inputs from actuarial teams, to improve risk assessment
• Reducing middle- and back-office headcount, targeted at improving the expense ratio, a byproduct of the aforementioned focus areas

Now, as the world looks toward a post-COVID world, that focus has quickly shifted from back-office efficiency to front-office, customer-facing interaction. Seeing the shift that other areas, for example clothing retailers and retail banking, have seen toward always available, short interactions for customers to engage with services and acquire products, insurance carriers are moving their resources and strategic future planning toward areas where insurtech offerings can meet this new demand. 

Digital transformations that would historically take three to five years are now happening in under six months, spurred by software-as-a-service availability, ever-increasing service offerings for insurers and acquisitions. Customers simply do not want to interact with insurers the way that they have historically, and this is serving as the driving force for this digital transformation acceleration. Carriers that do not follow suit will quickly fall behind in this new digital reality.

See also: Re-engineering Claims Payments

Many high-impact insurtech capabilities are seeing massive growth in carrier interest and activity to address these new customer needs:

• Virtual agents have gained popularity as a way to serve customers with specific needs who want to quickly complete their transactions. IPSoft and RozieAI both have virtual agent technologies that serve as omnichannel communication mediums between customers and carriers; no longer relying on preconfigured call routing or static online forms, these “humanized” virtual agents are able to parse and understand natural language, both text and voice, and either address customer wants completely virtually or route to a human agent quickly. This technology has driven increased volumes as well as higher customer experience reviews, both big wins in a highly competitive market.
• Gig economy coverage is quickly becoming a necessary offering across major carriers to serve customer needs that have been growing rapidly both pre- and post-onset of the COVID pandemic, including food delivery, ride shares, home shares, etc. The digital nature of gig services requires a digital solution for the insurance covering them, and customers who seek coverage in the gig economy will always demand a more innovative model than the traditional insured-broker-carrier interaction paradigm.
• Claims are being fully automated, both in adjustments and processing, in a customer-focused way that promotes speed and accessibility while still working to mitigate losses. Insurtechs such as OCTO Telematics and HOVER offer services that collect and process enough data to no longer require on-site adjusters for many auto or home incidents. With pre-installed data collection devices in commercial and personal vehicles, data about a car’s performance in an accident can be gathered at the primary source, rather than during an adjuster visit. Similarly, roof damage can now be adequately assessed via a series of customer-captured smartphone photos that are submitted to adjusters virtually, aided by technology that helps the adjuster properly assess the incident.

Industry disruptors serve as proof of the efficacy of focusing on these areas. Lemonade’s revolutionary customer experience has led to triple-digit year-over-year growth in gross written premiums, and it’s not difficult to see the popularity of its value proposition. A fully virtual chatbot, given a human name and face, quickly guides a potential insured through qualification questions for renter’s or home insurance (with more coverages promised in the future). Claims are often settled within minutes or seconds using propriety technology to assess customer reports. Lemonade has made it so easy to purchase insurance and file claims on a beautifully designed mobile user experience (UX), that customers are happy to never have human interaction.

In the post-COVID future, a differentiated, digital-driven customer experience and enhanced product offerings will determine who wins and who loses.  

Even with this new focus on front office engagement, there are still hundreds of insurtechs offering back-office solutions to further enhance risk analysis and processing, and the accelerating capabilities of these new services can have material effects on carrier performance. Data services increasingly rely on the Internet of Things (IoT) to collect data at the source and provide both risk-specific histories as well as aggregated datasets for new markets. Home monitoring systems and pre-installed vehicle sensors continuously collect massive amounts of data every day, and carriers must be ready to ingest and leverage it in their pricing and actuarial models, as well as use it to drive more robust loss prevention strategies.

To leverage these new technologies, carriers will need to become more comfortable using services operated on the cloud versus the traditional on-premises model. Of course, the sensitivity of customer data transmitted to an external service is of primary concern, and insurtechs are offering top-of-market security to address carrier requirements. The future of big data ingestion and efficient processing will require cloud solutions, and carriers who seize these new partnership opportunities will set themselves up for a better outlook in performance.

See also: 6 Megatrends Shaping Life Insurance

As carriers consider the new reality of customer-facing demands, as well as the new possibilities of internal process efficiency, potential partnerships have become more attractive, and even necessary, for success. As a result, clear opportunities for acquisition in these areas will likely emerge in the near future.

The U.S. has grown to become the second-largest Spanish-speaking country in the world, only behind Mexico. The impact the Hispanic population has had — and will continue to have — on this country is quite vast, especially with purchasing power nearing $2 trillion. This serves as an extraordinary opportunity across a variety of markets, insurance being one of them.  

While this demographic shift has created a once-in-a-generation opportunity to serve a historically underserved market, many in the Hispanic community continue to struggle when it comes to getting insurance, which goes for both personal and commercial insurance. Not only is it challenging for this customer to find and evaluate options in Spanish, but the customer is also often forced to brick-and-mortar brokerages, two inconveniences that could easily be solved. 

Conning Research predicts that there will be more 30 million new Hispanic drivers searching for insurance throughout the next 30 years. Why not meet the need?

To do so, it’s important to understand the distinctions in purchasing behavior and preference when comparing the Hispanic market with the broader insurance market. These differences are critical in effectively servicing this market. 

Younger Customer = Opportunity for Longer-Term Value

Because the Latino consumer is younger than the general population, with a median age of 28, this younger customer base translates into a longer average lifetime as they enter their prime earning years. The trend in increasing purchasing power also reflects the increasing needs for personal insurance, from car insurance today to homeowner’s insurance in the future. 

This is also an opportunity to build a customer base that over-indexes on brand loyalty, as more than 50% of Latinos are “likely to find a good source and stick with it,” compared with just over a third of the broader market. A relationship can unlock long-term value and pay dividends over time.

Being Available in Spanish Is Non-Negotiable

Most of the Latino market prefers to speak Spanish, so, if you’re interacting with prospective Latino customers, you should consider providing Spanish language materials or support. You can hire employees who speak Spanish or contractors who can translate your marketing materials. This will open up access to a market that cannot be uniformly served in English. 

Understand What’s Needed and Prioritize Relationship-Building

Most U.S. Hispanic consumers today primarily purchase auto and health insurance. Given the socioeconomic and cultural characteristics of our community, many Latinos focus exclusively on buying the insurance they need.

While many insurance companies want to serve the Latino market, they often ignore the fact that customers are primarily purchasing basic auto insurance and basic health insurance. While maybe not the ideal purchase for insurers right off the bat, these products can serve as an entryway to serving the future insurance needs of the customer, or even providing other valuable and complex products. In many working-class neighborhoods, for example, auto insurance is purchased at the same place where you do your taxes or get loans, so by building a relationship with the Latino consumer you will have the opportunity to earn more of their business in the future. 

See also: 3 Tips for Increasing Customer Engagement

Use the Right Channels

Building a relationship with your Latino customer first requires meeting them where they are. Latinos are extremely tech-savvy and spend more time on their mobile phones than any other demographic. Latinos do research, watch television and purchase all over their phone. Using mobile channels, like social media and text messaging, to reach and service our community will help lower your costs and increase chances of success. 

Putting the proper measures in place to find and attract Latino customers is a no-brainer. It’s not only the right thing to do to provide this underserved demographic with easy-to-access and fair-priced insurance, but it also means increased customer acquisition and revenue numbers for you. To move beyond intention and into implementation, work with your Latino employees to better understand the community, hire employees who know the market and explore partnering with other trusted service providers in the community. 

By taking advantage of this opportunity, insurers will reap the rewards throughout the next decade. And if you don’t meet the market need, someone else certainly will.

Many agents see technology as a threat. Several years ago, when hundreds of millions of dollars began to flow into insurtech companies, the promise these startups made was that they would disrupt the insurance industry. The rise of online insurance distribution firms, with steadily increasing capabilities, has added to the anxiety of insurance agents. 

But as the years go by, what we’ve seen is technology that, while it may be disruptive, holds the promise of reducing the drudgery of agents’ lives. It can do this by eliminating the need for manual data gathering, creation of applications, coverage analysis, policy marketing and proposal preparation. The technology promises to free agents to spend more time with clients and prospects, allowing them to broaden and deepen their relationships, which is the most important and highest-value activity of the professional agent of the future. 

The AI Promise

If one steps back from all of the tasks performed by agents today, data gathering, manipulation and presentation take up a large percentage of the time. All of these tasks can and will be performed more efficiently by artificial intelligence (AI). 

Peter Diamandis, the author of “Abundance: The Future Is Better Than You Think,” says that not only will everything will be knowable in the very near future, but artificial intelligence will be able to retrieve it and organize it for us instantaneously. While this seems fantastic to some, it's already taking place. Many insurance companies, for example, are already purchasing third party data for all or most of the underwriting information they need to make coverage and pricing decisions and then using this data to make those decisions in real time. 

One of the largest commercial carriers has been demonstrating the capabilities of AI to eliminate agent’s work by quoting business owner policies (BOPs) with nothing more than an address. While this capability is nascent, it will be expanding dramatically in the next few years. In personal lines, Plymouth Rock Insurance has demonstrated its ability to underwrite, price, sell and deliver homeowners insurance with a lower-than-average loss ratio with nothing more than an address. These kinds of capabilities are being developed now and will rapidly reduce the time agents must spend on these and similar activities in the near future. And they won’t be limited to simple accounts; they’ll also extend to the most complex middle market and large accounts, as well. 

See also: The Future of Blockchain Series

AI for agents will be able to collaborate with these smart underwriting systems and do much of the now laborious analysis required on differing policy options. When clients need service, or claims assistance, agency automated technology will handle the details. While some capabilities in these areas are already available. we will look back in the coming decade and think today’s technology is like the Model T when compared with the Dreamliner in speed and ease of use. 

With these capabilities coming soon, what will the role of the agent of the future be? I believe it will be to develop real relationships with clients that go beyond the superficial to a true understanding of the needs, wants, aspirations and fears that an individual organization or person experiences. With that knowledge, agents will be able to tailor coverage solutions in a way that is much more intimate than is possible today. 

No More Free Pass

Until now, clients have largely given insurance agencies and agents a pass on the customer experience they are now demanding from other businesses. This isn't going to continue. The average person's routine experience offers customized recommendations based on detailed knowledge and an understanding of their other interests. While this has been fairly simple in the beginning, like suggesting additional products based on purchase history, it is evolving rapidly. 

What people experience in other areas of their lives necessarily informs their expectation in others. For example, Amazon and other online merchants are now able to automatically deliver things as mundane as toilet paper to a consumer before he or she knows she needs it. Soon enough, that toilet paper will not only be delivered before it's needed, but changes in brand, quality, quantity and other factors will be done automatically on behalf of the consumer because the vendor’s AI will know before the customer does what they really want or need. 

When agents marry this type of technology to the unique human communication that will remain necessary for complex purchases like risk transfer, the future will be much different. 

Some are concerned that technology will enable businesses and consumers to bypass agents and make insurance purchase and placement decisions on the basis of their artificial intelligence alone. I don't think this is likely. It's true that properly programmed algorithms can sort and analyze data far faster than any human. But it is only the human who can look into the eyes of another human being, judge the voice tonality, body language and dozens of other nonfactual and nonverbal cues that create and power true communication. When the agent is freed from the drudgery of data analysis and manipulation, she can focus increasingly on the human aspect of serving clients. And she will be able to do so faster, better and more deeply. 

This marrying of technology and human capability will serve to increase opportunity at the same time that it lowers costs. While this future isn't here yet, it is close, so agents need to begin to prepare now to remain competitive in the future. The first step is to maximize their existing data gathering and analysis capabilities and leverage existing technologies to the greatest extent possible. The beginning point for that is the commonplace agency management system. Automating every agency process possible with current technology will prepare the forward-thinking agent well for what is coming soon.

Beyond the Transaction

The other focus for agents is behavioral. Even in middle market and larger accounts, selling insurance has become largely transactional, particularly in new business situations. Agents all too often allow themselves to be placed in the trap of providing apples-to-apples replacement comparisons. These behaviors serve neither the agent nor the client well. One has only to look at the real, genuine confusion on the part of the business community regarding business interruption policies that did not provide coverage for coronavirus-related losses to demonstrate the result of quoting a standardized set of coverages, instead of focusing on communication about coverage needs and solutions. The agent who ends the process of allowing herself to be treated as a commodity is the agent who has begun to prepare for an effective and prosperous future. 

See also: The Future of Underwriting

As agents are freed up by technology, they will have the time required to delve deeply into their client’s greatest concerns. They will have virtually limitless ways to provide coverage powered by artificial intelligence. And they will have the well-earned trust of their clients because of the deepened relationships that time and technology have empowered.

The insurance industry excels at tactics. If one is an underwriter, a claims person or contact center manager, and a problem is detected, it’s all hands on deck to solve that problem. What tactics could wrestle that problem to the ground? That’s generally the direction the industry is most comfortable with because we are a pragmatic group by nature. IoT can easily fall into that scenario: if a commercial building is tall, let’s get a drone out there to inspect the roof. If a homeowner has a water damage claim, a water sensor is going to prevent a recurrence.

To be clear, the tactical use of technology is essential. If technology doesn’t solve a problem, then it’s just a shiny object, and no insurer has time for that – or the money to dedicate to it. However, particularly in terms of IoT, some may believe that it is a one-sided coin: a tactical tool to solve a specific problem. But that view short-changes the true value of IoT. It really is a two-sided coin.

The two sides of the coin emerge when IoT devices and sensors are connected with other initiatives. SMA finds four specific initiatives that change the business outcomes and value of IoT adoption:

• Data Initiatives. Sensors and connected devices generate unfathomable amounts of data. And almost all insurers are seeking new data sources to improve decision making, processes and risk management. It is critical that insurers include IoT data sources when initiating and advancing data-related projects. Ingesting and operationalizing IoT data is easier when these sources are planned for at the outset.
• AI Initiatives. In terms of IoT, AI represents a “chicken or egg” scenario. Is the tactical value of IoT the most important thing? Or is AI necessary to bring out the value? The tactical value of IoT is good. But using machine learning (ML), computer vision and natural language processing (NLP), to mention but a few of the AI family, generates new insights from the data and takes things to a whole new level. In fact, without AI, IoT is just a tactical tool. When assessing an incumbent or insurtech IoT provider, one of the important things to ask is whether they have data skills and AI embedded in the technology. Time to business value is critical.
• Customer Experience Initiatives. There are a number of things to consider when undertaking a customer experience initiative. IoT should be one of those things. For example, Siri, Alexa and Google Voice are present in many homes. With development and planning, these devices can be a service point to make policyholder experiences easier. Leading fleet telematics technologies provide fleet owners and managers with information to assist with driver development, making it easier to conduct business. There are numerous other IoT uses related to customer experience, and taking an outside-in view can reveal many opportunities.
• Parametric Product Development. In a quest to reduce claims expenses and facilitate the coverage for perils such as drought and pandemic, once difficult or impossible to insure, insurers are turning to parametric insurance. While not a primary line of coverage, parametric insurance can provide a source of indemnity to quickly assist a policyholder with immediate expenses. Sensors are frequently key in executing a parametric product because they define the attachment point for the coverage. Insurers can expand product offerings in new competitive ways by considering how sensors can define the occurrence.  

See also: Crucial Technologies for P&C During COVID

So IoT is a two-sided coin – tactical and strategic. Both sides need to be understood and developed. Personal lines insurers are further down the road in terms of adopting IoT, but in 2021 commercial lines insurers are adopting and spending.

A recent SMA report, IoT: Connecting P&C Insurers to New Business Opportunities, provides personal and commercial survey data around what insurers are doing, furnishes examples and includes an in-depth view of business value.

While I usually don't believe in either Christmas songs or lists of key New Year's trends until after Thanksgiving, Gartner recently produced an early list of technology trends for 2021 that provides some pre-turkey food for thought.

The most intriguing trend is what Gartner calls the Internet of Behaviors. The name itself reeks of consultant-speak for me, but the trend is profound. It combines the ever-growing reach of the Internet of Things with a surge in ability to understand customers, based on the burgeoning array of digital interactions with them.

Lots of commentators have talked about how the pandemic has accelerated the world's move toward digital. That's true and important, but this trend explains what comes next. Once interactions become digital, they can be easily captured and analyzed in ways that in-person interactions cannot. Digital interactions can also be easily tweaked, through what Silicon Valley calls A-B testing, and continually improved in ways that make customers happier while boosting revenue for insurers.

Basically, the Internet of Behaviors -- or whatever better name emerges -- is a road map of the sort that Amazon and other tech-based giants have been following for decades. Insurers can't follow their exact road map: Regulators wouldn't come close to allowing the tinkering with prices and product features that happens with Big Tech. But insurers can still massage all the newly accessible data and develop a deep understanding of their customers and prospects, even while using digital interactions to cut costs and speed processes.

What Gartner's list calls Anywhere Operations should also be a big one in 2021, I believe. While many businesses found it surprisingly easy to switch from in-person work to Zoom meetings and other forms of digital interactions, a second wave of digital innovation should be coming soon.

Former colleagues of mine at some of the big consulting firms say that travel won't rebound to anything like prior levels -- the in-person interactions were largely designed to show a commitment to client service that would justify those hefty fees, but nobody liked it, and it is turning out not to be necessary. So, the firms are all working on tools that will go beyond today's Zoom meetings, to make remote work as effective as possible. The firms are developing digital white boards that everyone can write on at the same time, ways for people to disengage briefly from a call to have a sidebar discussion, etc.

While the consulting firms are likely to be pioneers in Anywhere Operations, the capabilities should start rolling out to the rest of the business world some time in 2021.

Cybersecurity Mesh should also become important. As a colleague of mine puts it, the firewall approach to cyber is history. It's no longer realistic to think you can build such a secure wall that you can keep bad guys out. There are just too many entry points -- as Target learned the hard way in 2013, when hackers got into its central computer system through its HVAC operation. And, if you rely on a firewall, then there aren't enough safeguards to stop the bad guys once they've breached the perimeter and are roaming around inside. The Cybersecurity Mesh approach focuses on identity. I need to continually prove my identity to the system, and then am allowed to do whatever my status says I'm entitled to do. Under this approach, the equivalent of security guards will continually interrogate actors inside a computer system and kick out those who don't belong there.

There are certainly drawbacks to this approach. The continual authentication of identity could slow processes, and hackers will still find ways to impersonate people with significant privileges in the system. But, conceptually, the Cybersecurity Mesh idea could move us beyond firewalls.

There will be many more lists soon enough on what to expect in 2021. Tis the season. But I hope this discussion serves as a useful appetizer.

Stay safe.

Paul

P.S. Here are the six articles I'd like to highlight from the past week:

9 Months On: COVID and Workers’ Comp

Does COVID open the door for future infectious disease coverage under workers’ comp? Likely, yes.

6 Megatrends Shaping Life Insurance

The life insurance and retirement market is set for profound change in the next decade.

New Paradigm for Reinsurance

Can the global reinsurance market morph into a new paradigm, allowing a more responsible and sustainable market to emerge?

How AI Can Tackle Claims Staffing Gap

A job description with “acquire AI superpowers” might appeal to millennials more than “study policy footnotes and calculate claim reserves.”

NPS Scores Provide 3 Keys to Growth

Automation, analytics and the right ecosystem of partners can drive up customer satisfaction and let carriers grow in these chaotic times.

How to Boost Chance of Being Acquired

The founder of Limelight Health offers three key lessons on how to increase your company’s chances of being acquired.

Senior executives in few, if any, industries think in longer or broader time horizons than those in life insurance. But, thanks to persistent low interest rates, shifting demographics, technology-driven disruption and regulatory shifts and the current global pandemic, life insurance leaders have adopted a more urgent and near-term perspective. While insurers face considerable risk if they fail to take bold enough action or delay necessary investments, there is also tremendous upside potential for firms that move quickly and creatively. 

As highlighted by the most recent installment of our NextWave Insurance series, the following megatrends are reshaping the life insurance and retirement market now and setting the stage for more profound change in the next decade: 

1. Financial health and wellness: Financial well-being — or having the ability to control day-to-day finances, the capacity to absorb a financial shock and the confidence to meet financial goals — has become increasingly important to more consumers around the world. With state pension and retirement plans looking less viable, such security will be harder to achieve. 

For insurers, value propositions will highlight how they can help people live the lives they want. Offerings will be more flexible, forward-looking and “goals-based,” with an emphasis on preparation rather than downside protection. The value propositions will also reflect that more people work for themselves or participate in the gig economy. 

However, insurers will be more transparent about prompting necessary consumer behaviors to achieve goals, rather than guaranteeing outcomes, as in the past. Retirement savings products will be more holistic and offer more options as consumers’ needs change. That’s how they’ll enable individuals to follow nonlinear career paths and take nontraditional retirements, based on alternating phases of asset accumulation and decumulation. 

2. Long-term value: Investors and analysts will expand their valuation approaches to include more holistic, long-term metrics, rather than only short-term financial measures. Intangible assets, such as intellectual property; talent; brand reputation; innovation; and environmental, social and governance impacts now carry greater weight. The shift toward inclusive, or stakeholder, capitalism will help build trust with younger generations and spark broader public-private collaboration to address societal issues, including the cost of future environmental damage or social injustice. 

3. Collaboration with governments and regulators: Difficult macroeconomic conditions, underfunded government retirement programs and intense regulatory scrutiny (especially around consumers’ best interests and data privacy) will force insurers to collaborate with public authorities on multiple fronts. Other priorities: increasing financial education, facilitating product innovation, influencing public policies, including tax incentives and issuing long-term bonds. More robust consumer protections and data privacy standards, as well as financial reporting frameworks, will be designed to promote financial stability. 

See also: Speeding Innovation in Life Insurance

4. Ecosystems and omnichannel engagement: Ecosystems will continue to grow and mature, becoming a primary method that companies use to engage consumers across channels. Technology advancements – particularly in the realm of application programming interfaces, microservices and data fabrics – hold the key by enabling rapid integration and smooth data sharing. 

Insurers will create their own networks of partners to offer complementary services. They will also engage in those orchestrated by others. Ecosystems will allow insurers to focus on their specific strengths (e.g., offering particular services to niche segments) or innovate more broadly (e.g., with subscription models). Ecosystems also suit insurers looking to modernize their distribution and shift to hybrid advisory models that balance robo-advice with human interaction. Partnerships being formed today will set the stage for future ecosystem success.  

5. Capital optimization and convergence: Beyond the near-existential threat of low interest rates, macroeconomic and competitive factors are driving the quest for higher levels of capital efficiency. Mergers and acquisitions and reinsurance are key variables in the equation. 

With more capital available from a wider range of sources and increasing clarity about the need for well-being, sector convergence will accelerate among life and health insurance, retirement planning and wealth and asset management. Capital efficiency will be a key design principle for future business models, largely because it will be necessary for survival. 

6. Commoditization and customization: The long-term trend in customer preference toward greater simplicity, transparency and comparability has helped commoditize life insurance and retirement products. Increasingly, consumers perceive value through user experiences, ancillary services and trust-based relationships. That’s why flexibility and customization are imperative. Delivering the right balance of simplicity and personalization requires stronger digital and analytics capabilities.

In light of these megatrends, we see a greater appetite for operational, organizational and technology transformation than ever before. The rapid shift to remote working and all-digital customer touch points revealed how quickly companies could adapt. That ability to change quickly and nimbly will serve life insurers well in what promises to be a dynamic decade.

The global reinsurance industry has been battered by several years of underperformance. It has been hit by natural catastrophe losses, both modeled and unmodeled, social inflation, declining investment returns and diminished reserve releases and is now facing an unprecedented globally systemic loss in COVID-19. Have we now reached the point where the global reinsurance market can morph into a new paradigm, allowing a more responsible and sustainable market to emerge? Or are we seeing a reworking of old approaches that have failed to deliver the sustainable, efficient solutions that primary insurers, policyholders and increasingly society seek?

Moments like this do not come often. Arguably, the last opportunity for a reset was 20 years ago in the aftermath of the 9/11 tragedy. So, what has gone wrong, and how can we build back better?

The harsh fact is that, with a consistent weighted cost of capital in the 7% to 8% range, the global reinsurance industry has not covered its cost of capital for the last six years. A prolonged soft market has led to under-reserving on many long-tail lines, a problem that is being exacerbated by social inflationary pressures. Overreliance on pricing models that have proved unreliable has led to unsustainably low pricing, which eventually requires disruptive correction.

Despite the unsatisfactory performance, capital has continued to flow into the global reinsurance market, most notably in the very significant expansion in insurance-linked securities (ILS) over the last 10 years but also through retained earnings on existing reinsurers, which have been bolstered by investment returns. Without the constraints of capital limitation to control excessive competition, the inevitable result has been underperformance as reinsurers chased top-line growth at the expense of profit.

Fortunately, the reinsurance industry remains well-capitalized, with capital levels above the end of 2018 and only slightly reduced on the capital levels at the end of 2019. Because capital constraint is clearly not going to limit pricing competition, we must look elsewhere for drivers that will help to put discipline and structure around achieving sustainable, adequate returns.

Investment income offers a potential solution. Unlike previous hard markets, when investment rates were much higher, current investment rates remain pitifully low, and are likely to remain so for years because nearly all governments are pursuing fiscal expansion as a result of COVID-19. Most reinsurers' investment holding periods are four to six years, and they have to face the reality that low investment returns will continue.

Faced with the loss of the investment crutch, reinsurers have no option but to concentrate on improving underwriting results to generate enough margin to reward their capital. With a 7% to 8% cost of capital and return-on-equity (ROE) targets of 9% to 10%, reinsurers now need to run combined ratios in the low 90s, something the industry has not achieved for many years. This requires a back-to-basics underwriting approach to ensure that each unit of risk accepted is appropriately priced within a reinsurer’s overall portfolio. This approach inevitably means rate increases, along with changes to terms and conditions, neither of which will be easy to achieve in a global environment where many policyholders are under significant financial stress.

Reinsurers have a delicate path to navigate, but the strong capital position should let the industry ensure that risk is appropriately differentiated, and that pricing corrections are applied on a case-by-case basis in a sustainable fashion that clients can manage.

See also: 4 Post-COVID-19 Trends for Insurers

More important than addressing the short-term issues is to avoid the mistakes of the past and build a better future. Reinsurers must enhance their value to society and build long-term demand. Here, the COVID-19 situation helps, as it has moved the discussions about uncorrelated tail risk from theory to practice, and with it the demand for reinsurance. At the same time, the increased reliance on underwriting profitability is emphasizing volatility management, where again reinsurance plays a major role. Risks such as cyber and climate change also fall into the uncorrelated tail risk category, and again reinsurers have a pivotal role to play. Finally, there is the enormous opportunity represented by the uninsured economic gap. Finding innovative solutions to help society narrow the gap will lead to a complete reframing of the reinsurance market.

Achieving this will require dedication, long-term vision and the ability to build partnerships with organizations that the reinsurance market has never interacted with before, many in innovative public-private partnerships.

The opportunity to build back a better reinsurance market is clearly before us. The test will be whether reinsurers can develop transparent solutions that bridge the gap between capital that requires reasonable sustainable returns and new risks that threaten society. If the reinsurance industry fails to grasp this opportunity, it will be doomed to suffer the fate of so many, with the current generation repeating the mistakes of predecessors.

You can find this article originally published here.