Long before the COVID-19 pandemic, insurers were investing in digital transformation, spurred by the rise of startups. Those investments took on new urgency as the pandemic forced businesses across industries to move to digital operations to stay afloat. 

Over the long term, no technology will prove as vital to insurers’ agility and success as artificial intelligence, whose far-reaching impact will define the next wave of insurtech innovation.

Legacy players and nascent startups alike will leverage AI and machine learning to enhance customer service, speed claims processing and improve the accuracy of underwriting – enabling insurers to match customers to the right products, operate with greater efficiency and achieve better results.

Though insurance is often cast as slow to embrace technology and innovation, in a certain respect AI is very much within the industry’s wheelhouse. Since the first actuaries began their work in the 17^th century, insurance has relied heavily on data – and as AI empowers insurers to do even more with vast swaths of data, the benefits will redound to providers and policyholders alike.

Bringing Customer Service to the Next Level

In today’s digital economy, personalization is all the rage. Customers crave tailored, relevant experiences, offers and promotions that reflect their unique backgrounds, needs and interests – and they increasingly expect businesses to deliver these experiences as a basic standard of service.

While personalization is often discussed in the context of sectors like e-commerce, the insurance industry is no exception to this trend. According to an Accenture survey, 80% of customers expect their insurance providers to customize offers, pricing and recommendations. 

Of course, delivering bespoke experiences requires an abundance of customer data – and customers are more than willing to provide it in exchange for personalized service; 77% told Accenture that they’d share their data to receive lower premiums, quicker claims settlement or better coverage recommendations. 

Because personalization can only deliver on its promise if it’s holistic and omnichannel, the most successful insurers will be those that don’t view personalized engagements as one-offs – a tailored email here, a promotion there – but that consistently provide personalization at every stage of the customer journey. 

What will that look like in practice? AI chatbots will become a lot more “chat” and a lot less “bot,” not only providing 24/7 customer service but also using cutting-edge methods like natural language processing (NLP) to better understand what customers actually need and to conduct more natural, intuitive conversations. Underwriting will become much more precise as machines crunch massive sets of data – reams of usage and behavioral data generated by customers and their IoT devices, as well as relevant geographic, historic and other information – to create customized policies that reflect a policyholder’s true level of risk. 

See also: Insurtechs’ Role in Transformation

From Cumbersome to Swift

Harnessing the power of AI, insurers can also streamline claims processing as part of a comprehensive digital strategy. Forward-thinking providers will increasingly integrate automated customer service apps into their offerings. These apps will handle most policyholder interactions through voice and text, directly following self-learning scripts that will be designed to interface with the claims, fraud, medical service and policy systems. 

As a McKinsey analysis noted, with automated claims processing, the turnaround time for settlement and claims resolution will start to be measured in minutes rather than days or weeks. Meanwhile, human claims management associates will be free to shift their focus to more complicated claims, where their insights, experience and expertise are truly needed. 

These transformative applications of AI will unlock revenue opportunities, improve risk management and help insurers deliver a new level of personalized customer service. But if AI will act as the great enabler, what will enable AI itself?

The answer lies in a robust digital core, which is vital to facilitating efficient business processes, maintaining resilience in an unpredictable world and supporting the rollout of new products and business offerings. Whether insurers manage to achieve that kind of digital agility will determine their ability to survive and thrive in a landscape that’s shifting faster than ever.

The Next Revolution in Transportation Paul Carroll, Editor-in-Chief of ITL While we wait for the autonomous vehicle revolution to kick in, we can’t take our eye off a development that is already disrupting the car market and will ripple through numerous insurance lines. I refer to electric vehicles (EVs), which currently only account for about 2% of car sales in the U.S. but which will see sales increase rapidly — a trend highlighted by General Motors’ announcement last week that it aims to sell only electric cars and trucks by 2035. Market forecasts currently call for more than 11% of new cars to be electric in the U.S. by 2035, an enormous increase that would produce major changes in auto service and repair, in the wiring of homes and potentially in a host of other areas. And the transition to EVs could well be faster and broader, based on announcements such as GM’s... continue reading > SIX THINGS Insurtech 2021: Reset vs. Resume by Stephen Applebaum 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. Read More How CFOs Can Enable Innovation by Amy Radin Businesses need innovation now more than ever, and CFOs can energize their organizations by taking action in three areas. Read More Chatbot, Your Time Is Now! by Ross Campbell Newly enfranchised consumers want to stay empowered, and chatbots have been around for a while, so could this be their moment? Read More How AI Can Transform Insurance Correspondence sponsored by Messagepoint If you think insurers have issues with their mishmash of legacy technology platforms, take a look at the rat’s nest of letters, emails and other documents that languish in an array of systems and formats.  Learn how organizations can overcome the challenge of transforming communications by combining AI-powered approaches and best practices. Watch Now Personalized Policies, Offered via Telematics by Matthew Zollner Increasingly, insurers can understand how and when people drive, as well as how vehicles interact with the road and their drivers. Read More Insurance-as-a-Service 2021 by Alan Demers The future of insurance as-a-service, especially for claims, requires an action-based model that leverages on-demand support. Read More 6 Burning Questions on Field Reorganization by Troy Korsgaden and David Ascher Timid steps are giving way to massive reorganizations and wholesale redesigns of compensation programs. Read More MORE FROM ITL February's Topic: Blockchain While the pandemic has greatly accelerated the digitization of the insurance industry — turning years into months — it has also shown us how very far we still have to go. As a rule of thumb, I’ve heard consultants say that 50% of the operating costs need to be driven out of the industry in the next five years. Blockchain has held out this promise for some time now. It’s lost a bit of its shine because it’s been identified as a hot technology of the year for so many years in a row. But it may be coming into its own, with some uses starting to move into production. Take Me There The Insurer’s Customer Acquisition Playbook Sponsored by Data Axle The question for insurers is how they want to address a growing desire by small businesses to purchase online. Read More 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

In 2021, the increasing effects of climate change and the response from U.S. insurance regulators will create both challenges and opportunities for insurers.

U.S. insurance regulators will increase scrutiny of insurers' disclosures regarding efforts to manage potential climate change risks. Such risks range from unprecedented losses from climate-related natural disasters to concerns about hits to insurers' investments in certain asset classes (such as fossil fuels as the shift to alternate energy sources proceeds in coming years).

In 2021, U.S. insurance regulators will continue undertaking various actions designed to encourage insurers' climate change risk management.
At the same time, U.S. regulators will likely increase their demands on insurers to accommodate the needs of insureds who are already being hurt by climate change. For example, the California Insurance Department's mandatory one-year moratorium on insurers not renewing or canceling residential property insurance policies for policyholders living near a declared wildfire disaster may serve as a model for other U.S. insurance regulators seeking to retain the availability of insurance coverages for policyholders hit by climate change effects -- coverages that might not otherwise be commercially sensible for insurers.

U.S. regulators will also increasingly facilitate the development of innovative products to mitigate the risk of climate change for prospective insureds. For example, some regulators may follow an approach similar to that of the New York Department of Financial Services. It recently entered into a memorandum of understanding with the New York State Energy Research and Development Authority whereby the two agencies will cooperate to spur the development of new insurance and financial products "with the potential to de-risk and accelerate the development and deployment of key low-carbon technologies."

See also: Time to Move Climate Risk Center-Stage

Whatever the future holds in terms of climate change impacts, we are confident that U.S. states will look to retain insurance coverage options for their insureds and try to attract and nurture the growth of new insurance products that could help address the impact of climate change in their jurisdictions.

Achieving innovation in an industry that is heavily regulated can be challenging. First of all, regulation by definition imposes restrictions on what is allowed — for good reason, in many cases. Additionally, there are direct costs associated with regulation, and spending more on achieving compliance may mean fewer resources are available to invest in innovation. Regulation may also foster a way of thinking and culture that are counterproductive to truly revolutionary innovation.

The Impetus for Change

The COVID-19 pandemic has accelerated the digitization agenda for insurance companies. There are real challenges with applying traditional means for executing a sale, performing initial underwriting or assessing a claim in an era of social distancing. As individuals and companies have done their best to adhere to necessary precautions, the need for insurers to accelerate their digitization journey has emerged.

The long-term impacts of the COVID-19 pandemic on customer expectations are still unknown, but an important trend to date is an uptick in e-commerce. This trend is unlikely to dissipate — at least in the short term — so insurers need to find ways to respond to changing customer behaviors and expectations. This is a good time for insurers to take a step back and think about how best to set themselves up to achieve their innovation goals.

Insurance regulation is broad. For example, it mandates that insurers are appropriately set up and licensed, that the products sold are appropriate and that insurers maintain an appropriate level of financial health.

Regulation builds public confidence, which is critical for an industry that essentially sells a promise to fulfill a future obligation. Without public confidence, we simply don’t have an industry.

Some argue that insurers have fallen behind most other industries when it comes to achieving digital transformation. Even compared with other financial services that have accelerated their digitization transformation — such as banking, personal savings and investments — the insurance industry has lagged. The banking and investment sectors have sought to rethink how they do business and how they engage with their customers, and they have implemented end-to-end integrated solutions that ensure a seamless customer experience.

For the most part, insurance companies have focused on moving what they currently do to a digital platform, as opposed to rethinking what they currently do and how they do it. (There are, of course, challenges given the personal and emotional nature of buying insurance, particularly life insurance.

Types of Innovation

Broadly speaking, innovation can be divided into two categories:

• Incremental. As the name suggests, incremental innovation is a gradual build-up of little improvements that result in better, faster and cheaper performance.
• Breakthrough. This category is revolutionary and often disrupts the industry. Breakthrough innovation involves a complete reimagining of what is possible.

Insurers should consider taking different approaches to achieve their objectives for incremental innovation and breakthrough innovation, but, for both, it’s important to create an innovation strategy that is aligned to the broader company strategy and risk appetite. As an example, to the extent that an insurer’s competitive advantage is its underwriting capabilities, then perhaps that should be the focus for its innovation strategy. The company might double down on the future of underwriting — generating a move from initial underwriting to continuous underwriting, fluid-free underwriting and so on.

See also: COVID-19 Highlights Gaps, Opportunities

Incremental innovation is best achieved through internal efforts because making gradual improvements to existing practices often requires a deep understanding and appreciation of existing practice — what we do, how we do it and why we do it the way we do. Effective collaboration among internal research and development (R&D) teams and the business can generate appropriate returns on incremental innovation.

An internally led effort does not mean the absence of external resources, however. To the contrary, external resources can complement internally led efforts and may provide much-needed subject-matter expertise or offer skills or experience that may not be available internally. External resources also can be used to provide necessary bandwidth that may not exist on the internal team.

Incremental innovation often is done within the constraints of existing regulation. Gains from this form of innovation are generally moderate at best, but the burden of regulation doesn’t tend to overly inhibit progress.

Breakthrough innovation, on the other hand, is best achieved through externally led efforts. This is particularly true for industries that are heavily regulated, given that the culture can counterproductive for revolutionary innovation.

The emergence of insurtech firms, which are often led by individuals from other industries, provides a breath of fresh air. These companies and individuals can help traditional insurance carriers reimagine what is possible, because they are not inhibited by years of insurance industry knowledge and experience of how things have always been done. They are free to think of an ideal future state and use that as a starting point for a new solution.

One of the challenges of breakthrough innovation is that regulations often must be changed. That means demonstrating a benefit to policyholders, improving the stability of an insurance company or providing a benefit to the industry as a whole. And that takes time. Companies committing to breakthrough innovation may be committing to a notable investment that requires partnering with insurtech firms or leveraging innovations from other industries.

The first wave of insurtech firms was a source of dread for incumbent insurers. However, what could be termed “Insurtech 2.0” today is largely the exploration of partnerships between insurtech firms and incumbents.

Another example of breakthrough innovation being achieved through externally led efforts is in the form of industry groups or collaborations. A good example is the Blockchain Insurance Industry Initiative (B3i) consortium that is owned by a group of more than 40 (re)insurers. This consortium tries to help deliver better solutions for consumers through faster access to insurance with less administrative cost.

Opportunities exist to explore breakthrough innovation for the insurance industry as a whole through further collaboration. Innovations developed through industry groups may be more effective at getting regulatory buy-in, especially where tweaks to existing regulation are needed.

Expanding the Role of the Actuary

Keeping the consumer in mind should be at the heart of any breakthrough innovation strategy. Technological advances and new sources of data make new customer engagement models possible. Actuaries working in traditional roles at insurers often have been far removed from the end consumer and mostly focused on back- or middle-office activities. However, technological advances can blur the lines between front- and middle-office activities. For example, moving from initial underwriting models that most insurers use today to a continuous underwriting model will blur these lines. There are opportunities for actuaries at insurance companies to get closer to the end consumer and expand their role.

Tesla’s approach to innovation includes having engineers front and center in the design process. Its engineers work closely with the design team to develop an appropriate product for the consumer, instead of the traditional approach of using an iterative process where the designers create something only to later test it with the engineers for feasibility. Tesla found its approach, often referred to as “design thinking,” to be a more effective process.

One can think of actuaries as the engineers of an insurance company, and we can be more involved in the design process when the end consumer is being considered. This expands the role of the actuary to front-office activities, which in turn can increase the speed of innovation in the industry.

See also: How to Outperform on Innovation

Conclusion

The challenges to achieving innovation in a heavily regulated industry like insurance can be overcome by identifying the different types of innovation and establishing the appropriate strategy for each. Incremental innovation is best achieved through internally led efforts, while breakthrough innovation is best achieved through externally led efforts. Externally led efforts for insurers may occur through partnerships with insurtech firms and industrywide collaborations. But remember, any innovation strategy must be aligned with a company’s overall strategy and risk appetite.

This is an exciting era for insurance, and actuaries have an opportunity to expand and redefine their roles at an insurer in these changing times.

This article first appeared in The Actuary magazine online, January 2021

While we wait for the autonomous vehicle revolution to kick in, we can't take our eye off a development that is already disrupting the car market and will ripple through numerous insurance lines. I refer to electric vehicles (EVs), which currently only account for about 2% of car sales in the U.S. but which will see sales increase rapidly -- a trend highlighted by General Motors' announcement last week that it aims to sell only electric cars and trucks by 2035.

Market forecasts currently call for more than 11% of new cars to be electric in the U.S. by 2035, an enormous increase that would produce major changes in auto service and repair, in the wiring of homes and potentially in a host of other areas.

And the transition to EVs could well be faster and broader, based on announcements such as GM's and such as the executive order signed by the governor of California in September, requiring that all new passenger vehicles sold in the state be zero-emission by 2035. GM accounts for 17% of vehicle sales in the U.S., and California has 12% of the population, so their announcements alone, if they stand, would mean that EVs would surge from a 2% share today to more than 27% in less than 15 years.

The shift may happen even faster in other countries. Many, including the U.K., France and Sweden, have announced plans to ban the sale of new fossil fuel vehicles by 2040, at the latest. In China, the world's biggest market for EVs, sales of EVs, plug-in hybrids and hydrogen-powered vehicles are expected to soar from today's 5% share to 20% by just four years from now -- and that's actually below the government goal of 25% share.

While the high sales price for EVs has held back adoption to this point, unless governments have offered significant subsidies, we're nearing a tipping point. Some calculations suggest that EVs are now less expensive than ICEs over the lifetime of a car, without subsidies, because electricity costs some 60% less to power a car than gasoline does and because EVs require much less maintenance.

The ripple effects begin there, with maintenance, because EVs are far simpler than their ICE (internal combustion engine) counterparts. EVs don't have sparkplugs and don't need oil, for instance, so you never need to replace sparkplugs and change the oil. EVs don't require all that machinery to transfer power from the engine -- an electric motor can be placed right next to a wheel -- so there are fewer parts to break down. All that means less work for the Midases of the world.

Many repairs following collisions may, however, continue to become more expensive, because cars will continue to add sophisticated electronics (made possible by all that new battery power). The switch from ICEs to EVs could also create dislocation as tools, parts and parts suppliers change -- Tesla has certainly had some issues that have delayed repairs and made the whole process more expensive.

In other words, the new world of car service and repairs will take a while to sort out -- with plenty of implications for insurers.

The change will extend into homes, where many owners of EVs will install high-voltage systems to charge their cars faster than is possible using normal power outlets. Doing so could facilitate increased use of solar power and a general decline in reliance on the electric grid. The theory is that a car battery, along with similar sorts of batteries that Tesla has begun selling for installation on walls, would absorb enough solar power during daylight hours to power a household all day long, with little or no need to tap into the grid.

Doing away with ICEs will cut back on pollution in cities, improving health. (The full benefit won't happen until utilities cut back on or even stop burning coal and gas to generate the electricity for EVs, but the switch to solar, wind and other nonpolluting sources is well underway.)

Moving to EVs in volume will also pave the way for the even more radical move to autonomous vehicles, all of which will be EVs because of the electricity needed to power all the sensors and computers.

The switch could also create opportunities for new sorts of businesses, along the lines of the convenience stores that are part of almost every gas station these days. While charging times continue to shrink for EVs, "filling" a battery takes considerably longer than filling a tank. Drivers will do something with that extra time. Perhaps that just means more attention to Twitter and TikTok, but entrepreneurs may find something more tempting for people who are just standing around.

Because electric motors are so simple, they could even open up new, inexpensive forms of transportation, once the infrastructure for charging gets built out. In many retirement communities, residents already go to the store or visit neighbors in their electric golf carts (whose speed is limited only by a governor, to keep people from bombing around on the golf course, not by any intrinsic limitation to the motor). Why not have one- or two-person vehicles that are fully enclosed, to protect against weather, and that would be able to keep up with other sorts of cars on everything short of freeways?

Such a car, made by Wuling, costs just $4,300 and is the biggest-selling EV in China. And Nidec, a Japanese maker of electric motors, predicts that such a car will soon be available for less than $3,000.

Imagine how different the world will look, including for insurers, if we have a few million of these little cars bombing around on the roads in the next decade.

Stay safe.

Paul

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

Insurtech 2021: Reset vs. Resume

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.

How CFOs Can Enable Innovation

Businesses need innovation now more than ever, and CFOs can energize their organizations by taking action in three areas.

Chatbot, Your Time Is Now!

Newly enfranchised consumers want to stay empowered, and chatbots have been around for a while, so could this be their moment?

Personalized Policies, Offered via Telematics

Increasingly, insurers can understand how and when people drive, as well as how vehicles interact with the road and their drivers.

Insurance-as-a-Service 2021

The future of insurance as-a-service, especially for claims, requires an action-based model that leverages on-demand support.

6 Burning Questions on Field Reorganization

Timid steps are giving way to massive reorganizations and wholesale redesigns of compensation programs.

The lasting impact of COVID‑19 on commerce and trading is an issue for the future. While old routines may quickly resume as restrictions lift, there may be lasting changes to the ways we get things done.

The pandemic showed the importance of remote access to get information and to conduct transactions differently. Customers became self-servers using automated solutions that replicated or replaced some face-to-face interactions.

It’s hard to imagine a lockdown without online and do-it-yourself services enabled by technology solutions. The experience we’ve had as an industry has helped businesses understand what tech solutions work well or less well. Meanwhile, one outcome is that newly enfranchised consumers may prefer to remain empowered. Chatbots have been around for a while, so could this be their moment? And if so, what does this technology offer and can more insurers benefit?

Spixii is a technology company providing this type of customer-facing, automated-insurance solution to life/health and P&C insurance companies. To find out more, I spoke with Spixii founder and CEO Renaud Million.

RC: How does a chatbot operate?

RM: A chatbot is essentially a software program with a conversational interface that is usable by either a voice or by typing using a keyboard. A chatbot works best when it has a defined goal and can guide a user toward reaching this target.

RC: What makes a chatbot “intelligent”?

RM: With a chatbot, and systems with AI solutions more generally, intelligence refers to the ability to achieve these goals. The goals are defined by the chatbot owner, and the machine’s ability to achieve them is based on anything from a simple set of rules to highly complex algorithms.

RC: What type of advanced analytics and conversation insights make a successful chatbot?

RM: Chatbots generate a lot of data, much more than traditional digital tools -- such as web forms, which rarely capture the user interaction between screens separated by the “next” and “submit” buttons. The data generated by chatbots are related to the execution of the underlying process and how likely it is going to reach the defined goal. More granular data is generated for the conversation itself, such as where people are stuck, at what point they drop the conversation, on which questions people edit their answers, where more information might be needed and where questions are not clear.

RC: What are the prerequisites of an enterprise-ready chatbot?

RM: An organization just embarking on digital transformation starts with the desire to improve a single process, or even to create one from scratch. Once settled on a process, the chatbot needs to be integrated into middle- and back-office systems. This is a prerequisite for an enterprise-ready chatbot to deliver value. Capturing, validating and transmitting the data in a secure way to core insurance systems will deliver savings and efficiencies at enterprise level.

RC: Where in their processes can life and health insurers deploy chatbot technology effectively, and what is the business case for doing so?

RM: A chatbot can assist with many processes; for example, quote and buy, policy administration, submitting a claim or asking for a pre-authorization in a health product. The process of buying is complex and, as a result, often carried out over the phone. While these analogue conversations are great, they’re just not scalable. Online digital web forms are too rigid and lack the conversational aspect. Additionally, despite existing tools becoming less effective and the ever-increasing costs of expanding call-center capacity, the focus is always on the top line. This may explain why some insurers struggle with digital transformation by not prioritizing it in the short term. Chatbots are helping solve this conundrum from both a technical and regulatory perspective because they can be deployed rapidly and audited.

See also: Integrating Chatbots, Policy-Handling Apps

RC: Do you think people’s response of embracing remoteness during the pandemic furthers the argument for using chatbots?

RM: People were already accustomed to doing things by self-serving online. Pandemic restrictions simply accelerated this -- across all industries. Remote working also forced more people to go online for their insurance needs. As more people travel less, the need to physically meet with an agent is disappearing. Consumers are trying first to see if they can do what they need online and then call an agent. On the other hand, while insurers want to do more and be more efficient, remote working doesn’t automatically equate with service resilience if a surge in demand occurs. Offering digital-first communication tools -- such as a chatbot -- can bring both efficiency and resiliency.

RC: What is the next technical development for your chatbot technology?

RM: We have already helped several companies integrate chatbot technologies to their quote and buy, policy administration and claims submission processes. We are now refining these for specific lines of business to help them to grow their portfolios. We also realize that business reporting is critically needed for various departments -- ranging from IT, marketing and distribution to operations and claims -- but the precise data needs vary for each one. So we built an automated reporting function to bring the relevant data to the correct operational area at the right time. We believe this helps individual units make better-informed decisions for the whole business. From a tech perspective, we aim to extend the front-end integration of our chatbot, including more channels and platforms, making the configuration of the chatbot even more accessible and friendly. Also, Spixii has achieved accredited ISO 27001 certification for information security, and our work has been recognized by analysts from Gartner, Forrester and Business Insider.

RC: Will you share some working examples?

RM: We have worked with Zurich Insurance group in the U.K. since 2018, and, together, we automated the first notice of loss for home and motor insurance, helping them to win the British Claims Awards in 2018 for best use of technology. We also worked on the quote and buy processes with both the U.K. Post Office on travel insurance and Bupa’s private medical insurance. To be honest, it is an honor to work on processes that bring a better customer experience and generate a positive impact on operations.

RC: Finally, what is the next step for chatbot technology in your opinion?

RM: Although adoption started some years back, many implementations are yet to come. A lot of companies recognized the operational limitations of call centers, but only a few companies recognized the limitation of web forms. The ones that did recognize these two points also understood that these two channels should be supported by a third one that keeps the conversational aspect and yet manages to codify it in a digital way. We see a strong appetite for serving the customer better with the digital experience they expect. Digital functions are gaining more authority within insurance companies.

Both forces should lead to more and more successful use cases for chatbots to support the digital transformation of insurance companies. From the technological perspective, chatbots are needed for growing more sophisticated in the analysis of data collected -- with a particular focus on psychometric and customer behavior analysis -- but also they need to build a stronger understanding of obligations and duties to keep data protected and anonymized, which is an intriguing challenge for this new wave of data collection.

You can find this article originally published on Genre.com.

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.