Designing a New Employee Experience Paul Carroll, Editor-in-Chief of ITL As the pandemic has accelerated the digitization of interactions with customers, the insurance industry has begun to rethink the customer experience. But companies now need to start to redesign another experience, too: the employee’s. We know that two highly effective vaccines should be available in quantity in April or so, which means that they could become a reliable line of defense against COVID by next winter or perhaps even next fall. That gives us roughly a year to design and implement a new work environment, a new experience for employees that incorporates the best of the old, in-person model and the best of the new, digital/Zoom experience. What should that new environment look like?  continue reading > SIX THINGS How to Outperform on Innovation by Amy Radin It is up to all of us leaders to advance diversity and inclusion. It's the morally right thing to do, and it's the only commercially smart answer. Read More Technology and the Agent of the Future by Tony Caldwell Technology promises to free agents to spend more time with clients and prospects, broadening and deepening relationships. Read More 4 Initiatives That Unlock IoT’s Value by Karen Pauli IoT has largely been used in tactical ways to solve specific problems, but there is great strategic value if it is tied to certain types of initiatives. Read More How COVID Alters Consumer Demands by Kim Muhota and John Rodgers Digital transformations that would have taken three to five years are now happening in under six months. Read More Opportunity Among Latinos in U.S. by Nestor Solari It’s crucial to understand the distinctions in purchasing behavior when comparing the Hispanic market with the broader insurance market. Read More P&C Distribution: What’s Old Is New by Mark Breading There are eight different models or options for insurers to consider -- but it's fair to ask if these distribution models are really new. 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 a year marred by crisis and uncertainty, the mature property and casualty (P&C) insurance industry has seen its workload increase in both volume and complexity. According to the Insurance Information Institute, insured losses from natural catastrophes in 2019 totaled $71 billion. That number is only expected to rise in 2020 with the onslaught of hurricanes and wildfires hammering the U.S.

Insurers must contend with a rapidly changing risk landscape. Falling interest rates, climate change, man-made risks and civil unrest are causing unprecedented destruction and business interruption. This is exacerbated by the COVID-19 pandemic, cyber security threats and global terrorism, causing the number of claims to skyrocket.

Traditional methods of risk analysis are slow and expensive. Risk engineers spend considerable time performing repetitive assessment and administrative tasks that do not add value to clients.

One saving grace is the global movement toward digital transformation and automation, including the adoption of artificial intelligence (AI). Changing client expectations have propelled organizations to rethink age-old processes. 

An artificial intelligence study by PwC said, “AI could contribute to the global economy by 2030, more than the current output of China and India combined.” The same report estimated $6.6 trillion would likely come from increased productivity alone.

See also: Stop Being Scared of Artificial Intelligence

How do you know if you’re ready to embrace AI, and what are some of the areas it could improve within risk engineering? Below are three points to consider:

The easiest way to get started, is to contemplate your market in five years’ time and consider what capabilities you will need to compete – McKinsey

1) Align Business and AI Goals.

A certain appetite and readiness for change is required on the part of the C-suite and by the risk engineers within your workforce. A real pain point must be met, and the implementation of AI must align with the overarching business goals of your organization. For risk engineering, the time is ripe for AI disruption. According to McKinsey, “Efficiency improvement is an imperative. The industry’s current trajectory is inefficient and unsustainable, creating the conditions for disruption. This would involve digital technologies, automation and data and analytics to not only reduce error-prone manual processes but also enable an agile way of working.” 

If account engineers and risk engineering consultants spent more of their time on risk verification and selection rather than aggregation and analysis, this would help underwriters speed up the time to assess and quote on a new bid and ultimately increase the chances of winning business. The first response to a submission wins over 50% of the time. 

Still, the question remains, whether your organization wants to be an early adopter, fast follower or follower. Will the AI solution you create in-house or via a third-party vendor disrupt the sector and provide you with a competitive edge?

2) Examine Internal Talent. Find Your AI Champions.

Another critical factor is talent. Are there champions within your company willing to take on the added time it requires to inform the user journey and customizations, perhaps even label the initial data and ultimately execute on the AI opportunity at hand? It is vital that there is a top-down and, equally, a bottom-up culture of adoption for AI implementation to succeed.

A global digital practice survey revealed that insurance companies are attracting less digital talent than other financial services companies such as fintech and asset management. In a recent survey, 80% of millennials said they have limited knowledge of the insurance industry, and 44% said careers in insurance sound “boring.” Orbiseed's recent interview with a veteran risk engineer also revealed that the majority of senior risk engineers are close to retirement and may resist employing new technologies. “Indeed, perception can shape reality, and the current reality is that the insurance industry isn’t viewed as relevant or exciting to up-and-coming digitally savvy workers,” the report concluded. 

3) Partner With AI Vendors You Trust to Scale Quickly.

An AI firm should know your industry inside and out, have secure networks to help protect your data and enable you to scale your AI program fast. You will also need to consider whether to select AI integrations over ground-up builds. An integration will vastly reduce the time it takes to produce a working model for your business. A good software integration will also layer into the existing system you have rather than force your employees to learn an entirely new system.

See also: 3 Tips for Increasing Customer Engagement

Next Steps Toward AI Transformation in Your Organization

AI is fundamentally changing the way business is done in 2020. For mature industries that still rely on manual, labor-intensive processes, adopting new technology can make a measurable difference in efficiency and deliver significant competitive advantages.

Risk engineering seeks to manage risk: Adopting AI practices early will ensure that your organization hedges against the risk of falling behind the competition. Firms that effectively adopt AI early report significant performance gains compared with competitors, including higher revenues and reduced expenses.

As many of you know, my primary professional interest and focus has long been on the impact of information technology on insurance ecosystem transformation. But today I’m addressing a very different subject. 

While the pandemic has had a number of enormous consequences, many of them horrendous, I would argue that it has also enabled several much more positive, longer-term changes in societal values and perspectives as we, the survivors, re-evaluate our higher-level purpose, priorities and concerns for our fellow man and our home, planet Earth. The insurance industry is at the forefront of this movement, which one day may well be thought of as the beginning of the Second Age of Enlightenment.

One manifestation of this shift is the emergence of ESG. Some of you may not recognize this acronym, but you soon will. 

About ESG (and D&I and more)

The term ESG (environmental, social and governance) was coined in 2005 in a landmark study titled “Who Cares Wins,” published during a conference of the same name held in Zurich. It was the first such initiative to bring together institutional investors, asset managers, buy-side and sell-side research analysts, global consultants, government bodies and regulators to examine the role of ESG value drivers in asset management and financial research. There was an immediate and remarkable degree of agreement among participants that ESG factors play an important role in the context of longer-term investment.

ESG originally referred just to the integration of environmental, social and governance factors into the investment selection process, but ESG has since expanded into corporate strategic philosophy and decision-making and has also been extended into other socially conscious and ethical considerations to embrace renewable energy, green initiatives, D&I (diversity and inclusion, which encompasses LGBTQ+, gender and racial equality and diversity and the Me Too and Black Lives Matter movements). That’s a lot of new thinking in a relatively short time.

Redefining the corporate mission

Even before 2020 began – a year that has permanently altered societal perspectives, values and beliefs – meaningful debate had begun about the mission of corporations and their obligations to society beyond simply maximizing shareholder value.

The 2019 Business Roundtable, which represents the chief executives of 192 large corporations, issued a joint statement that was signed by 181 of its members concerning the purpose of the corporation, essentially declaring that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities. 

2020 saw the strongest level ever of corporate commitment to sustainability – up 19% from 2019, according to S&P Global Market Intelligence. This accelerated participation comes at a time when investor interest in ESG funds continues to increase. According to S&P, many large investment funds with ESG criteria have outperformed the broader market during the pandemic.

And according to McKinsey in a recent article on the case for stakeholder capitalism, “The business ecosystem is evolving; those who resist will find themselves not only on the wrong side of history but also at a competitive disadvantage.”

This enlightened thinking is very closely aligned with and derivative of the principles of ESG and diversity and inclusion. Over the past 15 years, corporate focus on ESG has evolved to encompass a lot more than just investment criteria. In fact, ESG has become a proxy for how entire markets and societies are maturing and is becoming more of a benchmark for how the financial community, shareholders, stakeholders, observers and the general public perceive and value a company.

See also: ESG Means ‘Extremely Strong Gains’

The D&I dividend

Diverse viewpoints and backgrounds make for a more vibrant and innovative team. “Companies in the top quartile for ethnic diversity are 33% more likely to have industry-leading profitability.” This statistic is part of the catalyst behind “Launch With GS,” Goldman Sachs’ $500 million investment strategy grounded in diversity. Diverse teams drive strong returns and increase access to capital and facilitate connections for women, Black, Latinx and other diverse entrepreneurs and investors.

The insurance industry is embracing ESG and D&I as aggressively as any industry.   

Insurance Industry Initiatives in ESG and D&I

• The Dow Jones Sustainability Index (DJSI), lists the top-performing companies in each of the 61 industries represented in the index. Zurich Insurance Group earned the honor in the insurance segment this week relative by outperforming in principles for sustainable insurance, financial inclusion and risk and crisis management. 
• In a July 2020 Milliman report titled “ESG considerations in the insurance industry,” Milliman reported that some insurers are setting standards for their investment managers with respect to how they take ESG factors into account, including Standard Life and AXA.   
• Commenting during the 2019 Business Roundtable, Tricia Griffith, CEO of Progressive, stated, “CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value.” Michael Tipscord, CEO of State Farm, added that the company agreed with the Roundtable joint statement even though it did not sign the statement because they do not have shareholders (though some would argue that policyholders of such a large mutual company are the same as shareholders). 
• To help create a strong and inclusive workplace culture, Sun Life is launching a peer learning program designed to guide the insurer’s employees toward diversity. Sun Life has also invested in Hive Learning’s Inclusion Works – an interactive digital inclusion program. The program embeds tiny, but powerful, acts of inclusion into daily behaviors and routines. The program was piloted over the past 18 months, with 1,500 employees in North America and Asia participating. 94% felt confident demonstrating inclusive behaviors at work.
• Northwestern Mutual, through its foundation, in partnership with its diversity and inclusion team, announced a 2020 commitment of $1.6 million to All-In Milwaukee to fund its new Talent of the Future program for area high school students over the next four years. This effort is emblematic of the company's focus on advancing change in Milwaukee and continued commitment to diversity and inclusion.

Insurance Industry Impact

These fundamental changes in corporate values and actions will have real impact on all industries, notably insurance, in many ways. Insurance companies invest enormous amounts of capital and have real influence on the policies and behavior of the recipient companies. Insurance companies provide a very large percentage of all consumers with protection products and services and are highly responsive to the changing values of these customers, many of whom embrace some or all elements of ESG and D&I.  Environmental threats, specifically climate change, hurt insurance companies, as vividly demonstrated by the catastrophic human, economic and property loss costs of this year's record-setting wildfires and record-setting hurricane damage. 

And “green” ESG initiatives will ultimately have tremendous impact on the very fundamentals of designing, underwriting and managing the risks of auto and property insurance.

Climate change, carbon limits and the Paris agreement 

To meet the terms of the Paris Agreement on climate change, which aims to limit global warming to 1.5 degrees Celsius above pre-industrial norms by 2050, developed economies need to phase out most thermal coal by 2030, with a global phaseout by 2040. Some of the world’s largest insurers and pension plans are warning companies they invest in not to finance, insure, build, develop or plan new thermal coal plants, or face sanctions, including possible divestment. The Net-Zero Asset Owner Alliance, whose members include German insurer Allianz and manage a combined $5 trillion in assets, is making the call after a recent commitment to set tougher carbon limits on their portfolios.

Such a change could help drive more examples like the fascinating, recently announced joint venture between Volkswagen and Greece, in which Astypalea will host a grand mobility system experiment. Astypalea, a small island in the southern Aegean Sea, covers just 39 square miles, has a permanent population of approximately 1,300 and is visited by some 72,000 tourists annually. 

Currently, energy demand is almost entirely met by fossil fuel sources. The island aspires to become a pioneer for sustainable tourism over the coming years and is therefore backing sustainable mobility. The transport system on the island will switch to all electric vehicles and renewable power generation. New mobility services such as vehicle-sharing or ridesharing will help reduce and optimize traffic. Energy will be primarily generated from local power sources such as solar and wind. The project initially will run for six years. The goal is to have Astypalea become a model island for climate-neutral mobility.

At the center of the project is an entirely new, cutting-edge transport system with digital mobility services, including an all-electric year-round ridesharing service designed to take the currently very limited local bus service to a new level. Part of the traditional vehicle rental business will be transformed into a vehicle-sharing service offering e-scooters from the Volkswagen Group’s SEAT brand and e-bikes in addition to electric cars. This alone will help to significantly reduce the vehicle fleet on the island. In total, some 1,000 electric vehicles will replace about 1,500 vehicles with combustion engines. Volkswagen has just started to roll out its electric models to the market, with the introduction of several new models planned over the next few years. Commercial vehicles from local businesses as well as utility vehicles on the island – such as police vehicles, emergency services transport and public sector fleets – will also be electrified. Volkswagen will install its Elli chargers across the island to ensure a comprehensive charging infrastructure offering about 230 private and several public charging points.

Volkswagen CEO Dr. Herbert Diess stated, “E-mobility and connected mobility services will significantly improve the quality of life, while contributing to a carbon-neutral future.”

Diversity and women in insurance

The Women in Insurance Initiative (WII) is a consortium of organizations throughout the insurance industry dedicated to taking substantive and measurable action by recruiting, mentoring, and sponsoring women to drive equality in career advancement and leadership throughout the insurance industry. The mission of the WII is to increase diversity and inclusion by developing insurance as an opportunity-rich industry for women.

Between June and September 2019, the Women in Insurance Initiative surveyed a diverse group of companies in the insurance industry to investigate how salaries and roles relate to gender. The survey represents more than 30,000 insurance professionals and found that women in insurance are:

• Underrepresented among executives; only 29% of senior leaders are women.
• Increasingly in the minority at higher salary levels - $100,000 to  $119,999 is the salary range where men begin to outnumber women.
• Highly loyal to their companies; 62% of those who stay 20 years or longer at a company are women.

Insurance companies are also lagging in efforts to promote gender diversity; 

• 78% of insurance companies lack internal targets for gender diversity
• 61% of insurance companies with internal targets don’t publish their progress.

The results are clear: Women are working longer at the same company than men. That loyalty, though, is not aligned with promotions and increases in pay. Women tend to occupy the lower corporate levels and progress to the first managerial level, but fewer climb the ladder to the next level. 

See also: Property Claims: It’s Time for Innovation

Racial diversity

Just this week, S&P Global Market Intelligence launched a series on diversity in the U.S. insurance industry with an article titled, “Black representation in insurance grows slowly as industry seeks to diversify.” The article is loaded with interesting facts and figures and definitely worth your reading. What struck me, however, beyond the simple fact that this highly regarded global market intelligence and research firm was writing this series, was its clear-eyed introductions to the topic: “With growing calls for diversity and a dearth of new talent, the U.S. insurance industry has made some progress in adding more people of color to its ranks over the last decade.”

Here are few highlights from the piece to pique your interest:

• insurance regulators have also taken up the cause. After George Floyd’s death while in police custody earlier this year brought racism into the national spotlight, the National Association of Insurance Commissioners launched a Special Committee on Race and Insurance to examine levels of diversity in the industry.
• systemic racism became part of the conversation for corporate America. Some insurance industry leaders say that improving racial diversity on their executive teams and boards will lead to better diversity throughout the organization.
• the insurance industry is outpacing the country in general at bringing in minorities as employees. The nonwhite insurance workforce was 21% in 2019, up from 15% in 2010. The Black/African American insurance workforce was 12% in 2019, up from 9% in 2010.   

At a recent APCIA conference about corporate responsibility, Jack Salzwedel, the outgoing CEO of American Family Insurance Group, said: "If this is going to be a movement as opposed to a moment, then these tactics, these ideas around talent and markets, have to fit into your business strategy." 

I believe that, although it took a pandemic to give ESG serious momentum, this long overdue re-evaluation of our industry and values is the most important, exciting and promising development of my career. Let’s welcome and actively support this second Age of Enlightenment.

As the pandemic has accelerated the digitization of interactions with customers, the insurance industry has begun to rethink the customer experience. But companies now need to start to redesign another experience, too: the employee's.

We know that two highly effective vaccines should be available in quantity in April or so, which means that they could become a reliable line of defense against COVID by next winter or perhaps even next fall. That gives us roughly a year to design and implement a new work environment, a new experience for employees that incorporates the best of the old, in-person model and the best of the new, digital/Zoom experience.

What should that new environment look like?

A smart recent piece in Strategy & Business provides a systematic way to start adapting now to the new world of work, by taking the same sort of approach to the employee experience that companies routinely take to understand the customer journey. The piece promises that companies have a "once-in-a-generation opportunity to increase engagement and productivity."

For me, the smartest suggestion in the piece is a variant of the test-and-learn approach that many companies have begun to implement in their formal innovation programs:

"Many companies conduct annual employee engagement or satisfaction surveys. Our advice: Throw them out, at least for now. What you need now is a steady series of short pulse surveys and conversations that ask employees to name their three biggest time wasters or other headaches. Focus on tools ('Do you have what you need?'), authority ('Are you empowered to make decisions?' or 'Is it easy to get approvals?'), and distractions ('What pulls you away from the task at hand?'). Turn those answers into a Pareto chart, start working the list, and come back the following month to get new insights."

The authors note that, while we focus on the change in our customers' behavior and demands, we should also realize that internal customers have changed, too, because of work-from-home and increased digitization. So, we should use process maps and customer journey tools to understand the flow of work and make sure we're serving internal customers as effectively and efficiently as possible.

The piece argues for starting now (if we haven't already) to rethink the mix of talent we'll need and suggests a key adjustment in management. Because the timing of work has to be less predictable, as people juggle kids at home, management needs to be more flexible. The focus needs to be on objectives, not schedule, the authors argue.

The authors say staff development poses a particular problem. So much depends on mentorship, which is far harder in a world of remote work; they recommend continual focus on finding other ways to build relationships that nurture talent.

Finally, they underscore the need for even more communication than normal. With so many working remotely, people can lose the thread. So, employees need to continually hear what the big picture is and understand how they fit.

The piece I'd add is that special attention needs to be paid to innovation, because it depends so heavily on the sorts of interactions that just aren't possible in a Zoom world. When I worked on an innovation-related project at the Department of Energy a decade ago, I was struck that Secretary Steven Chu's redesign of the national research labs spent a lot of time on schedules and the design of the cafeterias, because he wanted to encourage as much informal interaction as he could among his scientists. When my younger daughter somehow secured us a viewing of "Up" at Pixar headquarters a month before it debuted in theaters in 2009, people talked about how carefully Steve Jobs had designed the building, down to placement of bathrooms, to encourage informal interaction among all those creative folks. Kevin Kelly, the co-founder of Wired, says the new world of work should see people doing all their work at home and just coming to the office from time to time so serendipity can work its magic through chance meetings in the hallways.

Those chance meetings will become possible again, both in hallways and at in-person industry events, but not until the virus is well and truly contained. So, we need an interim strategy for innovation and all the other issues raised in the Strategy & Business article that will last us at least a year and perhaps longer, given how slowly the world will probably return to normal even once a high percentage of us are vaccinated. We should also take the time to pull out a clean sheet of paper and design the world of work that we want to inhabit once offices and travel become widely available to us again.

People have never been more open to change than they are now. Let's seize the opportunity.

Stay safe.

Paul

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

How to Outperform on Innovation

It is up to all of us leaders to advance diversity and inclusion. It's the morally right thing to do, and it's the only commercially smart answer.

Technology and the Agent of the Future

Technology promises to free agents to spend more time with clients and prospects, broadening and deepening relationships.

4 Initiatives That Unlock IoT’s Value

IoT has largely been used in tactical ways to solve specific problems, but there is great strategic value if it is tied to certain types of initiatives.

How COVID Alters Consumer Demands

Digital transformations that would have taken three to five years are now happening in under six months.

Opportunity Among Latinos in U.S.

It’s crucial to understand the distinctions in purchasing behavior when comparing the Hispanic market with the broader insurance market.

P&C Distribution: What’s Old Is New

There are eight different models or options for insurers to consider -- but it's fair to ask if these distribution models are really new.

In an industry with infrequent customer touchpoints, like insurance, every policyholder interaction holds a lot of weight. Your organization only has so many opportunities to connect with insureds, which means one negative experience could result in policy cancellations or customer churn.

It’s imperative for insurance organizations to evaluate the one, universal touchpoint every policyholder must engage with: making premium payments. This is one of the few moments your organization has a policyholder’s attention, so evaluating and optimizing your insurance payment experience could be monumental to organizational success.

Because the policyholder payment experience is critical to the success of insurance organizations everywhere, we decided to uncover what this experience is truly like. We conducted an online survey in June 2020, through which we asked policyholders about their recent payment experiences, payment preferences and what contributes to a good user experience.

We discovered a few key points that are affecting the insurance payment experience. Here are a few of the biggest takeaways:

Policyholder retention is key

Combating customer churn and policy cancellations are well-known challenges in the insurance space – and those pain points were represented in our survey results.

To gauge overall satisfaction with their current insurance provider, we asked survey respondents how likely they were to look for a new provider in the next 12 months. In total, 45% of respondents said they are “likely” or “very likely” to search for a new insurance provider in the coming year.

The results was consistent across generations: 50% of respondents under the age of 30 and 52% of respondents ages 30-44 said they are also “likely” or “very likely” to look for a new provider.

The key takeaway: Retention and satisfaction should be major focus areas among insurance organizations.

See also: COVID-19: What Buyers Want Now

Convenience drives online payments

We dug into how respondents felt about their insurance provider’s payment experience. When asked how they chose to make their most recent insurance payment, 77% of respondents said they made an online payment, either through a one-time checkout route or automatic payments (like AutoPay). This response was consistent across all age groups; 87% of respondents under the age of 45 made their most recent insurance payment online.

Next, we asked why this majority chose to make a payment online, rather than mailing in a check or calling their insurance provider. Overall, convenience was king.

38% of respondents chose the online option because they felt it was convenient, and a further 39% of respondents were already enrolled in AutoPay. This proclivity toward online payments is a fantastic trend for insurance providers; more insureds opting to make payments through self-service options ultimately means less work for your organization and, likely, a decrease in print and mail costs.

But, before you get too excited about those results, there is another side to that coin we must consider.

While online or AutoPay options appealed to many policyholders, we also found that payment platforms that aren’t user-friendly actually deterred online payments: 28% said they chose not to pay online because their provider’s system was too difficult to use.

So, while many insureds would prefer to make payments online, they may opt for a manual method if the online payment experience offered to them is subpar.

The key takeaway: Optimizing the online payment experience is critical; simply having an online payment option does not mean your organization is automatically providing a positive user experience.

Policyholders expect omni-channel offerings

We also wanted to get a sense of how satisfied insureds are with the omni-channel payment options (i.e. omni-channel capabilities, where you can pay a bill on your phone just as easily as you can on your laptop) their insurance provider offers. Overall, policyholders are satisfied with their options, with 46% responding “very satisfied” and 28% responding “satisfied.”

While it’s encouraging to see satisfied insureds, this feedback means a lack of omni-channel options could be a dealbreaker for your policyholders. If your organization is unable or unwilling to provide the flexibility of omni-channel offerings (which many of your competitors likely are), you could face customer turnover.

The key takeaway: Omni-channel offerings aren’t an option any more; they’re expected for insurance payments.

See also: 3 Tips for Increasing Customer Engagement

Insurance organizations can no longer afford to ignore their online payment channels – the results of our survey made that extremely clear. As one of the most frequent policyholder touchpoints, your organization’s payment experience could be the factor that determines churn rates and overall organizational success.

Simply put, optimizing your online payment channels is the best way to provide a positive policyholder experience and retain your customers.

Introduction

Unclosed business (premium) refers to the premium income from insurance policies that are yet to be processed, but for which the entity is liable at the valuation date. Because the insurer is liable for all unexpired risks irrespective of whether premium has been received, it needs to be stated in accordance with the standards set out for the unclosed business.

Unclosed business, also called "pipeline premium," can be a significant component of unearned premiums at the balance date. The materiality depends on the distribution channels, such that, if the proportion of business written by brokers and agents were high, the unclosed business would be higher given that brokers can retain premium for up to 90 days after the policy inception date. Broadly, unclosed business can be broken down into these components: 

• New business that has been written but not processed
• Renewals with a date of attachment before the balance date that have neither been paid nor canceled
• Broker business, where latest information about policies written has not been provided
• Any others, in situations that lead to non-receivable payments by the company

Most of the actuarial literature gives little attention to models for estimation of premium liabilities. Usually the approach for estimation of unclosed business entails application of chain ladder and methods such as 12-month rolling averages, proportion of premium closed at the end of six months. However, given the lumpy and seasonal nature of unclosed business, some issues can arise with these approaches:

• Methodology: Most often, methodology for estimation of unclosed premium is inconsistent and unstandardized across business units (BUs). BUs deploy different assumptions to calculate unclosed premium amount. 
• Process efficiency: Process may be inefficient owing to multiple manual interventions in preparing the final numbers. There could be involvement of multiple people, leading to delays due to lack of coordination and availability. 
• Accuracy: The estimated numbers suffer from low accuracy.

Given that there is regulatory requirement to report unclosed business, this article presents an actuarial model to estimate unclosed business on a monthly basis overcoming the issues highlighted above.

A Novel Approach for Calculating Unclosed Premium

A new modeling approach was developed with one of the insurance carriers across 10 different business units having 40-plus reporting segments. The data at a policy X term level was requested to start building the actuarial model. Though the model was built at the BU level with aggregated data, it was important to use the policy level details first and then roll up the data to the desired level. Over five years policy level data was received in Excel files, spread over five spreadsheets covering 10 BUs. 

Data Processing:

Data processing is a crucial component of model building, so a thorough approach was undertaken to ensure the robustness of the model. The following data sanitization techniques were performed:

• Data Quality Assessment — The trends in the data were screened to rule out missing or inconsistent information that could potentially distort the model results. It was observed that for a particular business unit, an erroneous value was present in the data, and the same was highlighted to the client to confirm the veracity of that data point.  
• Data Gap Assessment — The data requirements were shared with the carrier. Data for some BUs was not complete, and these gaps were called out to the carrier.
• Data Modification — This entailed changing the formats, as some fields were text. Furthermore, a new field "delay" was imputed, to factor in the processing delay pattern (in months). This was used to prepare the closed gross written premium (GWP) triangle by processing delays over the policy effective months.

For the purpose of a standardized model, a single consolidated source of data was used, and the following data preparation steps were followed:

Figure 1: Data Preparation Steps 

Model Methodology

It was observed from the data that, for most BUs, 90% of the unclosed premium processed within eight months. An assumption was made for the model, that the GWP processes fully within 12 months for any given BU. Given the variability of data across BUs, automating the estimate generation process with a high degree of accuracy allowed for moving beyond point estimation. The model that was finally deployed used a simplified GLM framework, calculating the development in GWP through the chain ladder, volume-weighted, age-to-age ratios and assuming Poisson residuals. Becausee the method used bootstrap simulation, it yielded a distribution around the estimates, giving more information about the results. 

The figure below pictorially depicts the model methodology 

Figure 2: Bootstrap Chain Ladder Methodology

The pivot triangles created as detailed in the section were an input to the model. Using the cumulative triangle for GWP and the volume-weighted, age-to-age factors, fitted values were calculated. 

See also: NPS Scores Provide 3 Keys to Growth

Model Output 

In each simulation, using selected development factors, basis the trend in the pseudo-generated triangle, estimated an unclosed premium accrual figure. The 500 simulations permit the model to pick different trends that may have occurred in the past, and each unclosed figure generated is thus an estimate with a certain probability. Ideally, 10,000 simulations are sufficient to approximate the theoretical distribution as in Monte Carlo simulations. However, the mean and median results of the model varied by less than 1%, and, thus, 500 simulations stood a good approximation, given the constraints imposed by Excel. The trends in data can be quite volatile to estimate a single number with reasonable accuracy in an automated model; thus, we produced a distribution for unclosed business.

The results generated include the mean, 50th, 75th and 95th percentiles to cater to all scenarios possible. The 50th percentile closely resembles the mean value, as 500 simulations will normalize the distribution. The 95th percentile can be interpreted as the tail value in the distribution and less likely to occur but still can occur with non-zero probability (basis the peak in data fed in the model).

Automation & Standardization

To improve the process efficiency, the steps were automated through VBA macros to make the whole modeling process seamless. A single person can run the model, with minimal need for training. With few user inputs like the model month and location details to store the results, the macros cater to these tasks:

• Data preparation steps 
• Creating empty workbooks pertaining to each of the combinations of BUs and product classes. This is where the results get populated and stored automatically
• Executing models as per the steps laid out in section above

It takes around 40 minutes to run the models for 40-plus reporting segments. This enables simplifying the process so that the actuarial resources could just focus on reviewing the numbers and efficiently use their time. As opposed to the existing process, which involved multiple people using different Excel models and disparate data sources, the proposed model reduced the average time by approximately 50%.

Results

For benchmarking purposes, the model was run for each month from February 2017 to November 2018, because it was possible to calculate the actual unclosed business or unearned premiums for these months. The model outputs were compared with the actual unclosed and the unclosed premium booked by the client in general ledger for these months.

It was observed that the new model does better in terms of accuracy for all BUs. It was observed that the 50^th percentile was a good prediction for all BUs for most months. In the peak months, like June and December, the 95^th percentile was better at predicting the unclosed premium. In addition, for BUs with a very low volume of business in certain months, the 5^th percentile fared well.

Conclusion

The advantage of the method proposed in this article over the traditional chain ladder is that it will automatically take into consideration the seasonality in data as resampling of residuals happens. Unlike traditional approaches like chain ladder, 12-month rolling averages require minimal intervention when selecting development trends. Its design allows for the addition of more BUs/reporting segments in the future. It just requires the data in the set format, allowing greater process efficiency. This approach is a win-win solution with respect to standardization, efficiency and accuracy, as was demonstrated with our client’s experience.

A final caveat is that one does not discount the need for review. The estimates produced by the model must be used in conjunction with new information that the business/underwriters possess, because the model takes historical data as an input.

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.