Normally, July and August are fairly quiet in the insurance industry --- but was not the case this year! Bold moves are abounding, by both new and traditional insurers alike, setting a new pace in creating the future of insurance and distribution. 

In this new era of insurance, nearly every insurance process is rapidly becoming frictionless, including buying. If channels are easy to use with products that are easy to understand, then insurance has the opportunity to grow through a friction-free experience. The benefit is that we move from needing to constantly go out and “sell” people on insurance to introducing insurance that is ready to be “bought” seamlessly at the point of need.

This is a sustainable business model, where, instead of perpetually fighting for prospects and leads, we are perpetually making insurance easier and more appealing to buy. 

Multi-Channel Is the Mantra for the Future of Distribution

Changing customer expectations and behaviors are rapidly pushing insurers into a multi-channel world, whether they like it or not. This requires a rethinking of their strategy and how they partner with others to reach customers in new ways – creating a porous market, where engagement is everything and the relationships among partners, insurers, customers and channels is crucial. 

In our newest thought leadership based on primary research with buyers of auto and life insurance, the agent and broker channel is still a top choice for both the younger generation of millennials and Gen Z and the older generation of Boomers and Gen X, with 74% to 80% indicating they would still use this traditional channel. But that is where the commonality ends. 

Unsurprisingly, members of the younger generations are open to buying insurance from a wide array of options. For auto insurance, 66% of the younger generation is interested in it being part of the purchase of the vehicle as compared with 52% of the older generation. 64% of the younger generation versus 52% of the older generation would buy from the auto manufacturer’s website or app. 

For life insurance, 54% of the younger generation would buy insurance via a fitness app, as compared with only 38% of the older generation.

For both auto and life insurance, the younger generation is very open to buying insurance from Amazon; 56% of the younger generation would do so, as compared with 46% for auto and only 38% for life by the older generation. 

The interest and acceptance of a wider range of purchase options underscores why insurers must consider when, how and where they interact with the younger generation, and to be there with timely purchase prompts. This is where having partnerships and an ecosystem becomes very strategic in helping insurers expand their reach and presence to where their customers will be.

Leaders Making Bold Moves

A number of announcements by some leading insurers about new partnerships will accelerate improvements in the customer experience, expanding distribution reach and the ability to buy seamlessly at the point of need! 

John Hancock announced the integration of its Vitality Program with Amazon Halo, allowing Hancock’s Vitality customers to use the Amazon Halo Band to earn vitality points based on their daily efforts for a healthier lifestyle that should mean a longer life. The Amazon Halo Band, a wearable health and wellness device, will measure and analyze users’ activity, heart rate, sleep and tone of voice to provide individual health insights and help encourage healthier habits – thereby earning users Vitality points. 

State Farm announced a partnership with Ford for usage-based insurance (UBI) using the auto telematics and connected data from eligible connected Ford vehicles. Ford vehicle owners will be able to opt in to State Farm’s Drive Safe & Save program, which aligns premium to miles driven while also rewarding safe and good driving behavior with potential discounts.

Tesla announced plans to harness the data from its cars and drivers to build a “revolutionary” insurer that provides better insurance value and also to help adjust the design of cars to make them safer and less costly to repair. Tesla believes the accuracy of the data from the car and driver behavior is “at the heart of being competitive” with insurance that looks forward, not backward. Uniquely, Tesla wants to assess the vehicle damage data to create a continuous loop of adjusting the design of the cars to make them safer and less costly to repair, which will further drive down the insurance cost.

Amazon had two interesting moves. First, Amazon’s India business is now offering auto insurance through a deal with Acko General Insurance (Amazon is an investor in Acko) to cover car and motor-bike insurance in India, marking Amazon’s entrance into auto insurance. Second, Amazon Web Services (AWS) and Toyota's Mobility Service Platform (MSPF) announced a collaborative mobility insurance program. AWS leverages its cloud platform and consulting to access and analyze Toyota and Lexus vehicle data and driver behavior, another step forward in a program to offer insurance to Amazon customers. 

See also: Digital Distribution in Life Insurance

Expanding Partner Ecosystems Separating the Leaders from the Pack

With these and other examples, market boundaries are no longer clear. They are shifting and, in some cases, evaporating. The combination of technology and customer expectations is directly affecting insurance by altering the traditional ecosystem of agents and brokers – who, yes, are still relevant – to have insurance embedded or sold differently across a broader ecosystem including automotive, transportation businesses, big tech and more. 

By doing so, these partners are breaking down business and market boundaries to make the ecosystems operate fluidly, based on the customer needs and expectations for both the risk product and other value-added services. This, in turn, creates greater value for these insurers due to new revenue streams and access to a broader market through the multiplier effect. 

The Future of Distribution Is Multi-Channel

For decades, agents and brokers have been the channel of choice for P&C and L&A insurers. This decades-long choice and channel landscape, however, is rapidly shifting and changing, driven by a number of factors, but especially customers and partner ecosystems. Customer expectations are shifting to a multi-channel world, challenging insurers to provide channel options and choice, whether directly or through partners. Multi-channel distribution options enhance customer interactions on the customer’s terms … not the insurer’s.

What are the inhibitors to establishing a multi-channel strategy?

• Current business models remain aligned with older generation buyers, not the younger generation. 
• Many insurers remain focused only on the agent/broker channel and lack plans as a way forward to a multi-channel world in terms of strategy, technology and partnerships. 
• Many insurers do not have next-generation distribution management capabilities – often still operating with home-grown solutions or multitudes of spreadsheets. These insurers lack depth of core distribution capabilities from on-boarding, licensing and appointments, compensation and incentive schemes, automation and data insights to effectively optimize a multi-channel distribution strategy, let alone to be competitive in attracting new partners.
• The lack of digital, next-generation technologies inhibits the ability to easily build a partner ecosystem, embed insurance offerings and more.

The result is that insurers’ ability to expand and effectively support new channels is beginning to redefine new leaders in the industry. In our Strategic Priorities research from earlier this year we found Leaders – those focused on new channels, partner ecosystems and technology – are well out ahead of Followers and Laggards. Leaders are expanding channels at a staggering rate of 20% more than Followers and 60% more than Laggards – expanding market reach and the ability to acquire and retain customers and revenue.

Market success increasingly depends on multi-channel strategies, including how to support the traditional agent/broker channel and new strategic partnerships are crucial to insurer’s ability to maximize growth strategies today and in the future. Insurers must master the science and art of making relevant and timely digital connections with customers who are motivated by life events and make it easy and satisfying for them to purchase insurance.

A distribution strategy and ecosystem are foundational to bring together a range of distribution and digital capabilities, channels and partners that will exponentially expand reach, brand and customer engagement while meeting the customer expectations of a digital, multi-channel world. Watch our webinar, The Future of Distribution Management – A 3D View, to learn how P&C and L&A insurers are using a 3D strategy (digital, data, distribution) to manage this changing distribution landscape.

See also: Modernizing Distribution – Now

In this new era of insurance, market leaders are experimenting with new opportunities. They are establishing new strategic partnerships. They are offering innovative products. They are experimenting with offering insurance when and where customers want it. They are experimenting with direct distribution. They are still committed to agents and brokers, but they are evolving to a multi-channel world. 

Market boundaries are being redefined. The combination of technology and customer expectations is directly affecting insurance by altering the traditional ecosystem of agents and brokers, to have insurance embedded or sold differently across a broader ecosystem, including wellness, health, financial services and other entities. 

How does your business strategy align to what leaders are doing? What is your multi-channel strategy? Will your technology support your strategy? What specific plans can you take to improve your odds of success? 

In my previous article (New Operating Model for Insurers (Part 1)), I set out the steps that an insurer can take to redesign its operating model to meet its new business priorities. Here, I’m going to offer some observations on what that new insurance Target Operating Model might look like.

My core assumption is that the insurer wants a model that focuses on delivering a high-quality customer experience at a reasonable cost.

To keep it manageable, I’ll restrict my Target Operating Model's scope to:

• Locations
• People Organization
• Governance
• Major Business Processes
• Key Technologies

…and I’ll go no deeper than the design principles level.

Locations

I’ll start with locations, as this is a hot topic in a pandemic world.

Insurers’ responses to COVID-19 have proved that remote working is a lot easier than many had thought. But I’m not anticipating that “everyone works from home” will often be adopted as a design principle. Why? Because in certain circumstances there are still benefits from, and even a necessity for, some face-to-face interaction. So I would expect to see design principles such as:

• All staff should be enabled to do most of their work without attending an office
• But all staff (or perhaps just certain types or grades of staff) must live within X hours of an office that they can use when needed or when they desire
• Offices must have flexible space catering for individual working and interactions of multiple types and sizes (for example 1:1s, small group meetings, large group meetings, workshops)
• Where possible, staff should be hired in low-cost locations ahead of high-cost locations

Each insurer will need to set its own rules for when staff must attend an office and figure out what its resulting occupancy levels and space requirements might be.

Beyond this, there will be customer expectations or regulatory requirements that compel insurers to have physical offices in locations (typically states or countries) in which they sell. Hence, there will often be a principle that:

• We will locate offices to meet the expectations of both our customers and our regulators

People Organization and Governance

At the level of this article, we can treat these two dimensions together.

As people are replaced by automation, I would expect to see increasingly flat organization structures. So a Target Operating Model design principle might be:

• Our organization structure will have no more than five layers

There might also be a corresponding principle setting out minimum or maximum spans of control.

But if there are few layers, and staff are highly distributed, there need to be ways to ensure that staff work effectively and make smart decisions without being micro-managed. Possible design principles for governance might therefore be:

• The mission, values, goals and objectives of the company are the primary arbiter of whether a proposed action or decision is a good one and must be visible to all employees at all times
• Role descriptions will clarify the limits of a role’s authority and autonomy (its scope, or guard rails), but within those our staff will enjoy a high degree of independence

Of course, a switch to this type of organization is unlikely to be possible without high-quality change management in place.

See also: Should Insurers Use Amazon Model?

Major Business Processes

In A New Target Operating Model for Insurers – Part 1, I offered the following generic insurance value chain, which, at this level of abstraction, covers both P&C and life:

It’s beyond the scope of this article to take each element in turn, but here are potential design principles that could apply to pretty much all of them:

• The process should be customer-centric: designed to fulfill its customers’ needs at the highest quality, at lowest cost, in the shortest time
• The process should be both common and shared across business lines, products and geographies to the greatest extent possible
• Automation (core automation, artificial intelligence, robotic process automation, etc.) should be employed as widely as possible, to accelerate delivery and minimize processing errors
• Unless we possess differentiating expertise in a process or sub-process, it should be outsourced to one or more third parties possessing the appropriate expertise

Some of these customer experience and efficiency themes are explored, in a greater level of detail, on my website focused on the Insurer of the Future.

Key Technologies

I’ve left key technologies until last, as some of the major design principles here depend on the areas already covered.

Here, I would increasingly expect to see design principles along the following lines:

• The primary function of our technology is to automate our Major Business Processes
• The primary non-functional requirement of our technology is that it be secure from external and internal threats
• Our IT systems will be shared across business lines, products and geographies to the greatest extent possible
• Our IT systems will be available to our staff from any location they choose
• Data will be shared across business lines, products and geographies to the greatest extent allowed by applicable regulation
• Unless we possess differentiating expertise in a particular aspect of technology (or its design, development or running), it should be outsourced to one or more third parties possessing the appropriate expertise

It is also possible that design principles at this level might lead directly to additional, more specific, principles such as:

• We will maximize the use of cloud technologies

Technology change is often, of course, the type of change that takes longest to deliver. So it wouldn’t be surprising to see one or more interim Target Operating Models (see New Operating Model for Insurers (Part 1)) as staging points on the roadmap for technology transformation.

See also: 10 Tips for Moving Online in COVID World

* * *

It’s an interesting time for insurers, with the changes to insurers’ business models arising from COVID-19 set against a background of continuing opportunities for digital transformation.

Using the approach set out in A New Target Operating Model for Insurers – Part 1, and developing a set of design principles such as the above, an insurer will be well-placed to design its new Target Operating Model.

And using the specific design principles as a starting point for discussion will help set an insurer on the road to delivering a higher-quality customer experience at a reasonable cost.

Over the last decade or so, there has been considerable investment in innovation across insurance, but one group has been hesitant to follow the path into the age of digitization -- independent agents.

Independent agents have always tied their strength to their personal relationships -- deals made over in-person meetings while grabbing a cup of coffee or lunch. Customer interaction was their bread and butter. Unfortunately for them, COVID-19 has tipped the scales. A business that once thrived on personal connection is now witnessing sales dropping and premiums and commissions decreasing.

COVID-19 has served as a brutal wake-up call. Survival in the era of COVID-19 will be determined by the independent agent’s ability to implement digitization. 

Consumer behavior is shifting 

Independent agents are starting to lose market share. Although direct writers in auto and home haven't replaced independent agents, the direct writers have cut into the channel's share. Many agencies are privately held family companies with modest organic growth, so growth over the last several years has come from consolidation and acquisition.

While personal relationships have limited the need for change, customer behavior is changing. Recent data from Jornaya showed that, across segments, insurance online shopping activity remains strong and since the start of COVID-19 has trended higher than normal. Due to the rise in consumers turning to online resources for guidance, independent agents are running the risk of being replaced by digital brokers and carriers. 

So what has been COVID-19’s impact on business?   

Research from the Independent Insurance Agents & Brokers of America found that nearly 50% of agencies they polled reported decreased revenue for the year; 46% said they had lost commercial clients due to the pandemic.

For many independent agents, a big part of their business is tied to writing policies for small businesses, which have been hit significantly by COVID-19. Consumers have been working to save wherever they can, which for some means cutting back on insurance policies or withdrawing from policies altogether.  

When the global workforce went remote, many independent agents were still in the office because they were unequipped to work remotely. Lack of access to digital products and Voice over Internet Protocol (VOIP), combined with the inability to meet with clients face-to-face, has been far more damaging to agents than many anticipated.

Some carriers have tried to support agents and customers and solve for COVID-19’s challenges by offering benefits such as profit-sharing advances, carrier-based service models, low-driving discounts and more online resources. Many carriers have also worked to adapt a hybrid work from home/office model and have invested in cloud-based solutions to better equip their agents to work remotely.

See also: New Digital Communications

Jumping on the digital bandwagon 

If COVID-19 has taught us anything, it's that business as usual is no longer possible for independent agents. But they have lacked the resources to change fast enough.

Agency principals need to recognize that COVID-19 has jump-started the need for investment in digital innovation. There are five things all independent agents can do: 

1. Know your customer: Read the data on consumer behavior and acknowledge the need to serve customers in the manner they choose.
2. Borrow resources: Review what carrier partners offer and take advantage of tools that can help support day-to-day business operations, including cloud and agency management systems (AMS). 
3. Model from other industries: Offer your customers access to the same tools and technology resources that are available to them during other service and business transactions (e.g., with banks, healthcare providers and mortgage lenders). 
4. Create a digital agency: Provide customers with a way to transact digitally on servicing, product cross-sales and online binding. 
5. Invest internally: Make sure that employees as well as customers have access to updated technology, including laptops, mobile devices and cloud solutions, and offer training on new resources. 

Many new entrants to the insurtech space including Hippo and Clearcover are already recognizing the distribution value of independent agents and have started appointing those that are willing to step outside of the carrier comfort zone for tech-first providers. 

See also: New Sense of Urgency on Going Digital

Digital transformation will make independent agents stronger in the long term; they just need some guidance on how to reinvent themselves and their business structure. If agents invest in the right tools, the combined value of a personal and digital relationship with customers will enable independent agents to compete and grow.

An Early Taste of Climate Change Disrupting Insurance Paul Carroll, Editor-in-Chief of ITL There’s a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage. Why is that? you ask. Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is. In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change — along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent — may face sudden changes that could even put them out of their homes... continue reading > Complimentary Q&A Panel The Future of Smart Property and Insurance  Watch Now SIX THINGS How ‘Explainable AI’ Changes the Game by Dustin Oxborrow AI often performs its magic with little insight into how it reached its recommendations. "Explainable AI" makes all the difference. Read More The Future Isn’t Just for Insurtech by Dan Epstein The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption. Read More ‘Virtualizing’ Your Customer Service by Fara Haron For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training. Read More New Operating Model for Insurers (Part 1) by Alan Walker Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success. Read More COVID-19 and Need for Analytical Insurers by Dave Ovenden Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits. Read More Of Independent Agents, Heirloom Tomatoes by Kate Terry Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages. 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 Be Innovative Learn about Notion's easy-to-launch programs to get started. Learn More SUBSCRIBE TO SIX THINGS

There's a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage.

Why is that? Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is.

In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change -- along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent -- may face sudden changes that could even force them out of their homes.

California, the bellwether for so many things in the U.S., is again in the lead on this insurance issue, showing how very complicated it will be.

Wildfires have burned more than 2 million acres in California this year. That is already an annual record even though September and October are historically the worst for wildfires.

The possibility of wildfires has put some 800,000 homes at risk of becoming uninhabitable because of soaring insurance premiums or of having insurers simply decline to cover them. State regulators ordered insurers not to cancel policies on those 800,000 homes, which are in or near dangerous areas, but the ban expires in December and can't be renewed. As this New York Times article details, insurers, regulators and customers are all working to solve the problem -- but not having much luck.

Data suggest that, in other areas, insurers are canceling policies or pricing homes out of the market. As the Times reports, "The number of households buying coverage from California’s high-risk insurance program, a costly and bare-bones alternative for people who can’t get private coverage, has increased by more than 50% between the start of 2019 and June 2020, to almost 200,000 households."

And even that program is becoming less accessible: The article adds that the program "has asked the state for permission to raise its rates by 15.6%, after initially seeking an increase more than double that amount."

Obviously, insurers need to be able to price based on the risk associated with each home, but it's not that simple. People demonize insurance companies that pull out of a market or that jack up rates after a disaster -- and people vote. So, regulators -- at least, those who want to be reelected or reappointed -- tend to limit rate increases and may block cancellations.

California has a further wrinkle (as it so often does): Insurers are only allowed to use historical data when underwriting policies. So, even though projections are for the fires to keep getting worse as the climate heats up, that information doesn't count -- it can't be used in pricing.

State lawmakers attempted a compromise that would have let insurers use projections and incorporate some other costs into pricing, if insurers would make coverage more widely available and provide incentives for measures that would reduce fire risk. But consumer groups argued that the deal was too favorable to insurers, and it eventually fell apart.

Economics has to win. There's no alternative. Assuming that climate change continues to worsen the wildfire threat in California and elsewhere, insurers will have to increase rates a lot or drop coverage, and homeowners in endangered areas will have to harden their properties to greatly reduce risk, pay those higher rates or move.

As I noted in last week's Six Things, some 43,000 homeowners have already taken buyouts from the federal government and relocated rather than continue to fight nature in areas being inundated by coastal waters. A similar shakeup will have to account for wildfire and perhaps other types of storms, such as the derecho that damaged millions of acres of Iowa farmland last month and will reduce this year's harvest by 25% to 50%.

But economics won't necessarily win any time soon. The failure to reach a compromise in California suggests that the state will muddle along, with consumer groups and insurers at odds and with regulators caught somewhere in the middle.

Muddling along is hardly ideal. A clear vision that could lead to an actual plan would be far preferable. But the best I can suggest is that those of you who don't live in California and don't have to experience the dysfunction directly should keep an eye on what we go through. Lots of insurers, regulators and homeowners will likely have to confront issues related to climate change, so you might as well learn from the mistakes by those of us in California so you don't have to make all of them yourselves when your turn comes.

Stay safe.

Paul

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

How ‘Explainable AI’ Changes the Game

AI often performs its magic with little insight into how it reached its recommendations. "Explainable AI" makes all the difference.

The Future Isn’t Just for Insurtech

The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption.

‘Virtualizing’ Your Customer Service

For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training.

New Operating Model for Insurers (Part 1)

Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success.

COVID-19 and Need for Analytical Insurers

Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits.

Of Independent Agents, Heirloom Tomatoes

Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages.

I was recently chatting with someone who insisted that we needed to sell directly to consumers to be successful…you know, like Progressive.

Progressive is where I cut my teeth on insurance, but it’s been years, so I grabbed the annual report:

Source: Progressive’s 2019 annual report

Yup, of the plain old auto policies in force, 47% were sold through independent agents.

My friend and I also had a nice chat about farmers markets. You know, where, at least pre-COVID, people would walk around with their “Shop Local” reusable bags and buy $5.99-a-pound heirloom tomatoes?

Shop local, but not for insurance?

Turns out we’re oversimplifying again.

Tomatoes come in varieties, insurance buyers don’t. There is no such thing as a direct consumer or an agency consumer.

This is kind of crushing if you’re proud of the insurance company you work for:

If you ask the first 10 people you find in the street who their insurer is, maybe four will give you an accurate answer. (Unless you’re standing outside an insurance convention, back when we used to have those). Another three will give you the name of a company they used to be insured with, or whose commercial they last saw. The last three will give you the name of an agency, which they may not actually be insured through. These numbers are approximate, of course, but they are close.

Even more dispiriting is if you choose 10 of your own customers and ask the same question….and get roughly the same set of answers.

Uh-oh. So, customers don’t care enough to remember who they bought insurance from?

This isn’t to blame consumers. Quick, last time you went to the emergency room for yourself or a loved one, what was the name of the medical professional who was most involved in your treatment?

Yeah, most of us have no idea, and it’s not because a medical emergency isn’t important. It’s just that the name doesn’t stick because it generally doesn’t matter – so long as the ER is staffed correctly, there’s someone to treat you. Similarly, so long as you’re insured, you’re fine. (Until you have a claim, which most customers won’t most years, and then fingers crossed…)

This lack of recollection also means that there are very few customers marching around insisting that they purchase insurance from a carrier that sells directly vs. through an agent.

Rather, people are just looking for what fits best in their lives.

People buy insurance based on the experience they are looking for and what’s easily available to them, at the point they want to buy in the context of their own lives.

• It might be the web search that they can do at 3am when they’re endlessly rocking the baby.
• It could be the person they can call who can explain what the heck they need to buy to make sure they’re covered if they hit a deer again this year.
• It could be the person who can switch around the day their payment is withdrawn when they take a new job and payday changes.
• It could be the friend they golf with who can explain what they need now that their general contracting business is expanding.

Note that none of these are specifically the purview of an agency or direct-to-consumer business.

There are agents with fantastic digital presence serving that 3am customer, and there are salespeople from direct-to-consumer businesses playing in the local charity golf tournament.

Yeah, the specifics of your economics just don’t matter to your customers, only whether you can provide what they want at a competitive price.

The economics of agency and direct businesses have different patterns, but aren’t that different overall.

No, it’s not cheaper to sell directly. And it’s not cheaper to sell through agents.

How can that be?

Well, you have to reach, sell to and service customers somehow, and that either costs Google Adwords and web development and call centers or it costs commission and co-marketing.

Again, consumers couldn’t give one whit about the line items in your acquisition or operational expense. They just know how they want to be served, and they want the cheapest prices they can find, too.

If Facebook suddenly started giving insurance advertising away as a social good, direct-to-consumer insurance would get cheaper. Customers would migrate that way, some agents would start accepting less commission to stay afloat and other agents would deploy sophisticated Facebook advertising campaigns. Net/net, you end up in the same place, where the pricing algorithms might be different but price levels are pretty much the same for a given consumer in either channel.

The reverse is true, too. Should digital advertising double in price, direct prices will increase, agents can ask for more commission, etc.

That’s not to say that the economic gambles aren’t different – upfront acquisition expense then work to maintain retention vs a more or less level commission year after year - just that the cost of customer acquisition to lifetime value is close to the same for a given product and segment.

See also: A Quarantine Dispatch on the Insurtech Trio

Finally, you can’t disintermediate a channel without somehow paying for the services that channel provides.

This is why “traditional broker-based insurance incumbents” (a term from Lemonade’s recent quarterly earnings call) as a pejorative is just, well, silly.

Where there are old monopolies, sure, you can squeeze costs out of a channel quite a bit (see Warby Parker). And if consumer shopping tastes change, you can replace a channel. Well, some small fraction of a channel in big markets where consumers have lots of different preferences (see Allbirds and Rothys), or nearly the entire channel if those preferences replace older shopping patterns (Netflix).

But, when there is variety in consumer preferences, those customers can be served in multiple ways by different channels. When the channels don’t just provide acquisition, but also counsel, peace of mind and simplification of product complexity (which is a topic for another day…), you can’t just replace them without paying to serve the same functions somehow.

And that’s why direct vs agency is a silly fight – neither channel maps cleanly to customer preferences, and they both have their advantages and disadvantages.

Like so many other things in life, your success depends on how well your goals and your actions align.

The companies that succeed are not those that are dogmatically direct or agency for no good reason.

They are the companies that know specifically which insurance buyers they are serving, how those customers want to be served AND how to build profitable insurance operations.

That, after all, is what supports both your customers and your channel in the long run.

It's not about us; it's about them.

Artificial intelligence (AI) drives a growing share of decisions that touch every aspect of our lives, from where to take a vacation to healthcare recommendations that could affect our life expectancy. As AI’s influence grows, market research firm IDC expects spending on it to reach $98 billion in 2023, up from $38 billion in 2019. But in most applications, AI performs its magic with very little explanation for how it reached its recommendations. It’s like a student who displays an answer to a school math problem, but, when asked to show the work, simply shrugs.

This “black box” approach is one thing on fifth-grade math homework but quite another when it comes to the high-impact world of commercial insurance claims, where adjusters are often making weighty decisions affecting millions of dollars in claims each year. The stakes involved make it critical for adjusters and the carriers they work for to see AI’s reasoning both before big decisions are made and afterward so they can audit their performance and optimize business operations.

Concerns over increasingly complex AI models have fired up interest in “explainable AI” (sometimes referred to as XAI,) a growing field of AI that asks for AI to show its work. There are a lot of definitions of explainable AI, and it’s a rapidly growing niche — and a frequent subject of conversation with our clients. 

At a basic level, explainable AI describes how the algorithm arrived at the recommendation, often in the form of a list of factors that it considered and percentages that describe the degree that each factor contributed to the decision. The user can then evaluate the inputs that drive the output and decide on the degree to which it trusts the output.

Transparency and Accountability

This "show your work" approach has three basic benefits. For starters, it creates accountability for those managing the model. Transparency encourages the model’s creators to consider how users will react to its recommendation, think more deeply about them and prepare for eventual feedback. The result is often a better model.

Greater Follow-Through

The second benefit is that the AI recommendation is acted on more often. Explained results tend to give the user confidence to follow through on the model’s recommendation. Greater follow-through drives higher impact, which can lead to increased investment in new models.

Encourages Human Input

The third positive outcome is that explainable AI welcomes human engagement. Operators who understand the factors leading to the recommendation can contribute their own expertise to the final decision — for example, upweighting a factor that their own experience indicates is critical in the particular case.

How Explainable AI Works in Workers' Comp Claims

Now let’s take a look at how explainable AI can dramatically change the game in workers' compensation claims.

Workers comp injuries and the resulting medical, legal and administrative expenses cost insurers over $70 billion each year and employers well over $100 billion — and affect the lives of millions of workers who file claims. Yet a dedicated crew of fewer than 40,000 adjusters across the industry is handling upward of 3 million workers' comp claims in the U.S., often armed with surprisingly basic workflow software.

Enter AI, which can take the growing sea of data in workers' comp claims and generate increasingly accurate predictions about things such as the likely cost of the claim, the effectiveness of providers treating the injury and the likelihood of litigation.

See also: Stop Being Scared of Artificial Intelligence

Critical to the application of AI to any claim is that the adjuster managing the claim see it, believe it and act on it — and do so early enough in the claim to have an impact on its trajectory.

Adjusters can now monitor claim dashboards that show them the projected cost and medical severity of a claim, and the weighted factors that drive those predictions, based on:

• the attributes of the claimant,
• the injury, and
• the path of similar claims in the past

Adjusters can also see the likelihood of whether the claimant will engage an attorney — an event that can increase the cost of the claim by 4x or more in catastrophic claims.

Let’s say a claimant injured a knee but also suffers from rheumatoid arthritis, which merits a specific regimen of medication and physical therapy.

If adjusters viewed an overall cost estimate that took the arthritis into account but didn’t call it out specifically, they may think the score is too high and simply discount it or spend time generating their own estimates.

But by looking at the score components, they can now see this complicating factor clearly, know to focus more time on this case and potentially engage a trained nurse to advise them. Adjusters can also use AI to help locate a specific healthcare provider with expertise in rheumatoid arthritis, where the claimant can get more targeted treatment for a condition.

The result is likely to be:

• more effective care,
• a faster recovery time, and
• cost savings for the insurer, the claimant and the employer

Explainable AI can also show what might be missing from a prediction. One score may indicate that the risk of attorney involvement is low. Based on the listed factors, including location, age and injury type, this could be a reasonable conclusion.

But the adjuster might see something missing. They adjuster might have picked up a concern from the claimant that he may be let go at work. Knowing that fear of termination can lead to attorney engagement, the adjuster can know to invest more time with this particular claimant, allay some concerns and thus lower the risk the claimant will engage an attorney.

Driving Outcomes Across the Company

Beyond enhancing outcomes on a specific case, these examples show how explainable AI can help the organization optimize outcomes across all claims. Risk managers, for example, can evaluate how the team generally follows up on cases where risk of attorney engagement is high and put in place new practices and training to address the risk more effectively. Care network managers can ensure they bring in new providers that help address emerging trends in care.

By monitoring follow-up actions and enabling adjusters to provide feedback on specific scores and recommendations, companies can create a cycle of improvement that leads to better models, more feedback and still more fine-tuning — creating a conversation between AI and adjusters that ultimately transforms workers' compensation.

See also: The Future Isn’t Just for Insurtech

Workers' comp, though, is just one area poised to benefit from explainable AI. Models that show their work are being adopted across finance, health, technology sectors and beyond.

Explainable AI can be the next step that increases user confidence, accelerates adoption and helps turn the vision of AI into real breakthroughs for businesses, consumers and society.

As first published in Techopedia.

While what we see as the fundamentals and benefits of becoming an "analytical insurer" haven’t changed, being one is even more important now because of COVID-19 and its far-reaching economic impacts.

Defining the "analytical insurer"

When talking about analytical insurers, we are first referring to companies that have embedded three key characteristics in their business: a reliance on data and an intolerance of anecdotes in making decisions; the effective compilation of data to present a single source of the facts; and the ability of all decision makers to access granular insight at the point of making a decision. From those foundations, some insurers are moving on to invest in areas that we group under three umbrella sets of capabilities:

• Active portfolio management, and specifically scenario modeling
• Intelligent intervention
• Digital enabled distribution

The incentives for pursuing these attributes nearly always boils down to a handful of drivers – greater agility, rapid speed to market and accuracy of decision making, all delivered at lower cost. The insurers are reducing the analyze-decide-deploy cycle of decision making from weeks and months to days, or hours in some cases - resulting in stronger market positioning, more competitive pricing, slicker operations, increased confidence, cost reductions and a much-improved ability to adapt to changing markets.

As more companies have been persuaded to invest in the benefits over recent years, competition has continued to fuel an analytics arms race. The exceptional economic and market circumstances that COVID-19 is creating only seem likely to raise the stakes, given the likely continuing impact on premiums, business mix, profitability, resources and working practices, not to mention customer experiences that may never revert fully back to their pre-pandemic nature.

The COVID-19 effect: Consider the dilemma facing hospitality or commercial property insurers. An insurer’s hospitality clients are essentially economically inactive, with the prospect that some will never recover. At the other extreme, some manufacturing plants are working flat out in ways that were never anticipated, potentially raising the risk of things like electrical fires or accidents involving tired employees. Understanding the change in both exposure and underlying risk of a given situation is vital at both case and portfolio level. Being able to scenario model differing lockdown and economic outcomes is key to successfully navigating the post-COVID risk landscape.

That’s not to say that COVID-19 is a signal for kneejerk reactions from insurers. Importantly, responding to the short-term pressures and realities that the virus brings to insurers can be compatible with longer-term ambitions linked to agility and pace of operations. For example, enhancing understanding of your portfolio is going to be just as important to insurers’ longer-term fortunes as it is in the short term, and the same applies to most aspects of capitalizing on the opportunities to build from a stronger analytical base.

Here are a few thoughts on how stronger analytics can assist insurers through the COVID-19 crisis, but also create building blocks for longer-term business benefits:

Active portfolio management and scenario modeling 

Going back to our hospitality and manufacturing examples, the uncertainty of COVID-19 and the potential new normal it will create could potentially decimate some portfolios and the basis on which they’re priced. 

More granular policy information makes ground-up scenario building possible, putting some meaningful number ranges on observed and anticipated trends, and teeing up a whole range of things, such as evaluating what portfolios will suffer most, or even disappear. 

See also: How Coronavirus Is Cutting Connections

The recent work we’ve been doing with the Lloyd’s and London market on active portfolio management demonstrates, however, that this is anything but a COVID-19-related issue; the issue is widely seen as critical to longer-term performance and profitability.

Equally, the COVID outbreak has vividly highlighted the opportunity to derive benefits from modeling more widely – say, moving from claims cost to more sector-based analysis using rich exposure data within pricing systems to look at what companies want to do and need to do in their portfolio mix. 

The ability to rapidly test hypotheses, and deliver against options, and then monitor and change tack if necessary has already become a backbone of dynamic pricing in personal lines. Real-time scenario modeling can be a similar enabler for underwriting, pricing and claims professionals in the commercial, life and health sectors.

Intelligent intervention

Whether it’s in underwriting or claims, the objective of intelligent intervention should be to deploy the right resources to the situation at hand. This could mean completely automating a process that is relatively straightforward or using experienced teams where complex judgment is needed. Whether adopting a low-touch, volume approach driven from portfolio data or making sure subject matter experts have the right insight available at the right time to make an informed decision, insurers' data assets make this possible. 

The intelligence comes from deploying a more granular approach and, where appropriate, predictive models to support routing and evaluation decisions. Using large loss propensity models to optimize survey and risk appetite decisions and using conversion data insight to prioritize underwriting activity are simple examples of this. 

From an automation point of view, it could be about adding granularity to feed a company’s level of automatic underwriting appetite and claims handling. Some insurers use relatively simple decision rules, such as that they’ll automate a risk if it has fewer than 10 employees, or if a claim is of a certain value. Adding additional decision layers (e.g. trade, geography, portfolio context, trust indices, etc.) refines the decision process and allows the safe expansion of automated approaches and lowers costs. At the same time, you get the most from your underwriters and claims experts by allowing them to use their expertise and add value in more complex, individual cases.

The ability to flex the mix between technology and human input is also highly desirable. For example, if a pandemic were to affect a significant proportion of the team, it would be possible to expand the automated or self-service footprint to bridge the gap. Such flexibility can also provide short- or long-term help in areas such as product simplification and cost management.

Digitally enabled distribution

One thing COVID-19 has done is shine a light on organisztions that are better or worse at interacting digitally with concerned customers. In the process, digital capability has become more a matter of reputation as well as a factor in general cost of doing business and customer experience.

Yet, the digital component is only the tip of the iceberg. Below that there are a lot of hidden but hard-working data assets, supporting applications such as products broken into components, the ability to manage channel conflict and active management of cross subsidies, not to mention addressing the widespread challenges of integrating legacy platforms. 

The benefits of getting the beneath the waterline on digital infrastructure right are already considerable, and growing outside the personal lines market when Lloyd’s is creating its digital trading platform, when self-service claims operations are making steady inroads, when initiatives are underway to allow brokers to simplify the binding process and when new digital distribution opportunities, perhaps where insurance is part of something else, increase.

See also: COVID-19: Technology, Investment, Innovation

Building for the future

At present, it is hard to understand the implications of the new normal, but foundational analytics capabilities should help insurers to not only better navigate that uncertainty but leave them better-equipped for the longer-term fallout and continuing market transition. As part of an insurance future that will inevitably demand more operational flexibility and nimbleness, with digital platforms coming more to the fore, data and analytics and the wherewithal to use them effectively will mark out analytical insurers from the crowd.

The options for digital communications keep expanding. Insurers' mobile interactions with prospects, producers and policyholders have become common, while methods like e-mail and web portals are extensively used. Now, there is a whole new world of messaging platforms, chatbots, business texting, voice assistants and more.

All of these methods are in widespread use in the world today, but not necessarily in insurance. Which methods should insurers employ, for which types of interactions and for which constituents? 

These are important questions because many insurers have expended considerable effort and money to implement various newer communication technologies only to find that the take-up was low. There are no magic answers, but the key to success lies in taking an outside-in approach.

Traditionally, system have been designed from an inside-out approach – taking into consideration the organization, products, IT systems and channels to reach out to external parties. These are critical factors, to be sure. But the better approach is to lead with an understanding of customer needs, customer journeys and the value that customers place on specific capabilities.

This requires more than just asking customers what they want. Whether the party receiving the communication is a prospect, producer, policyholder or even an employee, it is best to gain a more thorough understanding of segments, relationships and needs.

During our recent Digital Communications Virtual Event Experience, SMA asked insurers about their interests and objectives for digital communications, with nine possible responses. The top two choices were overwhelmingly 1) that digital communications are a vital part of the overall digital transformation strategy (83%) and 2) that digital communications will improve the customer experience (75%). Forty percent said reducing internal operational expenses was a key goal. Surprisingly, expanding capabilities for policyholders was way down the list, and expanding agent capabilities was even lower.

Incorporating new communications into the overall digital transformation and improving the customer experience are admirable goals. But it seems to me that, to achieve those goals, it is critical to provide agents and policyholders with new capabilities.

This doesn’t mean just throwing out a new option like a chatbot because others are doing it, and because it seems like a good idea. Decisions should be made in the context of an overall assessment of agent and customer needs.

Insights from three lenses should be used to inform the decisions on specific technologies and use cases. First, look at what interaction methods people are actually using today and throughout the lifecycle. This needs to be done in the context of each segment. Second, do extensive research to determine what new modes people would value for various types of transactions and interactions. Third, evaluate what others in the industry are doing – not just what capabilities they have released but what kind of success they have had (to the extent possible).

See also: The Missing Tool for Cyber Resilience

Finally, be sure to build in flexible configuration capabilities to enable individual users to customize their communication preferences. In the increasingly digital world, placing an emphasis on providing a rich set of communications options is an important ingredient in improving experiences, which leads to both top line growth and profitability.

I’ve posted previously on the implications of COVID-19 for insurers’ business models and for insurance products and services. And my survey on changed priorities in the wake of the pandemic showed that insurers feel they have much more work to do on both workforce flexibility and new or revised customer communication and servicing channels.

It seems timely, therefore, to provide a few thoughts on:

1. The steps an insurer can take to re-design its operating model to meet its new priorities; and
2. What the new insurance target operating model might look like.

This article covers the first point, and a future article will address the second.

Definitions

First, a couple of quick definitions. An operating model is a simplified depiction or visualization (a model) of how the insurer operates to deliver on its business objectives. It is both narrower and more granular than the insurer’s business model. Unless it’s a start-up, the insurer will already have a current operating model. Its design for a better operating model for its future is known as its target operating model (TOM).

Scope

Unfortunately, there’s no commonly agreed set of dimensions for a TOM.

My own view is that, at a minimum, a TOM needs to consider:

• Major Business Processes
• People Organization
• Key Technologies
• Locations
• Governance

This list can be expanded, when appropriate, to include additional dimensions such as:

• Customer Journeys
• Management Information Requirements
• Culture

Approach

At its simplest, the operating model can be re-designed using a three-step approach.

In the Understand phase, the insurer first needs to establish the scope of the target operating model it wishes to develop, selecting from the list of parameters in the Scope section above. The insurer should also agree on the templates it is going to use to document its current and future models.

In addition, the insurer needs to understand and agree on its value chain. This is important because the value chain captures, in simple terms, what the TOM will be required to deliver.

See also: 7 Business Models of the Future for Insurers

And the primary and support activities in the value chain model also provide a key underpinning for the current and target operating models, because we can structure those models to show how each element of the value chain is currently delivered, and will be delivered in the future.

A typical insurance value chain (which, at this level of abstraction, covers both P&C and life) appears below.

Once the value chain is agreed on, the insurer should then document the current operating model and (through document reviews, interviews or workshops) establish the challenges arising from the current model.

Some of those challenges may well have sparked the project in the first place. The review might have started, for example, to address a cost problem. But even where the primary challenge is clear, it would be a waste not to consider other difficulties (such as friction points in the customer or intermediary experience) that might also be resolved through a new operating model.

The Analyze phase focuses on understanding the challenges in more detail and considering the ways in which a new TOM could resolve them. In the example I’ve just given, that would require figuring out what types of changes in the operating models (the levers) could be used to address the cost and customer experience issues identified.

It’s possible to jump straight from these levers to potential options for the TOM design. But, in my experience, the range of options available is so wide that a useful interim step is to agree on a series of high-level design principles that the solution must comply with. Examples might be that, “All verbal customer interactions must take place in the customer’s country of residence” or “All locations should use the same core IT systems.”

The Re-Design phase refines the options down to a single TOM, documented using the agreed templates. Of course, this isn’t just a desk-based exercise, as buy-in to the result is likely to be required from multiple stakeholders. The insurer will need a process that involves those stakeholders in the decision-making, both to improve the decisions themselves and to harness stakeholder commitment to the forthcoming transformation.

Often, however, the "target" operating model is not enough. Although it’s the target, it might involve such radical change that it can’t be fully implemented in an acceptably short time. If that’s the case, the insurer may also need one or more interim operating models through which it will pass along the way.

Whether any interim models are required, the final step in the Re-Design phase is to set out the road map for delivering the new operating ,odel(s) and mobilize the transformation program.

See also: How CISOs Are Responding to COVID

Following these steps will enable an insurer to resolve its operational challenges and lay the foundations for future success.

In Part 2, I’ll offer my thoughts on what the new TOM for an insurer might look like.