Throughout the first quarter of 2020, the insurtech landscape has remained vibrant. There are record-setting venture capital investments, weekly announcements of new insurance/insurtech deals and lots of excitement.

Over the last few years, the volume of insurtech developments and offerings in claims has grown exponentially, and many are being implemented to help reduce adjustment cost and provide consumers with more choice, greater access and ease. Digital interactions, remote damage inspection and direct-to-debit payments are becoming widely adopted to move reach a touchless claim process.

However, given the tremendous progress over the last three years or more, some would suggest we should be moving much faster.

Insurers say it's simply too time-consuming to evaluate all the potential solutions. They also say that, while many of insurtech solutions are impressive, they only provide a single piece in a very large puzzle. Insurers also understand the significant work it takes to implement a solution: training, workflow and organizational changes just to get started. Insurers must be selective, which certainly elongates their decision-making cycles.

See also: Future of Claims: Automation, Empathy  

Insurtechs, meanwhile, are at the mercy of insurers’ decision-making cycles, while also facing investor pressure to grow. They have to remain patient -- remember how the Ring doorbell was initially perceived? -- but waiting is not a strategy.

Time for a new approach: Pairing

It is time for more pairings, or combining of forces. If two or more insurtech solutions combine to solve multiple challenges together, it is easier for insurers to commit.

Examples of individual components include: sensors to detect losses, chatbots to aid loss intake, image capture to estimate damages, AI fraud tools and e-payments instead of mailed checks. These can be very helpful but still force insurers to splice everything together and to manage a portfolio of providers, often resorting to manual workarounds.

The pairing trend has already begun

A better approach is to have, say insurtechs integrate with claim system providers, a la Guidewire and Duck Creek. Original equipment manufacturers (OEMs) and insurers are teaming up on telematics -- look at the partnerships Ford announced with Allstate, Liberty Mutual and Nationwide. Hover and FileTrac announced a partnership to combine 3D photo visualization with a claim management platform. 

See also: Claims: Beyond the ‘Moment of Truth’  

Depending on where your insurtech stands today, a good first step is to self-evaluate and gather feedback from claims leaders, innovation teams and others. Consider which features are immediately adjacent and may add value if combined with yours.

There are endless potential pairing combinations to consider that could shape the next phase of the insurtech landscape. Insurtech alliances are not a one-size-fits-all answer but are very much worth exploring in this grow-or-die environment.

At the Connected Claims USA conference (June 24-25, Chicago), insurance leaders and insurtech partners will gather to learn and form lasting partnerships that will change the game.

In a blink of an eye, the world – society and all of humanity – are being stressed at every level imaginable due to the rapid spread of COVID-19. No one could ever have imagined or planned what this could really be like … including our industry. But since the beginnings of insurance, we have had a history of weathering all storms, all types of disasters and even pandemics. And I am confident that we will weather this one, as well. Insurance is a financially strong, resilient industry. We serve as a safety net for society, mitigating risks for all types of disasters – man-made or natural. This is who we are and what we do. And this is our moment of truth.

In the midst of all of this upheaval, we have a unique opportunity to do what is right by being a strong, dependable force for good. Our world – our employees, customers, partners and everyone in our ecosystem and beyond – need our strength and resilience, right now, tomorrow and every day moving forward. 

On the other side of this pandemic wave, the core of who we are as an industry will remain the same, but every aspect of what and how could be altered by this experience. The rules of engagement are changing, even as I write this blog. And that is okay. Every disaster presents new clarity and new experiences that create opportunities. 

At SMA, we are confident that new ideas, new approaches and new ways to accelerate the connections with our employees, customers, partners and everyone in our ecosystem will happen by adjusting and advancing digital transformation strategies and plans. 

See also: The Best Tools for Disaster Preparation  

Just remember, we are all part of this amazing insurance industry, and we are all standing strong. We will continue to stay present in this moment of truth. And we will do our absolute best to help you, as well. Just stay safe and healthy. 

The amount of vim, vigor and rigor brought to decision-making will determine the extent to which the insurance industry will harness the insights provided from enhanced analytics, artificial intelligence, machine learning and cognitive computing. The topic of operational decision management (ODM) is not new, but its importance is peaking as the topic of decision intelligence grows.

There still seems to be a gap in understanding among insurance experts about the straightforward topic of decision-making. Whether it’s for a macro/strategic decision or repetitive business process decision-making, there’s a clear, proven approach.

A recent article, nCov-19, Mitigate the impact to your business (Part 1), written by Ryan Trollip, does a superb job of walking through the decision-making processes using the current COVID-19 situation as a case in point.

Key Points in the Article

Metrics — When looking to improve decision-making in an organization, we need to identify what metrics we are trying to improve and then select decisions that have the biggest impact on those metrics. With the virus outbreak, understanding and monitoring key metrics using dashboards like the wildly popular one that John Hopkins made available, have been key in monitoring trends and understanding the impacts of policy decisions. 

Subject Matter Experts and Decision Modeling — Leveraging knowledge effectively and not just data, is the key to delivering ROI quickly. Your expert's business knowledge can be extremely valuable if you have the disciplines in place to effectively elicit this knowledge and represent it in a way that can be leveraged by others. We call this discipline decision modeling. Whether you automate those decisions or not, or whether the decision leverages machine learning or simply conditional logic (rules), the first step is to leverage existing knowledge (not data, yet) to break down the decision to understand its dependencies, understand what types of decision-making and data will be required to drive the decision. Again, this is where subject matter experts play a critical role. 

See also: How Coronavirus Is Cutting Connections  

An example of this, from the referenced article, is from an epidemiologist on how to mitigate workplace risk, looking at the density of the workspace, how regularly the area is cleaned, ventilation type used, supplies available, high traffic area touch mitigation. etc:

On the other side of the equation, we want to balance risk aversion against impact to productivity. Each organization is different, but generally it’s not critical to have all employees in the office all the time. Even for companies that have no critical, in-office needs, it is clearly preferable, for productivity and culture, to have some roles in-office over others -- e.g., a design team that needs to white board and discuss ideas vs programmers executing on a design.

There are other factors. For instance, some employees are more self-motivated than others to work without in-office supervision, and there are varying levels of technical ability to work remotely. If we take this day by day, role by role, employee by employee, for many companies, it would not be critical to have each employee in-office every day. If we rank the criticality of these in-office days and chart them, employees ranked by criticality (y axis) against level of in-office criticality per employee per day (x axis), for many companies, it would look something like the chart above. The intersection on the chart (red lines) is a rough illustration of how risk will likely fall faster than the impact to the business when reducing the in-office employees for many businesses.

Advice

Besides providing some insights on COVID-19 risk management decisions, we hope this article illustrates the process of crafting decisions.

The use of insights produced through new technologies, data and systems will only be valuable when it affects the main line decision-making processes across the insurance industry and in particular in the underwriting, claims and policy/customer administration processes.

Developing decision intelligence and decision management competencies is like any other skill. They need to be taught/learned, practiced and matured. There’s no once-and-done. Sure, there’s great technology to assist, but the business of insurance needs to evolve its decision making.

See also: Coronavirus: What Should Insurers Do?  

Whether you are targeting macro decisions like the one illustrated in this piece, or day-to-day operational decisions – pick a straightforward place to start. Lead it with an excited line-of-business sponsor. Select a team of willing business process practitioners and engage in a decision-making workshop or design thinking workshop to uncover imaginative and informed ways to hone the decisions at hand.

Then you will be in a position to engage with operations and technical folks to examine how to institutionalize these new approaches.

Don’t forget to measure the results so that the outcomes are within expected tolerances and that all lessons learned are captured for the next advances in these newfound capabilities.

I hope that you, your families, your friends and your colleagues are staying safe and aren't going crazy in isolation. I live in Northern California and (gah!) am in the over-60 demographic, so I've been sheltering in place for days. The good news is that, without sports on in the background, I'm being wildly productive.

As I have searched for an analogue that would help me get my head around the global pandemic and its two-by-four to the face of the economy, it has occurred to me that I have a fairly good one. I was the bureau chief for the Wall Street Journal in Mexico City during the peso devaluation crisis that began in late 1994. So I watched, up close and personal, a crisis that threatened to not only take down the Mexican economy but also spread to the rest of Latin America and eventually to throw the U.S. into a recession. 

Now, I realize that what my colleagues and I covered was a financial crisis, not a medical one, and that my degrees are in journalism, not in medicine, public health or economics. But I still think some aspects of the peso crisis match what's been happening in the coronavirus crisis and may have something to say about what will happen over the next several weeks and months.

I certainly hope so, because the Mexican government fumbled its way through the first two phases of its crisis and still came out pretty well in the third. I think the U.S. (and many other countries) have likewise been slow in the first two phases of the coronavirus, but I still hope we can thread the needle and bring the crisis under control in the third phase before many thousands more people die or our economy is trashed, or both. 

So, I'll lay out what I see as the three phases to a crisis—the buildup, the inflection point and the aftermath—and explain how I think the current crisis maps to what I witnessed in Mexico in the mid-'90s. I'll then describe what I see as the best option for action now, based on considerable reading on the subject, and will provide several links for those who want to dig deeper. 

Yes, I'm being speculative, but I figure that it just wouldn't make sense to write about anything other than coronavirus at the moment, and my experience in Mexico is about the only thing I can lob into the discussion: a bit of heavily qualified hope.

The background on Mexico:

When I moved there in 1993, it was the darling of the developing world. Under the leadership of a group of young technocrats, the country was privatizing businesses that had been nationalized under previous, leftist governments. NAFTA was about to be ratified, which could turbocharge foreign investment and modernize the economy—but only if Mexico could maintain the stability of its currency. There had been so many devaluations that earlier in 1993 the country switched to nuevos pesos (new pesos)—I had loads of bills that said they were worth 100,000 pesos, but those were old pesos; you lopped off three zeroes to convert to new ones. Foreign companies liked what they saw in Mexico's leadership in 1993, but they were nervous. 

The buildup to the crisis began on New Year's Day of 1994, when some indigenous rebels took control of the capital in the state of Chiapas. The threat escalated in March when the man who had been designated to be Mexico's next president was assassinated. But the Mexican government took a "nothing to see here" approach and did little but talk even as the instability made foreign currency reserves dwindle. 

The inflection point came in December, when uncertainty about the newly inaugurated administration exacerbated the pressure on the peso. The government bungled this phase, too. It tried to "widen the band" in which it would let the peso trade, but foreign companies panicked, and hard currency fled the country. Soon, the currency had lost more than half its value. Spooked investors fled other Latin American countries, too. 

The aftermath worked out far better, partly because economies tend to be resilient, even when they're as fragile as Mexico's was, but largely because of a $50 billion bailout that President Clinton signed into law in April 1995. The decisive action steadied the ship and gave Mexico time to work things out on its own.

It's that aftermath that gives me hope that the economic package that is being negotiated in Congress (as I write this on Monday, the 23rd), combined with shelter in place orders and increasing production of medical equipment, will let the U.S. not only stop the virus in its tracks but let the U.S. economy survive the enormous hit it is now taking.

But the smartest people I've read on the subject say we have a narrow window in which to get the interventions right and need that steady hand that the U.S. bailout provided Mexico. They say we need to limit interactions quickly enough, severely enough and long enough that we can switch from our "horizontal" attack on the virus to a "vertical" approach before the economy melts down—in other words, going from a thinly spread, nationwide approach to deep dives into local flareups.

For now, we need the horizontal approach, covering everyone, because we simply don't know who has the virus. A key danger with the coronavirus is that many of those who are infected don't show symptoms, and we don't have enough tests available to do a blunt-force check of the population. But if we really all stayed away from each for two weeks, while practicing proper hygiene, we could drastically reduce the number of new cases, resetting the pandemic back to where it was perhaps two months ago.

At that point, we could switch to the vertical approach: watching closely to see where a case appears, then drilling down into it to see how the person got infected and who else had been exposed. Cellphone tracking data is turning out to be very useful in this regard because, once you know someone is infected, you can work backward to see where he was in prior days and get a sense of those with whom he has interacted while infectious (though there are obvious privacy issues). It's also helpful that the virus seems to infect people in clusters—families, those on cruise ships and others who interact with each other repeatedly, rather than just in passing. A vertical approach, based on detailed investigation into individuals and clusters and on extensive testing of all those possibly exposed, would let us shift to treating the coronavirus as a series of small fires rather than as a nationwide conflagration.

The vast majority of people could resume normal activities, and the economy would get rolling again.

But for my optimistic-ish scenario to have a chance, two things have to happen. First, we have to enforce the shelter in place for weeks—in theory, two weeks is enough, but there are enough folks mingling on beaches for Spring Break, etc. that I'm guessing three or four weeks will be needed. (Again, consult experts like Dr. Anthony Fauci et al. for actual data, not the journalist who is self-taught on science.) I worry we may not last three or four weeks because the president already is clearly itching to call an end to quarantines and reinvigorate the economy. Second, we have to produce tens of millions of tests and be able to use them quickly. That means not just having the tests but also having people who can administer them, personal protective equipment for them to wear and lab equipment that can determine results within 24 hours, if not faster. And we may have trouble just ramping up the availability of tests by the time we leave the horizontal phase—the CEO of Roche says that an adequate number of tests is "weeks, if not months, out."

There are loads of apocalyptic economists out there. Over the weekend, I saw big-name economists predicting a 15% to 30% contraction in U.S. GDP in the second quarter, with unemployment as high as 30%. And an economic collapse would trigger massive health problems even if the virus is then contained—more suicides, more homeless, few resources for the poor, etc.

I dearly hope the scariest numbers prove wrong, but I think we're on the knife's edge and need to get everything just right from here.

Stay safe.

Paul Carroll

Editor-in-Chief

P.S. (As promised, here are some links: a New York Times article that explains just how harsh the horizontal phase needs to be; a Twitter feed that shows the dramatic effects possible through social distancing; a column in the Times that lays out in detail the horizontal/vertical idea and is where I first saw it; a Tom Friedman column in the Times that builds on the horizontal/vertical notion; a McKinsey article that lays out several possible scenarios, including the one that I'm hoping occurs; and the most optimistic of them all, a Los Angeles Times piece about a Nobel laureate who sees hope in the pandemic numbers even as the grim death tolls keep climbing.)

P.P.S. I didn't want to clutter the main text but thought that those of you who've made it this far might permit me a personal note. That stretch I spent in Mexico was the most important journalism of my career. My little group made the right call during all three phases. We warned readers throughout 1994 that there could be a problem with foreign reserves, making the peso vulnerable. On the day of the "widening of the band," when others took the government at face value, we reported that the peso was going to get slaughtered—and it did, on the first day of trading. Then, when most others went into panic mode, we quickly switched to more optimistic stories because of signs of resilience that we saw.

The Mexico coverage was nominated twice for a Pulitzer Prize, and we were a finalist once. 

I even had a Deep Throat moment. Through considerable maneuvering, I convinced a senior official to sneak away from his bodyguard and meet me in secret at my home, even though he was in fear for his life. Trying to defend the government, he spent two hours explaining in detail how the devaluation had looked from the inside, including how it was botched. As we said a friendly goodbye at my front gate, knowing we were unlikely to ever see each other again, a car backfired somewhere in the neighborhood, sounding like a gunshot. He dashed to his car and drove off. 

Insurance has a fatal flaw. Few of us want to be reminded of how dangerous the world is. Cars crash, buildings burn, accidents happen. Usually to other people. So, unless we are highly sensitive to risk, unless we are unusually thoughtful about the future or unless regulation requires it, we don’t care much about insurance.

Recently, that all changed. The WHO declared COVID-19 a pandemic. Suddenly, we’d lost a big chunk of our savings, the rest of the world didn’t want to see us, most events planned for the coming months were canceled and the pandemic pushed everything else off the BBC evening news. Now we care about insurance.

For the last five years, the celebration of the emergence of innovation in insurance and the invention of insurtech has had to battle with a fundamental problem. How to change an established industry, reliant on legacy, which most people don’t really care too much about and which is, most of the time, good enough?

Successfully driving any change without a major shift in how we see the world is really hard. Often, we need a shock to the system. Our view of how our lives might change – for better or worse – radically alters if we directly experience disasters (personal, national or global). The emergence of new technology can also drive massive changes. Sometimes, very quickly. And not just recently. The Liverpool to Manchester Railway opened in 1830, and, within three months, over half the 26 horse-drawn stagecoaches on the route had gone out of business.

COVID-19 will bring many challenges, but it may be the reset button for insurance innovation. It's happened before.

Hurricane Andrew hit Florida in 1992, the most destructive hurricane ever to hit the state. The claims bankrupted 12 insurance companies. Soon after, the insurance rating agency A M Best required every insurer to prove that it had sufficient capital to withstand a “one-in-100-year” loss. No actuary had enough claims data to figure out what that meant. Andrew, and then the California Northridge Earthquake in 1994, gave birth to the specialized techniques of catastrophe modeling and led to the founding of RMS and AIR (now part of Verisk). The power of first-mover advantage, and the difficulty of building credible catastrophe risk models, is demonstrated by the fact that almost 30 years later both companies still dominant this space, with combined revenues of around $500 million.

Fast forward a decade or so. Despite 2019 being a record year in funding for insurance technology start-ups and scale-ups, with over $6 billion invested, it’s getting hard for some of the best-known business ideas to gain traction. Trov and Wrisk have announced recently they are shifting from being insurers (or, more accurately, MGAs) offering contents or device insurance, to becoming platforms. Their clients will now be other organizations with established insurance offerings or existing distribution and customers. Lesser-known companies have quietly packed up or are stuck in insurtech zombie land, never quite launching. Other well-known entrants such as Bought by Many and Lemonade appear to be doubling down on pet insurance. A perfectly acceptable strategy, but a future defined by our love of furry animals is not quite where were many people expected us to have got to by 2020.

See also: How Coronavirus Is Cutting Connections  

Innovation is really hard. We may have heard of the H1N1 variant known as Spanish flu from 1918, but, until we started to experience the impact of COVID-19 virus, few of us gave much thought to the possibility that a pandemic was something we would need to deal with in our own lives. I haven’t done a comprehensive search of Google, but I’m struggling to find any insurtech-like company that has been building solutions to model the risk of pandemics.

A quick editorial note here. I write “insurtech-like” because there is no universal agreement on what the word actually means these days. I’m using it here as a shorthand for any company launched within the last 10 years or so that is using new technology or data or analytics to help with distribution, pricing, risk management, claims and probably a lot more. Please don’t quote me on that definition, though -- the topic probably merits a full article in itself, and I prefer Andy Yeoman of Concirrus’s definition from when I interviewed him recently: “Every insurance company is insurtech, some just have bad tech.” But I digress.

RMS started building pandemic models in 2012 to help price “excess mortality,” a polite actuarial term to describe too many people dying at once. The idea was to help insurance companies manage their capital and get access to tools to help them buy reinsurance more effectively. The problem was that the rather simplistic capital models accepted by the regulators gave a lower risk price, and less capital requirement, than the sophisticated RMS models, which ultimately would have led to more costs for the insurers. There wasn’t much interest from the catastrophe bond market, either. There are a couple of parametric bonds in place just now, but few companies really worried enough about pandemics to justify the cost of buying protection.

Metabiota, founded in 2008, uses real-time data collection and analytics to model epidemics. A partnership was announced with Munich Re in 2016 to develop models and insurance solutions for property and casualty insurance designed to mitigate the economic losses caused by epidemics. Marsh has tapped into the Metabiota relationship with Munich Re to create PathogenRX. According to its website, this is index-based insurance that offers protection to US clients against losses resulting from a pandemic or epidemic affecting international travel, study-abroad and research programs. I’m not sure how successful this has been (watch this space) but anyone that has bought the cover is going to feel pretty smart just now. Techcrunch mentions that Metabiota is also working with African Risk Capacity (ARC), the agency using parametric insurance to provide cover for a number of African countries.

By the way, if you don't already know what an epidemic is, it's a sudden increase in the number of cases of a disease, more than what's typically expected for the population in that area. A pandemic is an epidemic that has spread to several countries. 

SparkBeyond, an artificial intelligence company formed in 2013 that I spoke to recently, has been commissioned by one major country to help it understand how to use analytics to minimize the pandemic spread. The company operates across many industries, so it's not really an insurtech (by whatever definition you use) but does hint at what could be on offer for those currently in the insurance world. (Check out the Instech London podcast to learn more.)

One system shock that may give the London market the jolt it needs is the potential for Lloyd’s to close for an extended period, forcing insurers and brokers to exchange risks electronically. The market shut for the first time recently for one day to test its resilience to a longer shut down, and at least one London company, Canopius, announced that it was asking all staff to work from home starting Monday, March 16. The recently launched PPL system for placing insurance contracts may not work as smoothly as it needs to, but it's unlikely that the Lloyd’s market could ever have contemplated working remotely without it. 

As we start to understand the far-reaching implications of this pandemic, and adjust our lives to cope with it, remember that with every crisis comes an opportunity. I was working the phones recently, speaking to some of the experts from modeling, medicine, insurance, supply chain and AI to help put some context around the news and record their insights for a pandemic podcast special. I explored what has been done around analytics and what could still be done to give some pointers to those of you looking for new business ideas or even just consulting work. I asked what the insurance implications would be, and I discovered how vulnerable the supply chains are. I found out that there are massive amounts of data available related to the pandemic, much of which is open source, and I reveal where to go to get the best insights.

See also: Innovation: Top Down/Bottom Up  

The podcast is number 72 on the Instech London series. It's 40 minutes long and a chance to hear what Robert Muir-Wood (RMS), Dr. Chris Martin (medical), Nick Wildgoose (supply chain), Sam Casey (Insurance Insider) and Alex Easaw (SparkBeyond) have to say. You can find it at any decent podcast channel (search "Instech London") or listen directly from here on the podcast section of the Instech London website (www.instech.london). Now with the added benefit of gaining Chartered Insurance Institute CPD credits while you listen.

Of one thing we can be sure, however the world looks in a few months, we are going to be thinking very differently about the threat of pandemics and what this means for insurance. Unfortunately, for many people and companies, insurance cover will be found to fall short of expectations in compensating losses, and when life returns to normal we might see a fundamental rethink of what insurance is all about. But maybe, at last, we can move beyond accepting that pet insurance is the best we can do when it comes to introducing innovation into insurance. 

Countless articles about the implications of COVID-19 on the insurance industry are circulating in the digital universe. Many aspects of the industry will be affected, but the ultimate impact depends on the length and magnitude of the virus crisis, something that is difficult to predict. However, one thing that is clear and will become more firmly entrenched as the reality of what is happening sinks in, and the weeks go by – digital capabilities are paramount for this day and age.

The work from home movement (#WFM), voluntary or mandatory quarantining, retail store closures and limits on public gatherings all serve to significantly increase our dependence on digital capabilities. More and more of the population are shifting their commerce online, using home delivery and expanding their usage of social media and digital tools for communication. The more that people and businesses get used to operating remotely via digital tools, the more it will be expected – even after the virus is contained. The genie is out of the bottle, and it will be hard to put it back.

What does this mean for insurance? Could COVID-19, in fact, create the tipping point for digital transformation?

For starters, it will bring into stark relief the level of digital capabilities that each insurer has. The demand for self-service digital interaction capabilities will increase significantly, both from a sales and service perspective. In addition, it is critical to assess insurers’ internal operations and the implications for employees. Another area of concern for insurers and customers is the potential for increased cyber risk. Finally, it is essential to look at existing transformation plans and IT projects and assess how these might change in the short and long term.

Let’s take a closer look at each of these areas:    

• Digital interaction capabilities: Self-service portals for agents and policyholders, websites that are easy to navigate and built using responsive design approaches, mobile apps for policy service and claims and world-class call center technologies will become more critical than ever. Volumes are likely to increase as fewer face-to-face interactions occur by necessity. Capabilities such as virtual inspections, do-it-yourself (DIY) claims reporting for first notice of loss (FNOL) and AI-based damage assessment will be much appreciated by all involved.  
• Internal operations and employees: The digital delivery of policy declaration sets, statements and correspondence is important for customers but also has a significant impact on employees. Documents that require production and mailing require employees to be physically present onsite to manage operations. In addition, the processing of inbound documents is a high-volume, people-intensive activity. The more that insurers can provide digital input options and automate and digitize inbound documents and correspondence, the better – for both customers and employees. Increased digital payment options can reduce the flood of checks that require physical handling. An environment in which more employees are working remotely makes the shift to more digital interactions vital. Also, modern technology enablement options for agents, adjusters and others who are in the field will enable them to do their jobs in a world where customers expect to interact and conduct business online.
• Cyber risk: The massive shift to WFH and increased reliance on digital interactions will increase the exposure for cyber risk. Both the insurance company’s internal data and the data of the personal or commercial lines customer will be more at risk. There will need to be greater adherence to security protocols and the stringent use of security technologies. From an insurance product standpoint, insurers will need to reevaluate an already rapidly growing product line to assess coverages and limits.
• Transformation plans and projects: The P&C insurance industry is in the midst of a wide-ranging digital transformation. Much has been done over the past decade to digitize documents and content and provide more ways for prospects, producers, policyholders, claimants and others to interact digitally with the insurer. However, most in the industry would agree that insurance is still in the earlier stages of comprehensive digital transformation across the enterprise. COVID-19 will not only create an immediate sense of urgency to provide digital capabilities during the crisis but will also reinforce the value of being digital.

When the spread of the virus is under control and the world begins to move back to a more normal state, insurers would be wise to rethink their plans for digital transformation. Many already sense that the pace of transformation is not fast enough. At SMA, we predict that COVID-19 will trigger a tipping point that results in more aggressive digital transformation plans across the industry.

See also: The Best Tools for Disaster Preparation  

Watch for a series of blogs, videos and webinars focused on “In the Moment of Truth” from the SMA team as we experience this new norm and together explore the possibilities and implications for the P&C insurance industry.

There is much discussion right now on the impact that COVID-19 (Coronavirus) will have on workers’ compensation. Most of this discussion has focused on the potential for claims activity arising from the virus. The determination of whether a communicable disease is “work-related” is a case-by-case evaluation. The large employers that I work with tend to retain risk on both their workers’ compensation and employee benefits programs. Thus, they are not concerned about which financial bucket the money comes from but are prioritizing caring for their workforce instead. Potential claims arising from COVID-19 are not the focus of this column. Instead, I’m looking at how the challenges arising from this virus will affect the workers’ compensation industry.

Individual Claims Costs

In the short term, expect the overall costs per workers’ compensation claim to rise due to the increased duration of claims caused by many factors: 

• There will likely be delays in treatment as the healthcare industry focuses on fighting COVID-19. That means physicians, hospitals and testing facilities are tied up and that elective surgeries are on hold until this crisis passes. This challenge is not unique to workers’ compensation, as the group health and Medicare setting will be experiencing similar delays. 
• Modified work will likely be unavailable for many employers, due to the significant downsizing of workforces in many industries, including retail, restaurant, hospitality and airlines.
• Return to work in any capacity may be a challenge for these same industries. In wage-loss states, indemnity benefits often cannot be stopped without a return to work. 
• Courts are mostly closed in many states, halting the workers’ compensation adjudication process. 
• Outside job placement efforts through vocational rehabilitation will be almost impossible, with so many employers idled and a significant percentage of the workforce looking for work. 

Total Claims Costs 

Due to the significant decline in people working in most industries, there will be fewer new claims over the near term. With so many businesses closed or functioning with reduced operations, there are simply fewer opportunities for workplace injuries to occur. 

On the flip side, it is too early to tell what the ultimate impact of compensable virus claims will have on the industry. No one can rule out that the costs from these claims will be as high, or even higher, than what we would experience typically. Specific industries, such as healthcare, some retailers and occupations such as first responders, could see an increase in claims and costs due to the combination of virus-related exposures and the significant overtime hours by their workforce.

Nationally, there is a significant increase in the number of people working from home in response to the outbreak. There is very little case law out there regarding what constitutes a compensable claim when working at home. It will be interesting to see what claims arise from these situations and how courts around the country interpret these situations.

See also: How Coronavirus Is Cutting Connections  

A decrease in total claims may mean less revenue for industry vendors with fee-for-service and per-claim business models such as medical management providers, including utilization review, bill review and case management. Third-party administrators are also often on per-claim contracts, and fewer claims could mean less revenue for them.

Later this year, there could be a spike in claims as things start to return to normal. There will be a massive influx of workers who are both deconditioned and may have forgotten procedures and loss-prevention policies. It will be challenging for employers to ensure their returning workforce is fit for duty and retrained appropriately.

Other Claim Considerations

As many restaurants shift to a delivery-only model, employees who are not usually commercial drivers find themselves adapting to this new role. Could that lead to a spike in work-related auto accidents in that industry? Possibly, but a more significant concern may be that many businesses may not have adequate commercial auto coverage because they did not have drivers until now.

Also, as non-essential businesses close, and many companies shift to a work-from-home model, there should be fewer auto accidents overall.

Industry Financial Implications

The dramatic drop in payroll for many employers may also mean a reduction in the corresponding workers’ compensation premiums they pay. It’s relatively simple; fewer workers equals lower premiums. Look for overall industry premiums to drop sharply for 2020 compared with prior years. Lower premiums also mean lower revenue for state regulatory agencies that are often funded by premium taxes and assessments.

The insurance industry, in general, and workers’ compensation carriers, in particular, depend on investment income as an element in their overall pricing model. With the Fed interest rate at zero and the massive drop in the stock market, those investments will be down across the board. Carriers may have to charge higher rates to make up for the significant decline in investment income.

Like all industries, the workers’ compensation industry is dealing with significant business disruption because of COVID-19. Many offices have closed, and, where possible, companies are implementing work-from-home models. Companies that focused on business continuity planning for such situations have an advantage over competitors that may not have been as diligent in these areas. It is imperative that insurance companies be included as “essential businesses” in any state or local shut-down orders because of the important financial backstop the industry provides to the economy and the workforce in general.

Finally, almost all in-person industry conferences are canceled right now until mid-May and possibly longer, including two of the largest industry events of the year, RIMS and the NCCI Annual Issues Symposium. The conference business is a challenging one because it requires you to invest up-front to secure facilities and resources with the hope you will be able to recoup that investment with sponsorships and attendee fees. Conferences have incurred costs preparing for now-canceled events, and they may not be able to recover those costs. Those unrecouped costs could put a significant financial strain on some event budgets, especially the smaller events that tend to operate with no surplus to tap into year-to-year.

See also: Coronavirus: What Should Insurers Do?  

On a positive note, most workers’ compensation carriers have strong balance sheets that will enable them to come through these challenges. The current crisis is an example of a time when the financial strength rating of your carriers matters most. Injured workers will continue to receive their benefits, and carriers are being very responsive to policyholders, including timely payment of claims. Many claims administrators use electronic banking where allowed, which means even injured workers under confinement receive their benefits in a timely matter.

COVID-19 will affect the workers’ compensation industry well beyond claims related to the virus. However, our industry is strong and resilient, and we will persevere and adapt to these challenges.

Within the commercial property and casualty sector, there has been a lot of attention on the underwriting process, which is inherently manual and time-consuming. Carriers and insurtechs are primarily trying to accomplish two things: make it easier for the end user to buy insurance and improve the accuracy and efficiency of underwriting.

These two goals complement each other. By tapping into third-party data sources, carriers can get more accurate information. Carriers also increase ease of doing business, for both underwriters and customers.

To date, carriers have leveraged in-house tools and partnered with technology providers to gain information for underwriting. Property sensors, public records, telematics and drones are just a few of the sources underwriters are using to access risk. But to stay competitive against other carriers and to continue to cut down on the number of questions that will need to be answered by the applicant, carriers need to continue to innovate.

See also: Winning in Small Commercial Lines  

An Accenture report centered on the rise of insurtech found that 86% of insurers believe innovation must happen faster. So, what can carriers do to boost their underwriting game?

1. Start with areas that are aligned with strategic objectives: Insurance carriers need to think more strategically about innovation. Areas of investment in innovation need to tie directly to where you want to grow or improve from a business perspective. It is easier to gain internal buy-in and traction on topics that everybody already agrees need the most attention.
2. Understand operational readiness for prioritized uses: Before any investment takes place, business leaders must understand what it would take to put an idea into production. In many cases, a clear path to test a new capability is identified--e.g.. limited proof of concept (POC)--but the actual requirements, timeline and costs (rough order of magnitude) in a production scenario are not analyzed or understood. Early focus on the desired end state can set the proper vision and avoid stalls and misdirection later on. 
3. Make it easy to collaborate. The thing that insurance carriers that have strong innovation programs have in common is that they are not afraid to collaborate with insurtech partners. Today’s insurtechs are building niche businesses that can be tapped to enhance specific parts of the insurance value chain, often far faster than a carrier’s internal capabilities could allow on their own. Leading-edge carriers are collaborative and oriented toward feedback. The approach by insurtechs creates a healthy ecosystem and promotes effective product development.  

Once a carrier implements new technologies in the underwriting process, the organization should ensure that it is measuring the improvements in accuracy and efficiency. One way is to look at the organization’s overall profitability. Another is to look at team productivity--if measures have been put in place to boost efficiency and accuracy, the same underwriting team should be able to quote more policies than before, and more quotes should be "bindable."

Agents will find it easier to do business with carriers that operate more efficiently and effectively.

While the insurance industry has fallen into the late adopter category, carriers and insurtechs have the opportunity to take advantage of a market that is ripe for change. 

See also: The New IoT Wave: Small Commercial  

DataCubes focuses on powering commercial underwriting using decision science. The organization was built on the idea that there is a more productive way to underwrite.

The insurance industry continues to be an enabler of innovation. Since its creation three centuries ago, it has become an essential part of the global economy — providing security and resilience to businesses and individuals alike. But the fundamentals of how it operates have barely changed.

As we enter a new decade, the industry must reflect the reality of the needs of today’s businesses and society. Large commercial insurers and reinsurers, in particular, have an increasingly urgent imperative to realign their organizations and modify their offerings to include stronger preventive services against new and evolving threats, including climate change and cyber risk.

There is a huge opportunity. Our latest NextWave Insurance report (released March 3, 2020) reveals that, should the industry act now, an unprecedented growth and profitability spike is within reach. By 2030, we project that large commercial insurers and reinsurers could experience:

• $600 billion in revenue growth
• 25% to 35% improvements in combined operating ratios

To realize these gains, the industry must become more dynamic and agile.

A range of forces — from technology advancements to a dynamic value exchange — will propel the creation of new business models and the evolution of existing ones.

We’ve identified seven business model trends already emerging across the industry that are pointing the way to what the future insurance ecosystem might look like:

1. Global composites

Market mainstays are evolving by leveraging strong balance sheets, strategic capital investments and new expertise to ignite growth across markets.

In the next decade, modernized technology will enable workers to re-skill while creating a culture that places the customer, process efficiency and operational agility at the center of insurers’ business models.

On top of this, organizations will become much more data-driven and increasingly reliant on productive partnerships and collaborations. These capabilities will be necessary to offset competition from smaller players.

2. Specialty insurers

Boutiques are starting to protect their market share by writing risks others won’t.

In a highly specialized commercial reinsurance marketplace that generally demands either specialization or scale, the most successful boutiques may navigate competitive threats by targeting specific niches where they can operate profitably and where few other firms are bold enough to tread. Boutiques' ability to survive will depend on the quality of their specialist expertise and a willingness to write risks others generally decline.

For these insurers, their strategic priorities for the next 10 years should revolve around expanding and enhancing business origination, loss prevention and other high-value services. These insurers must become smarter and leaner in risk transfers and forge better relationships with partners and suppliers.

3. Global reinsurers

Innovative traditionalists are remixing their talent base and upgrading their technology to provide compelling risk-transfer solutions and access to secondary markets.

Future global reinsurers will devise innovative risk-transfer solutions with smaller teams. By creating partnerships with alternative capital providers, these reinsurers will increase product innovation and boost their market penetration rate. Additionally, they will diversify their offerings to include primary insurance products and new loss-prevention and ancillary services.

See also: New Business Models Are Needed  

Advances in data mean they will employ more data scientists and fewer claims processors. Their ability to match different opportunities and new products for different risk appetites will help them provide access to secondary markets and engage with more stakeholders. 

To fully succeed, their strategies must prioritize growth opportunities and capital risk management capabilities. They must partner with alternative capital providers on product innovation, increase their access to big data and augment their analytical capabilities.

4. Underwriting agents

Future managing general agents (MGAs) are building momentum and capitalizing on market trends to create and capture profitable niches. 

Lean, agile and dynamic, tomorrow’s MGAs will build thriving niche businesses and grow profits faster and at a larger scale than the industry as a whole. Their sole purpose will be providing specialized underwriting services to portfolios and networks of investors and capital providers. Though specialization is key to success, “Mega MGAs” will emerge, reaching $1 billion in revenue through consolidation or by duplicating their success across multiple market segments.

By leveraging defined products and targeted expertise to exploit distinct and profitable market niches, this subsegment may grow to $150 billion in revenue, doubling the current revenue base. The largest may ultimately pivot to become insurers — a further threat to traditional business models.

The MGAs must engage with the most suitable partners, such as capital providers and supporting vendors. They must also strike the right balance between growth and scale as they seek to duplicate success across multiple segments.

5. Capital providers

Lean and agile portfolio managers are driving capital returns by aggregating strong delegated authority and managing general agents/managing general underwriters (MGAs/MGUs) to find profitable niches.

By 2030, some carriers will shift their focus to become experts in capital deployment and management of third parties. These firms will operate with relatively few employees and exceptionally lean in-house models. They will home in on well-defined market niches, customer segments and specific product types. These portfolio managers will excel in managing arrangements with multiple delegated authorities (DA) for underwriting, claims handling and other service providers, such as loss prevention specialists.

Strategic priorities will include identifying and engaging the top-performing DAs and improving operations by strategic sourcing. Should these managers deploy capital flexibly and efficiently, they will have a greater opportunity to develop niche products for target customer segments. 

6. Self-insurers

Customers are beginning to compete with traditional insurers as “super-sized captives” and are developing in-house capabilities to self-insure more of their risks.

Companies that formerly bought insurance are now more interested in selling risk, pushing traditional insurers into new roles and marginalizing some carriers. The absence of appropriate coverage for intangible and virtual assets will push large multinationals to deepen their commitment to self-insurance. Self-insurers may also contribute to the rise of industry associations as they build out capabilities that can be sold on the open market.  

These companies need to get comfortable taking on more risk, as they learn to generate superior insights and develop tools for stronger loss prevention. Deep and granular analysis of their considerable data resources, as well as knowledge of their own operations, will match coverage to risk appetite and eliminate the need to place business on the open market. Self-insurers will also develop the skills and knowledge to navigate increasingly complex regulatory and tax environments. 

Strategic priorities will need to include risk prevention, rather than risk protection only. Self-insurers will need to consider product innovation to map coverage to existing needs, as well as develop new skill sets.

7. Global intermediaries

Brokers are repositioning as underwriting and risk advisers, boosting revenue and strengthening customer relationships. 

Risk placement will always be important to commercial insurance brokers, but it will no longer be their sole focus. Their placement teams will be considerably smaller after extensive re-skilling, and the most successful firms will transform their models to expand and diversify their offerings to include underwriting and risk advisory services.

Of course, it will take considerable effort and significant investment to execute this transition. Brokers must overcome market skepticism about their ability to add value in a primarily digital world. They will also need new skill sets, higher-quality data and modernized technology. Those that transform successfully (and immediately) will be well-positioned to lead the creation of industry ecosystems that connect industry players following variants of all these business models — a traditional strength of brokers. 

See also: Future of Insurance Is Clear (but Hard)  

Their strategic priorities will consist of bringing in new skill sets to help develop new offerings. They will need to effectively use distribution networks to launch and refine services, along with using data comprehensively to identify opportunities to serve a broader range of customer needs.

An ever-evolving insurance ecosystem

Some of these changes are already underway. Yet others are only in the early stages. Some will be easier to turn from vision to reality, while many will involve significant disruption.

As our previous NextWave personal lines and small commercial report found, a business-as-usual operating approach is no longer an option. Changes are already affecting the industry now, and the early movers are seeking out competitive advantages that may become lasting as the insurance ecosystem is reshaped over the coming years.

We know what’s likely to come next — and picking the right business model to pursue will be key for insurers and reinsurers to reposition for what’s to come.

Click here to download the full NextWave Insurance report.