In part one of our series, we explored the evolution of traditional marketplaces toward fully integrated experiences that include complex industries such as regulated services. In this article, we’ll take a more focused lens on the insurance industry and the value that can be created through digitally connected ecosystems. Let’s break this out into the four key stakeholder groups that would benefit from a connected insurance marketplace:

• Customer
• Adviser
• Carrier
• Reinsurer

It’s all about the customer…duh! Let’s face it, most people don’t really enjoy buying insurance. Most of the time, they are making the decision under pressure (they’ve been hard sold) or appeasing social norms (“everyone says I should buy insurance when I have kids”). What they really want is to get through the process as easily and quickly as possible. However, as an industry, we require personal data points to predict and manage risk through a pooling of profiles. For a customer, the only way to obtain insurance is to provide enough personal data to allow an insurer to make an informed risk assessment and product offering — and the process can be extremely time-consuming. Data is inherently built into insurance. For the customer to have a great experience, we need to collect the information as easily and unobtrusively as possible (no more needles and cups…please!). Convenience and accessibility are key decision-making factors for consumers today, which is why we’ve seen major industries like banking and retail digitize much of their business processes. An integrated marketplace can remove the hassle and wait time for clients by digitizing checkpoints and interactions. The less paperwork and redundancies that are involved in the process, the better the experience will be for the client, which translates into more revenue for businesses. Advisers matter more than ever For complex products like life and health insurance, most consumers decide on buying these products after a series of conversations with a trusted professional. The adviser in this equation is there to educate, support and guide the customer’s decision toward the best solution to meet their needs. The real role that advisers play is coach and therapist. For great advisers, most of the time spent with clients is less about the products and numbers, and more about understanding the people and their goals, dreams and fears. Therefore, advisers have the essential role of understanding various carrier products and making recommendations based on what they know about the client — all while adhering to industry standards and compliance regulations. See also: Designing Workplace of the Future   This is very difficult to do at scale with paper-based processes. One of the benefits of a digital marketplace is supporting advisers with “product discovery.” Searching and comparing insurance products can be done much faster through the use of technology. Marketplaces also increase options for advisers, thereby creating value and a better experience for clients. Having a larger pool of insurance products to choose from, advisers can leverage technology to filter options based on the client’s goals and financial situation. Using technology to alleviate manual processes and automate compliance will enable advisers to spend more time doing what they do best; coaching and supporting their clients. Advisers care deeply about people. Insurance is about protecting people. Finaeo is about supporting advisers through the use of technology. Carriers are moving toward digitization About two months ago, I was in a carrier’s office discussing the future of insurance distribution and the role it would play in the customer experience. We started getting into the subject matter and sharing examples of areas where today’s experience is broken. All of a sudden, in a proud moment, an executive almost stood on a chair to share a profound insight: “Six months ago, our organization came to a great conclusion; we have to focus on the customer.” This “perceived insight” seems so trivial, but, in fact, is the tipping point of a billion-dollar incumbent understanding what matters most: the customer experience. By providing a digital-first experience, carriers can help prospective clients with education, analysis and recommendations to meet their individual needs. A seamless experience means policy-holders will enjoy, as best as they can, the decision to spend money on the insurance they likely aren’t excited to pay for. Making the customer experience as great as possible will provide carriers with a significant competitive advantage. An integrated digital marketplace helps insurers in a few ways:

1. Access to data to make better risk decisions
2. Understanding of how products are performing in real time
3. Increased visibility in the moment of purchase

Risk management is about math. Insurers use models to predict if the premium that consumers pay will be profitable based on their health. Insurance companies compare the client’s personal information to their internal risk guidelines (known as “underwriting rules”) to produce a price in exchange (i.e. marketplace) for a policy. Carriers that obtain the right information digitally and automate it against their underwriting models will have the opportunity to make better decisions at scale. In addition, they will have the opportunity to layer on technologies such as machine learning to drive insights on product manufacturing that previously would be unseen. These “hidden secrets” are the key to unlocking the future model of insurance. Once carriers can optimize their understanding of customer data and risk management, they can start to develop a more competitive product offering based on their ability to understand the performance of products in specific markets and customer segments. Carriers that are digitally connected with their customers will have the opportunity to create, deploy, analyze and iterate on products not in multi-year cycles but in real time. Lastly, buying insurance is all about a series of choices, but what truly elevates a carrier is the ability to capture the attention of the “buyer” (which could be the adviser or policyholder, depending on the distribution model) in the moment of purchase. Today, insurance is an open — mainly analog — marketplace where buyers can choose from an array of carriers to obtain the coverage they need. Carriers are competing for business against their competitors on a daily basis and are relying on their brand strength to win the business. However, in today’s world, people spend most of their time online. Therefore, carriers need to adapt their marketing efforts to stay competitive and create content that resonates with modern consumers. Once connected to a digital marketplace, carriers can start to develop more targeted “in the moment” marketing and advertising campaigns and quickly leverage modern marketing strategies such as A/B testing, retargeting and segmentation. Reinsurers can change the game In an industry centered on risk management, the ultimate risk-bearer, the reinsurer, holds one of the most important and influential roles in the market. As with many financial markets, the availability of capital is more flush than ever before, and, by nature, value is being eroded. The traditional relationship between supply-chain participants has shifted, and the expectations of value creation are stronger than ever before. In any market where a pyramid distribution model exists, there is an inherent risk of channel conflict. It’s an accepted and known reality of insurance that co-opetition exists and that, as a result, there are trade-offs made in growth strategies that stem from a desire to maintain the “perceived” conflict. Every partner that a reinsurer works with ultimately sends the reinsurer similar information, and, by helping the industry standardize these data requirements, reinsurers can help create a more efficient, compliant and valuable relationship with the industry. Helping carriers move toward a digital-first distribution model will ensure that reinsurers are capturing the most information possible to generate a better view into how risk management decisions affect their partner’s distribution strategies. This symbiotic relationship can now be focused on strategic value rather than capital access. In short, money is fluid and available; partners are hard to find. Today, the industry looks at exchanging insurance as a buy/sell model. Even in the language we use (“distribution,” “sales,” “supply chain”), we talk about the purchase as a good rather than a service. Financial services is a deeply personal and complicated experience for most people. An integrated marketplace experience allows everyone to focus on the most important part: the customer relationship. Each stakeholder in the experience should be seen as a partner, not as a buyer/seller in a service marketplace. Ultimately, to create the best experience, the industry needs fully integrated and digitized marketplaces that provide today’s digital customers with the experience they expect and deserve.

I have mentioned before that analysts benefit from stronger commercial awareness. But what do I mean by this term? The easiest way to explain is to set it in context. A lack of commercial awareness is normally shown when an analyst presents findings. The impression the analyst leaves with internal customers is of being naive. I’ve written before that this too often happens to otherwise very technically capable analysts. Their work may be based on high-quality, well-prepared data. Their analysis may be statistically robust and perhaps even presented using engaging data visualization. But, if the analysis ignores commercial priorities or constraints for the business, or recommendation would actually destroy value, it is doomed. Other problems can be ignorance of competitor behavior, agreed strategy or even how the business makes money. As someone who works with a number of the U.K.’s largest businesses, I regularly see the need for commercial awareness. Clients request training or mentoring to hone this skill. So, in this post, I will seek to draw back the curtain on what is meant by this term. Commercial Awareness 1: Understanding Finances This might sounds like a Captain Obvious statement, but most analysts and data scientists have no background in finance. Yet much of their work requires a good understanding of how the business they serve makes money. The work can often also require an awareness of current financial performance, so the analyst can understand priorities. Having worked with a number of finance professionals, as well as a bank and an insurer, I’ve found that much training or communication on this topic assumes too much in terms of people’s understanding of the basics. See also: Expanding Into Small Commercial   The single best sources I have found is a great book called “Naked Finance” by Dr. Dave Meckin. I had the pleasure of being on one of Dave’s training courses many years ago, and he really brought the subject to life. In this book, he helps explain key topics, including:

• Understanding profit and drivers of profit
• Reading the three main financial statements
• Understanding how companies are valued
• Seeing what drives share price movements
• Comparing value of potential projects (NPV)

If you recognize the need to better understand the basics of business finance, then I highly recommend Dave’s book. Commercial Awareness 2: Strategic Alignment Another way analysts can get it wrong is failing to understand the context of not just current performance but also future plans. In a previous post, I recommended that customer insight strategies need to influence and be aligned to the business strategy. Analysts will benefit from understanding not just the final communication of the business strategy but also the rationale. What does the brand stand for? How is it different from competitors'? How does this play to strengths or opportunities? What participation decisions have been made with regard to markets, products, channels and segments. Understanding more clearly the unique identity of the business will help analysts. Take time to read strategy documents, to understand more clearly threats, opportunities and relevant profit levers. A great tactic here can be job shares/swaps/shadowing, giving analysts the opportunity to work with the finance or strategy teams charged with strategic reviews. Analysts can develop an appreciation of priorities and which potential insights actually align with bigger picture -- another way of avoiding coming across as a naive analyst. Commercial Awareness 3: Market and Competitor Intelligence Guest blogger Peter Lavers has shared before on the need for B2B businesses to have market and competitor insights. The same is true for business-to-consumer firms. Failing to understand the dynamics and trends in a market can result in inappropriate recommendations. Not knowing what competitors are doing and what has worked in the past can result in “insights” that sound just like copycat or too-late recommendations. I shared before the advantages of a broader holistic definition of customer insight. Within that approach, there are advantages to including market and competitor intelligence teams. Too often, these fine people are kept separate from other data analysts or market researchers. Often, they report into finance or strategy lines. However, the regular analysis of market and competitor behavior often allows them to develop crucial domain knowledge, expertise that may prove crucial to analysts and modelers, for example when developing econometric models. See also: Innovation: ‘Where Do We Start?’   Some of these teams also develop models of market behavior that are very useful for scenario modeling and stress testing strategies. At the most basic, analysts need to know if apparent strong performance by their firm or a competitor is truly out-performing the market (or just “a rising tide lifts all boats“). How Do You Develop Commercial Awareness? I hope those thoughts are useful. You may include other aspects within commercial awareness. If so, please do share comment below or on social media. Either way, I encourage you to invest in developing the commercial knowledge of your analysts. Doing so can pay you back in spades, in terms of their confidence and impact on other stakeholders. Feel free to get in touch if you’d like to know more about my training courses to develop these skills.

Have you ever wondered, “Where would basketball be without the three-point shot?” It has been my husband’s favorite shot as a player, coach and fan, and it's mine as we watch Big East Creighton basketball games, because the energy, excitement and momentum completely change in seconds! You may never have considered this (and you may not even care), but it bears real relevance to what is happening within the insurance industry right now regarding the relationship between innovation and regulation. The history behind the development of the three-point shot is fascinating. The rule was actually tested as early as the 1940s, but it didn’t become mainstream within the NBA and NCAA until the mid-1980s. Suddenly, a team that was down by two points with only seconds left could do more than tie the game — they could win! A dunk used to be thrilling (and it still it is), but there is no question that the three-point shot (one simple new rule) has generated greater popularity, attendance and income for basketball teams – literally a game-changer! But here’s the nugget: The reason that the rule became mainstream was NOT because coaches and players wanted the rule. It was because fans loved how it transformed watching the game, and league commissioners wanted to please fans. The regulating organizations and the fans were jointly instrumental in bringing about the change. Moving Innovation From Concept to Precept Today’s insurers are finding themselves at a similarly historic point on the pathway to innovation. Customer needs, expectations, desire, lifestyles and technologies are driving change in insurance. Some insurers have been innovating and testing their ideas, with some success. But now, regulatory organizations that govern our industry are fostering innovation with sandboxes for testing new products, and rating agencies are planning to score carriers’ innovation efforts and outputs as part of the ratings process. This completely changes the nature of the word "innovation." It borrows the idea of innovation as a conceptual word and recasts it as a formal precept. Some insurers might see enforced rigidity, but it is the exact opposite. It is the freedom to innovate in the direction of customer and market opportunity, with potential guidelines that may help insurers invest wisely. This is just another example of the customer driving the change, with the regulatory bodies listening well enough to bring validation and accreditation to the change. As we’ll see throughout the rest of this blog, insurers are now free to make three-point shots and have them count! In our latest thought leadership report, The Future of Insurance: Optimization, Growth and Innovation, we explored the idea that companies should take this opportunity to reinvent themselves. Last week, we started by looking at this opportunity from the standpoint of strategic alignment. How does a two-speed model for transformation fit the strategic alignment needs of insurers that are trying to innovate while they also need to optimize their current business? See also: An AI Road Map to the Future of Insurance This week, we’re looking at how two recent regulatory events signal innovative opportunity for insurers. Can we use the changes in our game to learn and innovate? Can we use the rule-book as a tool for optimizing our processes and growing through innovation? We begin by looking at the details of regulatory possibilities. We will then follow up with some suggestions for insurer response. Innovation and Regulation — Is there really an opportunity here? With the rise of insurtech, the flow of capital into insurtech, changing customer demographics, shifting market boundaries and the pace of emerging technologies adoption, insurance regulators have noticed.

• The National Association of Insurance Commissioners (NAIC) established an Innovation and Technology (EX) Task Force to monitor insurtech developments and help regulators stay informed and educated. One of their tasks was to explore the use of a sandbox to accelerate innovation.
• A.M. Best proposed a new innovation assessment to be included in the annual AM Best rating review.

So, the regulatory gears are in motion for change. Let’s look at both of these signals in light of their impact on insurers. The Sandbox Concept — “You are now invited to innovate. Potentially, one of the most important changes considered by regulators is the sandbox. In November 2016, Munich Re America submitted a proposal to the NAIC to lower the barriers to test new ideas, address how innovative ideas can be quickly developed and launched in an environment that is strictly regulated via a “regulatory sandbox.” This legislative proposal for the sandbox, similar to what has been used in Europe, would allow an insurance commissioner to receive an application from an insurer or other licensee that essentially says, “We can meet the consumer protection need of that law in another way,” but still in a supervised environment via the sandbox. Adding support to the concept, the American Insurance Association in December 2017 presented a model law to the National Association of Insurance Commissioners that would allow for the creation of a regulatory sandbox in which insurers could test digital innovations without fear of running afoul of regulations. In 2018, I had the opportunity to speak to a few state insurance commissioners and some of their staff, sharing our consumer and SMB research that reflects the changing customer needs and expectations. At the end of one discussion, the commissioner commented to staff that they needed to understand these changing needs because these are the customers they serve. What an insightful comment! Since that time, states have been taking differing approaches. Some believe sandboxes are not necessary or that their legislature would not allow for sandboxes. Others, including Connecticut, Illinois and Wisconsin, believe their current regulatory environment allows them to provide guidance to innovators without the need for a sandbox. Arizona, Utah, Vermont and Wyoming are taking steps to encourage sandbox environments. In late May 2019, Kentucky became the first state to pass a bill to create a sandbox for the development of creative risk management. The launch of the sandbox concept in various forms offers one of the most potentially important shifts made by regulators to encourage insurance innovation. This is a potential game-changer — one that aligns regulators with customers! Where previously some innovations might be stifled by regulatory constraints, the NAIC is signaling that it would like for these innovations to count toward the improvement of the industry. Those that embrace new ideas and test and learn are free to capture the growth opportunities in a changing marketplace. The Innovation Assessment — “You can talk the talk, but can you walk the walk?” In early March 2019, A.M. Best published a draft document, “Scoring and Assessment of Innovation Methodology and Criteria.” The document states, “Given the accelerating pace of innovation and magnitude of change, insurance companies that fail to innovate may find it difficult to sustain long-term success/profitability and may ultimately be subject to anti-selection and loss of relevance. Those insurers that successfully incorporate innovation will likely strengthen their organizations, increase their customer base and improve efficiency, which will support their financial strength.” Hence, they are introducing new innovation scoring criteria. The report states, “A.M. Best defines innovation as a multi-stage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful. These products, processes, services, or business models can be created organically or adopted from external sources.” How does this look in practice? The innovation scoring and assessment includes two components: innovation input score and innovation output score, both of which have sub-components. The innovation input subcomponents include leadership, culture, resources (allocation, strategy, management) and processes and structure for innovation. Innovation output subcomponents include results and level of transformation. The natural tendency for insurers will be to look at the criteria and find out what they need to do to “look innovative.” But when insurers examine the criteria more deeply, they will quickly realize that this is impossible. A.M. Best has created a framework for analysis that is transparent from top to bottom. The goal for insurers won’t be to look innovative, but to take the innovation criteria as a helpful guide to actually become innovative through and through. See also: Future of Insurance Looks Very Different   If the A.M. Best proposal moves forward, insurers will be tagged, like this:

• Non-innovator: Companies receiving an innovation score of less than 12
• Reactor: Companies receiving an innovation score between 12 and 17
• Adopter: Companies receiving an innovation score between 18 and 22
• Innovator: Companies receiving an innovation score between 23 and 27
• Innovation Leader: Companies receiving an innovation score of 28 or higher

The best part about the innovation scoring is that it is holistic, covering people, process, leadership, transformation and results. With the knowledge of what may be coming from A.M. Best, insurers are now able to ask themselves some important questions. Are we investing our resources in areas of innovation where we are likely to see transformative results? Cloud-based platforms, such as Majesco CloudInsurer and Majesco Digital1^st Insurance platforms will help insurers achieve the transformation results and launch innovative products in weeks rather than years that can lead to higher A.M. Best innovation scoring. Are our processes and structure designed to make the most use of real-time data and digital connectivity? A.M. Best will be scoring the alignment of strategy and innovation in light of data’s use in decisions, solutions, problem-solving and data governance. Are we ready for insurance’s innovative three-point shots? The lesson that we gain out of these regulatory signposts is that we are close to a day when innovation is no longer optional, but it becomes an embedded tool for buzzer-beaters against the competition. Regulation and innovation are not incompatible. When combined effectively, they will please customers and open new markets and opportunities. Insurance will see a resurgence of popularity and the game will never be the same. Is your organization ready to change its game in light of an industry that is driving toward innovation?

Insurers already collect heaps of data; with artificial intelligence, they can use it to its full potential and improve at every level, from automating call center request processing to helping make accurate assessments and executive-level decisions. Through its power to recognize patterns and anticipate actions, AI can provide a predictive environment where risks are anticipated and hedged. So far, it seems that the main areas of AI application in insurance include customer experience (58%), process optimization (43%) and product innovation (19%), according to a 2018 study by Everest Global. AI could also be applied to fraud, which a report by the FBI shows costs more than $40 billion per year. The insurance industry is prone to multiple fraud schemes. However, most fraudsters follow well-known patterns that AI can identify in minutes. The need to address fraud will become even more critical in coming years when more policies will be issued and handled exclusively online, and AI will be able to highlight any abnormal patterns during claims. See also: Untapped Potential of Artificial Intelligence   Claim Support Right now, the insurance sector requires a lot of staff for processing and inspecting claims. This makes policies more expensive and case-solving more cumbersome. These manual tasks can be at least partially replaced with a chatbot to record the claim, verify the details, make sure there is not a fraud attempt and pass the claim along. Through computer vision, the chatbot can also analyze the evidence and assess the damage. Better Underwriting The complaint about insurance policies is typically their price. AI can create personalize rates based on the client’s actual choices and lifestyle. Factors such as the distance traveled, diseases, financial stability and more can create dynamically priced policies. Metromile, for instance, uses an AI-enhanced sensor system to monitor the driver’s behavior and any incidents. A similar solution could be created for life insurance based on data provided by fitness trackers and medical records. This is called behavioral premium pricing, and it’s about paying for what risks you take. You are no longer just a data point in a statistic; you are paying for your actions. It’s not about approximating but about taking responsibility. Better Marketing and Customer Experience An enhanced online profiling tool can help insurance companies tailor products for a wide array of client segments. Using natural language processing and scanning comments from online platforms and forums can lead to the creation of innovative insurance products that are more adapted to the modern client’s needs. It’s listening to the client’s voice but in a new, AI-powered way. Customer experience is all about speed and reliability. The time to settle a claim is a key performance metric, and it can in many cases be reduced from days to minutes. The next step of using AI is not so much about innovating but about integrating. We have different services providing us with insurance for health, car and home, but we can hope to see universal insurance models that are customized to the client’s needs and priced dynamically according to the perceived risk. A McKinsey report, Insurance 2030, describes a fictional client who uses his digitally powered AI assistant to do some daily chores, while insurance premium is computed on the go, based on the client’s decisions and lifestyle. People will become more careful and try to prevent claims instead of repairing or treating. Until now, joining an insurance pool was about sharing risks, but AI is making us more responsible for our own actions. Is the Public Ready? Any new technology is just as good as the adoption rate. The good news is that Accenture has found that as many as 74% of customers are willing to use computer-generated insurance advice through easy-to-use channels, such as messengers and voice. See also: Strategist’s Guide to Artificial Intelligence   In the era when a selfie is enough to buy insurance, like in the case of Lapetus Solutions, the customer gets much more than an insurance policy. The customer gets healthcare advice, possible savings, and dedicated products. The downside of this approach has to do with privacy. In a world where your insurance company can determine what you did last night and if you took your medication, do you feel safe or do you feel part of a Big Brother system? What is the perfect balance between customization and intrusion?

What is remarkable about the debate over California Assembly Bill 5 (Gonzales) is how unremarkable the issues actually are in the debate over the Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903. Of course, as has been well-documented, the Dynamex holding and AB 5 could disrupt the digital platform “gig” economy, and misclassification of employees as independent contractors is a vitally important issue. It has serious implications for the fundamental fairness of how businesses compete with one another and how we value and protect workers on whose endeavors our entire economy depends. But the debate, while appearing in the digital marketplace as its latest forum, is multi-generational. The Dynamex decision is the current law of California as it relates to classification (employee or independent contractor) disputes over wage and hour obligations of California employers. AB 5 is intended to codify this decision not only for wage and hour determinations but also for unemployment insurance obligations and workers’ compensation coverage. This legislative process has led to chaos, with a host of employers asking for dispensation from the “ABC” test borrowed from Massachusetts (and used in Illinois and New Jersey, among other states), arguing that the test should not really apply to, among others, dog groomers, hairdressers, real estate agents, truckers and insurance producers. The list goes on and on. The queue is as long as it was in Casablanca when desperate people were seeking exit visas at any cost from Rick’s Café Américain. But Dynamex isn’t the product of the California Supreme Court sitting down together over lattes one afternoon and deciding, “Well, let’s change the law on classification disputes involving independent contractors and see what happens.” It was a final decision in which the trial court and the court of appeal used existing tests for independent contractor status to arrive at the conclusion that Dynamex workers were, in fact, employees. In other words, even though imposing the now infamous “ABC” test in California, the Supreme Court affirmed the decision of the court of appeal. It is unfortunate, but not surprising, that Dynamex is being divorced from its facts in the current, overheated debate in Sacramento. Perhaps the most important part of the court’s lengthy decision is found in this part of the factual record: “Prior to 2004, Dynamex classified its California drivers as employees and compensated them pursuant to this state’s wage and hour laws. In 2004, Dynamex converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company.” Dynamex, 4 Cal.5th 917, emphasis added. There is simply no test for classification status that would not be triggered by this action. And indeed it was, in the lower courts invoking both Martinez v. Combs (2010), 49 Cal.4th 35 and the now iconic decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399. That leaves us with the question – how to address the misclassification of a workforce while preserving the ability and prerogative of an individual worker as a sole proprietor to offer his or her skills to businesses that need such services on an ad hoc or project basis while not displacing work that would normally be done by an employee. See also: Keys to California’s Consumer Privacy Act   It is a question for the court – because the legislature could not resolve it – to clarify the comment: “As explained, in light of its history and purpose, we conclude that the wage order's suffer or permit to work definition must be interpreted broadly to treat as 'employees,' and thereby provide the wage order's protection to, all workers who would ordinarily be viewed as working in the hiring business.” Dynamex, 4 Cal. 5th at 916, emphasis in original. This is the “B” part of the test adopted in Dynamex that is causing millions of dollars to be spent lobbying in Sacramento and may result in tens of millions being spent in a costly ballot measure in 2020. This is also the core issue left unresolved by AB 5. What AB 5 does in its present state, however, is to accelerate the path to the Supreme Court for it to address the ABC test in a broader context than the facts presented in Dynamex. It can be argued that the legislature is doing little more than asking, ultimately, for the court to refine its application consistent with the public policy objectives articulated in that decision. However, the complex rules now in AB 5 will cause both employers and workers considerable grief in coming years.

July marked the 50th anniversary of the maiden moon landing, and the social media algorithms weren’t going to let us forget it. A truly incredible feat of human ingenuity, the moon landing proved to the world’s 3.6 billion inhabitants that the sky was not the limit and that progress was coming, and coming fast. And so it has. What started with Apollo 11’s landmark lunar mission, quickly blossomed into an era of explosive productivity (and reproductivity -- 4 billion extra people) for humankind. Medical advances wiped out deadly diseases, and wireless technologies connected us globally and allowed products, services and tasks to be accessed and accomplished from the palm of our hands. Fifty years ago, MRI scanners didn’t exist; today, wristwatches can take ECGs. The last half-century has witnessed a frenzy of technological innovation in almost all facets of human life. Well, almost all. Houston, we have a problem child. The insurance industry didn’t get the memo. It seems implausible that you could write $5 trillion of premium globally without riding the wave of technological change; but, in relative terms, the techniques used and services offered by the industry have by and large remained static ever since the moon landing. [caption id="attachment_36533" align="alignnone" width="500"] A 1960s insurance cover note — the form was likely quicker to complete than today's equivalent.[/caption] In 2017, the incoming Manulife CEO Roy Gori succinctly summarized the state of the industry with refreshing honesty:

“We need to transform our business to be much more of a technology-driven company…We need to become a much more customer-orientated organization and quite frankly the entire industry does. In many ways, if I’m absolutely honest, our industry is still in the dark ages.”

The insurance industry has managed to get away with remaining product-centric and making incremental marginal gains. Incumbents have benefited from business model inertia with high barriers to entry, such as minimum capital requirements and exacting regulatory standards. In the time it took the music industry to go from vinyl to tape to CD, through piracy, downloads and on to today’s streaming services -- insurance added questions to forms and put them on websites.

“If you apply for an insurance product, you’ll get a 16-page application form with 120 questions, more often than not. It’s still very paper-based, very manual, and, as a result, our industry net promoter scores are really very poor” (Roy Gori)

But things are about to change. Countdown Initiated The good news is that filling in endless forms to get an insurance policy may soon be a thing of the past. An armada of over 600 insurtech companies has assembled and raised a total of $8.5 billiion in funding over the last five years. (source: fintech global database) [caption id="attachment_36534" align="alignnone" width="570"] A group of plucky insurtech founders plan their next sortie.[/caption] Last year, over $3 billion of rocket fuel was invested in insurtech alone, double the 2017 total investment.

“Venture investors have recognized the scale of the opportunity being addressed and are allocating larger sums to invest in rapidly growing insurtech solution providers. At the same time, incumbent insurance companies have joined the scramble to back companies that are developing and integrating new technologies in ways that could either threaten — or enhance — incumbent business models.” (source: Global Insurtech Summit)

The second quarter of 2019 has seen over $800 million sunk into four insurtech players: Lemonade raised $300 million at over a $2 billion pre-money valuation; Collective Health secured $205 million at approximately $1 billion pre-money; and PolicyBazaar and Shuidi Huzhu bagged $152 million and $145 million, respectively. (source: Willis Towers Watson) With seven-figure money pouring into multiple unicorn scale-ups, (re)insurance industry eyebrows are rising almost as fast as insurtech valuations. For the first time, incumbents face a new breed of tech-savvy, customer-obsessed startups that are unencumbered by legacy systems and starting to aim at their customers. But, the imperial old-guard isn’t going to move aside for insurtech rebel insurgents. The race to adopt new best practices has already begun, and smart (re)insurers are investing heavily in modern tech approaches, with data analytics top of the wish list. This critical industry software update certainly won’t download overnight.

“Making this shift is much easier said than done. Underwriting has historically been slow to change, yet clients — and the perils they face — are rapidly changing. Making transformational investments to reinvent the role of underwriting has never been more important.” (source: McKinsey & Co.)

But, fortunately for the industry behemoths, for every insurtech competing with an incumbent, there is another offering to empower them. The question comes down to “what’s next?” From the Dark Ages to the (White-) Space Age. Insurance leaders embark on this voyage of technological discovery just as the industry faces a paradigm shift, as human risk migrates to machines. It’s too early to know precisely how autonomous cars will affect motor insurance, but KPMG predicts that the market will shrink 60% by the year 2040. While the likes of Tesla may prove to be insurance kryptonite, another of Musk’s iconic companies, Space-X, is helping accelerate a revolution that will give them a new super-power: geospatial analytics. [caption id="attachment_36537" align="alignnone" width="530"] source: CB Insights[/caption] Only five years ago, there were approximately 15 commercially useful earth observation satellites in orbit. Today, thanks to SpaceX and other new launching options, over 350 observation satellites encircle the Earth, and the insurance industry is on the cusp of unlocking the potential thanks to branches of AI, such as deep learning and computer vision.

“What was once niche has today become a booming business, with estimates putting the number of small satellites to be launched between 2018 and 2027 in the range of 6,500–7,000.” (source: Geospatial World)

The outcome of this space renaissance is unprecedented levels of high-quality, reliable and regularly updated data, in every nook and cranny of our planet. Thanks to recent advancements in branches of AI, such as deep learning and computer vision, these rich data sets are now cost-effective and ready for prime time, with the insurance industry a willing benefactor. See also: Insurtech’s Approach to the Gig Economy   Critically, insurers don’t need to attempt to build and manage this advanced capability in-house. Many leading names have already partnered with geospatial players, initially on the catastrophe response side. To see a real-life case study on how geospatial visual intelligence improved claims response in the aftermath of Hurricane Harvey, take a look here. Data-hungry (re)insurers have discovered that these evidence-based insights can tip the scales in their favor long before an event or claim, by pre-underwriting the risk. Starting today with property insurance. Death to Forms: Frictionless Property Insurance In a world where we can summon a car, or our favorite Mexican restaurant’s veggie burrito, at the touch of a button; shouldn’t we be able to get insurance cover for our homes by just providing our address? One of the fastest-growing insurtech ventures in the U.S. certainly thinks so. Hippo recently joined the unicorn insurance stable, raising 100 million Series D at a $1 billion valuation.

“We launched Hippo to transform the outdated and often frustrating relationship people have with their home insurance provider into one that’s approachable, modern and always adding value,” (Assaf Wand, co-founder and CEO of Hippo)

Traditional insurers can’t change their onboarding process overnight, but one company is providing them with insights to better understand the characteristics associated with individual properties or large portfolios, from a simple address input. [caption id="attachment_36538" align="alignnone" width="570"] Machine Learning / Computer Vision + Satellite Images = Property Insights[/caption] Geospatial Insight is a U.K. company pioneering the use of artificial intelligence on satellite imagery to improve decision-making in insurance (full disclosure -- we liked them so much, I led their Series A investment round with VenturesOne). Their latest product, PropertyView, delivers new insights and enriched data to help insurers, reinsurers and brokers better understand characteristics associated with individual properties or large portfolios, supporting more confident risk selection and more accurate pricing and coverage. See also: Insurtech Needs a Legislative Framework   With machine learning that is constantly evolving, the company has created feature extractors detecting buildings, cars, driveways, solar panels, roads, containers and more. For residential and commercial property, the information includes building size, building height and number of stories, total floor area, roof type and material. AI-Powered Roof Material Identification

“The key is that we can do it at scale and at a reasonable price. Similar technology exists in the U.S. but is either more costly or is driven by drone, use which is considerably more difficult to scale up.” (Dave Fox, CEO of Geospatial Insight)

The use of geospatial big data analytics by property insurers and reinsurers offers to improve risk understanding in a globally scalable, rapidly deployable and affordable manner. It also allows insurers to rapidly populate risk-focused property databases, reducing the burden on clients to provide this information and aiding client on-boarding and retention. Innovative approaches prove that, 50 years from the moon landing, insurance might just be about to join the space race. One small step for insurtech; one giant leap for an industry.

As we continue to face a national opioid crisis, insurance adjusters need to keep their safety top of mind during the inspection of a drug-related claim. It is essential to be aware of the potential health risks you could be facing, especially if the property or vehicle you are dealing with may be contaminated with an illicit drug. When you first step on the scene, remember to think whether the property could have been contaminated by the insured, a third party involved in the claim or an unknown party. Take a situation where an adjuster is inspecting a property damaged by the renter, and a mysterious white powder is discovered. This powder could be a number of substances --flour, drywall compound, cocaine or even fentanyl. It is important to treat it with caution while identifying the substance, as this will affect the claim and your safety. Another example is water damage that has occurred to a home where recreational drug use or pill pressing occurs. Adjusters must ask themselves and their teams what the contents or mixture of those pills were. Moreover, what if a car is stolen and damaged by individuals high on drugs? What is the risk is to the repair facility? It’s important to mitigate and manage these types of losses. How do we protect ourselves and our sub trades and rehabilitate the risk? Start by asking yourself, do I really know what the risks are and who can help assess and clean it up? Next, think about the risks by asking yourself, how can we best manage the salvage? As the fentanyl crisis continues, these questions are all crucial. Fentanyl and carfentanil are both now being cut into to illicit drugs like cocaine, heroin and counterfeit pills, which are made to look like prescription opioids. For this reason, there is no easy way to know if carfentanil was used in the making of a drug – especially because you can’t see, smell or taste it. This causes additional problems, as it is essential to know if there is even a very small amount of fentanyl when handling a substance because of its danger due to the high level of toxicity. See also: Better Treatments for Opioid Addiction   What level of exposure from opioids increases health risks? The answer isn’t clear-cut, as it depends on the types of drug that are present – scenes are highly variable if inspections are uncontrolled and unregulated. With fentanyl being 50 to 100 times more potent than morphine, and carfentanil approximately 100 times more potent than fentanyl, the risk is apparent. As little as a grain of salt of carfentanil could be lethal. If faced with a situation possibly involving illicit drugs, it is important to do your homework and make sure that qualified and experienced firms are used for the testing and decontaminating of fentanyl or carfentanil. Cleaning can create hazardous wastes or other issues if not done properly. Documenting the work and results by designated professionals is another way to limit a potential liability. In any case, next time you’re walking through a property and notice a strange powder on your clothes, think twice before simply brushing it off. The results could be fatal, not only to you but to whomever you may come in contact with.

Two bills currently being considered in the U.S. Congress may expand the insurance options available to marijuana-related businesses (MRBs) that operate in states that have legalized marijuana for medical or recreational use. As discussed in the recent Insurance Thought Leadership article, “Marijuana Policy Gap: Insurers’ Uncertainty,” 33 states have legalized marijuana for medical use, with 10 of those states legalizing for recreational use. As a result, cannabis has become a multibillion-dollar industry in the U.S. and is expected to continue growing rapidly. Nevertheless, pursuant to the Federal Controlled Substances Act (CSA), the cultivation, sale, distribution and possession of marijuana remains illegal under federal law. The conflict between the CSA and the laws of states that have legalized marijuana in some capacity has resulted in uncertainty for those interested in entering the “legal” cannabis market. The confusion created by conflicting approaches to marijuana legalization has implications for businesses in the cannabis industry and those that service the “legal” cannabis industry. So, the insurance options available to MRBs are fairly limited, as large, admitted insurers have taken a cautious approach and largely avoided entering this market. Many of the insurance options available to MRBs are limited to smaller, specialized insurers and the excess and surplus lines market. Excess and surplus insurers tend to be more specialized and are “non-admitted,” meaning they are not licensed by the insurance department of the state in which they underwrite risk. This is significant because excess and surplus policyholders are not protected by state insurance guarantee funds, which offer protection to insureds in the event that their insurers become insolvent. In addition, because excess and surplus insurers are not licensed by the states in which they issue policies, they are not necessarily subject to the same regulations as admitted insurers, such as regulations governing policy forms or finances. Accordingly, MRBs may face higher premiums and less comprehensive coverage. See also: Marijuana Policy Gap: Insurers’ Uncertainty   As a result of the limited and, in some cases, cost-prohibitive coverage options available for MRBs, many remain underinsured or even completely uninsured. This can have disastrous consequences, as MRBs can face significant liability, just as any other business does. Moreover, the lack of coverage available to MRBs can leave consumers or other injured parties unprotected in the event of a claim, as it can be difficult or even impossible to collect against an uninsured or under-insured business. To address the uncertainty and foster a more robust insurance market place for MRBs, on July 22, 2019, Sen. Robert Menendez (D-NJ) introduced a bill in the Senate titled the “Clarifying Law Around Insurance of Marijuana Act” or the “CLAIM Act” (S.2201). A similar bill was introduced in the House of Representatives just a few days later by Rep. Nydia Velazquez (D- NY), with the same name (H.R. 4074). The stated purpose is to create a “safe harbor” from liability for insurers that underwrite policies for MRBs in states where medical or recreational use of marijuana is permitted, to encourage more insurers to enter the market. Both bills enjoy bipartisan support, being co-sponsored by both Democrats and Republicans, although their prospects for passage into law remain unclear. The Senate version of the CLAIM Act would protect insurers that engage in the “business of insurance” with a “cannabis-related business” or service provider within a state that allows the cultivation, production, manufacture or sale of cannabis from being held liable under “any federal law” including regulations. The bill defines a “cannabis-related business” as a manufacturer or producer or any person or company that engages in “any business or organized activity that involves handling cannabis or cannabis products,” including cultivating, producing, manufacturing or selling cannabis or cannabis products. The bill would also prohibit any federal agency from penalizing or prohibiting an insurer from providing insurance to a “cannabis-related business.” The text of the House bill is substantially the same as the Senate bill. See also: Legal Marijuana: An Insurance Perspective   While these bills, if passed, could encourage more insurers to enter the cannabis market, potentially resulting in broader insurance options for MRBs, they may also clarify issues surrounding the enforceability of existing insurance policies that cover marijuana-related risks. After all, while some have argued that policies of insurance that cover marijuana-related risk are void as against public policy or otherwise invalid, even in states in which marijuana is legal, those arguments will become much harder to support if the federal government has carved out a “safe harbor” for insurers to underwrite cannabis risk in states in which cannabis is legal. As such, both S. 2201 and H.R. 4074 have significant implications not just for the future of the cannabis insurance market, but also for policies of insurance that have already been issued to MRBs for cannabis-related risk. Therefore, it is important that anyone working in the cannabis industry, or servicing those who do, continue to follow these critical pieces of proposed legislation.

We have been telling everyone who would listen for a long time that the future of the insurance industry will be dictated, not by the insurers, but by the clients. We have also been telling you that this reorientation will manifest itself first on the commercial side of things, if for no other reason than the greater bargaining power of the customer. Sure enough, Willis Towers Watson announced last week an innovative risk advisory service that very much looks at the world through corporate clients' eyes.

Of course, Willis is not the only organization moving in this strategic direction. We know of at least one large broker that is actually ahead in its thinking. But it's still worth looking at the implications of the Willis program, which helps risk decision-makers (usually risk managers or CFOs) manage risk more effectively, balancing retained and transferred risks to reduce companies' total cost of risk. 

I have heard from a lot of risk managers that they would like their role within their organizations to be elevated. They would like to be part of strategic decision-making, forging the organization's risk profile. Well, as the Willis program shows, here's your chance. 

The key to the future of risk management is that risk has always been viewed as an expense or a liability but, because of technology, will start to feed into opportunities on the top line of a company's financial statement. Basically: Yes, there will be a risk if we attempt X, but we can be smart and mitigate risk by doing Y. The numbers for X now look a lot better, so let's go ahead with it—and watch sales climb.

Risk management can become strategic if managers find ways to enable projects that can drive revenue. We have seen more than a few examples of this. The benefits are not fractional; they are measured in multiples, as in P/E multiples that make the stock market amplify the gains.

From the standpoint of brokers like Willis, the needs are pretty straightforward: They need to become better at identifying technology advances that are important for clients, to stay ahead of their broker competitors, and will need to consult more with clients while selling products less. There will, of course, be some transition required in the business models, because consultants don't get paid a commission on premium. New pay arrangements will need to be figured out.

From the internal risk manager standpoint, the situation will be more complicated. Even though many risk managers say they want to take a more strategic role in their organization, they may be reluctant to stick their necks out. (No jokes needed about being risk-averse.) Just look at all the RMs that have sprung up over the years—ERM (enterprise risk management), SRM (strategic risk management), IRM (integrated risk management) and maybe more—without causing the sort of major shift in role that many have predicted.

There isn't always an appetite among senior management for more input by risk managers, either. Our friend Chris Mandel, an SVP at Sedgwick who is one of the world's ranking authorities on risk management, says input is requested on the most destructive exposures, so requests for strategic advice are scattershot. But the needs are there among senior management, and aggressive risk managers can spot and fill those needs. (Chris offers more thoughts on risk management opportunities in a podcast I did with him earlier this year.)

Clients will, of course, continue to work on reducing their traditional, internal risks, and technology will help there, too. For instance, many companies have learned the hard way that they had more cyber exposures than they realized—the sort of thing that technology can track. Reducing the number and severity of claims will, at least eventually, lead to lower premiums. But the days where the risk management game was based on ratings and recovery are numbered, and the days of prediction and prevention are fast coming. The new game will be won by those in the industry that can help clients switch from a focus on reducing losses to enabling growth.

Those companies that embrace the notion of risk as a value driver will see exponential gains in enterprise value, and those of us in the insurance industry need to enable those gains. It's all about the clients, not the insurance.

Wayne Allen
CEO

This summer, we celebrated the 50th anniversary of the Apollo 11 spaceflight that first landed men on the moon. Just eight years before, President Kennedy gave his famous speech calling for America to land a man on the moon and return him safely to earth by the end of the decade. At the time, the goal seemed both impossible and within reach. It would require a level of collaboration, innovation and commitment never before accomplished in the world, and an unwavering focus on a light in the sky previously accessible only in our imaginations. In July 1969, Neil Armstrong took his famous “giant leap for mankind.” Today, we are dedicated to creating the workplace of the future, in which the leadership strengths of men and women are deployed equally, in combination more powerful than either can be on their own. The goal seems both impossible and within reach at the same time. There is endless conversation about why women need to be included in organizational leadership and reams of data establishing that, when women lead organizations, result across all measures improve. Nonetheless, the same data also shows that, despite a tremendous investment of resources, we are making no meaningful progress and may even be sliding backward. Our focus on the future world previously accessible only in our imaginations seems to be fading out of sight. The commonly accepted (and overly generalized) problem statement is that society views men as better than women, and women in many instances behave as though they are less than men. The solution everyone comes up with, as we did originally, as well, is to separate men and women and work on elevating women. See also: 3 Keys for Building Women Leaders   Women generally acknowledge we have some work to do to clear through barriers we put in front of ourselves and to overcome the inner voices telling us we are less than. Companies and media outlets are raising awareness of hidden gender bias. The market is overcrowded with women’s networking organizations, training programs, conferences attended by thousands of women, a plethora of books written by women with star power and movies about strong women, all aimed at “inspiring and supporting” women. Women are inspired and supported, but the work isn't making any meaningful difference. A few years ago, a study projected that it would be 140 years before we achieved gender parity in the C-suite. A few weeks ago, that number was updated to 204 years. At the same time, a survey of male executives revealed that about 60% of them refuse to work on projects with or be alone in a room with a female colleague. We believe the problem is that incremental change can’t accomplish transformational goals. Women need to jump the abyss, rise up above the quagmire of little things that keep us stuck in place and stay focused on the possibilities from a new world view. We call it jumping the abyss because it requires a willingness to leave behind the comfort of our belief system and jump toward the unknown of what can be but isn’t yet. However imperfect, the status quo is at least familiar and is scary to leave it behind. This type of leap is necessary if we want to make progress, because incremental change keeps us stuck in the quagmire. The mistake we are making is the assumption that women need to jump the abyss on their own power and for themselves. We believe women need to be self-propelled. However, women can’t execute the leap on our own. This is the crux of why a tremendous investment of resources is not producing meaningful progress. To accomplish something that has previously existed only in our imaginations, we need a level of collaboration, innovation and commitment never before accomplished in the design of organizational leadership. For women to successfully jump the abyss, men and women must make the leap together. See also: Why Women Are Smarter Than Men   What’s available on the other side is the opportunity for women and men to work together as partners in leadership, designing and building the workplace of the future. All are welcome, and there is no longer any doubt that all will benefit from a new approach. We don’t have a leader today who can put out a call we will all be inspired to answer, as President Kennedy did. We have to decide on our own that we are ready to take “one giant leap for mankind” and then do it. Every person can play a role. Are you willing? If you want to engage in conversation, if you want to explore how women can move forward, breaking through the tangles and making transformational changes for themselves and those around them, we would like to talk with you. Please reach out to us or check our website at www.hightidesgroup.com.