Much has been said about the challenges facing the reinsurance industry, to the point where the industry and a few of its major players have been characterized as being in a potentially terminal decline. However, to focus on recent results is to overlook fundamental changes in the nature of risk in the 21st century that could benefit the world’s major reinsurers, with opportunities unlike any seen before in the modern history of reinsurance. A difficult financial backdrop for reinsurance in 2017 Financial results for major reinsurers in 2017 saw substantial contractions from prior years, driven by large catastrophe losses from hurricanes and California wildfires. These results have been followed by cost reduction in the reinsurance industry, which has elicited surprise in two conflicting ways. For some, the surprise was that the cost-reduction efforts could affect reinsurance, given that such exercises were more common for their cedent primary carrier clients. For others, the surprise was that it had taken so long for a focus on cost to come to the reinsurance market. Concerns about the future financial performance of the reinsurance industry are held at the very highest levels of leadership among major reinsurers. In response to questions about the company’s 2017 performance, Swiss Re CEO Christian Mumenthaler commented on the state of the property catastrophe market that “we need to get used to a world where margins are much lower.” Given that property catastrophe profits have been one of the best-performing segments, not just in reinsurance,but in the entire insurance industry, according to McKinsey, this is an unwelcome development for the medium-term profitability of reinsurance firms. Bearish commentators do not blame recent poor results on an unfortunate confluence of large-scale U.S. property losses, excess capital in the reinsurance industry or a temporary soft market. Rather, global advisory firm EY points to “clear signs that reinsurers face a long-term structural phenomenon rather than a short-term fluctuation of the insurance cycle.” EY goes on to warn in a report on the reinsurance industry that there is “compelling evidence that reinsurers are inexorably moving toward a 'dead end' with their legacy business models.” The potential for reinsurance, with a longer-term lens Such pronouncements about the potential for the reinsurance industry to perish are, however, overblown. Far from the rapidly changing risk environment undercutting the role of reinsurance, changes in the nature of risk have the potential to unlock a golden age of reinsurance where reinsurance institutions could play an even more important role in the future of the global economy than ever before. Two megatrends affecting society in the 21st century could bode very well for the reinsurance industry. The shift from physical to non-physical assets on balance sheets First, the emergence of non-physical assets fundamentally alters the nature of risk, which will require major changes in the P&C insurance industry. According to Ocean Tomo, in 1975, more than 80% of the market capitalization of the S&P 500 was derived from physical assets and infrastructure. Property insurers, therefore, had a key role in insuring the most valuable assets of the business community. However, by 2015, property assets made up a relatively small share of the value of businesses, with 87% of that value being tied to intangible assets. For centuries, the P&C insurance industry was focused on the protection of property, but in the space of a generation the relative importance of physical property has declined precipitously. Risk to assets hasn’t gone away; there has just been a shift from physical to non-physical assets. See also: The Dawn of Digital Reinsurance   The shift toward digital risks as a driver of risk to a company’s income statement Second, the emergence of digital risk is fundamentally changing the potential causes of loss for businesses. When you move beyond a balance sheet perspective, where physical property has declined in importance, and look at the income statements of contemporary businesses, you also see an increasing reliance on digital technologies with substantial potential for business interruption when these technologies are disrupted. These losses are already being witnessed today with the recent NotPetya attack illustrating that many major businesses can lose hundreds of millions of dollars from a single cyber event. It is, therefore, no surprise that cyber risk has skyrocketed in importance from the #15 item on the minds of risk managers in 2013 to the #2 item on the minds of risk managers in 2018, according to a report from Allianz. What is remarkable is not just the meteoric rise in importance of cyber risk over the past five years but the fact that we are just scratching the surface of a megatrend that promises to have an even greater impact in the years to come. Changes in technology are fundamentally changing the nature of risk due to the digitization of the economy, the automation of entire industries and the explosion of Internet of the Things (IoT) devices. As the economy shifts from having 10 billion Internet of Things (IoT) devices to more than 200 billion IoT devices, sources of digital risk are set to skyrocket, along with the potential for cyber losses. The foundation for any financial risk transfer product – where is the financial loss? Estimating the financial impact of cyber risk is a difficult endeavor. A recent piece of research conducted by RAND, supported by the CyberCube unit of Symantec and the Hewlett Foundation, estimated that cybercrime today costs the global economy at least $275 billion to as much as several trillion dollars. When you layer on the emergence and deployment of new technologies, this number will only increase over time. Not only will these losses due to cyber events rise, but cyber catastrophe modeling research undertaken by CyberCube suggests that there will be a shift from attritional day-to-day losses affecting individual to firms to more and more large-scale losses affecting multiple companies simultaneously from global aggregation events. Such events were once deemed somewhat theoretical, but the last 18 months have revealed a series of cyber aggregation events that have shown that cyber events have the potential to lead to simultaneous losses from many companies, and we are just at the beginning of a major technological change. In many cases, the absolute level of risk for the global economy will decline. For example, with the emergence of new safety features in automated cars, the incidence of property and casualty losses from automobiles will decline. However, new sources of catastrophic risk emerge as the potential arises for mass losses from the simultaneous failure of the technology affecting thousands of companies simultaneously. CyberCube has identified more than 1,000 technology “single points of failure” that could pose sources of aggregation risk to insurers, and this number will only grow as the years go by and new cloud-connected technologies are rolled out. To draw an analogy to the property insurance market, you can expect far fewer one-off damages from one-off fires burning down a single home and far more wildfires destroying entire towns. Implications for reinsurers So what are the implications for reinsurers? 1. The foundation for any financial risk transfer product – where is the financial loss? Changes in the nature of company assets, technology and the emergence of connected digital risk are reducing absolute levels of risk to the society overall but concentrating the potential for financial losses in a smaller number of catastrophic events. This is precisely the type of risk and financial transfer that the reinsurance industry can provide. 2. Emerging cyber risk is so complex that the largest and most sophisticated reinsurers stand to gain the most from this shift in the risk landscape Given that cyber risk is not geographically constrained, the ability of smaller and less sophisticated reinsurers to participate in a large number of geographically diversified natural catastrophe treaties is diminished. The nature of cyber risk is so complex and dynamic that only reinsurers with a critical mass of expertise in connected digital risk will be able to effectively understand, monitor and model cyber risk. There will be more differentiated insight in cyber risk than in natural catastrophe risk. 3. Investment from reinsurers is needed to understand cyber risk today, in advance of catastrophe events that could create tremendous financial opportunities for reinsurers in the future It is a cliché to say that it is just a matter of “if not when” for cyber attacks on individual companies. What is becoming increasingly apparent is that the same can be said for catastrophic cyber aggregation events that cause material damage to many companies simultaneously. When this happens, insurance history suggests that demand for coverage will increase, capital will flee the market and prices will harden. The reinsurance market for cyber as a peril might be small today, but reinsurers that have taken the time to invest in their own capabilities ahead of these events, with informed capital to deploy when market demand spikes, will benefit tremendously. See also: Mamas, Tell Your Kids to Sell Reinsurance   Conclusion: Terminal decline or golden age? The nature of risk is fundamentally changing, which means the nature of financial risk transfer also must change. 2017 may have been a bad year for the financial performance of the reinsurance industry, but this is a market where time horizons need to be considered over many decades and certainly not over the results from one financial year alone. Far from the reinsurance industry being in a potentially terminal decline, changes in the nature of risk in the 21st century, stand to benefit the most sophisticated players in the reinsurance industry if they can take advantage of digital trends and understand new risk concentrations. Reinsurers that invest in understanding the nature of cyber risk, and the sources of catastrophic losses, not only stand to benefit in outsized ways relative to other insurers, but they also stand to help society reap the tremendous rewards of new technology by mutualizing financial risk when technology inevitably goes wrong. The reinsurance industry as a whole is neither in terminal decline nor at the beginning of a new golden age. It is the action of individual reinsurance companies, and their efforts to understand, quantify and model digital risk that forms the basis of whether they will thrive or falter in this emerging digital age.

Despite continuing efforts to cut costs, U.S. commercial lines loss adjusted expense and underwriting expense ratios have not improved over the last 20 years. Over two-fifths of every dollar of U.S. commercial lines premium collected is used not to pay claims but to fund loss adjustment, commissions and brokerage and underwriting expenses (source: S&P Global Market Intelligence data and PwC Analysis). New regulatory burdens and requirements for better service, among other factors, have negated any efficiency gains from technology investments. However, we expect that today’s market environment is forcing a shift, and that a more strategic approach to cost management will become an imperative for growth in 2018 and beyond. It’s becoming harder and harder to sustain the same returns as in the past. Insurers are facing pressure on both sides of the balance sheet. Coming off multiple years of soft market pricing and a string of catastrophes in 2017, underwriting margins are being squeezed and reserves depleted. Looking forward, any market hardening is likely to be moderate and short-lived, given advancements in data and analytics and flow of capital toward industry opportunities. At the same time, investment returns are at historic lows. Accordingly, a fresh look at costs is an obvious path to improve returns. Technology has now advanced enough that significant productivity gains can result from digitizing and leveraging information assets. Over the past year, enabling technologies such as cloud, artificial intelligence and robotics have continued to mature. They are no longer “innovative,” but tested and proven mechanisms. These technologies help attack the expense problem much more efficiently and at a lower cost than five years ago, and, with the help of insurtech firms that offer point solutions, they no longer depend on core transformation and in-house development to yield results. With companies already feeling pressure to shift cost curves, tax reform further increases the impetus and opportunity to think differently about operating models. In particular, companies will have to make key decisions on existing and new businesses, reinsurance arrangements, investment opportunities, products and services, systems and technology and employee compensation considering the tax implications. For example, companies will want to evaluate operations in U.S. states and non-domestic jurisdictions to determine strategy for where employees are located, where revenue is accrued, and from where items are sourced. Multinational insurance companies may have significantly more earnings onshore given the U.S. mandatory tax on foreign earnings, and a lower corporate tax rate will make domestic investment more attractive. Additionally, with more cash onshore and the lower tax rate, companies may want to look at how acquisitions can advance their strategies. Tax reform also may drive changes to structure, valuation and timing of acquisitions, dispositions, and alliances. Given the level of change, tax implications can both spur action and uncover cost-saving opportunities. Challenges vary by segment At the highest level, the commercial lines market consists of 1) small to mid-sized companies needing standard products (e.g., property, auto, general liability, workers’ compensation), 2) large companies with more complex needs and program structures (e.g., self-insured retentions, captives, reinsurance) and 3) companies with high-hazard/specialty risks with customized product needs. Commercial insurers face different challenges to remain profitable and grow in each of these segments, and expense management tactics vary accordingly. In the personal lines market, an expense ratio advantage typically provides a sustainable competitive advantage (i.e., those with the lowest expense ratios grow the fastest). The small to mid-sized standard market is increasingly going the way of personal lines. A heightened demand for a streamlined agent and customer experience coupled with a larger focus on price means insurers have to focus on efficiency and simplification to remain competitive. Those that do this well will more easily steal share. On the other end of the spectrum, clients with large or high-hazard/specialized risks continue to demand high-touch service and customized underwriting and claims solutions to meet their needs. Insurers in these markets must balance efficiency improvements to reduce cost to serve against the need to deliver the “last mile of service” to a specific location, whether a handshake at New York headquarters or a truckload of generators and plywood to keep operations going after a storm in Oklahoma. Larger clients also may demand higher touch on financial analysis to support their own reserving and reinsurance needs. See also: Are You Fit Enough for Growth?   Insurers in multiple segments must consider the intricacies of each business segment while leveraging scale and national presence across all of them. This makes cost optimization more complex than it first appears. To add to the complexity, the demand for simplicity and efficiency is increasingly moving up-market while the demand for customized service is moving down-market, blurring the lines between segment needs. Strategic Cost Management Tactics Cost management is not a new phenomenon. Our research shows that 75% of insurers have undertaken cost-cutting programs in the last three years and that 61% of insurance CEOs plan to launch cost-reduction initiatives this year alone. However, while many insurers have cost management on their agendas, few are achieving sustainable cost savings. While most have tackled the basics when it comes to process design and efficiency, business complexity (often driven by a desire to be infinitely flexible and meet a wide range of needs) and fragmented technology environments can get in the way. Furthermore, when cost-cutting efforts do not tackle strategic and structural issues or address required cultural changes within the company, costs tend to creep back up as focus fades. What should commercial lines insurers do? 1. Don’t try to shrink your way to greatness. Driving toward the lowest possible expense ratio is not the key to long-term success. Underwriting is still king and likely always will be; you cannot sacrifice your underwriting prowess in favor of stringent cost-reduction tactics or policies. Acquiring and developing strong underwriting talent and having appropriate data, analytics and governance to guide decision-making are fundamental to strong performance. Investments in these areas may be necessary to keep pace: If they stall for the sake of cost management, there could be bigger profitability challenges down the road. For example, no-touch underwriting and processing in the small to middle market space requires appropriate a) data quality, accessibility and monitoring mechanisms to govern what is on the books and b) speed-to-market (in terms of decision-making and system change processes) to adjust to market changes. In the large commercial and specialty segments, careful operating model design is essential to align proper expertise to relevant risks at the right time. That said, costs can be shifted from fixed to variable to a) align more closely with the size of the business and b) provide necessary market agility. Partnerships with MGAs can enable quick stand-up of new underwriting operations (with appropriate underwriting expertise) without having to build them from the ground up. This also allows for a quick exit if the new endeavor isn’t profitable. In addition, shifting low-value work to lower-cost resources (e.g., from underwriting experts to processing centers) makes it easier to hire and train for these activities when scaling up for growth in a given area or repurposing FTEs to other areas when exiting. 2. Manage costs for the enterprise, not one function Insurers should approach cost management at the enterprise level, setting targets for the organization and challenging the business units and functions to work together to identify opportunities to hit them. When tackled function by function, cuts may be made at the expense of other functions, thereby cutting capabilities others need to perform well (e.g., eliminating required fields at the first notice of loss may affect the granularity and timeliness of underwriting analysis), or simply shifting costs from one area to another (e.g., eliminating information gathering in the underwriting process means processing will have to do it, likely resulting in inefficient back-and-forth when gathering information). Additionally, changes in one area may be justified by cost savings in others (e.g., removing a coverage option simplifies both the billing and claims handling). Lastly, success in one area has potential benefit elsewhere in the organization (e.g., RPA in processing also could apply to claims). Fostering collaboration across the enterprise (and even incorporating feedback from distributors and customers) can uncover new insights and opportunities, as well as promote the cultural shift that sustains a cost-focused mindset. 3. Cut features and services, not just costs Choosing where not to invest can be difficult; defining a strategic “way-to-play” is the first step to understand which products, services, channels and capabilities can be eliminated to better manage costs. For example, continuing to support legacy products and features (e.g., pay plans) can add significant complexity to an insurer’s operating environment, which adds cost and can stall efforts to upgrade platforms or add new features for future products. Choosing to move existing customers to the latest products and features (or even exit certain markets) can be difficult, but it can be the right move to unlock growth, profitability and cost savings across the rest of the portfolio. Customer segmentation also can help insurers determine where to invest and what to cut. Not all customers require the same level of risk analysis and customer service and identifying which segments are currently overserved can help align cost with customer value. For example, underwriting reviews could be triggered by changes in risk exposure rather than annual or once-every-three year reviews. Loss control visits could vary by industry, size and length of relationship. Distributor service levels (e.g., turnaround times, quote negotiations) could be tailored to the value of the relationship. Taking a closer look at customer and distributor needs and value can help cut costs without sacrificing revenue or profitability. 4. Put new technologies front and center When it comes to cost cutting, the traditional levers have not changed. Commissions, headcount and IT remain significant areas of spending for insurance companies. However, there are innovative ways to reduce these costs. Offering certain value-added services to agents (e.g., taking on servicing) can indirectly bring down commission expense, artificial intelligence and robotics offer new ways to reduce headcount and the cloud lowers IT costs and enables a more variable “pay-as-you-go” model. See also: 7 Steps for Inventing the Future   Too often, cost management efforts that focus on immediate savings put new technologies in a “parking lot,” treating them as a future-state opportunity that will take significant up-front investment for questionable down-the-road benefits. However, immediate benefits are now readily available. Many insurers are partnering with insurtech companies to quickly enhance their capabilities and realize long-term savings. Moreover, new technological capabilities are leading insurers to rethink their broader business models. Implications

• Although a cost advantage has not driven commercial lines performance to date, times have changed.
• In the short term, cutting costs will help insurers fund strategic initiatives that better position them for growth and profitability in their target markets.
• In the mid- to long term, insurers with a sustainable cost advantage empowered by efficient operations and a flexible cost structure will be able to compete more aggressively on both price and service and have the flexibility to allocate capital to the most promising market opportunities.

This report was written by Jamie Yoder, Francois Ramette, Bruce Brodie, Joseph Calandro, Jr., Katie Klutts and Matt Shuman. You can download the PwC report here.

If the buzz of the P&C insurance conference circuit is to be believed, whizbang new technology and “big data” analytics provide the answers to every problem the industry has ever experienced. More precise risk projections, streamlined customer service functions, 24/7 automated support, claims investigation – they’re all getting better with new technology, and the industry is investing heavily to keep pace. However, while there is no question that carriers need to build better technology and secure better data, neither technology nor data alone will fundamentally improve the customer experience. According to findings in the 2018 U.S. Property Claims Satisfaction Study from J.D. Power, a positive customer experience isn’t driven by which carrier has the slickest photo app, uses drones to survey properties or has streamlined the first notice of loss (FNOL) process to be highly efficient. Instead, customers want to feel their carrier has their back in a time of stress or crisis. Customers simply want to understand that everything is going to be okay; they want to know how the claim process will run; and they want someone to care enough to keep them informed about their loss. Technology can fill some of these customer needs, but before the technology or any type of enhanced processes can be effective, someone must set the right expectations. See also: 3-Step Approach to Big Data Analytics  Consider the Insurance Information Institute’s evaluation of homeowner claims from 2011 to 2015, which indicates that one in 15 insured homes has a claim each year. Excluding catastrophes, the claim frequency for homeowners is quite small, which means most customers have no idea what to expect when they have a loss. Beyond their lack of claim experience, there is also the emotional toll a homeowner loss takes on a customer. The empathy and guidance provided when a customer reports a claim can truly determine whether the customer’s claim experience will be successful. Regardless of the severity or nature of the loss being reported, the carrier must set the right expectations at the beginning of the process. The customer needs to understand what will be covered, how the process will work and how long the claim process will take. Once these expectations have been set, the carrier must effectively manage the process to ensure the schedule is being met and communicate with the customer about whether the process is on track, or, if it isn’t, communicate even more frequently and in more detail. J.D. Power research on property claims has found that customers whose claim took more than 18 days to settle – which would normally create a very low customer satisfaction score – are more satisfied with the process than are those customers whose claims were settled in less than five days. The difference in satisfaction scores is based on having met customer expectations (in fact, the customer satisfaction delta in the 2018 J.D. Power study between meeting customer expectations and missing them is more than 100 points). Creating a speedy process without setting the right expectations does not improve customer satisfaction. If anything, a speedy process can hurt. Setting the right expectations leads to creating the right experience. To a claim professional, a simple fast-tracked water claim may be part of their daily routine, but for the customer, such a loss could be the worst thing that has happened to them in a long time. Without showing empathy for what the customer is going through, the process might be efficient, but it likely won’t be effective. Artificial intelligence technology can certainly help align the right adjuster to the kind of loss being reported, as well as scrub the claim for potential fraud, help align reserves or even trigger a faster payment. However, there also must be a human element to the process. For many carriers, the agent is the source for this empathy and is generally the one to set the level for customer expectations. Yet, as more claim operations move to a direct digital or customer care center, the FNOL process is shifting from the agent (who normally has a personal relationship with the customer) to a faceless website or a call center, where in many cases the process overrides the personal experience. A digital FNOL or a call center is not necessarily a bad approach. Indeed, quite a few carriers have successfully used these channels to handle claims, and digital with a call center or chat function is certainly the wave of the future. But without some personal way to create a level of empathy, the resulting lack of concern and guidance creates a customer who does not feel comfortable with what is happening. When such a customer doesn’t feel at ease, customer satisfaction suffers. Even Gen Y customers (who embrace technological transactions more readily than older customers) find a personal touch at the time of the loss to be a more satisfying experience than using a digital FNOL process. Throughout the claim process, the carrier must maintain a clear, active line of communication with the customer. Simply sending a text notifying the customer that something has changed with a claim is not a sufficient level of communication if the carrier wants to provide a high level of satisfaction. Such a text needs to be informative by letting the customer know what has changed, as well as include what effect it might have on the claim (either good or bad), and it must provide enough information so that the customer doesn't feel the need to call the agent or the carrier. See also: Strategies to Master Massively Big Data   J.D. Power’s insurance industry research affirms that carriers with the most successful claim operations understand how to balance the customer experience with the need for internal efficiencies. Using technology and data analytics as tools to reduce the level of stress and effort for their customers is a clear pathway to developing not only a strong customer experience, but also an enhanced return on investment.

The investment and activity related to the insurtech movement that began about four to five years ago show few signs of abating. If anything, the movement is moving into a new phase. But before even evaluating whether insurtech is maturing, it is important to set some definitions and boundaries. Although some consider any tech firm with insurance solutions to be “insurtech,” for our purposes, we are focusing on recent insurtech startups, typically those that have been launched in the last five years. The question posed here is whether these startups are collectively maturing and moving beyond the initial stages of a startup effort.

To answer that question, I will conduct my own point-counterpoint before drawing a conclusion. There are arguments to be made that insurtech is maturing, but a case can also be made that it is still nascent and, dare I say, immature?

See also: Where Will Unicorn of Insurtech Appear?  

Yes — Insurtech Is Maturing

A strong case can be made that insurtech is maturing. For starters, we are almost five years into the activities related to insurtech, and much experience has been gained by entrepreneurs, investors, insurers and others. In the early days, there were a small number of new ventures and limited involvement by incumbent insurance industry players. Now there are more than 1,200 insurtech startups that SMA tracks, approximately 50 (re)insurers with insurtech investment arms and many more insurers engaging in partnerships, pilots and insurtech strategies. Although there are still new insurtechs being regularly announced, the total number has stabilized in the range of 1,200 due to exits of various kinds. This stabilization, in itself, is an indication that the movement is maturing. Another important development is that winners are beginning to emerge. SMA expects many of the startups to ultimately fail or be absorbed by another entity – perhaps as many as 80% to 90% of the total. But there are currently around 50 that are gaining traction and have the funding to support growth and success in the industry. Eventually, there may be 100 to 200 prominent firms started in the last five years that become more permanent players in the industry.

No — Insurtech Is Still in Early Stages

The counter-argument is also strong – and supports the reasoning that insurtech is still not maturing. Exhibit A for this stance is that there are still only a small number of visible use cases that have made a difference in the industry. True, there are many interesting companies and projects, but there are few case studies that make you say: “Wow!” The impact on individual insurers or overall financial metrics is tiny. Another indicator of the relative immaturity is the lack of industry experience at many of the newest startups. Insurtechs that have been around for a few years have often gained more insights into the complexity of the industry and have brought industry veterans onto the team. And, of course, they have gained their own experience through engaging with insurers over this time. But many of the newer insurtechs still have a negative view of the industry and believe they will disrupt an industry that they see as a dinosaur. A final point in the counter-argument is that there are still vast sums of money set aside in funds to invest in insurtech. Insurers have billions set aside that is not yet invested. New venture funds are being formed even now. Certainly, much of these funds will be allocated to the firms that are emerging as winners, but there will be just as much going into new ventures, resulting in continued momentum over the next few years.

See also: Insurtech Presents Major Opportunities

Conclusion

I don’t want to cop out on the conclusion, but I see elements of both maturity and immaturity in the insurtech startup movement. What we may see is a bifurcation, with a subset of firms producing results, gaining significant funding and making a measurable impact on the industry. In the meantime, there will be a second (larger) group of startups still looking for that big win, that big funding round and the momentum to move them into the winner's circle.

It was 1975. While completing an application for malpractice insurance, a dentist told me his address was 12345 Main St. I commented on how simple it was. He shot back, “So simple even insurance agents can understand it.” In 1994, while speaking about managed care to a conference for librarians, I mentioned the rising cost of healthcare. There were about 250 in attendance. The audience was engaged. Suddenly, someone in the back of the room screamed, “Read the Golden Stethoscope and see what those bastards are doing to us!” I was shocked by this apparent “nut” in the crowd. Looking around, I realized the majority of attendees were nodding in agreement with the “nut.” A few months later, working as the executive director of the Louisiana Managed Healthcare Association, I was at my office. Don, one of my board members, called to say I needed to come to his office right away because two federal agents wanted to talk to us. I did what any of you would have done. I threw up in my garbage can, then went to Don’s office. We met with these two agents for about four hours. They were investigating physicians in two parishes who were allegedly colluding with a hospital to drive patients to their institutions. What they were doing was illegal. Later that week, I spoke to the medical society in one of these parishes. One hundred doctors were in attendance. The doctors had just concluded a meeting that celebrated their leadership in funding a physician-owned HMO. This was a priority because no one was going to tell them what they could or couldn’t do in the practice of medicine. See also: How to Earn Consumers’ Trust   Once introduced as the executive director of the Louisiana Managed Healthcare Association, I began my presentation on Managed Care 101. Ninety-eight of the doctors were polite hosts and a respectful audience. The two other doctors operated in full attack mode. Toward the end of the program, one screamed at me from the back of the room, “I don’t think insurance companies and HMOs should make money in healthcare.” I explained that many people felt doctors were making plenty of money in healthcare and that premiums were too high. I will never forget one doctor’s response. He said, “We’re just getting by.” Ninety-eight of his colleagues bowed their heads in embarrassment. Later, I was told he was grossing $2 million a year. (I wanted to yell, "The Feds are going to get you," but I didn’t.) A November 2012 Gallup survey ranked 23 professions based on the public’s perception of their ethics. Agents rank seventh FROM THE BOTTOM – between legislators and attorneys. Not everyone loves us as much as we love ourselves. The dentist, the librarians, the physicians and the participants in the ethics survey all have their opinions. I’m assuming most see themselves in a positive light but are often suspect of others. This brings me to the point of the story. On TV in 1954, Robert Young played Jim Anderson, an insurance agent, in Father Knows Best. Those were simpler times, and insurance was not the expense that it is today. We now see ourselves as the Main Street agent (adviser), a trusted choice, “like a good neighbor” and other “feel good" personifications. But more and more consumers I talk with are “mad as hell and won’t take it any more” with the cost of insurance. Premium costs, rate increases, larger deductibles and co-pays are breaking our clients. The worst is yet to come. When the National Flood Insurance Program must finally demand actuarially sound rates, and the adverse selection of the ACA finally takes its toll, voters will rebel, and government will gladly welcome the chance to further expand its failed involvement in our industry. See also: Why More Don’t Go Direct-to-Consumer   We can explain all we want. Consumers don’t care. All they want is relief. In my opinion, if we don’t aggressively work to solve the cost problems because we believe nothing can be done, we will lose our industry and agency system as we know it. Peter Drucker stated this clearly in 1993, when he said, “Customers do not see it as their job to ensure manufacturers a profit.” Peter Drucker was a very wise man. Video stores, book stores, travel agents, solo practitioner doctors, full service gas stations, etc. were dumb, fat and happy, and now most are gone. The consumers no longer saw their value. How might consumers spell relief? A – M – A – Z – O – N, or W – A – T – S – O – N or A – I or some other innovation that we can’t even imagine. America's agents need to wake up before it's too late!

Part 2 – You CAN reduce your claims expenses and improve the customer experience. In Part 1, we looked at how your claims processes and systems are a customer experience issue. This time, I will dive into the fact that you can reduce your claims expenses while improving the customer experience. A recent article in A.M. Best’s journal shared a survey that indicated the top two items that needed technology improvement are: --Improving the customer (and agent) experience. --Legacy administrative and claims systems. Reducing the claims expenses of a company does not have to mean a reduction in the customer experience. Improving the customer service or experience does not mean you need to increase expenses by adding human capital in the company. I have learned that there can be a happy medium. See also: Finding Efficiencies in Claims Process   Here are some questions and thoughts to keep in mind as you and your team evaluate ways to reduce the claims expenses while maintaining or enhancing the customer experience: Does your company have a proactive or reactive digital strategy? Digital strategy and digital capabilities are not the same thing. I believe digital channels and experiences are going to change the insurance industry. You must meet your customers where they are and want to meet. If that is mobile, then you need a way for your customers to process claims on their mobile devices. And not just some functions, all of the claims functions. Have you ever started a process on your mobile device only to go down a path that leads to – “We apologize, that function is not available on our mobile app, please go to www dot…” (You get the point.) It is frustrating, to say the least. Insurtech: Does your company just talk about it, or do you actively engage in it? Talking about insurtech and actively engaging are two different topics of discussion. Here is what I have learned in building businesses. A business is always in one of four phases at a given time: innovating, pivoting, growing or dying. Ask yourself, which category are we currently in? Let's hope it isn’t the last category. Insurtech can help your company with the first three categories. However, you must become engaged. This means reaching out to insurtech companies and taking a new approach by working with them. You may be pleasantly surprised by what they can offer to you, your team, your company, your customer experience and your bottom line. Are your legacy systems hindering innovation, or even preventing it? Let’s discuss item #2 of the A.M. Best survey results. I can tell you from experience; When I inquire about legacy systems at life insurance companies, I hear a sigh. This is not a sigh of happiness, it is a sigh of not wanting to discuss this subject. At all! Most people almost cringe at the thought of discussing the legacy systems. See also: Top 10 Claims Trends That Will Affect 2018   Here are the facts: Your legacy systems exist and are currently a necessary part of the business. They will probably get phased out or updated. This process is going to be expensive. But does it have to be? What if an insurtech recognized this issue as a barrier to entry for its product or offering and decided to tackle the legacy issue head on? What if it could connect to your legacy systems and complete the claims processing functions while delighting and providing WOW to your customers? What if it could accomplish this with minimal resources and at a reasonable price? My point is there are many ways your company can be innovative. If you start to have an open mind and explore some of the insurtech companies out there, you may get all of the innovation your business needs! Stay tuned for Part 3 of this article to learn how your claims process can become a revenue driver for your products.

Picture this scenario: For an hour, you have the undivided attention of an expert in your field with years of experience directly relevant to your current job and your career. How would you spend that time with the expert? Specific answers will vary, but chances are that watching a PowerPoint presentation or reading from a textbook together isn't very high on your list. Yet those passive acts sometimes make up most of an organization's training sessions, leading some to wonder if there is a more efficient way to train employees. A growing number of learning and development pros have found success by turning that model on its head with the flipped classroom approach. With this concept, trainees study material on their own time and spend classroom time working through real-world scenarios and having more in-depth discussions with experts on the topic. The Pros and Cons of a Flipped Classroom Proponents of flipped classroom training argue that traditional “sage on the stage” training sessions squander the valuable and limited time trainees get with subject matter experts. The experts essentially become content delivery vehicles. Even if they present the information in an engaging and informative way, much of their expertise and industry know-how remains untapped as they spend time covering the basics. Traditional training sessions are not ideal for learners, either. In a traditional classroom setting, the lesson can progress only at a single speed. In turn, advanced learners may get bored with the pace and lose interest, while less experienced learners may struggle to keep up. See also: How Millennials Are Misunderstood   In flipped classroom structures, trainers record videos or prepare presentations that trainees watch on their own before the training session. They’re expected to show up to the session with a basic understanding of the material and to be ready to discuss it in greater depth with the trainer and fellow participants. This flipped classroom approach offers advantages that may be compelling to many—trainees can learn at their own pace with relatively basic technology requirements in preparation for a collaborative training session focused on social interaction and tapping the expertise of the subject matter expert leading the training. Potential issues do creep up with flipped classroom learning. First and foremost, trainees must find time to complete the pre-assignments. This means either finding time during the workday to watch videos or being sufficiently motivated to review the material after hours—both of which are easier said than done. There’s also a small technology hurdle to overcome. Trainers need to be comfortable creating the content, and trainees need to be tech-savvy and have the resources to access the content. Can Flipped Classrooms Work for Risk and Insurance Training? The flipped classroom concept has already delivered proven results in school classrooms. In one school that implemented the flipped classroom approach, the failure rate dropped from 30% to 10%, and the rate of graduates going on to college increased by almost 20%. The flipped classroom concept is not new to the corporate world, either, though advocates say it’s still underused. Some companies, including McAfee, are already using it to train and onboard new hires. Others are using the basic concept to flip business presentations and meetings. Many insurance professionals are finding success with the approach, as well. The increased interaction between learning and development professionals and trainees is an obvious benefit for students, and employees showing up with a basic understanding of the material can make sessions less frustrating for trainers. In many cases, the flipped format is actually a better fit for learning industry-specific topics like underwriting or claims because the collaborative environment more accurately simulates the workplace. See also: Time to Formalize Insurance Career Path   It’s important to note that the same pitfalls that exist in traditional classrooms can limit the effectiveness of flipped classrooms. The challenge of developing quality materials still exists for those leading the training, as does the challenge of motivating trainees to thoroughly review the pre-training materials and actively participate in discussions. If you can solve these challenges, however, the format has serious potential to reinvent training, from general onboarding to more specific technical topics. Have you had success with the flipped classroom approach or with giving trainees material to review at their own pace before entering the classroom? Let us know in the comments section below.

"My light bulb moment was when I realized that as important as insurance—and by extension insurtech—is, 'risktech' is the future of technology that will be the most helpful to risk leaders going forward.

"I am not talking about today’s popular governance, risk management and compliance systems framework, but rather the technology solutions that will help mitigate risk by more effectively navigating the digitization of the risk profile of organizations."

This was an insight shared by Chris Mandel, Senior VP of Strategic Solutions for Sedgwick, in a recent article, "Insurtech or Risktech," published by Risk & Insurance. Chris's lightbulb moment came during a discussion that occurred during an event on technology hosted by Siemens in Houston, the result of a collaboration between Siemens and Insurance Thought Leadership.

Chris closes this piece with what amounts to a leadership challenge for risk managers in verticals other than insurance: "The good news is that these solutions are already beginning to emerge…. The remaining question is whether or not risk leaders are up to this new world challenge and how they’ll respond." 

The basis for Chris's challenge to risk managers certainly also applies to corporate leaders across the insurance industry. 

Never before have leaders faced a more demanding or compelling challenge to innovate. But, to do so, they must suspend a host of common beliefs: that an innovator first requires size, a particular culture, an abundance of resources or the completion of internal digitization efforts. 

A few quick snapshots from the Innovator's Edge shows why those beliefs must be set aside.

In a relatively short list of technology-based firms, the total funding into their success exceeds $78 billion, spanning 2,096 firms. Look at the mix of technology applications.

Many fall outside of what many might classify as insurtechs, yet, to echo Chris’s phrase, these are very much "risktechs" in that many of these early-stage firms will affect risk—and by extension the insurance industry—to a far greater degree than many of the process improvement benefits being delivered to insurers via insurtechs. Note that many of these companies started with teams of less than five, yet will deliver massive amounts of innovation without meeting many of the common beliefs about how to produce it. 

To highlight the need for broader thinking about innovation, consider the next chart, based on 547 early-stage entities with a funding total exceeding $29 billion. This chart shows that the funding supporting autonomous vehicle startups exceeds the selected insurance categories combined.

While insurtech companies will yield benefits to insurance operations in the near term, in the long term the application of "risktech," such as autonomous vehicles, potentially rewrites the rules of the entire insurance industry.  

Since 2000, the cost of technologies has fallen by a factor of 3,000X while the computational capabilities have grown by a factor of 10,000X, and the insurtechs and risktechs riding those waves will provide the insurance industry with exponential growth opportunities. We maintain that adopting the best practices in insurance innovation is achievable, regardless of the size and perceived resource constraints of an insurance company.

Corporate leaders across the entire insurance value chain would be well served to consider these trends in the context of their legacy. Who will be remembered as the leaders who embraced growth via innovation vs. those who chose not to? Which path truly represents the more significant systemic risk to an enterprise: embracing the possibilities of innovation, or staying the course while competitors become innovators and transform their future?

Guy Fraker
Chief Innovation Officer
Insurance Thought Leadership

p.s. I'll be speaking about the tremendous opportunities for insurance innovation in an upcoming webinar in partnership with Johnson Lambert. Register to attend and join the conversation. 

Over the past nine years, $20.6 billion has been invested into insurtech startups (data below as of March 21). In 2016 and 2017 alone, this figure amounts to $10.7 billion. I love it. There is nothing better than reading about a newly funded startup from a large VC firm. It takes a ton of blood, sweat and tears to get an investment from a high-profile VC, and it is extremely rewarding for the startup that is able to secure funds from one. These transactions tend to generate a lot of press (as they should). The money allows the startup to say, "We have proven ourselves by gaining some traction, have passed the intense due diligence of a VC firm and now have the runway to serve you." "You" in this sense typically means a carrier (in the case of a B2B insurtech startup). There is another group of startups out there that do not get any funding press because they are self-funded. These firms sometimes fall under the radar of carrier innovation teams that are scanning the market for meaningful solutions. This article is NOT to take away from the funded companies. The majority of startups I work with are well-funded by VCs. This article IS to educate on what a self-funded (i.e. bootstrapped) startup is, some advantages and challenges of working with one as well as how a carrier should assess a bootstrapped startup vs. a VC-funded one. To help with this, I had the pleasure of interviewing Nick Mair, CEO and co-founder of Atticus DQPro. Atticus DQPro is a data monitoring platform designed specifically for the operational and regulatory needs of the insurance market. Atticus DQ Pro was bootstrapped from Nick’s first business, Atticus Associates, a consulting service to the London and specialty Insurance market. What is a bootstrapped startup? The self-funding can either come from a founder's personal finances or another revenue stream, such as consulting. A third approach is to fund a company based on the revenue from a product that you are building, though this can be harder to get off the ground. There are also circumstances whereby a company will bootstrap for a period of time to obtain more attractive fundraising terms (more on this later). For Atticus DQPro, Nick had an established consulting business in the U.K. insurance market. The focus was on technological implementation and transformational change for carriers. See also: Where Are the Insurtech Start-Ups?   By gaining on-the-ground understanding of how carriers work and what their problems were, Nick and his team were able to identify a solution for the specific need their clients were facing. They got the idea and the funding from their consulting business. What are some of the advantages to working with a bootstrapped insurtech startup? "When you are bootstrapping, you are living on very limited amount of cash, and this means you are forced to solve a problem faster than a VC-funded outfit." I found Nick’s statement to be quite interesting. Whether a startup is bootstrapped or VC funded, it must have a solution that is relevant to the carriers it is trying to work with. For those that have VC funding, their runway may be a bit longer. VCs are typically looking for a total return/liquidity event five to seven years from time of investment and good traction within one to three years. Bootstrappers do not have this same luxury. "Many bootstrappers are looking to solve a real problem now rather than something truly disruptive," Nick said. Nick explained that, from his experience, bootstrappers must get to product/market fit and real revenues faster. If they don’t (unless they have very deep pockets), then they could be out of business in less than a year. Nick said bootstrappers are pushed to solve problems faster with the carriers they work with and then scale quickly after that. Bootstrappers can mine opportunities that are not of interest to VCs because they’re sub-scale; e.g it’s a $5 million to $30 million opportunity rather than $100 million-plus. That window leaves a lot of niche problems for bootstrappers to fix without competition from funded startups. Nick said: "We can argue revolutionary change is required for our industry, but evolution can happen in parallel to solve real business problems now." Lastly is the area of domain expertise. Many bootstrappers (as in the case with Nick) are industry specialists who have found a need within the domain and want to fix it. By contrast, many of the VC-funded startups come with founders with deep technology backgrounds. They have built great solutions that they believe can enhance or disrupt insurance yet lack the insurance industry domain expertise. I do see this dynamic shifting. There are many more VC-funded startups with founders who come from within the insurance industry. What are some of the challenges to working with a bootstrapped insurtech startup? Not all VC-funded startups are looking for long-term disruptive solutions. Many have product/market fit solutions that solve the existing problems of today’s insurers. These VC-funded startups can scale their teams (specifically in sales/business development) much more quickly than a bootstrapped model allows. Nick shared that this problem typically comes when the bootstrapper has around 10 clients and needs more resources to continue to market and deliver their product. This is typically the time that a bootstrapper needs to try to secure outside funding. Nick’s view is that bootstrappers that can generate a decent annual recurring revenue (of roughly $1 million to $2 million) will be in a better position to get additional funding on more favorable terms (i.e. the startup already knows it has something that works and can be more confident when/if seeking additional funding to scale, through a VC, small private equity firm or carrier). Getting to that point and knowing when to make that call can be hard for a bootstrapper. Another disadvantage of working with one is that the team is primarily the management team and advisory board. Having a VC-funded startup brings the experience of the firm that invested. A VC firm has massive skin in the game for the startups to succeed. If the VCs are with a reputable firm, they have dealt with startups for a long time and likely had some good exits. They will be able to bring a perspective that the founders may not have and may not have access to within their own management team/advisory board. What does this mean for carriers? Should they partner with a bootstrapped insurtech startup or a VC-funded one? A few months ago, I wrote An insurance carrier’s guide to working with an insurtech startup. The first point is to "understand and prioritize your organization’s needs." I would like to reiterate this. A carrier must have a problem/area that needs to be addressed. If the startup fills this need, then I said to move to the next, which is due diligence. If the startup is VC-funded, this is a good first step. VCs have ridiculous due diligence processes (just ask any founder what the process is like). If a startup has secured a Series A or higher from a reputable VC firm, it has passed a certain test. The VC will have looked at the business plan, legal entity setup and founding team to the nth degree (among other things). A carrier must perform its own due diligence but has the assurance that someone else has also done a fair amount. For a bootstrapped one, it is important to know where the funding is coming from and what sort of runway the startup has. For both, it is important to know what sort of engagements they have done. If they are only in pilot stage with the carriers they are working with, this is OK. Ask what sort of results they can share with you from the pilots they have done/are doing to indicate whether that is the sort of result you are looking for. Additionally, when looking at the team of the startup, it is extremely valuable if some of the founders/team members have actual insurance industry experience. This will add another element of understanding of the carrier’s business while working together. Lastly, carriers should start with a pilot when working with a startup (whether funded or bootstrapped). This is a good way to validate the work the startup says it is going to do with you before going fully commercial. Summary There are tons of startups out there. It’s such an exciting time to be in this business and to be working with such smart and energetic people who are trying to make insurance better for consumers. I have deep admiration and respect for all startups, whether they are funded by VCs or bootstrapped. It takes a lot of courage and perseverance to start a business, especially in one as highly regulated as ours. See also: What’s Your Game Plan for Insurtech?   There are many reasons why a startup would be bootstrapped vs. raising funds. The last point Nick made to me was that "self-funded can mean bootstrapped by design/choice rather than trying to get funded. Founder reasons can be keeping control, better work/life balance or greater freedom." For those thinking about starting an insurtech startup, have a look at this article that Nick shared with me. And for those carriers looking to partner with a startup, do your due diligence and make sure you are filling a need and putting the carrier in a better place as a result. VC-funded startups and bootstrapped ones are both good options, and you should consider both for your innovation efforts. This article first appeared at Daily Fintech. 

There’s a lot of talk about how artificial intelligence (AI) will lead to the displacement of vast numbers of agents and brokers in the insurance industry. The truth is, while AI will automate certain processes, it will ultimately enhance — rather than replace — humans in the marketing and distribution of insurance. “Human advisers are going to continue playing an absolutely critical role,” said Farron Blanc, VP, Innovation Studio for RGAx, at Denim Summit 2017. “When you go fully digital, the conversion rates are probably about 1% from seeing an ad all the way through paying the first premium. As soon as we put in a call center, we’re seeing — depending on the segment — a 30% conversion rate.” There’s no question both humans and technology will play a critical role in the future of insurance. But what are the benefits only a human can bring, and what are things humans can’t do without technology? Let’s take a look. The Human Value Below are a few things humans bring to the table that technology can’t do alone:

• Trust. As Chip Bacciocco, CEO of TrustedChoice.com, pointed out during Denim Summit 2017, insurance is, at the end of the day, a social contract and requires trust. “The real point of buying insurance is that you can go to sleep at night feeling like you did the right thing, you’re taking care of your family,” he said. “If you aren’t 100% certain you clicked the right button on that screen, and that real people are really going to pay your claim someday, you never really get to sleep.”
• Accountability. Along with trust, any type of business or social contract needs someone to hold accountable. “You need to know who to talk to when something goes wrong. You need to know who your advocate is,” Bacciocco said.
• Expertise. Let’s be honest: Insurance is confusing. Often, customers and potential customers need to talk to another human being who can empathize with their concerns and truly get at the heart of their questions. Agents and advisers bring years of expertise to the table that can help customers make the right decisions and give them peace of mind.

See also: Cyber: How to Fix the Human Factor   The Technology Value Here are the types of benefits made possible only when technology is added to the equation:

• New markets. Technology makes it possible to reach new market segments. For example, RGAx looked at the needs of Hispanic remitters and found that a $7 per month insurance policy would solve a pain point for them: protecting their loved ones with remittances for two years if something were to happen to them. “How do you get humans to sell $7 insurance to people who really need it?” Blanc asked. “Technology is this great democratic leveler that allows us to reach new forces.That’s why it’s disruptive. It allows us to reimagine the value chain and serve people in whatever way they want.”
• Personalization. There is an unbelievable amount of data available on consumers, especially when it comes to their digital behaviors. Recently, Denim announced we have collected more than 1 billion data points on consumer engagement with mobile and social media ads powered for insurance and financial services companies. Technology allows us to activate data to deliver highly relevant offers and personalized experiences to consumers.
• Multiple channels. Not all consumers want to engage with their insurance and financial services providers the same way. Some would prefer to do everything face-to-face or over the phone, while others would prefer to do everything online. Still others will start the process online but then need to talk to a person to complete the request. Technology makes it possible for consumers to engage with providers in the channel they prefer, any time of the day or night.

See also: How Technology Breaks Down Silos   Key to the future will be combining the best elements of human interaction with the best elements of technology to provide a superior experience to every consumer, every time.