Following on from last week's post on investment management, today we tackle that omnipresent question for carriers old and new: regulation. Regulation affects absolutely every part of the insurance business, from how customer data is held and used to how insurers reinsure themselves and invest the premiums they gather. The time and money cost of complying with regulation is often significant, with recent estimates suggesting that 10% to 15% of the total workforce in financial organizations is currently dedicated to governance, risk management and regulatory compliance. The opportunity for greater efficiency here is so large that a whole new tech-powered industry – regtech – has sprung up around it. And, with demand for regulatory, compliance and governance software expected to reach a massive $120 billion by 2020, this is a space to watch. The following stats and perspectives are taken from our Global Trend Map; a full breakdown of our survey respondents, and details of our methodology, are included as part of the full report, which you can download for free at any time. See also: New Regulations for Disability Claims   Assessing the Impact of Regulation Regulation is a serious issue not just for (re)insurers but for the insurance ecosystem more generally. Out of all our survey respondents (unfiltered), 20% indicated that regulation had impeded progress "a lot." As we see from our our burden chart below, the impact is evenly spread across different ecosystem players.

#regulation remains a burden across the #insurance industry. See whether it's growing in the #InsuranceMap: https://t.co/QH8z3aYH7y#regtech pic.twitter.com/kimsBHWrgN

— Insurance Nexus (@InsuranceNexus) July 26, 2017

Here, 24% of brokers and agents state that regulation has impeded progress "a lot" within their organization, along with 17% of technology partners and 22% of insurers. The trend is the same when we use a weighted score (one point for "a little," two points for "somewhat" and three points for "a lot"), giving us an overall "burden score" of:

• 186 for brokers/agents
• 159 for technology partners
• 175 for insurers

While regulation is a concern for insurance companies across the whole globe, it manifests itself differently in different regions. Our stats suggest that regulatory burden is above trend in Europe and below trend in Asia-Pacific (in terms of respondents answering that regulation is impeding progress "a lot"). Regulatory compliance certainly remains a daily issue in APAC but may, for structural reasons, be easier to deal with there on a big picture level. In Asia-Pacific, industry participants have the advantage of dealing, in the main, with large national markets (bigger than any U.S. state, for instance) but without the complexities of an overarching regional regulator (like we find in Europe with the E.U. and Solvency II). That said, carriers wishing to be active across the region still have a multitude of different regimes to comply with. Additionally, we asked survey respondents to indicate, via an open-text response, which regulations were currently the greatest cause for concern. There were too many responses to list everything, but some that stood out were Solvency II and the Insurance Distribution Directive (IDD) from respondents in Europe, and the DOL fiduciary rule from respondents in North America.

"Currently the focus is on protecting personally identifiable information, personal health information and personal credit information. Regulations in the future may evolve, requiring companies to ensure that they are using information in a fair and just fashion. For example, much can be inferred from the data from an individual’s smartphone, but it may not be fair and just to act on those inferences." — Cindy Forbes, EVP and chief analytics officer, Manulife Financial

Regulatory Burden: A Growing Challenge There is a marked trend toward rising regulatory burden, and we found this to be consistent across our different ecosystem players and regions. 89% of insurers and reinsurers believed regulation was posing a greater challenge to their organizations than during the previous 12 months. "Increased regulation" was one of the external challenges we explored in our industry challenges section, coming in sixth place out of 12 (based on all respondents). Drilling down into different carrier departments reveals that its impact is not evenly distributed across the business: "Increased regulation" was among the top three external challenges for carrier staff working in actuarial, analytics, capital management (where it took the top slot), investment, risk, senior leadership, strategy and treasury. The overall balance of these departments suggests the greatest burden from increased regulation within (re)insurers is falling on the investment and risk-modeling side of the business. Europe has certainly been a case in point over the past couple of years, with Solvency II subjecting carriers to more rigorous capital requirements. See also: Aggressive Regulation on Data Breaches   Regulation’s growing prominence in the eyes of high-echelon staff (senior leadership) indicates just how seriously it is viewed within the ecosystem. This, along with the other measures we have presented in this section, creates a perfect storm for the rise of regtech over the coming months and years.

A customer purchasing auto insurance lives somewhere, in a house or an apartment that needs homeowners’ or renters’ insurance. A customer seeking homeowners’ or renters’ insurance might have a vehicle or two parked out front. And how many of these individuals also run their own business ventures? Carriers have been becoming more mindful of the need to own customers, meeting all their needs. The idea of keeping your insurance customers under your roof for all their needs is appealing from a business perspective. After all, if your auto insurance customers need to insure their dwellings, as well, why shouldn’t they avail themselves of the coverage you already provide? But owning the customer isn’t just about money. It’s also about service, as Blue Cross Blue Shield notes. An insurer that covers a client on multiple fronts, even with products the insurer doesn’t underwrite itself, is poised to provide a level of service that can meet a customer’s needs over an entire lifetime — if the insurer’s own systems support this goal. Enter omni-channel. Omni-Channel 101 The goal of an omni-channel presence is to provide a single, seamless experience for insurance customers. From the customer’s perspective, buying property and casualty insurance should be a “one-stop shop”: everything they need, reachable through a single interface, says Bryon Morrison at Nectarom. Most carriers currently fall short of that customer expectation. If one-stop shopping sounds like a rebranding of multi-channel without any real substance, think again, says Kathy Hutson of IBM Analytics. Multi-channel marketing was a stopgap solution, a way to allow customers to reach multiple products while still keeping those lines siloed. With omni-channel tools, insurers break down the silos — allowing their teams to provide the specific solutions customers want and need. Frost & Sullivan offers an elegant definition: An omni-channel presence offers “seamless and effortless, high-quality contact experiences that occur within and between contact channels.” Instead of directing customers to “the folks over at ___,” an omni-channel presence puts all of an insurer’s “folks” into a single line of approach for customers. Omni-channel and similar tools are shaking up the insurance industry, according to a 2016 Majesco white paper. Omni-channel approaches provide exciting opportunities for both insurers and customers, Mark Breading says, and we are only scratching the surface of their potential. The first of the big carriers to embrace omni-channel, Progressive, is already seeing early returns on this investment, as we will touch on below. See also: Where a Customer-Focused Culture Starts   Keeping Customers in the Fold An omni-channel approach offers several opportunities for P&C insurers. Here’s how omni-channel helps maintain customer ownership. Meeting Customers Where They Are While good customer service and relationship management has always been about meeting customers where they stand, their position continues to shift in the digital age. Consider:

• 84% of U.S. households own a computer, according to Andy Serowitz at Insurance Thought Leadership.
• 80% of shoppers use digital tools at least once during their shopping process, including while they shop for home, auto and other forms of P&C coverage, according to a recent McKinsey study.
• 53% of consumers have tried a new-to-them financial or insurance brand in the past year after finding it online, according to the program for the 2017 Digital Marketing for Financial Services Summit.
• 25% of shoppers now buy things like insurance via a mobile app — and that number is increasing. Millennials and the coming Generation Z are far more likely to buy insurance online, Serowitz says, and the percentages track their presence in the population. As today’s children and young adults grow, the use of these tools will increase.

These digital natives are well-informed and expect a seamless experience, Kamna Datt at Ameyo says, and these changing demands are shaking up the insurance industry. Once the domain of local friendly faces making personal connections with clients, insurance companies must now contend with customers who want to do their shopping online. The demand for online connections is more than a whim. One Accenture study discovered that 78% of insurance customers are happy to share personal information with their insurance company, if it means better coverage or service. Customers want to hand companies their info — and the value of that info can only be leveraged by companies with the omni-channel infrastructure to unlock its potential. Customers expect different things from their insurance experience in today’s world, as well. Once, a core concern for consumers was whether a P&C insurer underwrote the products it sold. Today, however, customers are more interested in convenience, says Progressive Product Manager Carolyn Wald. Progressive’s home advantage program bundles other carriers’ homeowners’ and renters’ insurance offerings with the company’s own auto insurance plans. The result is big business for Progressive, benefits for the insurers that underwrite the non-auto portions of the policy and convenience for customers that keeps them coming back. Whose Customer Is It, Anyway? In 2011, Andres A. Zoltners, PK Sinha and Sally E. Lorimer posed an important question in the Harvard Business Review: Do your customers “belong” to your salespeople, or to your company? “In a complex ecosystem of intermediaries and agents, ownership of the end customer can sometimes be lost,” says Dennis Vanderlip, industry solutions director at Microsoft’s Worldwide Insurance division. When communication channels are siloed or confusing, ownership becomes harder to maintain. And with every intermediary who enters the picture, ownership becomes even more muddled. This also shines a light on a frustration that customers experience. Customer want to be loyal, a 2016 Bain & Company brief found. Or, more precisely, they don’t want to juggle multiple insurance providers. Instead, they prefer to “simplify their lives and do business with a single company that gives them reasons to stay.” Omni-channel platforms offer a solution. When customers can carry out most or all of their insurance business needs through a single user interface — and when that interface connects to all the core systems of a P&C insurer and even to core systems of other carriers products — the customer’s experience becomes one seamless dealing with the insurer. Even when the underwriter changes, the customer can stick with the insurer of her choice. Planning Throughout the Lifespan Because customers are willing to provide information through digital systems and find it easier to keep using a single familiar interface, an omni-channel approach makes it easier than ever to maintain customers by anticipating their needs. A well-designed system can use customer data to anticipate needs and provide personalized alerts and service to customers who are buying a car or home, opening a business or passing through other major life stages. One of the biggest questions that arises when “insurance” and “lifespan” are paired is that of life insurance — an area that stands to be upended by omni-channel approaches, according to an EY white paper. While life insurance has long been hands-off in its approach, an omni-channel approach both make it easier to meet customers’ needs in this area and to bundle life insurance with other insurance solutions, e.g., auto, homeowners, etc. Building Your Omni-Channel Presence: A Quick-Start Guide While an omni-channel presence can go very well for both customer and insurer, it can also be a disaster that causes customers to eschew the company permanently. In an article for The Financial Brand, Jim Marous describes an experience with his own auto insurer that left him cold, mainly due to major mistakes in the company’s uses of its omni-channel system. Marous breaks down the major problems into several categories. The insurer’s system, he says, made communication harder, was essentially a multi-channel approach overlaid on still-siloed product systems, created redundancies that resulted in broken promises and made it difficult to view customer data across channels. Such negligence is a surefire way to weaken relationships between existing customers and their agents — to the point that neither the agent nor the company can claim ownership anymore. See also: How to Enhance Customer Service   How can insurers avoid these pitfalls? Vinod Muthukrishnan, co-founder and CEO of customer experience management company CloudCherry, recommends keeping the following points in mind when seeking an omni-channel platform that boosts customer ownership:

• Know your brand. The customer-facing end of an omni-channel presence must communicate a unified look, feel and vision. No matter how your customer connects to your company or through whom, the experience should consistently sell the company’s brand, vision and coverage. By doing so, you can differentiate your brand to promote ownership, as well, as one IBM white paper notes.
• Understand your customers. Tracking how customers interact with you and what they prefer can help ensure your company doesn’t waste time and energy on tools that customers ultimately won’t use — or overlook communication channels customers crave.

In addition, choosing platform provider and other professionals to build and service your omni-channel presence should be done with care. Look for companies with an eye toward customer experience and ownership; they’ll already be thinking about how to unify your brand and connect with the people you serve. Finally, realize that a true omni-channel experience should enable a customer to complete a single application for all of their insurance needs, even if the last mile of the application process takes place at a call center. And this is true whether you underwrite all of the products you offer or not. The key, which we will explore in a future piece, is to have alternatives and robust offerings to meet all of your customers’ needs.

There is a culture clash in the construction industry. Employers and lenders want their contractors on the hook for any insurable losses as long as possible, whereas insurers want to switch from the construction phase to operations, where they usually have rights of subrogation against the contractor as soon as the facility has achieved commercial operations date (COD). This can cause a mismatch where either a project may be uninsured but does not realize that is the case, or the employer is in breach of its contract with the contractor. Both these potential situations can produce an excellent payday for lawyers, with a cost to the litigating parties far higher than the premium and advisory expenses to ensure it didn’t arise in the first place. See also: Strategies to Master Massively Big Data   Most construction underwriters aim to have their policies cease once the project insured is able to operate and thereby achieve its (COD). Part of their desire for this is that they can then issue operational policies, which exclude some parties previously insured during the construction phase and thus ensure that insurers have rights of subrogation against those parties, primarily the engineering, procurement and construction (EPC) or turnkey contractor and major original equipment manufacturers (OEMs). This approach may resonate and align with a concession agreement or power purchase agreement (PPA)-type contractual structure because these agreements often allow commercial revenue generation at the earliest possible time to facilitate usage of the project by the public, whether it be a hospital, power station or road, etc. But the employer, which has the exposure to the availability and efficiency risks, wishes to receive a project of unquestioned quality, so many modern construction contracts demand a more stringent process for reaching a point where the employer will accept risk of loss back from the EPC contractor. These policies require the contractor to perform numerous tasks beyond simply helping achieve commercial revenue generation before a form of "completion" is awarded to the contractor and risk of loss reverts back to the employer. Indeed, terms such as COD are rarely found in construction contracts. A recent example from a project where Aon is the broker involves a contract where the contractor is required to provide confirmation of the successful finalization of more than 20 items in addition to completing a testing regime to allow for the COD to be issued. Therefore, the issue is essentially about a disparity between insurance industry practice and the risk allocation in the main contracts that create and drive projects and especially in public-private partnership (PPP, or P3), build-operate-transfer (BOT), build-own-operate-transfer (BOOT), build-own-operate (BOO)-type deals where greater lifecycle risk remains with the private sector stakeholders even during operation. The disparity can lead to a situation in which:

• COD has been awarded under a concession-type agreement, and therefore commercial revenue is being generated,
• So the construction-period insurers are looking to come off risk,
• But the EPC contractor still has risk of loss (for at least a part of the project), which, contractually, is still considered as being under construction,
• And the owner has agreed within the construction contract to maintain insurance on behalf of the contractor until completion, however defined, in the construction contract
• Which can create confusion as to the date of commencement of any defects liability or maintenance or warranty period insurance cover.
• Plus, there are situations in which through this initial period (i.e. until the contractor has demonstrated that the project can meet the performance criteria required by the EPC contract, which may have some differences to the owner’s agreement with their client), it is the EPC contractor that operates the plant, thus ensuring the need for that entity to remain an insured.

See also: Why to Refocus on Data and Analytics   Therefore, it is essential that your construction risk and insurance adviser is:

• Involved early enough in the procurement process to become fully versed in the contractual terms, clauses and nuances of all the project agreements (i.e. not just the construction contract),
• Able to engineer an insurance solution that both meets the contractual requirements that the employer desires (or has agreed to) and leaves no stakeholder exposed to an uninsured loss that could result in legal action against the employer and even become an event of default under the loan agreement, and
• Able to explain the contracts and their ramifications to the insurance market to ensure that no gaps in coverage are created and that no insurer can subsequently say: “we weren’t told about that.”

Policy administration systems (PAS) replacements and expansions remain top of mind for property/casualty insurers. Carrier goals include: improving time to market, advancing business intelligence and analytics capabilities, improving customer and distributor service, increasing operational efficiencies and eliminating technical risk and debt. To reach these goals, insurers are investigating and considering the impact of several trends on core systems: the increase of SaaS/cloud, advances in microservices, the rise of insurtech and shifts in implementation strategy. Software as a Service Increasingly, insurers are willing to consider or implement core PAS in the cloud through a software-as-a-service (SaaS), or cloud, model. The adoption of cloud for ancillary services is commonplace in the insurance industry, and within the past few years the trend has expanded to include core systems, as well. These numbers are expected to rise even more now that some high-profile Tier 1 insurers are migrating to a cloud model. Novarica expects that 50% of insurers will license a PAS for new books of business though a cloud-based or partially cloud-based approach within five years; many are considering cloud for their existing books, and we expect to see more migration to the cloud over the next few years. Numerous vendors and insurers are using different but overlapping definitions for hosting and SaaS. As the line between the two grows increasingly blurry, vendors are trending toward offering more robust options with some level of enhancements and upgrades included, in addition to operations and basic maintenance services that are expected with every cloud offering. Microservices and Headless Core Systems “Headless” implementations entail implementing core systems capabilities by leveraging an underlying, commercially available core system with a carrier’s own user interface built on top of it. Therefore, instead of relying on the core system for the end-user experience, it is reduced to a set of services, transactions and business logic. Headless implementations offer carriers the flexibility to develop a differentiated user experience for internal and external users while leveraging core transactions that are configured and maintained in a single core transaction engine. Some solution providers are building out microservices to enable this flexibility, improve reuse within their own solution set and address concerns voiced by carriers over the difficulty of accessing functions with more limited Web services. There are few offerings with a full set of proven microservices, but the availability and granularity of the services is rapidly increasing. This modern architecture approach will bring future core system implementations flexibility and longevity as back-end transaction platforms. See also: Policy Administration: Ripe for Modernizing   Insurtech Silicon Valley’s insurtech investment boom (with outposts in insurance hubs like Des Moines and New York) is inspiring both excitement and fear in insurers across the country. Insurtech startups include software, data and service providers that could be invaluable partners to carriers, as well as new industry entrants that may become competitors. Whether viewed as a threat or an opportunity, insurtech is teaching the industry important lessons on how to optimize and prioritize the customer experience and how to make the most of underserved markets. Despite insurtech developments, insurer IT budgets are still mostly dedicated to the maintenance, modernization and replacement of core systems. Many insurers are still busy laying the modern, flexible core system foundation necessary to take advantage of many emerging technologies. There is little movement in the vended core systems market to incorporate insurtech capabilities within core. Instead, vendors and insurers should consider how the architecture of a new core system can provide the flexibility needed to take advantage of future technology and allow integration with future partners. Implementation Strategies Until recently, a typical PAS implementation involved an initial release that addressed two to three lines of business, a handful of states and renewal on conversion. Subsequent releases would deliver the remaining lines of business and states in a multi-year program. Today, insurers are reacting to the perceived extended time frames, large scope and significant investment by taking an approach to accelerate delivery of the first release. It is becoming more common for insurers to implement PAS with a greenfield line of business in the first release, adding in legacy lines and data conversion in later releases. It is also becoming more common for insurers that implement legacy products to go live with new business only for a significant pilot period before introducing conversion on renewal. Finally, extended full-suite implementations (PAS, billing, claims, reporting and portals) are becoming a more standard approach for smaller insurers, where they deliver more within the traditional implementation timelines. See also: Microinsurance: A Huge Opportunity   As major portions of IT budgets are dedicated to PAS and the surrounding core components, insurers need to keep these trends in mind when considering PAS providers from the increasingly rich vendor market. While challenges still exist with conversion and with managing overall project risks, insurance carriers are realizing benefits in time to market, efficiency of operations, improved functional capabilities and better data management. PAS replacement projects are extremely complex, risky and all-consuming, but they are also extremely necessary.

An agent received the following email from a customer: “A few people are telling me to save money on car insurance by NOT telling the insurance company who is driving my cars. I have a 23- and 16-year-old – the older one had two accidents, but her premium is reasonable at $2,300 per year for good coverage. These people are telling me that the cars are covered no matter who is driving so don’t tell them about your kids.” These “people” are allegedly other agents bidding on her personal lines account. I don’t know about you, but I call this email insurance fraud. I suspect most regulators and state attorney generals would concur. For example, here is just one of many fraud statutes from Florida: 817.236 False and fraudulent motor vehicle insurance application:  Any person who, with intent to injure, defraud, or deceive any motor vehicle insurer, including any statutorily created underwriting association or pool of motor vehicle insurers, presents or causes to be presented any written application, or written statement in support thereof, for motor vehicle insurance knowing that the application or statement contains any false, incomplete, or misleading information concerning any fact or matter material to the application commits a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084. See also: How Bad Is Insurance Fraud Really?   A felony conviction is not an inconsequential thing, nor are the civil penalties and possible incarceration associated with insurance fraud laws. In addition to the fact that insurance fraud is illegal in every state, those that have adopted the NAIC’s Insurance Fraud Prevention Model Act or their own version of that law make reporting of such fraud mandatory. For example, the model act says: "A person engaged in the business of insurance having knowledge or a reasonable belief that a fraudulent insurance act is being, will be or has been committed shall provide to the commissioner the information required by, and in a manner prescribed by, the commissioner." The industry and state regulators encourage the reporting of insurance fraud. States with mandatory reporting requirements usually have mechanisms for confidentiality and immunity. If you’re an agent who is aware of this market conduct, have you reported it? If you’re an underwriter or adjuster who is aware of an agent who has engaged in this practice, have you reported it in addition to terminating the agent? In my blog, I often give “big data” a hard time, but this is an example of how it can supplement underwriting and claims. In a recent blog post, I expressed my distaste when my personal lines carrier sent me an additional auto insurance bill for almost $600 because it apparently learned that my son, who moved out three years ago, still gets his vehicle registration renewal mailed to our house. The presumption, without verification from us, was that he still lives here. I don’t have a problem with this practice, just with the execution and presumption (from my viewpoint) that I’m dishonest. There is nothing wrong with verifying information provided by an insured or agent, and ‘big data,” without misplaced overreliance, can be a viable tool for that purpose. This is one reason why an agent who engages in the fraudulent behavior described above is being foolhardy. With the growth of data analytics, more and more agents are going to get caught engaging in this type of fraud. And I hope that carriers will have the backbone to report them and get them out of the business. See also: 3 Major Areas of Opportunity   This is not a singular or unique tale. I’ve heard it from agents before. Too many agents compete unethically, and some do it illegally. Whether it’s the personal lines agent deliberately underinsuring a home with a “guaranteed replacement cost” provision or the commercial lines agent undervaluing property insured on a blanket basis without a margin clause, the offender needs to be reported and driven out of the insurance industry. Are you willing to do your part in cleaning up the insurance fraud swamp?

It is not unusual to hear someone use Google as a verb in ordinary conversation: "I googled….” Being part of building a company that becomes so prevalent that your name is used as a verb is no small accomplishment. A company I'm working with, Groundspeed, may be on its way to achieving verb status. In October 2016, I reconnected with Jeff Mason, the CEO of Groundspeed (he was part of a management team at a company I had endeavored to acquire earlier in my career). In all my dealings as a strategy consultant, a P&C executive and now in an investment capacity, I have maintained that for any new tech businesses to get real traction in the insurance sector, particularly in serving the incumbents, you had better be laser-focused on solving important industry (economic) issues, and Jeff had a vision to solve a very important industry problem. In the ordinary service of clients, brokers receive multi-page client loss (runs) information from their carrier partners in the form of PDFs and other not particularly consumable forms. On the flip side, when larger (loss-rated) business is submitted to carriers for quoting, the claims, exposure basis and other relevant information used for rating is provided in unstructured (frequently PDF) forms that are costly to interpret and input into systems. In both cases, the current process to prepare this information is completely manual, involving days of work, sifting through hundreds of data sources and thousands of document formats. In the end, 90% of the data is lost. Although this problem is less visible than some, the financial cost is substantial — Groundspeed estimates that agents and brokers spend 3% of revenue, or $4.2 billion a year, on manual processes to ingest and analyze unstructured client data and that carriers spend approximately $2.7 billion a year manually processing and analyzing unstructured files attached to inbound application “submissions.” Groundspeed is singularly focused on solving this problem – bringing down costs, improving accuracy and, most importantly, providing dramatic strategic benefit by unlocking information that goes to the core of underwriting performance. Groundspeed has built a one-of-kind solution that transforms the unstructured information to the exact specifications of its clients through machine learning, natural language processing and data pipeline as a service. Brokers and carriers submit unstructured loss run, policy and exposure documents and receive structured information back — effectively getting any view of underwriting performance they require (client loss performance over time, portfolio profitability, performance by loss attachment point, etc.). For brokers, the benefits are obvious; they have far better information to serve their clients without the quality issues and costs of endeavoring to do the most basic analysis manually. They also get the strategic benefit of better understanding their portfolio in terms of the underwriting profits they are creating for their carrier partners. For carriers, the benefits, too, are obvious. Tactically, the Groundspeed approach is simply a better, faster, less expensive process to get loss experience data into their rating systems, converting statement of values to forms ingestible by cat modelers, etc. Strategically, carriers get the benefit of building a “data lake of structured information” of all submissions they receive, from which discrete analysis and insight on growth opportunities and market underwriting performance can be gleaned. (Most carriers don’t retain the information on accounts they choose not to quote, or quote and lose.) See also: How to Embrace Insurtech Culture   Fast forward to 18 months after I reconnected with Jeff: February was a milestone month. Now working with eight of the top 15 brokers (all C-suite relationships), Groundspeed was given the ultimate compliment when a partner at a major strategy consulting firm shared with us that a client stated that “all we would need to do is Groundspeed our data.” Groundspeed may have a ways to go before it joins Google as an official verb in the Oxford English Dictionary, but even to be used as a verb by one prospect is an important success.

Risk management competencies can significantly improve decision making in any profession. The bad news is that these competencies do not come to us naturally. They have to be developed. Even if you do not operate in a high-risk, uncertain environment, you should consider the extensive research into what is referred to by scientists as heuristics and biases, cognitive psychology and psychometric paradigm, collectively called risk perception. The History of Risk Perception The study of risk perception originated from the fact that experts and lay people often disagreed about the riskiness of various technologies and natural hazards. The mid-1960s experienced the rapid rise of nuclear technologies and the promise for clean and safe energy. However, public perception shifted against this new technology. Fears of both longitudinal dangers to the environment and immediate disasters creating radioactive wastelands turned the public against this new technology. The scientific and governmental communities asked why public perception was against the use of nuclear energy in spite of the fact that all the scientific experts were declaring how safe it really was. The problem, as perceived by the experts, was a difference between scientific facts and an exaggerated public perception of the dangers (Douglas, 1985). Researchers tried to understand how people process information and make decisions under uncertainty. Early findings indicated that people use cognitive heuristics in sorting and simplifying information which leads to biases in comprehension. Later findings identified numerous factors responsible for influencing individual perceptions of risk, which included dread, newness, stigma and other factors (Tversky & Karneman, 1974). See also: The Current State of Risk Management   Research also detected that risk perceptions are influenced by the emotional state of the perceiver (Bodenhausen, 1993). According to valence theory, positive emotions lead to optimistic risk perceptions whereas negative emotions incite a more pessimistic view of risk (Lerner, 2000). The earliest psychometric research was performed by psychologists Daniel Kahneman (who later won a Nobel Prize in economics with Vernon Smith “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”) (Kahneman, 2003) and Amos Tversky. They performed a series of gambling experiments to understand how people evaluated probabilities. Their major finding was that people use a number of heuristics to evaluate information. These heuristics are usually useful shortcuts for thinking but may lead to inaccurate judgments in complex business situations of high uncertainty – in which case they become cognitive biases. Cognitive biases are just the beginning Besides the cognitive biases inherent in how people think and behave under uncertainty, there are more pragmatic factors that influence the way we make decisions, including poor motivation and remuneration structures, conflict of interest, ethics, corruption, poor compliance regimes, lack of internal controls and so on. All of this makes any type of significant decision-making based on purely expert opinions and perceptions highly subjective and unreliable. Risk management can provide clarity and assurance to decision makers anywhere within the organization, not just the risk management team. Risk management provides a set of tools to help management see risks, understand their significance to each decision and determine the best course of action with these risks in mind. Risk management may seem simple enough in theory, yet many employees not part of the risk team still do not have the necessary skills and competencies to apply it successfully in practice. The following are some practical ideas to bring risk management competencies to life, regardless of where you are in the organization (based on the free risk management book “Guide to effective risk management”):

• Risk management competencies should become an important attribute when hiring personnel – HR teams should include risk management requirements in all relevant position descriptions when hiring new personnel for the organization. The level of detail will of course depend on the risks associated with each role. Any finance, accounting or investment individual should possess a basic understanding of risk.

• Risk-based decision-making in induction training for new employees – New hires come from a variety of educational and experience backgrounds, and, most importantly, each new employee has her own perception of what is an acceptable risk. It is important for risk managers to cooperate with the HR team or any other business unit responsible for training, to jointly carry out training on the basics of risk-based decision-making for all new employees.

• Risk awareness sessions for senior management and the board – Executives and board members play a vital role in driving the risk management agenda. Nowadays, many executives and board members have a basic understanding of risk management. Auditors, risk management professional associations and regulators have been quite influential in shaping the board’s perception of risk management. It is important that risk management training focuses less about risk assessments and more about risk-based decision-making, planning, budgeting and investment management. The paradox is that risk management training should not teach management how to manage risks; instead, it should show them how to carry out their responsibilities with risks in mind. Click here to order training for your company.

• Advanced training for “risk-champions” – Additional risk management training may be needed for the risk management team and business units responsible for internal control, audit, finance, strategy and others. In-depth risk management training should include: risk psychology and risk perception basics, integrating risk management into culture, basic knowledge of ISO 31000, risk management and decision-making foundations, integration of risk management into core business processes and decisions. Click here to order risk management training for your risk/audit team.

• Passive learning techniques – Make risk management information available to employees, contractors and visitors. Place the risk management policy on the intranet and the corporate website. Record and publish risk management training or awareness sessions videos on the dedicated risk management intranet page. Invite guest speakers (risk managers from other companies) to speak to the audit committee or risk management committee and give all employees the opportunity to participate. I have used this in the past, and it worked very well.

• Risk management as part of everyone’s responsibilities – It helps to include risk management roles and responsibilities into existing job descriptions, policies, procedures and committee charters. The common approach of capturing risk management information in a single risk-management framework document does not work well.

• Risk management integrated into day-to-day work – My experience shows that updating existing policies and procedures to include aspects of risk management works much better than creating separate risk procedures or methodology documents.

See also: 4 Steps to Integrate Risk Management   Risk management is a valuable tool to help employees make business decisions under uncertainty. It works equally well with strategic, investment, financial, project or operational decisions. However, consistent application of risk management requires good knowledge of risk-management standards, risk psychology and quantitative analysis.

Brian Solis, a digital analyst and anthropologist, studies the effects of disruptive technology on business and society, calling it “digital Darwinism." Solis borrowed Darwinism to describe how organizations adapt to changing customer behavior (anthropological view) and rapidly changing technology through digital transformation. As Solis says in various articles, the effect of digital Darwinism on business is real, and it’s enlivened through evolutionary changes in people in their views, expectations and decision-making. And we are seeing it rapidly unfold in the insurance industry. The pace of disruption and dramatic changes are truly evident when we look at Majesco’s first Future Trends report from February 2016 to the second one in March 2017…and now in 2018. This year’s Future Trends report takes a deeper look at the current state of insurance disruptors across people, technology and market boundaries, and how they are pressuring insurers to adapt, pushing them out of their traditional orbits and toward new models and opportunities — “digital Darwinism” — to Digital Insurance 2.0. The Insurance Darwinian Shift Majesco’s consumer and SMB surveys show that customers seek “ease in doing business” across the research, purchase and service aspects of insurance. In addition, they are rapidly adapting to the digital age, and they have a rising interest in innovative products and business models emerging in the market, posing a threat to existing insurers. See also: Digital Playbooks for Insurers (Part 1)   Startups like Lemonade, Slice, Zhong An, Haven Life, Bought by Many and Neos are embarking on Digital Insurance 2.0 business models using digital platform capabilities and ecosystems that exploit untapped markets and address under- or unmet needs that strengthen customer relationships. New business models are serving different markets, have different products and services and use different strategies. While customer demographics and expectations, emerging technologies and data, and insurtech have had a majority of the focus, one area that has been a catalyst for these companies to shift to Digital Insurance 2.0 is platform solutions. Platform solutions provide these innovative companies speed to value, unique customer engagement, a test-and-learn platform for minimal viable products and value-aligned optimized costs. Their platform solutions also catalyze digital technologies and processes, AI/cognitive, cloud computing and an ecosystem, into a powerful new force to expand capabilities and reach well beyond those of the traditional Insurance 1.0 model. They are creating new paths, energizing the market and lowering operational costs. Digital Adaptation is Just Beginning As a result, incumbent insurers must aggressively begin to define their vision and path to Digital Insurance 2.0, leveraging today’s catalytic lever, platform solutions. And Digital Insurance 2.0 is just the beginning. The catalytic effect of platform solutions in the shift to Digital Insurance 2.0 is rapidly evolving, gaining momentum and laying the groundwork for future reactions. Will the next catalyst be blockchain or some other trend that will propel us toward Insurance 3.0? See also: Digital Insurance 2.0: Benefits   Insurers’ abilities to adapt and rapidly move to Digital Insurance 2.0 will likely define their future. As such, insurance executives and leaders should ask themselves the following:

• Are we appealing to customers’ motivations, making our processes simple and creating compelling triggers to act?
• What is our business strategy, and how are we incorporating a platform and ecosystem approach?
• In which markets and with what customers will we find our future growth? What will they expect?
• What is our partnership approach today, and how will it need to change to extend to a broader ecosystem?
• Is our technology platform the foundation for our growth?

The future is still unfolding. New technologies and ecosystems will continue to emerge. And with those changes, over the next decade, we will likely see the beginnings of Digital Insurance 3.0 emerge.  Organizations will need agility to adapt and respond, a keen focus on innovation that encourages experimentation, and a priority on speed to value to succeed, or even survive.

This is the fifth part of a five-part series. The previous articles can be found here, here, here and here. If you’re just tuning in to this series, here’s a brief recap of what we’ve discussed so far: Insurance is ripe for disruption, and insurers must balance two measures to respond. They need to get the Brilliant Basics right, and they need to innovate with Cutting New Ground initiatives. Both are necessary, as Brilliant Basics enable core transformation, which in turn frees up investment capital and enables the agility needed to innovate. It’s about this point in the conversation when insurance leaders start looking uneasy. That’s when the elephant in the room starts knocking over the furniture. The elephant is legacy: legacy thinking, legacy processes and, most definitely, legacy systems. Legacy is a legitimate concern. Chronic underinvestment in IT and growth through acquisitions has left many insurers facing high technical debt—the amount of money it would take to get legacy systems to a state fit for today’s business environment. Digital decoupling for an intelligent enterprise Insurers can look to new digital architectures to help address the issues of legacy. For example, cloud services, data lakes, microservices, open APIs and robotic process automation can not only reduce dependency on—and the cost of maintaining—legacy systems but also help them execute business strategy more quickly. See also: Innovation Is Really Happening Accenture calls this digital decoupling. Digital decoupling is a way to release an organization from its dependency on legacy systems. In many cases, we can rebuild the capabilities needed for the back office in the cloud, without the convolution of the legacy system. Robots and cognitive processes can help identify where the cloud-based system needs to plug into the legacy system. Digital decoupling can deliver savings to release capital for investments. It also contributes to the stable foundation required to underpin agility and support innovation. Let’s look at a few ways that digital decoupling can help insurers. Case study 1: Buy a car…while you’re in the car One global bank was mired in legacy systems but wanted to grow its car financing market. Accenture helped it launch the capability to have customers buy a car when they’re in the car. Think of it: You’re immersed in the new-car smell, fresh off a test drive. With the push of a button and a digital signature, you can buy the car, along with the financing, insurance and extended warranty. Talk about delivering a knockout customer experience at the moment of truth. Accenture made it happen in just three quarters. We used cloud-based digital tools to rebuild the bank’s back office, enabling almost exclusively straight-through processing. Next, the cloud-based back office was integrated into essential enterprise systems, but otherwise bypassed the legacy system. The cloud-based office is 50% cheaper to run, creating an immediate cost advantage over the competition. And in this particular market, where the economy declined by 8% over the past two years, the bank’s car sales are up 30%. Case study 2: Robots enable Sunday mortgages This particular bank had a mortgage office with typical office hours: Monday through Friday, 9 am to 5 pm. But when do people buy houses—and, therefore, when do they need mortgages? The weekend. But in this region, weekend mortgages weren’t possible. Accenture worked with this banking client to develop an AI-backed mortgage capability. Robots worked beside people to learn how to make mortgage decisions. When the people go home for the day, the robots keep working. Today, if you want a mortgage on a Sunday, you can get one—and, more important, you can buy your dream home. Accenture tapped into new technologies to bypass this bank’s legacy systems to deliver the AI-backed mortgage capability in just 20 weeks. What’s notable about these digital decoupling efforts is that they tend to be self-funded, especially when data lakes are leveraged. For example, using data lakes and other technologies, Accenture was able to create an entirely new bank in about six months—and eventually, as the business shifted to the data lake from the mainframe, the project became self-funding. Using data lakes, in particular, tends to result in a new architecture that is more efficient and cheaper to run than the legacy system. See also: Linking Innovation With Strategy   With digital decoupling, insurers can innovate without being shackled by their legacy systems. Think of it as two-speed IT. You can move fast with innovation by decoupling the back end. Meanwhile, you have time to move slowly later as you start shutting down parts of the legacy system—a process that releases even more trapped value.

This is the fourth in a four-part series. The first three are: Investment in Insurtech Continues to Surge, Insurtech Presents Major Opportunities and Key Insurtech Trends to Watch. In this series, I’ve been discussing the continued global rise in insurtech investment and innovation and the potential benefits to both traditional insurers and insurtech startups. I’ve highlighted some significant emerging players in this exciting new space. Insurers understand that now is the time to innovate. On the whole, successful companies have evolved into thriving ecosystems, offering digital platforms that bring together diverse products and services into a community. Think of Amazon and Uber as examples of these leaders. Insurance also needs to move to this model to thrive in the new economy. Insurtech can help you connect with your customers Understanding where the gaps are, both in the current insurance market and in the customer experience, will be key. Fortunately, technologies are emerging that can help insurers understand their customers’ needs, and, in turn, customers are increasingly open to purchasing insurance in non-traditional settings, especially via smartphone platforms. Insurtechs can offer tools to help incumbents become digital insurers, but they are not a solution in and of themselves. Conventional enterprises must innovate across the organization, from the C-suite to the front line, to derive maximum benefit from a collaborative partnership with insurtech. The technologies in question—whether they use artificial intelligence (AI), the Internet of Things (IoT) interfaces or big data and analytics—can’t be quick fixes. See also: Insurtech: An Adventure or a Quest?   Successful insurers will learn quickly from the insurtech trend and will do more than just experiment with new technologies. They will need to embrace innovation at all levels, company-wide, across their everyday business. Those insurers with a strategic innovation agenda and a clear plan for where insurtech fits into that agenda, will be in a better position to lead in the new environment. Read our full report: The Rise of Insurtech: How young startups and a mature industry can bring out the best in one another.