As consumers, we know that digital has transformed the way we discover, engage and transact with businesses in every industry. From ordering coffee on our mobile devices to running our smart homes on voice-command, we expect all of our experiences to be fast and seamless. The insurance industry has gone through its own digital transformation over the past five years. With a general acceptance that digital is here to stay, most insurers have incorporated digital into their organizations, implementing ad hoc capabilities to make their business faster and cheaper, creating online tools to further engage their distribution channels, and implementing table stakes technology in areas such as marketing, digital portals, customer self-service capabilities, and automation of some back-end processes. As we move into 2018, digital is continuing to reshape the way insurers do business. The ecosystem of available capabilities has grown exponentially and industry leaders are starting to leave behind the “fast-follower” mentality, reallocating their investments into core capabilities that give them a more customer-centric view, as well as ways to differentiate themselves in the market. Industry leaders are starting to leave behind the “fast-follower” mentality, reallocating their investments into core capabilities that give them a more customer-centric view, as well as ways to differentiate themselves in the market. From our perspective, insurers will take one of two paths:

1. Continue as followers, investing in only select digital capabilities that support their existing business model. This is a bottom-up, project-driven approach that identifies select digital capabilities within different parts of the value chain.
2. Take a digital-first mindset by better understanding the end-to-end customer experience and how business models need to evolve in order to increase growth and reduce costs. This is a top-down organization transformation with the goal of becoming a digital and data-driven organization which can continuously reassess the business and operating model.

As the graphic opposite illustrates, taking a digital-first approach and synchronizing investments across functions and processes will promote success by enabling a digital strategy that is a “North Star” that guides continuously improvement rather than just a point in time assessment. See also: Digital Insurance 2.0: Benefits   The companies that develop a meaningful competitive advantage will design and implement digital platforms that can handle disruption and positively change cost structures. They will:

• Build scalable systems, even for niche offerings,
• Deliver an end-to-end customer experience, and
• Change their business models to foster a test and learn environment that helps them improve how they go to market. These leaders will be the most likely to quickly adjust and grow as the industry continues to become more digital.

Building a digital platform Although we tend to understand digital transformation and modernization of technology platforms as sequential, multi-year events with multi-million dollar price tags, finite delivery dates and fixed realization periods, true modernization requires a foundational shift in the organizational culture, operating model, and underlying architecture that enables business flexibility and agility. Building a digital platform that will take your company into the future — not just respond to current needs — is critical to prolonged success. Insurers are currently enabling access to data across various domains and dimensions, but the companies going the extra mile to design a futuristic platform architecture are the most likely to benefit in the long term. Future-oriented platform architectures should be able to:

• Enable more granular services,
• Provide flexibility when reacting to traditional demands and responsiveness to disruptive emerging products,
• Support business models and technology needs beyond now standard core platform capabilities (e.g., policy, billing and claims systems).
• Feature consumer-centric architecture built on the core guiding principles of atomic components and services vs. monolithic applications,
• Enable reusability across constituent groups and processes vs. process-centric solutions,
• Assemble best-of-breed technologies, capabilities, and/or service models vs. being just a broker of services.

Enabling your digital platform Gone are the days of a simple buy/build/rent conversation where companies could seek to house all capabilities within their own walls. Now, everything from insurtech incubators to white-labelled products are revolutionizing the way insurance is bought and sold. The rise of flexible, digital B2B2C platforms is giving rise to faster, better, and previously unconsidered partnerships across the insurance and retirement spectrum. Industry leaders are identifying how they can extract value from partnerships in all areas of their organization, whether by providing newer customer engagement models, adding revenue streams, or reducing cost structures, all while building digital ecosystems that can easily integrate with these strategic partners. These partnerships are enabling companies to respond more nimbly to changes in market trends, consumer expectations and nascent technology, creating frictionless capital flows across the value chain. Better know your customers by serving them better While many insurers have been actively investing in customer facing digital capabilities for the past several years, the industry as a whole is not yet fully realizing customer and economic value. As insurers continue to respond to constantly evolving customer expectations, a holistic, data-driven approach that drives a detailed understanding of the customer and the contribution of digital initiatives to actual business value will be critical to meaningful ROI. Developing a detailed understanding of customers and their end-to-end journeys is necessary to improve customer value. Knowing your customers – not just as segments but individuals – will help you pinpoint opportunities and effectively optimize their experience across all channels and throughout their lifetimes. Tying these digital initiatives to measurable business value from the beginning is critical to justifying the case for investment and creating a framework for measuring the effectiveness and impact of various initiatives. With a strong, flexible framework in place, companies will be able to re-focus time and money into revenue-driving capabilities like external partnerships, invest in data-driven digital capabilities to improve customer value, and build back-end processes to support platform scalability. Don’t forget about back-end processes All the recent hype about insurtech and customer interactions has shifted attention away from digital considerations beyond technology and customer experience. However, leading companies’ back-end processes will support a digital environment. In a rapidly advancing industry, the companies out in front are transforming their processes to automate repetitive, business rule-driven work; this is rapidly reducing costs, improving controls, enhancing quality, enabling scalability, and facilitating effective 24/7 service. Future profitability and ROI hinge on being extremely responsive to business and market conditions and making business processes digital. The market leaders of the future will have fully digitally enabled operating models that feature a low cost profile, increase automation and efficiencies, offer an easy end-user experience. All of this will help them accelerate innovation and invent the future of insurance instead of just reacting to it. See also: Digital Playbooks for Insurers (Part 1)   Where we’re headed The world of insurance has already become digital. Whether you are a personal lines insurer assessing digital sales and service platforms or a life insurer trying to understand interactions with your end consumers, most of the industry has adopted digital agendas and many companies are is seriously trying to become digital-first organizations. Current frontrunners are redirecting their roadmaps and investments to high-priority business areas differentiate them in the market. Over the next five to ten years, all insurers will be able to take advantage of a broader ecosystem of available tools, leveraging test and learn capabilities that promote innovate in an industry that has not been reinvented for quite some time. Anyone still waiting on the sidelines is in jeopardy of falling so far behind recovery will be extremely difficult. Don’t blink and miss your chance. Most of the insurance industry has adopted digital agendas and many companies are seriously trying to become digital-first organizations. If you aren’t doing the latter, you risk falling behind; if you haven’t done the former, you may never catch up. Implications

• Industry leaders are starting to leave behind the “follower” mentality, reallocating their investments into core capabilities that give them a more customer-centric view, as well as ways to differentiate themselves in the market. Whether you are a “fast- follower” (as opposed to just a follower) or a market innovator, you are likely to share essentially the same approach to establishing an agile organization.
• The companies that develop a meaningful competitive advantage will design and implement digital platforms that can handle disruption. They will build scalable systems, deliver an end-to-end customer experience, and change their business models to foster a test and learn environment that helps them improve how they go to market. These leaders will be the most likely to quickly adjust and grow as the industry continues to become more digital.
• With a strong, flexible framework in place, companies will be able to re-focus time and money into revenue-driving capabilities like external partnerships, invest in data-driven digital capabilities to improve customer value, and build back-end processes to support platform scalability.

This article was written by Jamie Yoder, Tom Kavanaugh, Juneen Belknap and Alex Jaeger.

Following on from our previous post on product development, which concluded the key themes section of our Global Trend Map, we now examine the insurance and insurtech trends in the world's major markets via our dedicated regional profiles. We focus on seven key regions. In our forthcoming posts, we will be referring back — on a regional and comparative basis — to the stats presented across our earlier installments on: Industry Challenges, Insurtech Perspectives, Insurer Priorities, Services, Investments & Job Roles, Analytics & AI, Digital Innovation, Internet of Things, Marketing & Customer-Centricity, Distribution, Claims, Fraud, Cybersecurity, Investment Management, Regulation and Product Development. Additionally, we supplement our statistics with perspectives and discussion from a range of local correspondents in each region. In this post, which introduces our regional profiles, we present a brief preview of each region including key external and internal challenges, as well as insurer priorities. Each preview kicks off with a Top-Trumps-style summary table of key stats (an exhaustive key explaining each measure is included in the full report). In our Profile on Europe, we draw on the expert opinions of Switzerland-based venture capitalist Spiros Margaris, VC (InsureScan.net, moneymeets & kapilendo), and Charlotte Halkett, former General Manager of Communications at UK-based telematics provider Insure The Box (now MD of Buzzvault at Buzzmove). For all their insights, simply download the full version of the report. Below is a sneak preview of the stats and themes we discuss in the full profile.

"Europe presents us with a potentially gloomy picture, with the on-going issues of low interest rates and weak growth prospects, to which we may add growing regulatory burdens and political uncertainty – especially in the wake of the UK’s Brexit vote. However, we have nonetheless gathered plenty of evidence that incumbents have the tools in place both to come through and to hold their own against new entrants." — Helen Raff, Head of Content at Insurance Nexus

i) The External Challenges: Europe In Europe, the top three external challenges facing the insurance industry as a whole follow the global trend we outlined in our earlier post on Industry Challenges: 'Technological advancement', 'Changing customer expectations' and 'Digital channel capabilities'. Looking further down the table, some points of note are the higher position attained by ‘Increased regulation’ and the lower positions of ‘New emerging risks’ and ‘Catastrophe risk’. Compared to some of the other regions we examine, like Africa and Asia-Pacific, Europe is relatively sheltered from natural catastrophes and the associated risks that they bring with them, which possibly explains the lower scores we find for ‘New emerging risks’ and ‘Catastrophe risk’. As for the prominence of the regulatory challenge, we need look no further than the EU’s Solvency II, which came into effect at the start of 2016 and represents the first major shakeup of the landscape since the 1970s. --- ii) The Internal Challenges: Europe Internally, the top challenges are close to the global trend we outlined in our earlier post on Industry Challenges: ‘Lack of innovation capabilities’ and ‘Legacy systems’ take first and second place respectively, with ‘Siloed operations’ edging out ‘Finding and hiring talent’in third place. --- iii) Insurer Priorities: Europe These are the priority areas on which European insurers lead our other regions, out of our shortlist of 15 priority areas presented in our earlier post on Insurer Priorities: "Customer-centricity is an important issue because insurance is a 'trusted good'. To address social values and preferences is important. Customer-centricity means building trust, branding and a business model based on relational values. Not for nothing: Empirical evidence shows that identity is the strongest customer KPI." — Andreas Staub, Manager Partner at FehrAdvice In our full profile for Europe, we dig deeper into these challenges and priority areas on a more qualitative note, with insights from our two regional contributors, Spiros Margarisand Charlotte Halkett. Key focal points of our discussion include:

1. Growth opportunities in a relatively saturated market
2. The European consumer and Europe’s ‘early adopter’ status
3. How European insurers are using new technologies to deliver on their customer promise
4. Dynamic, real-time insurance and IoT
5. Progress on developing connected insurance models across the continent as a whole

NORTH AMERICA PROFILE: Preview In our profile on North America, we corroborate, and expand on, our stats via the seasoned perspectives of Chicago-based Stephen Applebaum, Managing Partner at Insurance Solutions Group, and Boston-based Matthew Josefowicz, CEO at Novarica. Below is a sneak preview of the themes we tackle in the full profile.

"Rising claims costs – both attritional and catastrophic – against a backdrop of low interest rates calls for a new approach to insurance in North America. That the lion’s share of Insurtech deal money has been going to US companies suggests that this change of approach may not be long in coming." — Marsha Irving, Head of Innovation / Commercial Director at Insurance Nexus

--- i) The External Challenges: North America In North America, the top external challenges for the insurance sector as a whole follow the global trend from our earlier post on Industry Challenges, with ‘Technological advancement’ and ‘Changing customer expectations’ taking 1st and 2nd place respectively, except that in 3rd place we find ‘New emerging risks’. In comparison, this comes 4th globally and only makes 6th place in Europe – which, as we indicated in our Europe preview above, likely reflects some parts of the world being more exposed to disasters (and hence concomitant risks) than others. Further down the table, 'Increased competition' moves up a place, knocking 'Increased regulation' down one spot to 7th. See also: How Is Insurtech Different in Asia?   --- ii) The Internal Challenges: North America Looking internally, the top challenges reflect the global trend we outlined in our earlier post on Industry Challenges, except that ‘Legacy systems’ wrests the top slot from ‘Lack of innovation capabilities’ (which, by way of comparison, comes first in Europe and Asia-Pacific). Innovation is, at its heart, customer-driven, and, as part of our Regional Profiles, we compare the insurer-customer relationship in North America with what we find in our other key regions – and this may well explain the different positions ascribed to ‘Lack of innovation capabilities’ in their respective challenge tables. The parallel suggestion is that ‘Legacy systems’ play more of a role in North America, which is another theme our full profile investigates in more depth.

"Legacy systems has long been a core challenge for executives across functions within insurance carriers who are focused on innovation, customer experience and efficiency. Impacting product development, applying analytics, claims modernization, marketing optimization and more, it’s no surprise this is such a top priority for insurers. In the future, I think we’ll see more legacy system upgrades across insurers looking to digitize and streamline operations." —Emma Sheard, Head of Strategy at Insurance Nexus

--- iii) Insurer Priorities: North America These are the priority areas on which North American insurers lead our other regions, out of our shortlist of 15 priority areas as presented in our earlier post on Insurer Priorities: In our full profile for North America, we return to these challenges and priority areas, bouncing them off our two regional contributors, Stephen Applebaum and Matthew Josefowicz. Some of our key points of interest that emerge, and which we discuss in detail, are:

1. Insurers’ renewed focus on their primary underwriting business in the face of low interest rates and impending market disruption
2. The rise of the ‘new consumer’ and how this is changing the insurer-customer relationship
3. Customer-centricity as the prime mover of distribution and product
4. The impact of legacy systems and regulation on (re)insurers’ innovation and transformation efforts
5. How insurers are to unlock new sources of growth in a mature market

ASIA-PACIFIC PROFILE: Preview Our exploration of Asia-Pacific brings into play, alongside our statistics, the experience and perspectives of three in-region commentators: Steve Tunstall, CEO at Singapore-based Insurtech start-up Inzsure, João Neiva, Head of Innovation, IT and Business Change at Zurich Topas Life in Indonesia, and HK-based David Piesse, Chairman of IIS Ambassadors &Ambassador Asia Pacific at the International Insurance Society (IIS). What follows is a preview of our Asia-Pacific Profile (full thing here). --- i) The External Challenges: Asia-Pacific In Asia-Pacific, the top external challenges facing insurance as a whole follow the global trend familiar from our earlier post on Industry Challenges, with ‘Technological advancement’ and ‘Changing customer expectations’ taking first and second place respectively, except that, as in North America, in third place we find ‘New emerging risks’(by way of comparison, this challenge only makes 6th place in Europe). One possible explanation for the higher ranking of ‘New emerging risks’ is to be found in the related challenge of ‘Catastrophe risk’ – which also results one place higher in Asia-Pacific than was the global trend. While natural catastrophes are not emerging risks, in the sense that they have always occurred, their consequences are becoming more multifaceted as a result of the massive growth in urban areas and the rife interconnection of business in today’s globalised economy. This has introduced a new class of accumulation risk which could justifiably be called ‘emerging’. We know anecdotally that this phenomenon is particularly pronounced in the APAC region, which boasts some of the densest urban and business conglomerations in the world, in and among noted catastrophe zones, and the trend towards urbanisation and megacities is only set to continue. See also: Insurtech Ecosystem Emerging in Asia   Another detail we notice with the external challenges is the relatively high position attained by ‘Increased competition’ (two places up on the global trend), and we believe this is a natural consequence of the expansion opportunities on offer in the region. As we uncover in the course of our full Regional Profile for Asia-Pacific, this uneasy marriage of high growth and high competition is in many ways APAC’s defining market characteristic: to win is only ever to win big (get the full profile).

"The most significant challenges for insurers in Asia, from an IT perspective are: firstly, moving services to online sales – for agents, brokers, bancassurance and direct to customers; secondly, providing instant and ideally paperless servicing on claims management; and finally, the development of Chinese Insurtech players if they decide to compete outside of their local market." — Ash Shah, Regional CIO and Chief of Staff Property and Casualty at AXA Asia

--- ii) The Internal Challenges: Asia-Pacific The internal challenges highlighted by APAC respondents exactly replicate the global trend we staked out in earlier post on Industry Challenges, with a top three constituted by: ‘Lack of innovation capabilities’, ‘Legacy systems’ and ‘Finding and hiring talent’. --- iii) Insurer Priorities: Asia-Pacific The following 6 priority areas are those on which insurers in Asia-Pacific lead our other regions, out of our shortlist of 15 priority areas introduced in our earlier post on Insurer Priorities: "Doing nothing is not an option any longer. The top priority for many CEOs is to acquire the capabilities to deliver true digital innovation that achieves competitive advantage in a very short period of time. Understanding the agile and flexible lean techniques used within the start-up world can help. Analytics, the IoT or mobile are just enablers to ease such transformation." — Sabine VanderLinden, Managing Director at Startupbootcamp We return to these regional constellation of challenges and priority areas in our full Regional Profile for Asia-Pac, in which we present the direct market testimonies of Steve Tunstall, Joao Neiva and David Piesse. Key areas that we drill down into are:

• The high-growth, high-competition dynamic inherent in the Asia-Pacific insurance market
• The new calling for customer-centricity and the related question of disruption
• Using data and analytics to create more customer-centric products, such as personalised, on-demand insurance
• APAC distribution landscape and what insurers are doing to ensure scale for their products
• How to successfully manage back-office digital transformation

PROFILES FOR LATAM, MIDDLE EAST, AFRICA AND CENTRAL ASIA We are unable, given the constraints of this post, to provide full previews of our profiles for these regions. Suffice it to say, like the profiles that are presented here, they are fundamentally structured around discussion with in-region correspondents: --- LATAM Luiz Bruzadin, Founder at Brazil-based Insurtech Segure.me, and Hilario Itriago, CEO at VC fund Bullfrog Venture --- MIDDLE EAST Cherian John, 2017-18 Regional Chairman - Europe, Middle East & Africa at Million Dollar Round Table (MDRT), Ahmad Al-Qarishi, Chief Risk Officer and Chief Actuary at Saudi Re, and Israel-based Dani Cozer, Reinsurance Operations at I.D.I. Direct Insurance --- AFRICA George Otieno Ochieng, Claims Manager at Britam General Insurance Company, and Belhassen Tonat, Head of Non-Life at Munich Reinsurance Company of Africa Ltd --- CENTRAL ASIA Kevin Hartnett, Chief Operating Officer at The Insurance Corporation of Afghanistan (ICA)

Insurtech is a poorly defined term, and as a result is little understood across the industry. At one end of the spectrum it can refer to early stage startup spun out of the world of fintech to focus purely on insurance; at the other end of the spectrum, it can refer to anything remotely innovative around the application of technology within an insurance context. This ambiguity, coupled with a high degree of media attention, has led to confusion and inconsistencies in understanding future value. Typical accepted signs of success, such as a flurry of startup activity in a given sector, higher levels of hiring activity, new inward investment or exit values, are not always good indicators of future value — despite being useful pointers. Furthermore, focusing purely on market-visible startup activity omits equivalent innovation activity underway within insurers, either as part of incubation or greenfield ventures.

Increasingly, we are being asked to help identify the source for future value for a few select concepts being explored within insurtech, specifically around distribution, proposition design and business model formation. Although there is a significant amount of public information available across the market for startup activity, venture activity and exit values, there is a dearth of data available on market traction and customer value. Consequently, in this research, Celent chose to break down insurtech into a set of characteristics that describe a future vision of insurance, around which some predictions around time-to-value could be made. They include attributes like a heightened level of digital engagement, a switch in proposition from purely indemnity toward active loss prevention, a fundamentally different business model and a shift toward a more agile way of working. We refer to these as “insurtech concepts,” and they can be evidenced in both startup ventures and an insurer’s innovation activity, helping to make them universal in their applicability.

See also: How to Embrace Insurtech Culture  

Given this inherent market and data collection difficulty at this early stage, we gathered 72 expert predictions of time-to-value for some of these specific insurtech concepts and general preparedness from our innovation leaders panel. The findings from this research have been insightful.

When the insurtech concepts are viewed in their entirety across all lines of business, a number of patterns begin to emerge when evaluating expert predictions for time-to-value. Using these predictions, innovations and new partnerships in distribution are likely to remain the primary focus of insurers for generating value in both the near and medium term. Given the activity already underway around robo advice, aggregators and digital platform partnerships, this observation may come as no surprise. With respect to the proposition, the focus on patterns for continuous engagement also attract a degree of attention (with 92% expecting a significant shift within the next five years), albeit largely focused on existing propositions and models. Experimentation beyond this for the proposition will differ depending on the market segment and product line. It is likely that retail propositions will continue to become more sophisticated in pricing and the use of external data (from sensors or otherwise) for tailoring the price to the end customer, while commercial continues to develop around disaggregation and the formation of alternative distribution, and active loss avoidance. Although the switch to becoming a more virtual organization appears to attract less attention today, Celent believes that the fast pace of AI maturation will provide a more certain path to value in the near term. This sentiment is also being echoed in client conversations we have had as part of the 2018 planning process, as can be seen in Celent’s latest insurance innovation outlook report.

Other highlights include:

• When analyzing the expert predictions for a selection of insurtech concepts by line of business, the time-to-value expectations between retail personal lines and commercial lines, and among life, health and P&C, can vary by some degree.
• Based upon these findings, it is clear that greater levels of change are expected sooner in retail personal lines than, say, either life or commercial P&C.
• Regardless of line of business, there is an expectation that technology-led innovations focused on distribution will have a greater impact in the near term.
• An overall shift in proposition toward continuous engagement (92% over five years) and move toward product distribution via aggregators (86% over five years) also appear likely in the near term.
• Although still represented within an insurer’s innovation activity, the timeframe to achieve future value from new tech-enabled propositions and business models remains less certain; a longer time horizon is expected. Consequently, greater care needs to be taken when allocating resources.

Although still at a nascent stage, insurers should prepare to adapt innovation activities to recognize the different expectations for time-to-value between lines of business, while maintaining a strong focus on innovation in distribution regardless, because disruption in this part of the value chain is already clearly signposted.

See also: Key Insurtech Trends to Watch  

This report is the first of a two-report series. Part 1 focuses on time-to-value for given insurtech concepts. Part 2 explores how insurance company innovators are approaching insurtech in their ambitions to engage.

You can find the full report here.

While AI systems can now learn a game and beat champions within hours, they are hard to apply to business applications.

MIT Sloan Management Review and Boston Consulting Group surveyed 3,000 business executives and found that while 85% of them thought that AI would provide their companies with a competitive advantage, only 1 in 20 had “extensively” incorporated it into their offerings or processes. The challenge is that implementing AI isn’t as easy as installing software. It requires expertise, vision and information that isn’t easily accessible.

When you look at well-known applications of AI, such as Google’s AlphaGo Zero, you get the impression it is like magic: AI learned the world’s most difficult board game in just three days and beat champions; Nvidia’s AI can generate photorealistic images of people who look like celebrities just by looking at pictures of real ones.

But most business problems can’t be turned into a game; you have more than two players, and there aren’t clear rules. The outcomes of business decisions are rarely clear wins or losses, and there are far too many variables. It is a lot more difficult for businesses to implement AI than it seems.

Today’s AI systems do their best to emulate the functioning of the human brain’s neural networks but do this in a very limited way.  They use a technique called deep learning, which adjusts the relationships of computer instructions designed to behave like neurons. To put it simply, you tell an AI exactly what you want it to learn and provide it with clearly labeled examples, and it analyzes the patterns in that data and stores them for future application. The accuracy of its patterns depends on data, so the more examples you give it, the more useful it becomes.

Herein lies a problem. An AI is only as good as the data it receives and is able to interpret it only within the narrow confines of the supplied context. It doesn’t “understand” what it has analyzed, so it is unable to apply its analysis to scenarios in other contexts. And it can’t distinguish causation from correlation. AI is more like an Excel spreadsheet on steroids than like a thinker.

The bigger difficulty in working with this form of AI is that what it has learned remains a mystery: a set of indefinable responses to data. Once a neural network is trained, not even its designer knows exactly how it is doing what it does. As New York University Professor Gary Marcus explains, deep learning systems have millions or even billions of parameters, identifiable to their developers only in terms of their geography within a complex neural network. They are a “black box,” researchers say.

Speaking about the new developments in AlphaGo, Google/DeepMind Chief Executive Demis Hassabis reportedly said, “It doesn’t play like a human, and it doesn’t play like a program.  It plays in a third, almost alien, way.”

Businesses can’t afford to have their systems making alien decisions. They face regulatory requirements and reputational concerns and must be able to understand, explain and demonstrate the logic behind each decision they make.

For AI to be more valuable, it needs to be able to look at the big picture and include many more sources of information than the computer systems it is replacing.

See also: Strategist’s Guide to Artificial Intelligence  

In inventory management, for example, purchasing decisions are usually made by experienced individuals called buyers, department by department. Their systems show them inventory levels by store, and they use their experience and instincts to place orders. An AI could consolidate data from all departments to see the larger trends — and relate them to socioeconomic data, customer-service inquiries, satellite images of competitors’ parking lots, predictions from the Weather Company and other factors. Many retailers, including Amazon.com, are doing some of these things.

AI is advancing rapidly and will surely make it easier to clean up and integrate data. But business leaders will still need to understand what it really does and create a vision for its use — that is when they will see the big benefits.

The 4th District of the Court of Appeals has reversed a puzzling W.C.A.B. decision that had awarded TTD benefits beyond five years from the date of injury, ignoring the plain language of Labor Code 4656(c)(2). In County of San Diego v W.C.A.B. (Pike),<http://www.courts.ca.gov/opinions/documents/D072648.DOCX> the appellate court had little difficulty in reading the rather straightforward statutory language to firmly reverse the WCJ and W.C.A.B. decisions awarding TTD beyond the five-year jurisdictional limit set by statute. The applicant, Kyle Pike, sustained injury to his right shoulder in July 2010 while employed as a deputy sheriff for the County of San Diego. He was awarded a 12% PD benefit in May 2011. On May 26, 2015, within the five-year jurisdictional time to reopen his case, he filed a Petition for New and Further Disability seeking TTD and Labor Code 4850 benefits. He received his 4850/TTD benefits through July 31, 2015, at which time benefits were terminated. At trial, the WCJ awarded benefits on a continuing basis, determining that while Labor Code 4656 was clear regarding benefits payable within the five-year jurisdictional time frame in the statute, it was silent as to what benefits could be provided after five years from the date of injury. On reconsideration, the W.C.A.B., in a split decision, affirmed the WCJ’s award. The Appellate Court had little difficulty in seeing through the WCJ’s and W.C.A.B.’s construct: “       This interpretation of section 4656, subdivision (c)(2) is not tenable.  As discussed above, section 4656, subdivision (c)(2) clearly and unambiguously provides that temporary disability benefits "shall not extend for more than 104 compensable weeks within a period of five years from the date of injury." (§ 4656, subd. (c)(2).) Thus, contrary to the board's decision, the relevant statutory language does provide that all periods of temporary disability for which payments are made must occur within five years of date of the injury.” The court also pointed out that if the WCJ/W.C.A.B. analysis was correct, even the 104-week limitation would not exist after the five-year limitation, in effect, eliminating any limitation on TTD beyond five years while providing limitations within five years, hardly a logical result. “…Such inconsistent reasoning further demonstrates the fallacy of the WCJ's interpretation.” See also: Why WC Needs an Outcomes Strategy   The appellate court also pointed out that all of the authorities cited by the applicant attorney, amicus for applicant and the W.C.A.B. were interpretations of Labor Code 4656 prior to the amendments limiting TTD to the period within five years from the date of injury.  The court further noted that in the one decision it found where similar language was included in the statute, the appellate court had limited the receipt of TTD to within the five-year statutory time frame. The court reversed the W.C.A.B. decision remanding the case back to the W.C.A.B. to grant the Petition for Reconsideration of the Petitioner, County of San Diego. Comments and Conclusions: The W.C.A.B.’s decision in this case is at best puzzling, at worst a flagrant attempt to avoid the legislature’s clear intent. It is difficult to conceive of how this statute could be tortured into an interpretation that allowed TTD to be paid beyond the statutory limitation. The analysis by the WCJ, adopted by the majority of the W.C.A.B., was patently inconsistent and required a tortured reading of the statute to reach the final result. If the WCJ/W.C.A.B. analysis had been upheld, all an injured worker would have to do to obtain additional TTD is file a petition within five years from the date of injury and then wait till after the five-year date to claim additional TTD. Hardly a result the legislature intended and one that even the W.C.A.B. would have a hard time justifying with a straight face. A copy of the decision can be found here.

For many people, their first thought about natural disasters is the devastating property damage that is extremely visible and highlighted by the media. However, the impact of natural disasters goes far beyond property damage and includes the impact to your workforce, your supply chain and the operations of your business. During a recent Out Front Ideas webinar, we were fortunate to get the perspectives of leaders from three different segments of our industry on the impact of natural disasters on risk management. Our guests included:

• Tom Best, deputy general counsel for Home Depot
• Ryan Brannan, commissioner of workers’ compensation for the Texas Department of Insurance
• John Hinz, vice president of Vericlaim

Types of Disasters There are two basic types of natural disasters – those with warning and those without. With hurricanes and flooding, you typically have some degree of warning that allows you to initiate disaster response protocols and to prepare for the disaster. However, with events such as tornados, earthquakes and other sudden events, there is no warning and no opportunity for advance preparation to minimize the impact and maximize the response. Both types of disasters benefit from developing a disaster response plan in advance. Workplace Injuries One of the first employer concerns has to be preventing and responding to employee injuries when a disaster occurs. At Home Depot, they work with vendors on a daily basis to identify any potential weather that could affect their stores. When there is a potential event, they pull together their response team, led by a disaster captain. Their response team has functional members of all their critical business areas, including human resources, legal, supply chain and business operations. These teams meet every year before the start of hurricane season to make sure everyone understands their role and the disaster response protocols. They also connect with state, local and federal authorities to coordinate response efforts. Because Home Depot has a very important community role in disaster preparedness and response, they keep stores open as long as possible and reopen them as soon as possible. From a workers’ compensation claim standpoint, there are many concerns. Employees can be injured during the disaster itself. There is also significant potential for injuries sustained by first responders and the National Guard during the response and recovery. Texas deployed 14,000 National Guard troops in response to Hurricane Harvey, and those troops are all considered employees of the state of Texas when deployed. Traumatic physical injuries are not the only concerns. There are also occupational disease concerns because of the toxic chemicals that were in the floodwaters of Houston. Furthermore, there are concerns about post-traumatic stress. Because of the occupational disease exposure, there could be a very long claims tail from this natural disaster. Workforce Disruption Home Depot is a major employer, but they are also an essential element in any disaster response because people depend on them for building materials and other supplies. Their command center is focused on taking care of both their employees and the community as a whole. The Texas Workers’ Compensation Commission closed five field offices at various times in response to Hurricane Harvey. Their primary focus was the safety of their staff, but they were also concerned about being able to conduct the business of the commission. See also: 6 Reasons We Aren’t Prepared for Disasters   It is important to give your employees time off during a natural disaster to take care of their families and personal needs. Employers often bring in workers from other locations to assist in the affected areas so that the employees living in the area can tend to their personal needs first, then come back to work when able to do so. This allows the business to continue serving the community while also making sure that employees are settled. Workers’ Compensation System Impact Keeping the workers’ compensation system running during a natural disaster is important and challenging. In Texas, the governor suspended certain regulations and extended or tolled deadlines in affected areas to ensure that workers were receiving timely care and benefits and that carriers were focused on benefit delivery instead of bureaucratic issues. Social media was very useful in keeping people updated on when field offices were open and providing other important information to all stakeholders. Healthcare Impact One thing people do not often think about in natural disasters is the impact on the healthcare delivery system. The healthcare delivery system is disrupted in many ways:

• Technology: With electronic medical records and a wide variety of equipment powered by electricity, a prolonged period without power can make delivery of care very challenging.
• Continuity of care: Patients are often forced to treat at facilities outside their areas during natural disasters. Facilities need to not only be able to handle the influx of patients, but to deal with the potential HIPAA considerations.
• Supply chain: One impact of the hurricane that hit Puerto Rico was a significant disruption to the pharmaceutical industry, which accounts for more than 70% of Puerto Rico’s exports. There was a nationwide shortage of saline IV bags after the hurricanes, for instance, because most of these were manufactured in Puerto Rico, and those factories were shut down for a time.
• Life and death issues for patients: During Hurricane Katrina, healthcare workers and patients in New Orleans were trapped for many days without power. Providers had to make decisions around which patients to evacuate first and which patients were in such bad shape that they could not be saved.
• Litigation costs: There is always a big spike in litigation against healthcare facilities following a natural disaster because of care disruption and other challenges.

Supply Chain Supply chain is important to most businesses, and a natural disaster can significantly disrupt the normal supply chains. This was especially challenging on an island like Puerto Rico. Getting the supplies to the island was only the first step. Supplies sat for days in the ports because there were no dock workers to unload them and no trucks to deliver them. There are many lessons to be learned about disaster responses to islands after the events of 2017. On the mainland, supplies can be staged out of harm’s way in advance of a hurricane so that the trucks can start rolling in once the area is safe. Additional products are purchased in advance so there are ample supplies available. Home Depot works with local, state and federal authorities to coordinate the distribution of disaster relief supplies. Disaster Preparation Mitigating the risks and challenges from disasters takes extensive planning and practice. Every location and each facility is different and has varying needs. But as John Hinz explained, planning for emergencies can be the difference between staying in business and losing everything. There are several essential elements that should be included in any emergency preparedness plan.

• Focus on prevention: If there is any way to prevent a disaster from happening, that is your best defense. The first step in the process is to assess your risk and the potential impact to see how you can be more effective in disaster planning. Once you know the type of disasters for which you are most at risk, take steps to minimize potential damage to your facility and harm to your employees. Think of the actions you might need to take and what you would need in the event of a fire, flood, severe storm or other disaster.
• Evacuation plan: Every facility should have primary and secondary routes and exits that are well-lit, marked and easily accessible. There should be an outside area designated as a meeting place for employees to gather once they are out of the building. Staff members that may require assistance during an evacuation due to physical limitations should be noted in the plan.
• Communication: In addition to emergency contact information for local police, fire and ambulance numbers, you should have a contact list that also includes information for your customers, suppliers and distributors. This list should be updated continually, and copies kept both in your files and in offsite locations so you will be able to access them regardless of the situation. You may want to preset conference call numbers in case that is needed. Be sure you have a way to contact key players in and outside the organization.
• Protect vital company information and critical data and programs that are imperative to keep your operation running. Make sure these things are backed up and that the backup is kept in a location separate from the primary facility.
• Understand your insurance coverage: Review your insurance policies with your agent or broker so you know your deductibles and how they are applied to your coverages. You should know the limits and nature of your insurance, including coverage specifics. You may want to make changes to some policies, as all coverages are subject to limits and exclusions.
• Keep insurance information handy: The names and numbers of your insurance representatives should be kept in a safe, accessible place, as this will expedite the claims process when the time comes.
• Plan for contingencies: Despite your best efforts, your preparation may not be enough. Have an offsite location or allow personnel to work from home, if necessary, to keep the business running.

See also: Cognitive Biases and Risk Management   Final Thoughts There is no foolproof plan that will protect your organization from every disastrous situation, but you can be well prepared for most emergencies. If your company does not yet have such a plan, you can work with carriers or agents and brokers to begin the process. There are also a number of consultants that specialize in this area. After developing a disaster preparedness plan, you need to continually review and update it to make sure that it is current and that everyone understands his or her role if there is a disaster. You can listen to the archived Out Front Ideas with Kimberly and Mark webinar on this topic here.

The accident in which an Uber driverless car hit and killed a pedestrian Sunday night in Tempe, AZ, got us talking about how innovation should progress in a risky world. We worry that Uber hasn’t always been as careful as, say, Google/Waymo and GM/Cruise in testing its autonomous technology. An investigation will tell the tale soon enough in this particular instance (one of the advantages of all those sensors on driverless cars), but we’ll still be left wrestling with a world in which innovating can place people at risk, but in which not innovating might even be more dangerous. We can’t just sit still in a world where 1.25 million people die in traffic fatalities each year.

Our CEO, Wayne Allen, took up the pen to address the role we intend to play on innovating amid risk:

"I want to be super clear. We at ITL and Innovator’s Edge are going to increasingly take positions about what 'should be.' The rate at which certain technologies are being introduced into the marketplace outpaces the ability of lawmakers and even regulators to keep up, including those in the insurance world. Governmental authorities have jurisdiction over bits and pieces of the technology ecosystem, but it is rare for a single body to have complete authority over all the concerns about privacy, discrimination, consumer safety, etc.

"It is, therefore, incumbent on our industry, the folks who are supposed to manage risks of all kinds, to step forward and lead. Let’s provide innovation at the speed of reason.

"We will never advocate for the tempering innovation for the sake of antiquated processes. No. But we advocate for everyone to cinch up their chin-strap and do what’s right. 

"Consider chatbots. If chatbots are as much a commodity as many tell me they are, then anybody could roll them out to a carrier, right? Well, what if it turns out that the data transmitted to a chatbot is personal financial information or personal information about a health condition or relates to an accident and includes health information? Shouldn’t we be asking questions about how secure these chatbots are? How safe is the data being transmitted? Shouldn’t any company integrating chatbot technology in its claims process—or any customer communication, for that matter—verify that the bot and the path through which the information passes meet a standard for privacy? 

"What about autonomous vehicles? Should we be surprised if not all autonomous technology is created equal? Could one company’s technology be more secure, more heavily tested, just plain better than another? Are there standards for testing and product rollout that should be implemented? Should we as an industry simply take the position that we will not insure any vehicle (irrespective of the creative ways insurance can and will be built into the experience) that does not meet certain standards? If we do not, I am certain some enterprising politician will roll out a solution that will be the worst possible result, will likely be in line with what some lobbyist representing some corner of some industry wants, will stymie innovation and will be nearly impossible to overturn. 

"If you agree with me and want to help provide innovation at the speed of reason, for the benefit of us all, please email me at wallen@innovatorsedge.io. The table stakes need to be known, and they need to be raised."

Have a great week.

Paul Carroll
Editor-in-Chief

For several years, AIR has written about, presented about and created infographics around the problem of the “protection gap”—the difference between economic losses from extreme events and what is actually covered by insurance. For the most part, our discussions have focused on the macro-level issues of global (re)insurers and governments, catastrophe models and data. However, to learn more about the micro-level issues that may be contributing to the protection gap, I recently attempted to buy flood insurance on my townhouse condo in a suburb of Boston. As with any condo, there are two insurance policies at work here — a condo master policy and my condo HO-6 policy. In my case, there are two separate local insurance agencies. I called the agent on the master policy and asked whether I was covered for flood, knowing full well that I wasn’t. He correctly answered no, but quickly countered, are you in a flood zone? I responded no, and he appeared to be unsure as to why anyone would want flood coverage unless their bank required it for their mortgage. The same scenario played out with the insurance agent on my HO-6; she was confused about why anyone would want coverage that they wasn’t required by their mortgage lender. This time, I pushed a bit and explained that I had a friend who lived outside of a flood zone and had suffered a flood loss. That motivated her to initiate the process to sell me flood insurance. See also: The Myth of the Protection Gap   She emailed me a form that looked photocopied and asked me to fill it out, which I had to do by hand. Filling out forms by hand is one of the activities that I find most irritating in life, as my handwriting is absolutely illegible, even to me. Thankfully, the necessity of actually handwriting anything has declined dramatically in the past few years, but the technological changes that have made that possible have apparently not reached the independent insurance agency system in the U.S. But I had bigger problems than my handwriting. Many of the questions that were being asked on this form were ones I didn’t know the answer to, even after working at AIR for 10 years. The questions I easily knew the answers to were occupancy, year built, whether I had a basement and whether my house was elevated. Construction type was also an easy one for me, but I’m not sure that would always be the case for the typical customer. Here are some of the questions that I and the average consumer would find challenging:

• Foundation: slab or pilings
• Type of pilings: wood, concrete, driven or poured
• Base flood elevation
• Lowest floor elevation
• Post-firm or pre-firm enclosure (luckily, I don’t have an enclosure)

At AIR, we’ve been talking about the protection gap and how to close it at a very macro level, but this exercise gave me a more practical feel for why the protection gap exists at all—including in developed countries. The ability to properly quantify flood risk does exist, from AIR and other modeling firms. And as we know all too well, there is currently enough capital to insure the risk. But those capabilities break down somewhere within the insurance value chain. As my own experience illustrates, there is a lack of willingness of the front-line insurance distribution system—in this case, insurance agents—to push the coverage. To the extent customers are aware of the risks and ask their agents to buy flood or earthquake coverage (a rare situation, to be sure), the process of getting this coverage is cumbersome and antiquated, to say the least. On this point, there are a slew of venture-backed startups dedicated to making the insurance purchase “mobile first,” but to date these startups appear to be more focused on auto, renters or lower-value contents coverage, and have not yet made inroads into streamlining the process of purchasing flood or earthquake coverage. See also: Future of Flood Insurance   Closing the protection gap will require a concerted effort on the part of every player in the insurance value chain—from agents, to carriers, to reinsurers and to those of us in the modeling industry. I also believe it will require technology that identifies those who need coverage and places that coverage in a seamless way, as the status quo doesn’t appear to be doing the job. Getting the entire insurance value chain on the same page to make the necessary investments to close the protection gap is easier said than done, of course, but that’s the real problem that needs to be solved if we are serious about closing it.

Throughout this series, I have stressed the importance of connecting workers’ comp patients with great doctors at their time of need and how this results in an average of a 10% reduction in claims costs. I’ve also talked about the role of PPOs and EPOs. Next up: outcomes strategies for each jurisdiction. Workers’ compensation is determined state-by-state, requiring any national workers’ comp company to adhere to variations in the laws. Some states provide excellent control over care, while others allow so much choice that it can seem like there is no strategic use for an outcomes-based network. States use three main categories of jurisdictional control: panel (employee has to select from your list of doctors), care direction (you tell the employee who to use) and employee choice (employees choose their doctors on their own). The graphic below provides a visual breakdown of each state’s model: Despite what you might think, outcomes can play a meaningful role in any of these jurisdictions. Let’s discuss each model in more detail. Panel States In a panel state, employees are required to choose their doctors from a list created by payers or employers. These can range from exclusive provider networks (EPOs) to simple panels. The employee could be mandated to use doctors on the list for the life of an injury (as in the California MPN), or the designated doctor could maintain control for at least a meaningful portion of the claim (e.g., Pennsylvania workplace panels). The important consideration is that the employee can typically select anyone on your list. There is no way to manage around average doctors in your network, so it is in your best interest not to file your entire PPO as your exclusive provider listing. If you do, your overall average outcomes drop to the average across all doctors included, and you will have little recourse if injured workers choose the worst doctors on your list. For this reason, it is critical to stay on top of who’s included. Remove poor performers to ensure that any provider on that list can be trusted at any time. See also: 2018 Workers’ Comp Issues to Watch   My best practice recommendation is to “right-size” your EPO by first predicting how many doctors are necessary in each coverage area (typically about a 15-mile radius). Once you know your needs for appropriate coverage, then pull only that number starting with the best and working down the ranking. The tighter you keep participation, the more impact you will see on claims outcomes. A well-constructed model can leverage provider outcome and drive overall claims costs down by 10% or more. The downside of this model is the level of effort required to maintain your list. You should keep inclusion/exclusion criteria documented up front, so you have a structured plan for whom to keep and whom to remove. You also need to check in at least quarterly to remove anyone whose performance has dropped or who has moved or closed his or her practice. Typically, you are handing over a list and letting the employee select a provider. If there is a problem (such as a provider closing the practice and not notifying you), you probably won’t realize you have an issue until you hear from the injured worker’s lawyer. Key strategic driver: Focus on the providers in your listing at all times and keep the list tight. Care Direction States In a care direction state, the insurer or payer maintains the exclusive right to tell the injured worker which doctor to use. The biggest difference over a panel model is that providers can be selected in real time. This makes maintenance a lot easier because you don’t need to “right-size” the network and anticipate needs. What you do need is an integrated view of your networks that includes your scores. In care direction states, it is critical that the search engine your team uses to direct care shows the scores of the doctors. Any time a patient needs a doctor or specialists, you want your team selecting the best available provider proximate to the injured worker — not just the closest one in network. When outcomes as a measure first matured to the point where it was widely adopted, most people focused on using outcomes to select their networks for panel states. However, the care direction model actually has a higher potential ROI because you are always selecting the best provider at the time of need. In a panel state model, when I hand over a list, the average quality of all the doctors on the list will drive the impact on your claims population. In care direction, I am always selecting the best, which drives impact to the quality of your best doctors. In addition, because the scoring updates in real time, you are always making your care decision on the latest information at the time of need, not on the information available when you built your list. Also, your best strategy is to not limit yourself to your existing network. If you are looking for a top neurosurgeon in a rural area, and there are not any good options in your PPO, you should look for a high-scoring doctor outside your network before you send the patient a longer distance to an average doctor in your PPO. As I explained earlier in the series, the outcomes savings will almost always be more than the PPO discount. Key strategic driver: Always go for the best doctors available, keeping your scores integrated with your list. Employee Choice States Many people falsely believe that outcomes-based control strategies cannot work in a state that allows the employee to select whomever they want. This is not true. Soft channeling is a strategy that involves making targeted recommendations throughout the cycle of the claim. For example, selection of the doctors that show up on the workplace poster should be based on the best doctors nearby — not just the closest. Using outcomes scores when creating workplace panels helps encourage good choices without stepping on the rights of the employee. Another strategy for the employee choice model is to integrate scores into your billing workflow. If you see an initial consult from a poor-performing ortho, you have about two weeks before your claimant goes under the knife. If you can operationalize this strategy, you have the opportunity to reach out to the injured worker with a crafted message such as: “We typically recommend a second opinion in cases like yours; there is a great specialist not far from you. Would you like me to set up an appointment?” See also: The State of Workers’ Compensation   The point is to not interfere with the injured worker’s choice while taking every opportunity to provide great options for the person to consider. If your scoring model is focused on quality-of-life outcomes such as less time away from work or lower disability rates at the end of care, you are providing a valuable service to that injured worker when you steer the person away from a doctor who has high infection rates and a high incidence of failed surgeries. Certainly, the potential ROI is not as significant as in other states, but you only need a small number of injured workers to choose a better doctor to recoup typical costs of implementing these strategies. Wrapping Up There are methods and strategies to leverage outcomes in all jurisdictions. Some jurisdictions are easier than others, and your ROI and level of effort will vary, but don’t lose sight of why this is important: Better care improves everyone’s outcomes. Better outcomes improve not only the bottom line but also the quality of life for people who get injured on the job. Better care results in happier and more productive employees, fewer costly complications, less legal friction and, ultimately, a better workers’ comp system. Throughout this series of articles, I’ve covered multiple aspects of outcomes-based networks, including important considerations and strategies. These are recommendations and best practices pulled from my experiences. You don’t have to hit a home run every time. If you simply get 5% to 10% of the claims away from bad doctors and into the care of great doctors, you will have significantly better results overall. Please reach out with questions and feel free to comment with ideas for additional articles on the future of workers’ comp. As first published in Claims Journal.

In Part 1 of this blog series, we shared how a microservices architecture can bring value to a constantly changing business environment. In this segment, we will share our views on the benefits of a microservices architecture for the insurance industry.The traditional insurance value chain and subsequently the customer experience over the last two-plus years has operated across a number of functional silos. Each of these silos has unique characteristics and is organized around its own KPIs. For example, underwriting/risk management is focused on risk assessment, underwriting quality and booking of premium. Claims is focused on claims management, fraud detection, leakage reduction and processing turnaround time. Typically, each of these functions operates with limited organizational integration. This organizational design is several decades old and inspired by Henry Ford's assembly line innovation that optimizes processing costs through specialization and automation. This design has served insurance well during the industrial and information ages, leading to specialized functional IT systems targeting the business needs of the silo functions from underwriting to policy management, billing, claims and more. The core system components are integrated as a suite. The components and suite serve well-defined functions that have had less dynamic integration needs. This organizational model and IT system landscape has been effective for decades. But as we enter the digital age, the painful and expensive business and IT modernization projects over the last decade, coupled with portals and complex integrations to these core systems to improve agent and customer experience, do not align with new market needs. Today’s insurance landscape demands agility to adapt with ease, innovation to reimagine the possibilities and speed to capture the opportunities. The digital age demands so much more to stay relevant and competitive. Customer Experience is the Differentiator Customer experience is front and center in differentiating insurers in the digital age. It is a key factor in driving higher customer acquisition and retention, which, in turn, drives growth. Customer experience is much more than offering a better user interface. It is about the customer journey that creates a unique, compelling and engaging experience that makes it “easy to do business” with insurers. Customer journeys must cut through functional silos, which are currently optimized for internal operational efficiency. These silos, however, as customer journeys are changing, are now contributing to the degradation of the customer experience. To design and refine customer journeys in today’s digital age, insurers will need to collect siloed capabilities into a new virtual capability designed to optimize the customer journey. This new virtual capability will require hyper-integration and micro-granularities of system capabilities to achieve the desired result. See also: Insurance Hasn’t Changed, but… (Part 5)   Insurance Value Chain Disrupted As we highlight in our Future Trends 2018: Catalyzing the Shift to Digital Insurance 2.0 report, the insurance value chain is rapidly shifting to adapt to new business models, innovative products, expanded distribution channels, new competition with entrants from outside the industry, elevated customer expectations and emerging technologies. Digital transformation is redefining the value chains and each component. New products such as on-demand products, connected products and micro-insurance are reshaping business assumptions and fundamentals. We are seeing innovative product design that uses new sources of data, new risk assumptions, micro-segmentation, expanded services, new customer engagement approaches and new channels to reach customers. These designs leverage new technologies such as artificial intelligence (AI), cognitive, analytics and microservices. The result is the disruption of the insurance value chain. With the value chain disrupted, the underlying systems must be disrupted, too. Rise of Ecosystems and the Platform Economy As we enter the digital age, the blurring of traditional industry boundaries is seeing the rise of ecosystems and the platform economy. Companies like Apple, Alibaba, Google, Amazon and Facebook are at the forefront of this shift. They are using an ecosystem with connected services from different parties to create a seamless customer experience. An ecosystem is the DNA of the platform economy, enabling a business model to exchange and share value among its partners and customers. To meaningfully participate in the platform economy, insurers must embrace ecosystems and be prepared to partner with competitors, other industries and innovative technology-based service providers. ZhongAn, an online Chinese insurer, generated 70% of its 2017 car insurance premium in one month (January 2018) by using AI and big data with the ecosystem, including carmakers, dealers, after-sales service providers and lenders that created market reach and a loyal customer base. The ecosystem approach eliminates traditional industry or organizational boundaries in designing products and creating a new customer journey. However, it necessitates the need for a flexible and granular system composed of different services running on different technology platforms that can easily integrate with any ecosystem. A New System Paradigm for the Digital Age A common theme is emerging that highlights the need for a new set of capabilities to support the paradigm shift. To succeed, let alone survive, insurers will need to respond to the value chain disruption, elevated customer expectations and the rise of the ecosystem and platform economy by using granular (single responsibility principle) API/microservices to build an on-demand business solution with loosely coupled microservices and find-n-bind capabilities that can leverage any ecosystem. A microservices architecture enables the building of new capabilities to meet these needs. The graphic below contrasts the anatomy of a traditional “pre-digital age” monolith insurance app and a “digital age” innovative microservices-based insured app. Today’s monolith insurance systems, although partially accessible through APIs, are built as a large deployable monolith unit. This architecture does not easily adapt to the rapid pace of change because the change is to a large-system single codebase and specific localized API. A separate API layer exposed over the single-monolith code base makes it difficult to integrate with ecosystem partners as well as making it extremely complex to orchestrate services across various systems or apps. In contrast, a microservices architecture decomposes a large unit into fine-grained single purpose, self-contained and independently deployable business services that enable the ability for rapid change and open the possibility of multiple change deployments daily instead of waiting for the periodic release cycle. Using microservices across various apps, insurers can orchestrate a composite user interface that is a tailor-made customer journey. It can be enhanced quickly based on customer feedback. The graphic below shows how a microservices architecture can assist in the design of a unique customer experience using a product offering and ecosystem.  Multiple customer journeys can be assembled by orchestrating functional microservices and ecosystem services available outside the insurer enterprise. The times are changing. And it is exciting! The ability to leverage powerful microservices architecture to build a new foundation for the digital age of insurance is game-changing. It will enable new business models, new products, refined customer experiences and timely responses to new business needs (in hours and days instead of months and years), and it will help insurers remain relevant and competitive. While microservices is exciting and will accelerate the industry’s ability to innovate, it is not the Holy Grail. The smaller, focused services have many advantages but also create complexity in the orchestration of those services. Employing best practices in designing microservices size and data model sizing is critical. Most importantly, determining the gradual transition to microservices rather than a big-bang approach will help insurers build a platform that can withstand the test of time and constant change to help insurers participate in the digital age and platform economy with agility, innovation and speed. See also: It’s Time to Accelerate Digital Change   In Part 3, we look forward to covering our views on best practices in introducing and scaling microservices within the world of the monolith IT system environment. We encourage you to read our thought leadership, Cloud Business Platform: The Path to Digital Insurance 2.0, to gain a deeper insight on these topics. Please share your views on this exciting topic in the comments section. We would enjoy hearing your perspective. This article was written by Manish Shah and Sachin Dhamane.