Across industries, digital transformation and cloud migration are forces to be reckoned with. Insurance is no exception. As an industry accustomed to operating on legacy technology, insurers should approach the cloud migration process judiciously. But they should also know that moving all workloads to the cloud – even if incrementally – is necessary to keep up with evolving customer expectations. The industry at large is receiving this message. Nearly 70% of insurers report they are somewhere along the journey to digitally transform their infrastructure, according to a report from Ensono and Forrester. But the jump from mainframe to cloud shouldn’t take place overnight. By taking a methodical approach and prioritizing the right workloads, insurance technology teams can achieve a hybrid IT infrastructure that allows for improved operations at manageable costs. Here are three guidelines to follow as your insurance organization adopts a hybrid cloud strategy: Prioritize which applications to move first 46% of insurers surveyed in the Ensono/Forrester study cited improving application performance as the most important IT change their company could make to augment customer engagement. But according to IBM, nine out of 10 of the world’s largest insurance companies still run on mainframes. Leaning on legacy technology alone makes it challenging to keep pace with application upgrades and customer expectations for speed and experience. Organizations that remain within a stand-alone legacy environment will have to rely on workarounds to keep upgrading their app performance, and these workarounds will only become more frequent and costly. See also: Digital Transformation: How the CEO Thinks However, moving all operations to the cloud and scaling up overnight isn’t a realistic ask of traditional insurers, either. The transition is expensive and takes months of planning and testing. Instead, insurance organizations should take things slower by prioritizing the applications that require the highest levels of performance as well as most external and third-party connectivity. The basic rule of thumb: Apps that are customer-facing should be at the top of your list. Set yourself up with premium analytics Quality data is central to understanding the needs of agents and customers, but legacy technology doesn’t allow for the best insights. Turning to a cloud or hybrid strategy increases an insurer’s ability to access top-notch, real-time data and analytics, as well as expand into emerging cloud offerings. According to Ensono and Forrester, almost half of insurance decision makers use cloud platforms for advanced data analytics, and about 40% believe it’s important to expand their use of emerging cloud technologies like mobile or internet of things (IoT) and increase reliance on public cloud platforms for systems of engagement. Those systems of engagement need to connect seamless to systems of record. Find the right partners Data analytics clearly play a huge role in the benefits insurers can reap from a hybrid cloud strategy. But a full 100% of insurers admitted to facing data-related security issues, according to Ensono’s study. Whether this is due to outdated IT infrastructure or a lack of expertise, it’s unacceptable to put any data at risk, especially customer data. The right partners can help keep your organization’s data secure while optimizing the right applications for cloud. Mainframes – a true foundation of the insurance business – aren't going away in this process, but they won’t bear the whole burden any more, either. Legacy systems do have their perks, such as security and expense, but ultimately insurers need to ensure they have access to the expertise needed to help their businesses thrive in the cloud. See also: 4 Rules for Digital Transformation The transition to a hybrid IT environment requires re-engineered IT infrastructure, the use of real-time data and insights and the right talent – the kind that can create a flexible and competent IT strategy with a custom balance of legacy platforms and cloud environment. Partners like managed service providers (MSPs), migration services and consultants can make the process much smoother. Accessing third-party support also allows your organization to skip the stressful experience of hiring for internal tech experts in a talent economy suffering from an IT skills gap. The push from customers for faster, better service in insurance continues. But dated infrastructure and an IT talent shortage is holding the insurance industry back. Digital transformation is the only way to achieve growing expectations, cloud migration being the core driver behind the progress. Insurers must thoughtfully design an infrastructure migration plan associated with their application strategy and seek the needed resources to help carry it out, thus ensuring a stabler as well as growing customer-backed future.

According to the Gartner 2018 CEO and Senior Business Executive Survey, respondents who believe their company is an “innovation pioneer” reached a high last year of 41%, up from 27% in 2013. Responders are taking some measure of credit for moving their organizations ahead of competitors in the race for growth and relevance. The Gartner survey findings further reveal that the priorities ranked two through five – including new partnerships and M&A (part of corporate development), new technologies, workforce capabilities and the customer – all presumably enable the No. 1 priority on the C-suite list, which is, no surprise, growth. Add to the priority to-dos an additional leverage point that may be too buried to get well-deserved attention: to develop innovation metrics that monitor and accelerate the conversion of insights and ideas to sources of value for all stakeholders. Neither attempts at defining surgically precise metrics nor peering into one’s crystal ball will lead to helpful innovation metrics. Using legacy performance measures to assess concepts that may have little resemblance to established products and services, or treating innovation as an immeasurable, both turn out to undermine potential opportunities. Only the C-suite is empowered to assign new metrics that can nurture these investments and judge them appropriately, and that may not conform to the standards the entire organization has been taught are right. Choices should have rigor, be reasonable for the evaluation of potentially unprecedented products and services, and be able to hold their own even in zero-sum resource allocation processes. See also: Innovation — or Just Innovative Thinking?   Early in my career, an executive gave me valuable advice, more recently reinforced in conversations with corporate leaders, startup founders and investors as I undertook the research for my book, The Change Maker’s Playbook. Back then, my team and I were seeking seed funding for a new concept. In a presentation to this particular executive, we shared copious financial analyses, including five years’ worth of P&Ls carried out to the penny. He waved aside our spreadsheets and told us, “Don’t seek a level of precision that cannot be possible when you are looking at something so new.” Growth opportunities are put at risk when overly precise and backward-looking metrics, from old business models, are applied to gauge potential impact and measure their worthiness to be moved forward. Instead, executive teams can adopt common-sense approaches to ensure discipline – the right kind of discipline — for evaluating emerging business models. For an early-stage, new-to-market concept, what is most important is to ask the right questions, rely on judgment where facts simply do not exist, seek metaphors from other sectors or markets and accept good enough data that can be refined along the way. Smart questions answered in fast test-and-learn cycles can lead to relevant metrics and keep innovation projects moving closer to success or the set-aside file. Here are five suggested questions to find the right metrics for your innovation initiatives:

1. How big is the addressable market? As soon as the team can characterize the potential audience for an innovation, it becomes possible to estimate how many users and buyers exist. How big is the audience, in your geography, of people who represent the demographics, have purchasing ability and are reachable by your brand? Once you have this estimate, take the 1% test, i.e., would a good result be to earn 1% of the market?
2. What would you have to believe? In the absence of a rearview mirror’s worth of history, better to look forward and envision market, customer, operational and other basics that would need to exist for a concept to appear reasonable. A useful answer to this question assumes the team’s ability to avoid clouding the future view of what is possible with too much knowledge of past precedents that may now be irrelevant. What does the intensity of user reaction to prototypes reveal: Are you solving a functional problem, or are you also hitting an emotional chord with your audience, suggesting a willingness to buy? What breakthroughs can you discern by examining what is happening in other markets or sectors?
3. What are the key drivers of revenue and expenses? In early iterations, set aside the spreadsheets and calculators. Think conceptually about your preliminary assumptions regarding the business model. What appears to be the primary revenue driver? And what do your assumptions suggest about potential expense drivers? Perhaps early on each of these will only be assigned “high” “medium” or “low” designations to indicate importance, but not be any more quantifiable.
4. Can you figure out the unit profit model? Factor in early tests, as you refine your prototype and begin to engage potential users, gathering insight to determine the unit profit model and how comfortable the team is that it can be delivered.
5. What is the potential to scale? With the confidence that you understand unit-level profitability dynamics, test for the path to scale. What will it take to attract each new customer or dollar of sales, for example, and how steep will the growth curve be?

See also: Digital Innovation: Down to Business   “Reframing” is a popular innovation concept. Reframing is simply the ability to set aside beliefs and see concepts with a fresh eye. Executives who are able to reframe metrics stand to increase their organizations’ innovation effectiveness. They will energize members of the organization who are drawn to creating the future because the right metrics can themselves be powerful motivators and enablers.

As the pace of change accelerates, the chances that incumbent businesses will be affected or displaced grows. According to a recent CB Insights report, insurance is one of the top five industries facing disruption risk; 85% of surveyed corporate strategists believe that innovation is critical for their organizations. Yet the vast majority are focused on incremental changes. In other words, while the insurance industry is in the business of mitigating risk, too many insurance companies aren’t taking advantage of innovation to address disruption. A number of innovation myths foster complacency among market leaders. While the myths aren’t unique to the insurance vertical, our industry may have embraced them more fully than others. These myths can be grouped into three main areas: strategic complacency, financial concerns and misperceptions of the innovation process. Over the course of three articles, we will explore each of these areas in detail, starting with strategic complacency. Strategic Complacency Great Changes The insurance industry is at a crossroads. A number of significant trends are converging to change our customers:

• Their behavior,
• The risks they experience,
• The technologies they use,
• And, most importantly, their expectations.

Add to those challenges the changes in underwriting, pricing and service delivery allowed by new technologies and analytic capabilities. Both the opportunities and the challenges presented by the intersection of these trends are significant for senior leadership in all segments of our industry. Yet, too often, the insurance industry hides behind our perception that “insurance is different,” or that “we’re regulated” or that “it’s complicated.” Other industries have faced similar situations, and things haven't always gone well for the established companies, even in a complicated industry computers and software or a heavily regulated one like automotive manufacturing. Some market leaders such as IBM are often written off as roadkill, but they reinvent themselves time and again. Others like Blockbuster mistakenly believe that their position provides them with unassailable advantages and end up either dramatically changed or out of business. In Blockbuster’s case, the high water mark in their valuation was in 1996, the year before Netflix was launched. In 1998, their valuation was 50% of what it had been two years prior. They mistakenly believed that breadth of location and depth of inventory were walls that couldn’t be scaled by the competitive hordes. One thing is certain: The client views his or her needs and wants as primary. That client neither understands nor cares how difficult transformation is, what the backroom challenges are or whether we’re addressing the issues as fast as we can. See also: Innovation Imperatives in the Digital Age    Clients just want to solve their problems now. If the incumbent can’t or won’t provide what the client requests, then the client goes elsewhere. In times of great change, strategic complacency kills. Customer Intimacy Ask any insurer about its strengths, and one knee-jerk response will be, “We take great care of our customers.” If that is the case, why does such a significant portion of our customers respond negatively to the industry and our efforts? Explore customer experience with insurance industry leaders a bit further, and the responses will be more nuanced, perhaps to the point of admitting the poor job the industry actually does. The good news is that some of the problem isn’t our fault. Our industry provides irreplaceable products and services of which we can be rightly proud. We regularly step into the breach in some of the most trying times our customers will ever face. But, thankfully, those events are rare or even nonexistent for the average customer, and many insureds don’t recognize that a valuable service was provided by risk transfer even during a period when they experienced no losses. Insurers’ job is to see the big picture, and to connect disparate facts. We have increasing amounts of data about those customers, which provide insights into behaviors and opportunities. These factors lead many organizations to profess that they deeply understand their customers, and that, when the customer is looking for additional products or services, the insurer will immediately know and develop the appropriate response. Dig a bit deeper, and another story emerges. Perhaps we don’t have the intimate relationship that would inspire those insights. Unfortunately, in many corporate cultures, it is hard to be a dissenting voice on customer intimacy and experience when others are professing the “common wisdom,” no matter how misguided. Finally, both improved customer experience and more intimate customer relationships are difficult, multifaceted problems and easy to put off. Carriers rightly see the relationship as one insurer to many insureds. On the other hand, customers see the relationship as one to one. While insurers think in terms of spread of risk across a pool of clients, customers are only interested in what’s in it for them. In many instances, because of these differing perspectives, the carrier-customer bond is weak. A recent Bain & Co. report said that, worldwide, only half of insureds have been in contact with their insurer for any reason in the past 12 months. The result is that customers don’t have any real relationship with their carrier and are likely to focus on price. Rarely will they share their needs and wants with a services provider with whom they have a tenuous relationship. Strategic complacency can appear when shorthand expressions of customer intimacy and experience prohibit open dialogue on customer priorities, or efforts designed to address problems are short-circuited because of their complexity. Even though insurers have gigabytes of data on their insureds, the data doesn’t translate into information and insight. Lack of Urgency Another myth among insurers is that there is no great urgency to change. Organizations survey the competitive landscape and don’t see any discernible threats on the horizon. There are two primary reasons. First, most innovation efforts are quiet, so insurers don’t necessarily see what potential competitors are doing until a product or service hits the market. Second, many lauded innovation efforts are taking place in lines or niches that don’t appear to be a threat to incumbents. So what if one new insurer is writing usage-based insurance for the gig economy, or another specializes in coverage for renters? Either those aren’t lines of business that “real” insurance companies want to write, or they aren’t a key component of the carrier’s book. See also: Digital Innovation: Down to Business   The insurance innovation landscape is large and convoluted. Most early innovation efforts are small, and the “signal” is easily mis-categorized as noise. Because of this, potential competitors and collaborators are easy to miss. But the lack of urgency is a key factor in Harvard Professor Clayton Christensen’s seminal work on industry disruption. His model states that innovators find a segment of unserved or underserved consumers that represent low profit potential. These startups then offer an inferior product or service to these consumers. It doesn’t have to be perfect because these consumers aren’t being appropriately served prior to the innovator’s arrival. The crude nature of the solution is derided by incumbents, because their customers “wouldn’t want to purchase something that limited.” Because the unserved or underserved segment is low-profit, and may have other undesirable characteristics, the market leaders have no urgency to respond. But while the existing players ignore or disparage the newcomers, the disruptors refine their offerings. Once innovators win the low-profit segment, they move upstream by repeating the process with more profitable and desirable customers. Often, by the time established industry players figure out that they are under threat, it is too late to reverse their fortunes. Guy Fraker, chief innovation officer at Innovator’s Edge, says, “Ignore this innovation activity, whether from incumbents or new entities, at your peril.” This lack of urgency, and the willingness to either accept as fact, or blithely repeat, mistaken beliefs and put off difficult, needed changes to address customer problems contribute to strategic complacency. Recognizing these problems and opening dialog within your organization is a key to formulating a strategic response to the onslaught of changes affecting the insurance industry. The next post will further explore common myths with a focus on financial concerns surrounding innovation.

If you want to know why insurance companies need electronic signatures and document management, you must first look at the regulatory landscape. In the past 10 years, this climate has changed considerably, and most insurance companies are struggling to do one of two things to handle these changes: 1) make internal policies to comply with these changes without sacrificing profitability; and 2) find creative ways to outpace competitors looking for the same solutions to these problems. Neither is an easy feat. The National Association of Insurance Commissioners (NAIC) has even devoted a large portion of its industry report to addressing one of the myriad ways insurance companies are striving to transcend regulatory difficulties—through the efficiency of the internet. This is a major reason why insurance companies need both electronic signatures and document management. Used separately, they are ineffective at delivering that the solutions insurance companies need. Together, their interplay makes navigating regulatory changes easy, especially those administered and upheld by the Federal Insurance Office (FIO) and NAIC. Understanding E-Commerce and Insurance Sales Problems Most states in the U.S. require those applying for insurance services over the internet to complete an electronic signature, whether it is used as a standalone technology or integrates with document management technologies. Although the approach may seem like common sense, its advent does away with the use of a witness or notary and brings into question the legitimacy of signatures. See also: The Most Valuable Document That Money Can Buy   Despite digital signatures being more efficient (after all, if e-signatures existed in 1776, all 56 U.S. delegates could’ve signed the document on the day our nation was founded; instead, it took roughly a month to collect all the signatures), they require additional authentications. This can be automated by document management tools. Legitimizing Electronic Insurance Applications ACORD, the Association for Cooperative Operations Research and Development, achieved this automation by making digital forms available on its domain. Application of electronic signature technology situated in document management solutions just needs to be applied during the final stages of the process. Why the Need Is Paramount Above all else, these are the features that create an effective interplay between document management technologies and electronic signatures. Authentication Procedures Inclusion of a KBA challenge question helps authenticate the digital signature process. This ensures that the party attempting to sign a document is who he or she says he or she is. IP Address Verification IP address verification is an extra layer that can bolster the legitimacy of a signed document if a legal dispute over its authenticity ever arises. Form Fill Automation There are new and exciting ways to automate the form fill process for recurring client-based and document related processes. Zonal OCR makes this possible, eliminating manual processes and reducing document workload to a bare minimum. See also: E-Signatures: an Easy Tech Win   Bar Code Authentication Although a bar code authentication in an electronic signature should never be a standalone backup, it does add a layer of legitimacy. A bar code is a stamp of individuality that reveals its purpose and origins quite clearly. Ensuring Data in Documents is Unaltered It becomes obvious that electronic signatures are more useful if applied through document management technologies, as these technologies ensure documentation is not altered. What’s more, the role-based user permissions of a document management system can trace who changed what within a system, ensuring that those who alter data without authorization can be held accountable for their actions.

Anyone who thinks innovation is about an "aha" idea, the best partners or great talent should take a look at this article on the history of General Magic. 

It had the best idea, essentially designing an iPhone 6 in the early 1990s. It had the best partners: Founded by Apple, the company had all the major telecommunications companies as investors, from AT&T on down. The talent was off the charts. General Magic was run by the stars of the original Macintosh team and included others who went on to develop the iPod, iPhone and the Android and, as if that weren't enough, to found Nest and even eBay.

Yet the company sold only 3,000 units to what executives acknowledged were friends and family and burned a $100 million hole in the ground. 

Students of Silicon Valley history will note that this epic bust occurred during the interregnum at Apple, after Steve Jobs was forced out in 1985 and before he returned in 1997. But the genius theory of innovation doesn't explain the problems at General Magic, either. In fact, the problem was that there were too many geniuses at the company.  

Guy Fraker, our chief innovation officer, says people often think that innovation means thinking outside the box. In fact, he says, innovation efforts need a box, to focus people on the right customer need, the right technologies, the right costs and so on. The trick is to frame the box the best way possible.

"A disparate innovation collection lacking a clear mandate, shared focus and unifying goals," Guy says, "results in a more chaotic, minimally effective launch and problems with scaling."

And the General Magic effort was as disparate a collection as could be. At a time when WiFi didn't exist, when the Internet was still in its formative stages, when few people were even using email -- and were using faxes that had to somehow be integrated with the mobile phone being designed -- General Magic was trying to do everything at once.

There was no box in sight. In fact, many of the later innovations by team members at General Magic occurred because someone put a box around a particular problem and solved it. The iPod, for instance, occurred because Jobs wondered whether he could put 1,000 songs in someone's pocket. 

I still love the General Magic name. It drew on the Arthur C. Clarke quote that "any sufficiently advanced technology is indistinguishable from magic," combined with the belief that in the tradition of General Electric and General Motors there was now room for a General Magic. 

But it's a harrowing example of how not to innovate.

Cheers,

Paul Carroll
Editor-in-Chief

The more informed your employees are about health and healthcare, the wiser and more confident they’ll be when it comes to making the right lifestyle and healthcare choices. Health Literacy Health literacy improves health outcomes, while controlling health spending. The Institute of Medicine (IOM) defines it as: “the degree to which individuals have the capacity to obtain, process and understand basic health information and services needed to make appropriate health decisions.” What does the IOM mean by “basic health information”? It’s the knowledge necessary to understand the impacts and risks of different health-related decisions or behaviors. For example, basic health information would include knowing why you should complete the full dosage of antibiotics prescribed by a doctor. However, an even more informed healthcare consumer would know, or at least ask, whether antibiotics are even necessary for the ailment in question. The Low Health Literacy Rate Health literacy is very low in the U.S. – “proficiency” is pegged at 12% by the Journal of the American Medical Association, well below the level of other nations where citizens have access to technology. According to JAMA, having a “proficient” level of health literacy can mean making consistently good healthcare choices and understanding one’s insurance options. Yet, mere proficiency should not be the goal. At Quizzify, where employees are already “proficient,” we continue to learn something every day. For instance, today we learned that pregnant women should avoid consuming black licorice because it contains a chemical that can harm unborn babies. (In this situation, it’s the high-quality candy-store licorice that is the culprit. The version you buy at newsstands is only licorice-flavored.) See also: New Wellness Plans: for Employee Finances   Low Health Literacy Affects Cost A study conducted by the Veterans Administration (VA) on the literacy-cost correlation revealed that veterans with low health literacy spend roughly 50% more on disease management and medical care than veterans with proficient knowledge, other things equal. Think about what that means for your own healthcare budget, and how much you would save by making even a small dent in that. Low Health-Literacy Affects Employee Wellness Outcomes Health literacy training has far better outcomes than any other employee wellness program. Screenings, for example, do not prevent the utilization of medical care. In fact, they may actually encourage it. In the Health Enhancement Research Organization Outcomes Guidebook, researchers found that only 7-8% of hospitalizations are “potentially preventable” by wellness programs. They also note that many non-hospital expenses increase as a result of these programs. Meanwhile health literacy applies to the vast majority of decisions and behaviors that affect health. In contrast, health literacy applies to the vast majority of decisions and behaviors that affect health. Typically, literate consumers spend less. When literate consumers spend more, it is usually an educated decision and may avoid a bad outcome. Implementing Health Literacy Into the Workplace The Uphill Battle Toward Behavior Change: People who are smokers or overweight already realize they should make changes…and yet, for many complex and (in the case of obesity) poorly understood biochemical reasons, can’t. Encouraging smokers to quit or obese employees to lose weight is a totally uphill, probably unwinnable task for an employer, even as a lot of money gets spent trying to move the needle. It is nearly impossible to make significant dents in these two (and related) health issues through behavior change. Furthermore, employers are not especially well-positioned to bring about these changes. Trying too hard can even feel intrusive and uncomfortable for employees. Knowledge as a Solution: By contrast, in health literacy, most of the effort is in imparting the knowledge, not changing the behavior. Examples:

• Every smoker knows he or she is supposed to quit already for health reasons but doesn’t. However, a few smokers may be motivated to quit when they learn the amount of money they are really spending on cigarettes. ($300,000-plus over a lifetime.)
• People know that radiation is unhealthy, whereas very few patients receiving CT scans realize they will be absorbing as much as 1000 times the radiation of an X-ray. Simply obtaining the knowledge can change behavior while saving money.

See also: Ethics of Workplace Wellness Industry   Achieving a higher level of health literacy is not difficult– it just takes some learning.

No matter how hard you try to improve your company’s customer experience, the reality is that your customers won’t remember much of it. That’s because our brains aren’t wired like a video camera, recording every second of every experience. Rather, what we remember are a series of snapshots. And those snapshots aren’t taken at random. The camera shutter opens to capture the peaks and valleys in the experience – the really high points and the really low points. Most everything else, all the parts of the experience that are just “meh,” fade into the background and disappear from our memory. So, our recollections are less “streaming video” and more “still photograph.” But what does this have to do with the customer experience? Well, creating a great customer experience is a lot about shaping memories. For a business to derive strategic and economic advantage from its customer experience, people need to remember it positively. When a friend or colleague asks you – “what do you think of [Company X]?” – your response is grounded in your recollection of the experience, which is different from the experience itself. That’s because your assessment of the experience, the basis for repurchase and referral behavior, won’t be derived from some meticulous calculation of the ratio between pleasantness and unpleasantness. Rather, you’ll be making that judgment just based on the snapshots that your memory has taken from the encounter. This is why companies that excel at customer experience recognize that they’re in the business of shaping memories, not just experiences. They capitalize on cognitive science to influence what people will remember, strategically creating “peaks” in the experience that will outnumber and outweigh the “valleys.” Their success in this regard is why customers recall the experience so positively, even if every portion of it wasn’t “delightful.” (DisneyWorld’s customers spend a lot of time waiting in line at the park, but when they return home from their vacation, it’s not the lines they remember — it’s the attractions.) There are a variety of strategies that great companies use to positively influence customer memories, but they all essentially involve creating more and higher peaks, as well as fewer and less deep valleys. See also: Who Controls Your Customer Experience?   Great companies also recognize that it’s alright if there are parts of the customer experience that are just average (as long as they don’t involve interactions that are vital to customers). What’s more important is to make certain there are at least some parts of the experience that will generate those positive, memorable “peak” snapshots. Conversely, one must address aspects of the experience that may be leaving customers with memorable (but negative) “valley” snapshots. (Note that those valleys don’t necessarily need to be turned into peaks, but they at least need to be moved closer to “sea level.”) As you work to differentiate your company in the marketplace, keep an eye out for those peaks and valleys. They’re the features of your customer experience landscape that will shape people’s perceptions and, ultimately, their brand loyalty. And that’s something worth remembering. You can find the original published here on WaterRemarks.

Since commercial catastrophe models were introduced in the 1980s, they have become an integral part of the global (re)insurance industry. Underwriters depend on them to price risk, management uses them to set business strategies and rating agencies and regulators consider them in their analyses. Yet new scientific discoveries and claims insights regularly reshape our view of risk, and a customized model that is fit-for-purpose one day might quickly become obsolete if it is not updated for changing business practices and advances in our understanding of natural and man-made events in a timely manner. Despite the sophisticated nature of each new generation of models, new events sometimes expose previously hidden attributes of a particular peril or region. In 2005, Hurricane Katrina caused economic and insured losses in New Orleans far greater than expected because models did not consider the possibility of the city’s levees failing. In 2011, the existence of a previously unknown fault beneath Christchurch and the fact the city sits on an alluvial plain of damp soil created unexpected liquefaction in the New Zealand earthquake. And in 2012, Superstorm Sandy exposed the vulnerability of underground garages and electrical infrastructure in New York City to storm surge, a secondary peril in wind models that did not consider the placement of these risks in pre-Sandy event sets. Such surprises affect the bottom lines of (re)insurers, who price risk largely based on the losses and volatility suggested by the thousands of simulated events analyzed by a model. However, there is a silver lining for (re)insurers. These events advance modeling capabilities by improving our understanding of the peril’s physics and damage potential. Users can then often incorporate such advances themselves, along with new technologies and best practices for model management, to keep their company’s view of risk current – even if the vendor has not yet released its own updated version – and validate enterprise risk management decisions to important stakeholders. See also: Catastrophe Models Allow Breakthroughs   When creating a resilient internal modeling strategy, (re)insurers must weigh cost, data security, ease of use and dependability. Complementing a core commercial model with in-house data and analytics and standard formulas from regulators, and reconciling any material differences in hazard assumptions or modeled losses, can help companies of all sizes manage resources. Additionally, the work protects sensitive information, allows access to the latest technology and support networks and mitigates the impact of a crisis to vital assets – all while developing a unique risk profile. To the extent resources allow, (re)insurers should analyze several macro- and micro-level considerations when evaluating the merits of a given platform. On the macro level, unless a company’s underwriting and claims data dominated the vendor’s development methodology, customization is almost always desirable, especially at the bottom of the loss curve where there is more claim data; if a large insurer with robust exposure and claims data is heavily involved in the vendor’s product development, the model’s vulnerability assumptions and loss payout and developments patterns will likely mirror that of the company itself, so less customization is necessary. Either way, users should validate modeled losses against historical claims from both their own company and industry perspectives, taking care to adjust for inflation, exposure changes or non-modeled perils, to confirm the reasonability of return periods in portfolio and industry occurrence and aggregate exceedance-probability curves. Without this important step, insurers may find their modeled loss curves differ materially from observed historical results, as illustrated below. A micro-level review of model assumptions and shortcomings can further narrow the odds of a “shock” loss. As such, it is critical to precisely identify risks’ physical locations and characteristics, as loss estimates may vary widely within a short distance - especially for flood, where elevation is an important factor. When a model’s geocoding engine or a national address database cannot assign location, there are several disaggregation methodologies available, but each produces different loss estimates. European companies will need to be particularly careful regarding data quality and integrity as the new General Data Protection Regulation, which may mean less specific location data is collected, takes effect. Equally as important as location is a risk’s physical characteristics, as a model will estimate a range of possibilities without this information. If the assumption regarding year of construction, for example, differs materially from the insurer’s actual distribution, modeled losses for risks with unknown construction years may be under- or overestimated. The exhibit below illustrates the difference between an insurer’s actual data and a model’s assumed year of construction distribution based on regional census data in Portugal. In this case, the model assumes an older distribution than the actual data shows, so losses on risks with unknown construction years may be overstated. There is also no database of agreed property, contents or business interruption valuations, so if a model’s assumed valuations are under- or overstated, the damage function may be inflated or diminished to balance to historical industry losses. See also: How to Vastly Improve Catastrophe Modeling   Finally, companies must also adjust “off-the-shelf” models for missing components. Examples include overlooked exposures like a detached garage; new underwriting guidelines, policy wordings or regulations; or the treatment of sub-perils, such as a tsunami resulting from an earthquake. Loss adjustment difficulties are also not always adequately addressed in models. Loss leakage – such as when adjusters cannot separate covered wind loss from excluded storm surge loss – can inflate results, and complex events can drive higher labor and material costs or unusual delays. Users must also consider the cascading impact of failed risk mitigation measures, such as the malfunction of cooling generators in the Fukushima nuclear power plant after the Tohoku earthquake. If an insurer performs regular, macro-level analyses of its model, validating estimated losses against historical experience and new views of risk, while also supplementing missing or inadequate micro-level components appropriately, it can construct a more resilient modeling strategy that minimizes the possibility of model failure and maximizes opportunities for profitable growth. The views expressed herein are solely those of the author and do not reflect the views of Guy Carpenter & Company, LLC, its officers, managers, or employees. You can find the article originally published on Brink.

In today’s insurance marketplace, agencies face heavy competition from digital insurance channels and direct marketers like GEICO and Progressive. So what does the future look like for the thousands of carrier and independent agents --- proponents of human engagement --- who realize that all the digital insurance channels in the world can’t replace the human connection? Independent and carrier agents can enhance and build on their own strengths to compete head-on with the impending rise of the competitive insurance channels. Agents who give personalized advice and advocacy when needed represent the great upside and the future of the agency channel. Insurance is a security blanket. People want to know that they will be covered appropriately in their time of need, and that an advocate will be there to support them when things don’t go quite as planned. Certainly people want to know a live human being can be there when their basement floods, but being a trusted adviser relies on really knowing the policy holder - being in the life of that person with quality, frequency and continuity. The challenge for the agency channel is building a velocity of contact with current and prospective policy holders in the insurance industry, which undeniably has the highest-touch and highest-volume requirement for interactions by its sales professionals. When we accomplish the role of trusted adviser, it results in higher retention, cross-sell and referral business. This is being evidenced by proponents of the agency model who study the insurance industry. See also: Reinventing Sales: Shifting Channels   Bain & Co.’s research shows that agency/agent connection is unique to earn customer loyalty, and that a loyal insurance customer – measured by Bain’s Net Promoter Score – delivers a whopping seven times the lifetime value of a low loyalty customer and three times the value of a neutral customer. And loyal customers reward their agents by buying 25% more insurance at higher prices, staying with and consolidating their insurance with one provider and even referring friends and family. But we are not out of the woods yet! Ernst & Young Global Customer Survey found that 86% of insurance consumers are "not very" satisfied with communications from their provider. A whopping 44% report remembering zero communications from their insurance provider in the last 18 months. So what does all this mean for agents? The most important task for the agency channel is to focus on what they do best, offering peace-of-mind to their customers even over the values of price and convenience , which are offered by direct carriers and other emerging digital channels of the world. To earn customer loyalty, drive growth and attract new customers, agents are adopting and mastering newer technology that can provide continuous engagement — connecting to people on email, text, phone and social media — which are the new ways consumers shop for insurance today. In this way agents are partnering with technology to manage leads and organize marketing programs to guide consumers through an elevated, sequential customer journey geared at building relationships that are very highly valued by future insurance policy holders. Again, research is ahead of this curve. Top insurance executives in a recent Accenture poll on the “Future Insurance Workforce” survey found that artificial intelligence is here to stay and will create workplace opportunities that will help agents work more efficiently to help drive growth and attract new customers. In fact, the only economically feasible way to scale agency-policy holder relationship-building today is through connecting technologies that consumers now use and expect of their vendors. Savvy agents know their customers’ values well – and are in a strong position to deliver original content through technology that best expresses the value of the agency in ways that are most meaningful to each customer. Contemporary insurance marketing automation solutions – integrated with agency management systems that maintain volume and feature sequential and automated practices – will make insurance agents more valuable in today’s market. See also: Global Trend Map No. 9: Distribution   Technology Tips to Compete Head-on With Digital Channels and Engage Customers When it comes to marketing insurance, the agency connections coming from trusted advisers remain invaluable to policy holders who must choose between this and a faceless organization that relies on advertising. An agency equipped with appropriate technologies elevates the message to a much higher level! It grabs consumers and keeps them coming back for years to come.

• Use marketing acceleration programs that induce a repeatable pattern of activity garnered from artificial intelligence and machine learning. This will inform workflows that enable agents to have smarter marketing and more personalized and predictive customer experiences that will lead to better sales outcomes.
• Use technology tools to help meet the Telephone Consumer Protection Act, (TCPA) guidelines where everyone will need to be internationally compliant or face stiff fines for wrongfully filling out forms and other violations.
• Use technology tools to help cope with all applicable laws and regulations of the new General Data Protection Regulation, (GDPR) that took effect in Europe and promises to take on more importance in the U.S. in light of recent Facebook privacy issues.

Insurers, I have some good news and some bad news. Insurers have made tremendous progress in core modernization, purchasing and implementing new core systems and beginning to adapt their businesses to take full advantage of modern core systems’ capabilities. This is genuine cause for celebration – insurers that have made or are making these efforts are advancing their companies and our industry in general.

As insurers were engaged in these core modernization efforts, though, the personal lines market and technology itself have kept moving forward. A core system that was top of the line in 2013 may be showing its age unless it has been continually upgraded to serve the capabilities needed in 2018 and beyond. This may not be the most welcome news for those still thinking about core systems with an average lifespan of 10 years or more, but this is our new reality.

This is especially true for personal lines insurers, which are typically the first to catch the core modernization wave. They have also tended to be the leaders regarding new computing capabilities. It was true for mainframe systems, client servers, web-based applications. Now, heading into the new era of computing, it is true with computing trends like microservices and serverless computing coming to the fore. This is not technology for technology’s sake – insurers need to be able to handle an increasing number of transactions, including multi-threaded calls, and that increase is approaching an infinite number.

See also: 2018’s Top Projects in Personal Lines  

Further pressure comes from the insurtech startups active in the personal lines market. The original, widely known insurtech startups in P&C insurance were focused on personal lines. As the insurtech movement has matured, startups’ focus has widened to commercial lines and workers’ comp as well as crossing product lines. However, startups have been active in personal lines the longest, and those insurtechs that have thrived have gained market experience and are beginning to focus on organizational maturity. That means that for incumbent personal lines insurers, their insurtech counterparts tend to be comparatively robust and mature when compared with the commercial lines insurtechs I discussed in my earlier blog.

A key characteristic of insurtechs is that they are digitally native companies. That means that they are natively fluent, with enormous quantities of data and digital interactions, and their technology is geared toward this.

Core systems that can be described as “digitally native” have an edge in the digital market going into the future. Even though digital has been a crucial focus area for years, the insurance industry is still learning what a truly digital business entails – and what technology is needed to support it. Insurtech startups have given the insurance industry new examples of how to operate in the digital world.

Few core systems are built with the digitally native characteristics, but the core systems marketplace is beginning to adapt. Continued evolution toward open APIs and new data sources will provide insurers with the opportunity to interoperate with the new distribution channels and directly with the customer.

Whether you are a large insurer that is trying to support new digital brands and new product models (on-demand, telematics and others dependent on high amounts of data) or a small regional insurer trying to power consumer service portals, the key question is data availability and digital connectivity with the consumer and agent.

So, for insurers asking themselves: “Do we really need to think about modernizing our modern core systems?” the better question may be this: “Are your modern core systems digitally native?”