According to its generally accepted definition, operational risk is “the risk of loss resulting from inadequate and failed internal processes, people, and systems or from external events” and it covers also legal risk exposure. However, according to the risk management literature, strategic and reputational risks are excluded from operational risk definition. With its qualitative background, operational risk is found as one of the most treated components in business processes. Because its features, operational risk exposure of an entity is not easy to measure and risk appetite is not easy to determine. Like other qualitative risks, top down and bottom up assessments are performed for operational risk exposures. However, yearly analyses change frequently and finding a trend for exposures is really struggling. See also: Cognitive Biases and Risk Management   Risk management can add value to companies only because markets are imperfect and today, insurtech is the main driver which makes markets imperfect. As a revolution in insurance business, it is changing every dynamic in our business. Inevitably, it converts traditional risk management functions of insurance companies totally. After two very busy years with solid development, insurtech is more than an emerging risk now. And as risk management professionals, we need brand new approaches for manage its effects. Needless to say, insurtech affect all risk types of an insurance company, but because of above mentioned features, it is more difficult projecting how will change ORM (Operational Risk Management) after insurtech. My predictions on this grey point are as below. With digitalization, operational risk exposure of an entity will be based more on digital process based risks (not systematic or systemic risks!) than man-made risks. After insurtech implementations, many manual controls will die, and system-based ones fill these gaps. Enterprise risk manager will need to construct its risk management framework mainly on automated controls and this brings different testing processes as well. Insurtech implementations do not mean just digitalization, but also using disruptive technologies; as AI, IoT, machine learning, blockchain, AR, VR; in every step of insurance business. As a second line of defense of insurance companies, risk managers should be one step further from their colleagues and need to define control framework of these activities. See also: How to Improve ‘Model Risk Management’   Last but not least, one of the crucial side effects of insurtech in operational risk management is cyber risk. Today, cyber risk is assessed as third or fourth most threated risk in insurance professionals ‘expectations. However, more automated systems will put insurance companies into target of cyber-attacks and cyber risk will become most threated and costly risk in very short time.

One of the most pressing questions that has arisen from the insurtech movement is this: Will insurtech startups have a need to utilize the incumbent tech market’s capabilities? In the past three years, startups have been actively partnering with other startups, insurers and tech incumbents. Partnerships, of course, come in many different flavors. The latest SMA research has revealed that startup MGAs and greenfield insurers are increasingly partnering with existing core systems providers – as clients.

The first wave of insurtech startups – most of which were focused on personal lines – tended to go it alone, developing their own core systems. Many of today’s innovative new insurers and new MGAs have focused on commercial lines and see value in the core systems that incumbent insurers and MGAs already use. Their new core systems are increasingly coming from established core systems providers.

For the insurtechs, this means that they have access to expertise and content. Both are especially helpful for insurtechs pursuing opportunities in commercial lines – which account for the vast majority of the startups that purchased new core systems last year. The earlier insurtech startups targeted personal lines and life/health ventures. Today, more startups pursue the significant opportunities in commercial business.

See also: How to Collaborate With Insurtechs  

To compete in commercial lines, these startups need to have the robust capabilities that support the various new products being brought to market. Time to value is critical, and the content (rates, rules, and forms) provided by tech incumbents’ agile core systems can increase their speed to market. In addition, the expertise of their new vendor partners can be a valuable resource to help them navigate the complexity of the commercial market.

As SMA detailed in our recent report, Core Systems Purchasing to Thrive in the Digital World: What’s Hot – And What’s Not, 12% of all new P&C core systems sold in 2017 were bought by startup MGAs and greenfield insurers. We expect them to be a stronger presence in 2018 and onward, creating substantial benefits for startup and incumbent tech providers alike and opportunities in new spaces for all forms of partnerships. As this new market wave continues, the creativity and capabilities of all will be needed to support the insurance business moving forward.

The business of insurance has undergone drastic changes globally. In my recent article The Vote Against The Establishment, I noted that new entrant Lemonade paid a claim in three seconds. The growth of chatbots and claimbots is another attestation of the smart digital age, which is growing in the use of sophisticated technologies, including natural language processing, machine learning and augmented reality for all types of insurance from workplace safety to the general insurance life cycle. A recent interesting Bloomberg post indicated how WeChat influenced spikes in insurance sales in Hong Kong and the reaction by regulators. Yes, one can argue that the U.S. in general has strict regulations and gobs of historical insurance policies on siloed legacy systems. With globalization, consumer expectations worldwide have become very similar – no matter the age, geography or industry. Consumers care little about the technologies and processes an insurer or an agent uses to provide the information – all they care about is getting it immediately and via a device of their choice. Thankfully, there are metrics that insurers can use to measure how successful they are at doing this. The Net Promoter Score (NPR) is an age-old indicator of growth, and the Net Easy Score (NES) aka Customer Experience Index, is a metric for the contact center or service center. Simply put, a successful customer experience requires an understanding of the customer at a personal level and triangulating technology, information and human touch points, at the right time, in the right context and via the right device. The customer’s expectations are not the only trigger that is changing the insurance landscape. Insurers are leveraging technology advances to not only reach a wider market at a lower operating cost, and to improve their loss ratios, but also for economies of scale. Insurers will still need to balance technology with workforce behaviors and business priorities to allow for sustainable growth. It's not the millennial age group that positively disrupts — it's the millennial mindset! The customer is the common denominator across all industries. The customer demands immediacy, transparency and personalization of service at any time and on any device. Customers also demand to be able to connect with a human when they feel it is necessary, and to be left alone otherwise. Customers of all age groups and walks of life are usually heads down on their mobile devices during downtime, researching and comparing products, catching up on social sites, news, tech trends and more. While millennials like the convenience of shopping and researching online, they also crave unique experiences and instant gratification. The brand experience delivered to a customer is the sum total of personalized experiences across all the touch points – through advisers, service representatives, claims representatives and online channels. The retail industry offers an example in integrating offline and online channels. Yelp and Groupon, for instance, allow local businesses to reach potential customers with online, location-based technology. Millennial or otherwise, customers of every generation are familiar with the newest tech products. The Boomers are aging gracefully and have picked up on digital trends to make life simpler. Gen Xers on the other hand were always walking the fence and could adapt either way. Whether the consumer is 25 or 65, everyone is looking for hassle-free, seamless self-service and active customer care. See also: How Millennials Are Misunderstood   Take a simple example in insurance: Real-time alerts, offers and notifications and certain transactional capabilities on any device and at any time can avoid redundant or low-value calls into the service center or the agent’s office. This improves the productivity of the agents and service representatives and allows them to focus on more complex tasks for business success. This is just one of many reasons that a mobile-first approach to insurance products should be given top priority, even over the desktop experience. The tripod of customers, service representatives and agents According to Marketing Metrics, the probability of selling to a new prospect is 5–20% whereas the probability of selling to an existing customer is 60-70%. Service excellence is one of the drivers to customer retention and increased referral business. Insurers have undertaken initiatives to better understand their customers' insurance journeys (digital, emotional, physical) in alignment with those of the service representatives and agents. In addition, insurers are mining their historical customer data to assess the lifetime value (LTV) of the customer and the reasons for drop rates and spikes in purchase patterns. This not only provides up-sell insights but additional insights into the product uptake and service-level impact on business economics. Insurers are beginning to analyze information from social sites and literally billions of connected devices that consumers engage with every day to provide targeted, personalized and proactive service. Mobile Future projected that by 2020 there will be 5.5 billion mobile users globally. They also projected that by 2020 there would be 947 million mobile-connected devices and 163.2 million wearable devices in the U.S. alone. The service representatives and agents themselves need simplification of process and technology and require their daily journeys to be better understood by insurer management. As the face of the company, they provide the critical touch points that can make or break a relationship. More clients are becoming tech-savvy and will require a mix of digital empowerment and human engagement. Service representatives and agents/advisers need to have the ability to adapt to newer technologies, thus catering to customers in ways they choose to do business. Face-to-face guidance by advisers will still exist for those individuals planning for and nearing retirement, high-net-worth clientele and more sophisticated financial products. According to the U.S. census, there are almost 80 million Baby Boomers living in the U.S. Another article by CNBC indicated that only 27% of Baby Boomers were confident they had enough for retirement. Moving the Titanic from the Neolithic age to the fintech age Taking a specific example, the average life insurance application process takes 30 days or more with extensive and intrusive underwriting processes. Given the amount of information available through IoT, social sites, paid and unpaid data sources, plus historical insurer data, the underwriting processes can be minimized and personalized. Newer medical technologies that are FDA-approved exist wherein less intrusive and more immediate results can be obtained to drastically reduce underwriting and policy issue cycles. Simpler products with lower face values are already being issued online within minutes, including processing of the initial premium payment in the same session. Newer technologies provide powerful insights into personal and commercial risk information allowing various sales and service personnel the insights for pre-qualifying leads, providing targeted products and ensuring the highest quality of engagement. Another area is field service and productivity technologies that include augmented reality to drive productivity and reduce loss ratios. For instance, field staff and adjusters can use smart glasses to augment their inspections with additional safety and construction code information to help accelerate the underwriting process and assess claims losses. Furthermore, the vast expanse of information available today, and the AI capabilities to triangulate the information contextually have been proven to reduce loss ratios and identify high-risk entities. A handful of insurers and reinsurers are dabbling in advanced technologies, deriving contextual risk information from IoT, social sites and augmented reality and mining sentiments and financial trends for predictive and preventative claims analytics. Minimizing recruitment problems while maximizing productivity through technology Insurers are well aware of the recruitment issues they will face should they decide to not advance technologically in their business. This pertains more to the fact that a service representative’s turnover rate is very high and the average age of the agent is 56 (according to LIMRA). Attracting and retaining the younger generations (millennial, Gen Z and beyond), will require a realignment of the insurer business models, change in compensation models (especially for service representatives) and behavioral changes in the mindset of the workforce to realize the business metrics they need to stay relevant and gain competitive traction in the marketplace. See also: How to Attract the Next Generation   In summary, I see four major changes occurring in the industry: one where insurers are beginning to realize the benefits of their digital transformation efforts; second where the role of the agents, service representatives and underwriters is becoming more specialized; third where consumers are becoming more educated and empowered; and lastly where risk assessments are shifting from historical models to individualized and predictive projections.

When losses occur during natural disasters, carriers in the $4.5 trillion insurance market understand that — in addition to safety — at the top of policyholders’ minds is how they are going to recover, and how fast. It is at these times that carriers must respond quickly and efficiently to make their policyholders whole again while keeping costs as low as possible. Operating in a cost-sensitive and hyper-responsive market that affects all service industries, even the most sophisticated and progressive carriers often find themselves struggling to effectively deal with the scalability, complexity and unpredictability of managing a local, regional or national adjuster workforce. This typically drives up service costs, hindering service performance and ultimately hurting policyholder satisfaction, particularly in crises. One way carriers can respond quickly and safely — and keep policyholders happy — when natural disasters strike is relying on an on-demand model to supply a scalable and affordable workforce. This article provides an overview of the strain that natural disasters place on carriers and discusses how the on-demand model can relieve pressure by revolutionizing how the insurance industry responds. The Insurance Industry Is Feeling the Strain Since Hurricane Andrew, the industry has shifted from a reactive to a proactive approach. This process is assisted by the development of much more sophisticated technology, fully formulated catastrophe response plans and the realization of the necessity for immediate response. Still, as natural disasters increase in frequency and strength, the insurance industry is feeling the strain. It takes far too long to assess claims and initiate payouts following catastrophes in the current insurance environment. “Waiting six weeks, 12 weeks or more for financial reparations is terribly stressful for policyholders,” says Ryan Kottenstette, CEO at Cape Analytics. “Carriers are striving to do better, and emerging tech companies can help them.” Indeed, the internet, mobile apps, on-demand models, automated estimations, drones and storm tracking technologies are but a few examples of how technology is improving the speed at which insurance companies settle claims. See also: Key Findings on the Insurance Industry   The main struggles for insurance professionals and insurance companies when dealing with large-scale natural disasters like the one-two punch of Hurricanes Harvey and Irma include extended response times and lack of resources. Extended Response Times “A stale claim is an expensive claim,” says John Rollins, an executive with Cabrillo Coastal General Insurance Agency LLC in Gainesville, FL. “The key… is getting to the policyholder and getting some money in their hands so they can begin the recovery process.” Certainly, one of the biggest pain points is time. Anything that slows payouts diminishes their value at the front end of a crisis. “There is a huge number of claims and a limited number of adjusters to handle them,” says Suzanne McCormack, director of business operations at Robert L. McCormack Public Adjusters. “As time goes on, the policyholders become more and more restless because their homes or businesses have been impacted, and they want to get back to their normal lives. People are understandably very emotional having been through the trauma of the disaster, then waiting and waiting to get back to normal.” In addition to the emotional toll that wait times place on policyholders, delays open the door for insurance fraud. “In the past five years here in Utah, catastrophic winds have provided the opportunity for rogue roofing contractors to knock on doors with minor roof damage, claiming that they can help provide a free roof replacement,” says Brent Thurman of Keystone Insurance. “In some cases, the contractor has even removed additional shingles before the claims representative arrives in an effort to have the entire roof replaced rather than a smaller repair. This can be difficult to track during a normal claim load, let alone a time when claims adjusters are overbooked by the sheer volume of claims submitted during a catastrophe.” Lack of Resources Carriers have traditionally understood the value of in-person asset inspections. However, maintaining an infrastructure capable of quickly completing these inspections in any location has become cost-prohibitive for most companies. As expected, during and after Hurricane Irma, many of Florida’s adjusters were still on the front lines in Texas, working on claims made after Hurricane Harvey hit. “I would have to say it’s difficult to find enough inspectors willing to work 12- to 14-hour days seven days a week,” says John Espenschied of Insurance Brokers Group. “Most large insurance carriers are facing thousands of claims daily that need to be inspected. However, there are only so many insurance adjusters around the country, and pulling hundreds away from their regular duties creates a shortage.” Then there is the underlying problem of managing logistics during a crisis. “From a logistics perspective, the biggest issue for the insurance industry will be the ability or inability to ramp up quickly and effectively to appropriately service the volume of claims that have and will continue to be submitted after disasters like Hurricanes Harvey and Irma,” says Dawn Sandomeno, national director of brand management, Procor Solutions + Consulting. “Whether it is the insurance companies having enough trained staff to triage claim intake or insurance adjusters managing a portfolio of claim appointments to visit loss sites — many of which are inaccessible — the capabilities of the industry will continue to be tested.” In fact, as insurers scrambled to get more of the nation’s 57,000 independent adjusters to Florida, it created a bidding war and the promise of a record payday for anyone available. It was reported that some Florida home insurers increased fees paid to adjusters by about 30%. In some cases, adjusters could earn $30,000 for evaluating a single complex property claim. Of course, these unprecedented increases in fees have the effect of increasing the cost of each claim. See also: Why Is Insurance Industry So Small?   The Power of the On-Demand Model We live in an era of immediate gratification where Uber provides rides on demand and Amazon delivers almost any product we desire on the same day we order it. Consequently, policyholders’ expectations for the types of services they want to receive continue to grow more demanding. To respond quickly and safely, carriers can leverage innovative approaches that align business processes from information-gathering to claims adjustment. By further aligning these essential business processes in a real-time, location-based context, carriers will be in a better position to understand and calculate risk while responding during catastrophes in hours, not days. Using workers contracted through an on-demand provider, carriers can get more done more quickly. They have access to a distributed workforce of vetted and trained information gatherers who are ready to be dispatched to the scene of a catastrophe at a moment’s notice. As on-demand options become more accessible, the insurance industry is beginning to realize that some of its traditional processes are less efficient than they need to be. The idea of sending a highly-paid, licensed adjuster to handle every claim scenario, regardless of its complexity, is being questioned. “ During a catastrophe, many claims require only a simple validation of damage. But traditional claims handling processes are over-engineered for such a situation. Why send a highly paid, licensed adjuster when an on-demand workforce can validate the damage immediately for a third (or less) of the cost? Why tie up valuable adjuster resources on simple claims when there aren’t even enough adjusters to handle the more complex situations that do require their level of expertise? This article is an excerpt from a white paper by WeGoLook, a provider of on-demand workforce solutions for the insurance industry and other industries around the world. You can find the full paper here.

Walmart’s acquisition of Flipkart demonstrates both Indian e-commerce’s coming of age and a repetition of history. U.S. giants will spend billions in India because they see huge opportunities, and this will produce a short-term boon for Indian consumers. When the dust settles, though, prices will rise and consumer choices will become more limited than they had been. Foreign companies will mine data and manipulate consumer preferences. They will have once again colonized India’s retail industry. Protectionism for physical goods and services is usually a bad thing, as it limits the incentive to innovate and evolve, stifling a country’s competitiveness and productivity. India’s protected domestic companies became lethargic, offered substandard products and services at high prices, and hobbled India’s economy. In a digital economy, though, things are very different. The value resides in the ideas, which spread instantaneously via the internet. Entrepreneurs in one country can easily learn of the innovations and business models of another country and duplicate them. As core technologies advance, they become faster, smaller and cheaper — and accessible to everyone, everywhere. Startups constantly emerge, putting established players out of business. So, speed and execution are key to business survival and competitiveness. Valuable competition and innovation can arise from within the domestic economy itself, without having to invite foreign companies to the table. Technology-based industries, such as retail, electronics and distribution, that require large capital investments handicap the small players, because money provides an unfair advantage to the larger ones. See also: Copy and Steal: the Silicon Valley Way   The latter can use capital to put emerging competitors out of business — or to acquire them. It is what U.S. technology giants do as a matter of course. Amazon, for example, has been losing money, or earning razor-thin margins, for more than two decades. But because it was gaining market share and killing off its brick-and-mortar competition, investors rewarded it with a high stock price. With this inflated capitalization, Amazon raised money at below-market interest rates and used it to increase its market share. It also acquired dozens of competitors — just as it tried to do with Flipkart. Having become the dominant player in the U.S. e-commerce industry, Amazon has its eye on India. A company that it left in the dust, Walmart, is desperate not to also lose the Indian market. Both are doing whatever they must to own Indian retail and then split the spoils between them. That is why controls are desperately needed on this kind of capital dumping. And such controls won’t reduce competition or throttle innovation. As they did in China, they will stimulate competition and, through that, innovation. Chinese technology companies are now among the most valuable and innovative in the world. In addition to having a valuation that rivals Facebook’s, Tencent’s WeChat e-commerce platform is far more advanced than any rival in the West. Baidu is building highly advanced artificial intelligence (AI) technologies as well as self-driving cars. And DJI (Dà-Jia ng Innovations) has become a global leader in drone technologies. Had China not imposed controls, these companies may not have survived at all. It is probably too late to save Indian e-commerce from modern-day East India Company-style colonization. But there are many other industries in which Indian startups can still lead the world. See also: Too Much Tech Is Ruining Lives With the exponentially accelerating advances occurring in technologies such as sensors, AI, robotics, medicine and 3D printing, practically every industry is about to be disrupted, and there are opportunities for Indian entrepreneurs to create solutions that benefit India and the rest of the world. India urgently needs to wake up and protect its entrepreneurs from foreign-capital dumping. And it needs to provide incentives for Indian — and foreign — companies to invest in its startups, just as China did for its own.

A recent headline read, “Insurers go all-out on mobile, but what comes next is elusive.” But what if the future doesn’t have to be elusive? The article shares some interesting statistics on Canadians’ use of mobile related to insurance purchases:

• 74% begin their insurance research journey online.
• 25% of those who begin their research online use a smartphone only.
• 61% of this segment will immediately abandon a broker’s website if it is not considered mobile-friendly.

And it’s not just Canadians. A January 2018 Pew Research Center study of U.S. consumers found that as mobile devices have become more widespread:

• 77% of Americans go online on a daily basis.
• 43% go online several times a day.
• 26% report they are online “almost constantly” (up from 21% in 2015).

As the article rightly points out, new findings on mobile behaviors like these require insurance and financial services companies to avoid assumptions and dig deeper into the various segments — considering demographics that include lifestyle, employment statistics, income and related buying preferences — in their marketing efforts. However, what’s next doesn’t have to be elusive. Highly effective targeting based on these characteristics can easily be achieved through social media advertising. As we shared in A Brief Guide to Mobile and Social Media Audience Targeting, social media platforms allow marketers to target ads based on consumers’ locations, demographics, interests and behaviors. See also: The Time to Adopt Mobile Was Yesterday   But that’s not all marketers can do through mobile and social media advertising. The Denim platform allows corporate marketers to achieve micro-targeted, hyper-localized ads at scale on behalf of any number of agents or advisers. Why? Because an ad presented from a local agent’s Facebook page consistently outperforms the same ad presented from a corporate brand’s Facebook page. Best of all, customers achieve better results at lower costs. This is apparent when you compare consumer engagement data on ads powered by Denim to Facebook advertising benchmarks for the insurance and financial services industry:

• The average click-through rate (CTR) of finance and insurance ads placed on Facebook is 0.56%, while the average CTR of micro-targeted, hyper-local ads powered by Denim is 1.95%.
• The average cost per click (CPC) on Facebook for finance and insurance is $3.77 — higher than any other industry. In comparison, the average CPC of ads powered by the Denim platform is $0.33.

See also: 4 Ways Social Media Can Win a Promotion   Perhaps a better headline would go something like, “Insurers go all-out on mobile; what comes next is micro-targeted, hyper-local mobile and social media advertising at scale.”

Life, group and voluntary benefits insurance is one of the most competitive verticals in the financial services industry. Strong relationships with customers are crucial to competitive advantage. Engaging customers is a proven way of enhancing relationships. Unfortunately, the insurance industry has one of the lowest rates of customer engagement. Too often, the only contact with the customer is the bill. How can insurers improve engagement? Use these five technologies to enhance digital customer engagement. Two-Way Communication Tools Email, social media, wearables and chatbots allow insurance companies to optimize every customer interaction. For instance, insurers can partner with wearables manufacturers so that these tools can be used as digital modes of communication between insurers and digitally savvy consumers. Wearables, for instance, can monitor a customer’s health and give insurers a chance to reward good behavior of their customers – creating opportunities for engagement. Platforms such as Facebook and Twitter can be used to engage consumers on various insurance issues and as a way of getting customers’ feedback. Big Data and Data Services Insurance companies can use big data to find opportunities to add value to customers’ lives. The human touch is still important, but a computer is much better at searching through huge amounts of data in real time. Incorporating data-based services to provide the company with constant data streams from connected devices such as IoT and wearables is crucial. This data can be turned into insights that help improve customers’ daily lives, boosting customer engagement. See also: Seriously? Artificial Intelligence?   Artificial Intelligence Worldwide data production runs around 44 trillion gigabytes a year. One gigabyte alone is equal to about a 30-foot shelf of books, and insurers (along with the rest of us) are suffering from data overload. Often, customers have to wait on the phone while insurance employees sort through data. AI can help solve this overload. It can assist insurance companies in cleansing large volumes of data and offer accurate predictions of customers’ expectations. It can provide customers with realistic ideas of what the future will hold, helping them make better decisions for themselves and their families. In addition to dealing with all the data, AI can handle customer service with chatbots, as well, automating and increasing customer engagement in entirely new ways. Analytics AI helps insurance companies comb through large amounts of data to predict exactly what customers want. But this is not the end of the story. Insurance companies need to find actionable insights from the information provided by AI. This is where analytics tools come into play. Robust analytics programs (based in data science) can be used to study customers’ past data, research potential trends and evaluate the effects that certain decisions might have on consumers. Many are looking at predictive analytics related to claims patterns, benefit design and profitability. Analytical tools such as Google analytics and Woopra (a real-time customer analytics service) can help insurers gain more knowledge about customers, which can then be used to inform strategies for customer engagement. Analytical tools can help insurers to create an all-inclusive road map that will help them improve and manage their customers’ entire lifecycles. Web-Based Self-Service More and more insurance consumers expect to be able to monitor the status of their claims and manage their policies themselves online. Studies show that 38% of insurance consumers prefer web-based self-services and strongly feel that these platforms have shifted from “nice-to-have” to “must-have” options. Web-based self-service improves engagement with customers. They give customers the freedom of choosing their preferred ways of making basic changes to their accounts, finding answers, refining service flexibility and improving customer experience. The future is now Customer engagement is becoming an increasingly important part of insurance. Enhancing rich, digital customer experiences through strategic engagement offers great opportunities, especially for insurers that are looking to cross-sell and up-sell their existing clients. Insurance customers are more and more willing to shift their loyalty to insurance providers that guarantee customers communication through digital channels and devices of their choosing. See also: How Technology Drives a ‘New Normal’   They are looking for insurers that are able to interact and offer informed conversation that relates to their individual needs, desires and relationships. It is therefore important that insurers cultivate proper digital ways to engage their customers. Without these customer-focused technological trends, any insurance company risks losing a big chunk of market share.

For decades, privately owned, privately insured cars have been so common that few people have questioned these models of transportation and the associated risk. Property and casualty insurers deal with thousands of individual vehicle owners and drivers as a result. Insurers deal with those drivers’ mistakes, too. A study by the National Highway Traffic Safety Administration (NHTSA) estimates that human error plays a role in 94% of all car accidents. The entire auto insurance industry is built on this humans-and-their-errors model. But autonomous vehicles stand to turn the entire model on its head — in more ways than one. Here are some of the biggest changes self-driving cars are poised to make to the auto insurance world and how P&C insurers can prepare for the shift. Vehicle Ownership Most conversations about self-driving cars and insurance focus on questions of fault, compensation and risk. In a 2017 article for the Harvard Business Review, however, Accenture’s John Cusano and Michael Costonis posited that an even bigger disruption to P&C insurance practices would be a change in patterns of vehicle ownership. “We believe that most fully autonomous vehicles will not be owned by individuals, but by auto manufacturers such as General Motors, by technology companies such as Google and Apple and by other service providers such as ride-sharing services,” Cusano and Costonis writes. Indeed, companies like GM and Volvo are already exploring partnership with services like Lyft and Uber, as keeping self-driving vehicles on the road as much as possible amortizes their costs more effectively. Paralleling the autonomous vehicle/ride-sharing partnership trend is a decrease in vehicle ownership. Young adults and teens are less interested in owning vehicles than their elders were, Norihiko Shirouzu reports for Reuters. Instead, they’re moving to more walkable areas or using ride-sharing services more often, already putting pressure on auto insurance premiums. See also: Time to Put Self-Driving Cars in Slow Lane?   U.S. roads are likely to be occupied by a combination of human-driven and self-driven vehicles for several decades, Cusano and Costonis estimate. As ownership trends change, however, P&C insurers’ focus on everything from evaluating risk to branding and outreach will change, as well. Connected closely to the question of ownership is a second question: Who is at fault in a crash? Fault Ownership NHTSA’s statistics on human error as a crash factor imply that reducing the number of human drivers behind the wheel would reduce accidents. A McKinsey & Co. report agrees, estimating that autonomous vehicles could reduce accidents by 90%. Taking human drivers’ mistakes out of the equation means taking human fault out of the equation, too. But questions of human fault stand to be replaced by even more complex questions regarding ownership, security and product liability. Several automakers have already begun experimenting with approaches that upend traditional questions of fault and liability. Concerned over the patchwork of federal and state regulations in the U.S., Volvo President and CEO Håkan Samuelsson announced in 2015 that the company would assume fault if one of its vehicles caused an accident in self-driving mode. The statement appears to apply to Volvo’s vehicles during the development and testing phases, according to Cadie Thompson at Tech Insider. It is too early to tell whether the company will extend its acceptance of fault to autonomous Volvo vehicles that function as full-fledged members of the transportation ecosystem. Nonetheless, the precedent of automakers accepting liability has been set — and, as automakers continue to explore partnerships or other models of fleet ownership, accepting liability or even providing their own insurance may become part of automakers’ arsenal, as well. Ultimately, Volvo seems unconcerned about major liability shifts. “If you look at product liability today, there is always a process determining who is liable and if there is shared liability," Volvo’s director of government affairs, Anders Eugensson, told Business Insider. "The self-driving cars will need to have data recorders which will give all the information needed to determine the circumstances around a crash. This will then be up to the courts to evaluate this and decide on the liabilities." Meanwhile, in Asia, Tesla is trying another method: including the cost of insurance coverage in the price of its self-driving vehicles, according to Danielle Muoio at Business Insider. "It takes into account not only the Autopilot safety features but also the maintenance cost of the car," says Jon McNeill, Tesla’s former president of sales and services (now COO of Lyft). "It's our vision in the future we could offer a single price for the car, maintenance and insurance." Doing so would allow Tesla to take into account the reduced accident risk of the autonomous system and to lower insurance premium prices accordingly. This might reduce the actual cost of the vehicle over its useful life. The NHTSA has already found that accident risk in Tesla vehicles equipped with Autopilot are 40% lower than in vehicles without, and the company believes insurance coverage should reflect that, according to Muoio. If P&C insurers don’t adjust their rates accordingly, Tesla is prepared to do so itself. Future Ownership Property and casualty insurers seem torn on how self-driving cars will affect their bottom line. On the one hand, “insurers like Cincinnati Financial and Mercury General have already noted in SEC filings that driverless cars have the potential to threaten their business models,” Muoio reports. On the other, 84% don’t see a “significant impact” happening until the next decade, according to Greg Gardner at the Detroit Free Press. Other analysts, however, believe the insurance industry is moving too slowly in response to autonomous vehicles. "The disruption of autonomous vehicles to the automotive ecosystem will be profound, and the change will happen faster than most in the insurance industry think," KPMG actuarial and insurance risk practice leader Jerry Albright tells Gardner. "To remain relevant in the future, insurers must evaluate their exposure and make necessary adjustments to their business models, corporate strategy and operations." KPMG CIO advisory group managing director Alex Bell agrees. "The share of the personal auto insurance sector will likely continue to shrink as the potential liability of the software developer and manufacturer increases," Bell tells Gardner. "At the same time, losses covered by product liability policies are likely to increase, given that the sophisticated technology that underpins autonomous vehicles will also need to be insured." See also: The Unsettling Issue for Self-Driving Cars   Major areas of concern in recent years will likely include product liability, infrastructure insurance and cybersecurity. Meanwhile, the number of privately owned vehicles — and individually insured drivers — on the road will likely continue to drop, placing further pressure on auto insurance premiums. What should P&C insurers to do prepare? Cusano and Costonis recommend the following steps:

• Understand and use big data and analytics. As Eugensson at Volvo notes, autonomous vehicles will generate astounding quantities of data — data that can be used to pinpoint fault. It can also be used to process claims more quickly and efficiently, if insurers are prepared to use it. Building robust data analysis systems now prepares P&C insurers to add value by analyzing this data.
• Develop actuarial frameworks and models for self-driving vehicles. As Tesla’s insurance experiment and NHTSA data indicates, questions of risk and cost for autonomous cars will differ in key ways. P&C insurers that invest the effort into developing and using more sophisticated actuarial tools are best-prepared to answer these questions effectively.
• Seek partnerships. The GM/Lyft and Volvo/Uber ventures demonstrate how partnerships will change the automotive landscape in the coming years. Insurers that identify and pursue partnership opportunities can improve their position in this changing landscape by doing so.
• Rethink auto insurance. Currently, P&C insurers’ auto work involves insuring large numbers of very small risks. As our relationship to vehicles changes, however, insurers will need to change their approach, as well — for instance, by moving to a commercial approach that trades many small risks for a few large ones.

Autonomous vehicles are poised to become one of the most profound technological changes in an era of constant change. Fortunately, the technology to manage this change is already available for insurers that are willing to embrace a digital future.

Across industries, many mature organizations have become acutely aware that their industrial-based business models, which strive for control, efficiency and scale, are not designed for speed, innovation or individualized customer experiences. Corporate leaders have no option but to consider using cloud-based platforms, but that introduces new vulnerabilities. Finding an appropriate balance between cybersecurity and privacy strategy while allowing for innovation is of fundamental importance. As all businesses will become “data companies” in the digital networked world, the cyber insurance industry needs to adapt to effectively underwrite and manage the most dynamic risk in the world. Everyone wants a piece of the action, as there are more than 70 U.S. carriers and 30 U.K. carriers that offer cyber insurance, and the supply will continue to grow rapidly. There is, however, one fundamental flaw – there is absolutely no standardization! We don’t capture the same data points, conforming to an industry data classification, so there is no gold standard for coverage. See also: New Approach to Cyber Insurance   How can the industry appropriately underwrite, analyze and manage the most connected risk in the world if carriers don't capture the same data points in their underwriting application and there is no common data classification to map toward? Each insurer is analyzing different data. Perhaps even a greater issue is that the data is captured at a point in time, typically via checkboxes on a paper application. The data quickly becomes outdated. Unless a vulnerability assessment is mandated for some of the larger enterprises to obtain coverage, there is no true validation of the prospects' security posture. Insurers are not capturing contextual data to validate their insureds' policies and controls that ultimately represent the risk. Is it enough to ask, “Do you educate or train users on information security and privacy?”, or would it help to know whether one insured does training once a year during lunch while another insured holds quarterly training meetings with randomly scheduled, unannounced phishing simulations throughout the year? Cyber insurance needs context and validity; the industry is deficient in both! In direct, online-to-bind insurance, some carriers only require four to six data points to underwrite the risk and present a quote in a matter of minutes. Is a company’s industry, revenue, address, number of records and a question on any previous claims I’ve had really enough to understand the risk? I understand that we need a seamless customer experience to ensure we don’t lose new business, but requiring so little data looks more like a reckless arms race to see who can capture the most SMB business more than anything else. There is no validation of the actual inputs from the insured (major issue!) and, in terms of customer experience, we should focus on strategically important issues such as integrating cyber risk mitigation with cyber insurance under the umbrella of an organization's cyber risk management. Customers need a holistic solution evaluating risk mitigation and risk transfer. Anyone who has gone through risk and compliance assessments at the enterprise level will agree that they need to be streamlined, with a centralized solution that collects and analyzes information about the cyber program and that quickly reacts to identified vulnerabilities and regulatory requirements. The traditional, siloed approach, where a company completes assessments in confusing, overly detailed Excel documents specific to a regulation (i.e. PCI, HIPPA, NIST, ISO, etc.), keeps resources tied down and focuses on completing each actual assessment rather than truly understanding broad exposure. The approach unfortunately shifts the focus to defense, in complying with regulations, instead of determining actionable insights that enhance cyber maturity. This manual, labor-intensive process does nothing to solve the snapshot problem, and a company’s cyber exposure or cyber maturity is not nearly the same on Jan. 15, 2018, as it will be on Jan. 15, 2019. Continuous, standardized insight into a company’s cyber risk is required to appropriately assess risk. Insurers are spending thousands on isolated solutions, such as SecurityScorecard and Bitsight, yet they are only viewing cyber risk through a small prism, as these solutions only provide a snapshot of risk from what's available on the internet and open-source databases. What most insurers don't realize is that successful cyber insurance underwriting comes at the intersection of insurtech and regtech. Insurers need to shift toward a digital platform that standardizes the data capture, has the data immediately available for analysis and is continuously analyzing an insured's risk throughout the policy period. Both insurers and clients need a standardized assessment that automates the manual processes of traditional risk assessments and allows companies to automate and streamline the IT and vendor audit process by mapping to several security standards, such as NIST, ISO, HIPPA, PCI and the NY DFS Regulation, through one assessment. In responding to market needs, companies like Cyberfense will prevail. In stealth mode for the last year, Cyberfense is now working with two of the largest cyber insurers to streamline the underwriting process while providing continuous insight into a company’s cyber maturity and mapping a company's cyber risk to most national and global security standards. Cyberfense helps insurers manage cyber risk by analyzing an insured's exposure and detailing recommended solutions so the client easily understands how to fill security and compliance gaps. See also: Promise, Pitfalls of Cyber Insurance   The eRisk hub that many insurers offer now does not provide any added value as it is simply a list of vendors that a client could Google itself. Insurers need to guide their clients with appropriate solutions as early as possible and in a manner that is not too invasive. With standardization and automation, you will then create a brokerage force that can finally understand cyber insurance and is more willing to sell the coverage and act as an adviser to their client. This is how we effectively underwrite and manage cyber risk.

Easily the most startling number I've seen in ages comes from this article in the May 14 Wall Street Journal. The article is behind a paywall, and, in fact, the startling number is buried, so I'll go directly to it:

According to forthcoming research from Oliver Wyman, only 16 cents of every dollar of auto insurance premium directly benefits claimants through repairs, physical therapy and so on.

16 cents! 

I certainly knew about all the other aspects of insurance that draw on that dollar of premium and understand all the expenses associated with distribution, underwriting and the complex mechanics of the claims process. But I've been operating based on the rule of thumb, as reflected in this article, that about 60 cents of every dollar goes to claimants.

Even that number struck me as far too low, and I've been arguing for years, such as in this article, that the percentage of premium returned to customers needs to increase greatly. We've explored at length how insurtech can raise that percentage both through helping customers reduce losses and by slashing expenses.

Now I find that, for auto insurance, I was wildly optimistic about where we stand now. It's a good thing for the industry that auto insurance is required. Otherwise, who would buy something with a negative 84% return?

I understand all about peace of mind and about everything the industry has to do that lies behind that, but...16 cents?

Have a great week.

Paul Carroll
Editor in Chief