This article is the first in a series on key forces shaping the insurance industry. Trend #1: In the future, insurance will be bought, sold, underwritten and serviced in a fundamentally different way, and that creates opportunities for industry leaders and problems for industry laggards. We are still in the initial stages of what Gartner terms the Hype Cycle, with an ever-increasing amount of noise and expectation without clear impact and results. Have we reached the peak of inflated expectations? We expect not. Certainly, valuations continue to rise with relatively new businesses still at the effectively pre-revenue stage commanding valuations in the tens of millions. Hard to justify on any fundamental level. However, at the core of insurtech, we continue to see a huge opportunity to innovate in a sector that is ripe for change – lack of customer engagement, lack of customer trust, outdated and legacy infrastructure combined with traditional and unpopular products all highlight the need for change and the underlying potential. Ignore Insurtech at Your Own Risk Eos has talked with dozens of insurance companies, and there is a wide range of responses from the insurance community about when, where, if and how to engage with insurtech. The top insurance companies have, for the most part, followed a two-phased approach combining an innovation team with a corporate venture initiative. These carriers see the impending disruption clearly and want to be able to shape and influence the impact. The results so far have been mixed, as some large incumbents have found it difficult to circumvent legacy mindsets, governance, organizational structures and technology. See also: 10 Trends at Heart of Insurtech Revolution   Other carriers have yet to agree/settle on an approach to deal with these disruptive forces. Eos calculates that the impact of insurtech is at least 40% to the average carrier. We calculate that by looking at a 20% upside, and a 20% downside scenario: On a conservative basis, insurers may risk losing at least 20% of their business to disruption. On the flip side, for those that embrace innovation there is an opportunity to grow their business by 20%. Stated another way, the net present value (NPV) of insurtech is $100 million for every $1 billion of premium on the downside and $285 million on the upside, assuming a top-line and profitability improvement. Timing is also key, as the scale of adoption and impact is not linear. The upside opportunity by investing now in the right opportunities is likely to give an insurer a lead that others can’t catch --- essentially a “first-mover” advantage. At the same time, the lost opportunity by delaying is exponential, not linear. There are many ways to create and capture value The positive momentum is further driven by the growth of insurtech into all areas of the value chain and across multiple product lines. We see two broad types of innovator: the "enabler" and the "disruptor." The enabler is a business that significantly improves an existing part of the value chain driving efficiency, improved customer satisfaction or better customer outcomes. A great example is RightIndem, which is transforming the claims process by creating an end-to-end, customer-managed claims process. The disruptor is a business that has developed a new approach to fulfilling part, or all, of the value chain. This is illustrated by Insure A Thing, an insurtech startup that has created a way of providing insurance without the need for an upfront premium. On face value, the disruptors may appear more exciting, but the enablers perhaps better illustrate the underlying potential of insurtech, as there are an abundance of opportunities for most insurance companies to hit "the low-hanging fruit" and do things better, more cheaply and more aligned with the customer. Insurtech is not an overnight revolution, and there are many ways to create and capture value that combine different elements of the above, for example:

• Low-hanging fruit -- these are mostly your enablers,
• True differentiators -- a combination of enablers and disruptors
• Measured bets for the future -- all pure disruptors

At Eos, we continue to adapt and evolve our investment strategy to take advantage of these opportunities, with an initial focus on our three core platforms:

• Digital distribution
• Frictionless claims
• Artificial intelligence for risk selection, underwriting, pricing and capital optimization

All of the above underpin our first trend and belief that the future of insurance will look very different than today, with all areas of the value chain from distribution, underwriting, products, claims and customer engagement changing fundamentally:

• Bought differently: As asset ownership (cars, homes, etc.) mobility and crossborder employment evolve with the shared economy, insurance covers (at least personal lines initially) will be bought on a just-in-time, on-demand, needs basis. Greater information transparency on the buyer and seller side will enable direct interaction with lower cost of intermediation/brokerage. We see this starting with simpler personal line covers and gradually evolving to more complex risks.
• Sold differently: Insurance will be quoted, bound and issued at points of transaction/sales/service enabled by ubiquitous IoT, telematics and external data availability. Selling will become increasingly distributed and linked to companies with strong customer engagement across both B2C and B2B sectors.
• Serviced differently: End consumers will choose how to be serviced and made whole via a channel, time and a manner of their choice. Servicing, especially claims, will focus on "delivering on the customer promise" as an integral part of the policy.

See also: Industry Trends for 2017   We hope you enjoy these insights, and look forward to collaborating with you as we create a new insurance future. Next article in the series: Trend #2: “External data and contextual information will become increasingly more important than historical internal data for predicting risk and pricing.” This article was written by Sam Evans, Carl Bauer-Schlichtegroll and Jonathan Kalman.

The Ponemon Institute recently shared the results of its survey on risk management: The Imperative to Raise Enterprise Risk Intelligence: Inside the Promise & Pitfalls of Enterprise Risk Management. The results are disturbing, but unfortunately what I had anticipated. The 641 who answered the survey were involved in risk management within their organization, so the results are skewed toward having some level of formalized risk management. In other words, the respondents are better than the general population. Most of the respondents are IT folk, and some of the questions reflect the author’s IT orientation, as opposed to a general business one. See also: 4 Steps to Integrate Risk Management   The report, as so many, has to define risk management in its own way. But, frankly, the definition isn't bad. The report splits the issue into risk management and risk intelligence.

In the context of this research we define enterprise risk management as the application of rigorous and systematic analysis techniques to the evaluation of risks that impact the whole organization including information assets and IT infrastructure. Cyber risk management is considered a component of enterprise risk management. We define enterprise risk intelligence as the insight necessary to drive actionable business decisions related to governance, risk and compliance. It is the organization’s ability to think holistically about risk and uncertainty, speak a common risk language and effectively use real-time information and forward-looking risk concepts and tools to maximize business performance.

Ponemon tells us that only 24% of respondents said they have a risk management strategy that is clearly defined and pertains to the entire enterprise. Ponemon doesn't define what it means by a risk management strategy, so I can’t comment further. But this is key:

“…only 43 percent of respondents say enterprise risk intelligence integrates well with the way our business leaders make decisions.”

I have to wonder whether the business leaders would agree with that assessment by the risk practitioners! This adds fuel to that fire:

“A lack of collaboration among organizational functions is a barrier to an effective enterprise risk management program. 53% of respondents say their finance, operations, compliance, legal and IT functions do not collaborate on enterprise risk management activities. Only 8% of respondents say these functions fully collaborate in enterprise risk management activities.”

A lack of resources and an inadequate budget are identified as barriers. But here is the key question. If the leaders of the organization are not persuaded that risk management is adding value by enabling success, and believe that there are better ways to invest scarce resources, why should we surprised that the risk management activity is under-funded? This is demonstrable when “30% of respondents say no one person has overall responsibility to ensure the risk management program is well executed.” See also: A Revolution in Risk Management   The appendix contains some valuable pieces of information. Here are two:

• Only 32% say their organization has a very significant commitment to enterprise risk management.
• On a scale or 1 (low) to 10 (high), just 14% of the respondents rated the effectiveness of their risk management activity as a 9 or 10.

So what do we make of this? Let’s start with some unpleasant facts!

1. Our business leaders are not idiots. If they have not invested in risk management, there’s a reason! They are not convinced it will help them succeed. They see it as a compliance activity that costs time and money, checks the box for the board and regulators, but doesn’t help them be successful.
2. If they saw risk management as helping them make better decisions, you can bet they would invest in it!
3. They can be persuaded, not by words but by action.
4. Risk practitioners too often are focused on managing risks instead of achieving business objectives. There’s a huge difference.
5. Risk practitioners don’t connect with business executives because they talk technobabble instead of the language of the business. A discussion of risk appetite or a risk appetite framework is not something that any executive focused on results will want to attend.
6. The traditional approach to risk management, a list of top risks, is not going to work. It hasn’t worked for decades so why should it now?
7. Satisfying the board but not top management is not a recipe for long-term success.
8. The risk practitioner has to think out of the box. Understand what the company’s leaders need to be successful and make intelligent and informed decisions, then deliver it.

I welcome your comments.

EY last week held the glitziest event I've attended in some time. When I walked into a huge tent by the water along the San Francisco Bay, I was handed an iPad that contained all the information I'd need for the day. There was even a compass on the home screen that could direct me to where I should go. The name tag on the lanyard that I put around my neck was oddly heavy. It turned out to be a smart device. Rather than hand out business cards, you could exchange information with someone by touching your name tags to each other's. 

I half-expected a Cirque du Soleil show to start up. 

But our friends at EY, including Shaun Crawford and Dave Hollander, had bigger things in mind for the, I'd guess, 200 people who attended. They provided ideas and exercises to stretch our thinking on how to innovate, to get us past the incremental thinking that still afflicts so many of us even in these creative times. 

My group focused on reimagining healthcare and pretty quickly pushed the bounds of what we might have imagined would be possible. One subgroup proposed a sort of data foundation—medical groups and hospital systems or even countries could contribute anonymized data in return for the right to run analytics against the giant database and gain insights about population health. Another subgroup took a philanthropic approach—we all get worn down by travel and can feel disconnected on the road, but what if a group collected donations of frequent traveler points and let us feel at least a bit fulfilled by steering them to a good cause of our choice? Might travel gain a bit more of a purpose? My subgroup designed a sort of community health center. It would collect as much data as residents were willing to share electronically about their vital signs, sleep, etc., then provide dietary, exercise and medical advice electronically, bring people in via Uber or driverless car for consultations, offer social interactions for shut-ins and generally provide a low-key way of making the community healthier. (I later learned that such centers actually exist in poorer communities, under the name Federally Qualified Community Health Centers. I, of course, took them as validation of my subgroup's ability to define a real need.)

The point isn't so much the ideas—though EY said it was going to continue the conversation about some of the ideas that were developed about healthcare, smart cities and so on, perhaps even investing in some of them. The point is that we all need to find ways to shake out the cobwebs from time to time and let our minds wander to new possibilities. 

As always, when it comes to innovation in insurance, I'd steer you to our Innovator's Edge, which now tracks more than 1,000 insurtechs and helps you sift through them in ways guaranteed to stretch your thinking.  

Please also visit the ITL website for nearly 2,900 articles—including the six recent ones below—with cutting-edge thinking on how to take advantage of the huge opportunities in front of us. 

Cheers,

Paul Carroll,
Editor-in-Chief 

Over the past decade, many industries have made tremendous progress when it comes to offering consumer choice. Just look at the travel industry. Twenty years ago, it wasn’t possible to search for a flight, compare dozens of different options side-by-side and tailor your selection to match your specific needs. Shopping experiences across many categories are now offering choices -- and making those choices clear. The healthcare industry, however, is lagging behind. And when it comes to something as critical as healthcare, clear choices are imperative. Consumers who make a less-than-optimum insurance choice face higher costs, less satisfaction and poorer health when an issue that should be looked after gets ignored because it’s not covered. These Six Factors Make Clear Choices Imperative for Health Insurance Shoppers 1. Cost When most individuals shop for a new plan, it’s not just a matter of going with the option that comes with the lowest monthly premium. There’s always a juggling act between the monthly premium and out-of-pocket costs. If the co-pays and deductibles are too high, if there are services that individuals use that aren’t covered, the lowest-cost plan may well end up costing the consumer more. Consumers need to understand their total cost of healthcare with any given plan. See also: Key Misconceptions on Health Insurance   2. What’s Covered After the basics, individuals may have a wide range of services for which they seek coverage, and every healthcare consumer will have different needs. One individual may require mental health services, another physical therapy. For yet another, it’s audiology services. Even if a certain service is covered at some level, there will likely be different limits (e.g., the number of physical therapy sessions allowed) from one plan to the next. While it’s not possible for individuals to anticipate everything that they might need in a year, consumers should be experts in their current requirements. 3. Prescription Drug Coverage Formularies listing the prescription drugs covered under each insurance plan can be extensive. And when they’re on paper, they can be very difficult to navigate. However, consumers are quickly learning the importance of determining whether the drugs they take are covered by their health insurance plans. Given last year’s unexpected cost increases for the EpiPen, consumers are wising up. Looking through the formulary and not finding an expensive drug they need to take regularly may knock a plan out of consideration. 4. Provider Network Whether a healthcare provider is in-network is a big deal to consumers. In fact, when it comes to choosing a physician, it may be the biggest deal. A 2015 survey of more than a thousand patients showed that 90% of consumers reported that the most important attribute of a physician is whether they accept the individual’s health insurance – more important even than the physician’s clinical experience. Consumers need to know what happens when they see a physician or other provider, or use a hospital, that’s outside of their network: The costs may be untenable. Consumers might be okay with switching from a primary care physician to someone new if they only see them once a year for a regular physical. But if they’ve developed a close relationship with their pediatrician – someone they like and trust – they’ll want to make sure that their provider is in-network. 5. Unique Elements Consumers are taking more ownership of their own healthcare. These days, when shopping for health insurance, they are now factoring in all of the details that make them unique. For example, if their kids play sports, they’re thinking about ER visits. When they’re planning an addition to the family, they’re doing research to see if the facility where they want to have their baby is covered by their health plan. There are many unique elements that require choice. Health insurance is not a one-size fits all solution. 6. Overall Risk Aversion When it comes to choosing a health insurance plan, risk aversion is really about what level of financial risk an individual is able to accept. And, in this regard, every individual is different. The lower-cost premium plan might be fine if there’s a low probability of something occurring that is not covered. But if you’re likely to be making frequent ER trips with your kids, that low-premium plan may not be so attractive. It’s up to the individual to determine how risk-averse they are. Insurance customers are desperate for clear choices that are easy to understand. They need them because everyone is unique and living a different situation. And, given the wide range of choices that are available to consumers in so many other aspects of their lives, they expect options. Choices provide an opportunity for your customers to find the best-fitting health insurance plan. Are you offering enough choices? See also: The Basic Problem for Health Insurance   Clearly presenting the information that today’s healthcare consumers require can be overwhelming. After all, carriers are experts in insurance, not in software application development and data presentation. Fortunately, in the 21st century, data is highly digestible, usable and transparent. Health insurtech companies across the nation are making sure of that. As insurance carriers and health insurtech companies work together, slowly but surely, the industry will progress, offering more clearly defined choices for today’s consumers.

The long-term sustainable value from insurtech lies in its ability to change how insurance products are created. The economic model behind how startups bring their products to market is bending — no, breaking — the traditional development cost curve. Insurers that recognize this dynamic and adjust their innovation activities accordingly will create more value from insurtech than their competitors. Insurtech has already gone through at least two iterations in its short lifespan. A little more than a year ago, the market was abuzz about widespread disruption. Now that it is recognized that there is value in integrating insurtech, partnership is the rage. The next phase will see an increase in greenfield operations. Over the next 12 months, the economics of insurtech development will result in a significant increase in spin-offs and stand-alone propositions. See also: 10 Trends at Heart of Insurtech Revolution   The reasoning is this – economics will motivate different behavior. Traditional insurance product development is typically characterized by these approaches/tools/techniques:

• Product or process-centered design
• Waterfall development (although agile techniques are catching on)
• Centralized, on-premise infrastructure
• Package or custom-built software
• Periodic release and control procedures
• Service-oriented architecture (SOA) integration

Contrast that with insurtech operations. They are typically characterized by these approaches/tools/techniques:

• Customer-centered design focused on delivering a minimal viable product as quickly as possible to the market
• Agile development using small teams
• Cloud infrastructure
• Microservices architecture
• Use of DevOps to control updates
• Use of open source software
• API integration

Here is where the economics comes in. Without reading ahead, answer the following question:

If you spend $1 delivering a specific set of functionality in the traditional approach, what amount would be needed to deliver exactly the same functionality using the new development approach?

I have been asking this question for the last two months. It is a tricky one, because the best input comes from the limited number of people who have delivered insurance products in both the traditional AND the new development approach. These few professionals have “lived” both environments. My sample size is small so far, but I have polled about 30 people. The answer ranges between 20 and 30 cents on the dollar. So, call it a quarter. That means that a $4 million project delivered with the traditional approach is only $1 million using the new tools/techniques. Or, better yet, entire propositions, which include changes to both the insurance product and a new automation platform, can be delivered for less than $4 million. (For more on this, see the @Celent_Research report Slice Labs: A Case Study of Insurance Disruption.) With this cost profile, a greenfield startup approach becomes much more attractive. Investing in a new product/market approach is much less risky given the smaller level of investment. If we marry this with the innovation fatigue expected as incremental efforts fail to deliver sufficient value to the core business, the environment is ripe for spin-offs. This is not to say that the current “partner with a promising insurtech firm” or the “we want to make innovation part of our culture” approaches will go away. However, expect to see significantly more stand-alone efforts than we have seen in the past. Immediate adjustments to this opportunity include:

• Insurers should include multiple startups in their innovation portfolios
• Insurance software/IT services providers and venture groups should help both insurers and insurtech firms to set up greenfield propositions
• Insurtechs should look beyond incremental solutions and apply their talent and techniques to entire insurance propositions

See also: How Technology Breaks Down Silos   As some of the spin-offs succeed (and most of them fail), insurers will learn how to develop in the new environment and will transfer these techniques to their core business. As a result, the true value of insurtech will not be an either/or choice, but change through absorption of new approaches and techniques. Insurtech = new way to develop insurance products.

The Court of Appeals in the 3^rd District has issued a blockbuster opinion on apportionment in City of Jackson v W.C.A.B. (Rice) regarding the requirements for substantial medical evidence in worker’ compensation cases. In reversing the W.C.A.B., the court laid out its analysis of why a QME’s apportionment to genetic factors was well supported and legally sufficient. The applicant in this case was a 29-year-old, police officer who developed cervical spine pain, resulting in the need for surgery. He was evaluated by QME Sloan Blair MD on multiple occasions. Dr. Blair apportioned applicant’s disability to multiple factors, including 17% each to his employment with the city, to prior employment and to personal activities. The remaining 49% was apportioned to his personal history, including “genetic issues." In response to a request for supplemental report from the applicant attorney, Dr. Blair further clarified the basis for her opinion: “…“to a reasonable degree of medical probability that genetics has played a role in Mr. Rice’s injury,” despite the fact that there is no way to test for genetic factors. Citing the referenced medical studies, Dr. Blair stated that one of them said “heritability was . . . 73 percent in the cervical spine. . . . [S]moking, age, and work are only a small percentage of disc disease and most of it is familial.” Another source cited the role of heritability in disc degeneration as 75 percent, and the other stated it was 73 percent. Dr. Blair cited a fourth article that claimed, “ ‘[t]win studies demonstrate that degeneration in adults may be explained up to 75 percent by genes alone.’ ” The same study found environmental factors to contribute little or not at all. Dr. Blair stated that while these studies supported an apportionment of 75 percent to personal history, she decided to err on the side of the patient in case there was some unknown “inherent weakness” in the study, and decided that 49 percent was the “lowest level that could reasonably be stated…” The WCJ accepted Dr. Blair’s apportionment to genetic factors but rejected the other apportionment awarding PD based on 51% industrial causation. On reconsideration, the W.C.A.B. reversed, asserting Dr. Blair’s apportionment to genetic factors resulted in an allocation of disability to impermissible immutable factors and not to “specific identifiable factors” and was therefore not substantial evidence. See also: 3rd District Upholds Validity of IMR   The 3^rd District took issue with the W.C.A.B.’s entire analysis of this apportionment issue. Noting the specific intent of SB 899 to allow apportionment to “other factors,” the court went through multiple W.C.A.B. and appellate court decisions on apportionment and could find little to distinguish apportionment on the basis of degenerative joint disease, asymptomatic prior conditions etc. The court specifically rejected the W.C.A.B.’s reference to “impermissible immutable factors,”  commenting as follows: “…Precluding apportionment based on “impermissible immutable factors” would preclude apportionment based on the very factors that the legislation now permits, i.e., apportionment based on pathology and asymptomatic prior conditions for which the worker has an inherited predisposition.  The Court pointed to several instances where medical evidence relied on apportionment to genetic dispositions to develop medical conditions, citing the Kos v W.C.A.B., Escobedo and Acme Steel cases and further noting: “…We perceive no relevant distinction between allowing apportionment based on a preexisting congenital or pathological condition and allowing apportionment based on a preexisting degenerative condition caused by heredity or genetics.” The court also rejected the W.C.A.B.’s analysis that Dr. Blair’s reliance on the applicant’s genetic makeup resulted in apportionment to the causation of injury rather than the causation of disability. The court pointed out the cause of the injury was repetitive motion, not genetics. Rather, Dr. Blair commented that the applicant’s disability was caused by a combination of factors, including a significant contribution from his genetic makeup.. The court was also not put off by the QME’s reliance on medical literature to support her conclusion rather than on a specific history from the applicant of his genetic makeup or background. As noted by the court, the doctor’s conclusion was supported by significant, unrebutted medical literature that found degenerative disc disease was influenced significantly by genetic factors and only minimally to environmental factors such as work activity. The court points out that the research relied upon by Dr. Blair supported the conclusion that as much as 75% of all DDD was related to genetics, and the issue was not whether one could prove that the genetic factor existed; the existence of significant DDD established the genetic factor as present. “Dr. Blair’s reports meet all of the requirements of Escobedo. Dr. Blair expressly stated that confidence in her opinion was predicated on reasonable degree of medical probability. Dr. Blair gave the reasoning behind her opinion--the published medical studies--and even named the studies and the pages relied upon. Her opinion disclosed familiarity with the concept of apportionment. Labor Code section 4663 states that apportionment is based on causation, and that “[a] physician shall make an apportionment determination by finding what approximate percentage of the permanent disability was caused by the direct result of injury arising out of and occurring in the course of employment and what approximate percentage of the permanent disability was caused by other factors . . . .”  (Lab. Code, § 4663, subd. (c).)” The case was remanded to the W.C.A.B. to issue an opinion based upon the QME’s conclusions. Comments and Conclusions: Assuming this decision holds up -- it is certainly likely to be appealed further -- it dramatically reinforces the rules on apportionment to any relevant factors that a physician can identify with reasonable medical probability. There are some unusual circumstances in this case that may have played a role in the ultimate outcome. First, the applicant was relatively young to have significant DDD, only 29 years old. That fact probably tipped Dr. Blair off that there was something about the condition that could not be attributed to environmental factors, including work. Second, the length of employment as a peace office was not lengthy; the applicant had worked less than five years in a full-time capacity. There had not been a lot of time to attribute causation to work activity. There is also fairly strong support in the medical literature that DDD is not really activity-related. Other than studies that suggest whole body vibration is a significant factor, there is little to suggest that bending, lifting and stooping, without significant trauma, plays any role in the development of disc disease. The situation is much like carpal tunnel syndrome, where the medical literature overwhelming fails to demonstrate a relationship between computer usage and the disease process, and yet we still routinely get compensable reports without any real support in the medical literature. Spine pain is constantly related to even relatively benign work activities as a matter of course. Clearly, defense attorneys need to start appearing at doctor depos armed with the literature cited by Dr. Blair and challenge physicians to provide a basis for their unapportioned or minimally apportionment spine CT claims, especially in younger individuals. See also: Intelligent WC Medical Management   This decision may have even broader applications in non-orthopedic cases. We have a wealth of literature about causation of various internal medicine conditions and even psychiatric conditions attributable to genetic, historical and environmental factors that now can more carefully be considered to support apportionment where previously the W.C.A.B. had been rejecting such opinions. The issue of whether there can be apportionment to genetic factors or predispositions would appear to be resolved in the affirmative in this case.

The Global Insurance Accelerator, based in Des Moines, Iowa, has just participated in the fourth Global Insurance Symposium. Two of the big takeaways are that the insurtech movement is maturing, and there is indeed convergence happening between the traditional industry and the entrepreneurial startups that have new ideas and business models. For the insurance industry to advance, there must be a great deal of collaboration between all types of participants in the marketplace. The GIA represents a great example of how this collaboration can be facilitated.

Since its inception, the GIA has promoted collaboration instead of disruption. There is a clear focus on insurtechs and their potential to bring transformative ideas to the industry, but not with the objective of displacing the existing industry players. The model is designed to look for mutual benefit for insurers and insurtech startups. Insurance companies, regulators, investors, academia and other industry experts like SMA are actively involved with insurtechs to guide and support them as they mature.

See also: Insurance Coverage Porn  

The idea is that there is a win-win situation when the strengths of the traditional industry (capital, regulatory experience, scale, risk knowledge, etc.) can be blended with the strengths of insurtechs. The startups bring an entrepreneurial spirit, speed, innovation and new business models to the game. The best ways to partner and take advantage of these combinations require hard work and are enhanced by facilitating organizations like the GIA.

As the transformation of the insurance industry continues, more and more insurers are seeking to actively partner with insurtechs, leverage emerging technologies and institutionalize innovation. At the same time, the insurtech community in general is maturing and has a greater understanding of the insurance industry and the need to collaborate than it had a couple of years ago. This evolving formula creates the potential to provide new ways to deliver the customer experience, improve operational efficiencies and assist customers in risk management and wealth accumulation, resulting in success for insurers, insurtechs, and other market participants.

In my completely and totally unbiased view of the world, the most important news of this past week is that Guy Fraker joined us at ITL as our chief innovation officer. I've been a fan of Guy's for many years—in fact, for years before I even met him. The admiration began because my frequent co-author, Chunka Mui, had identified Guy as one of the leading thinkers on driverless cars and had quoted him in a book we did on the topic. Chunka and I felt like we were very early in identifying the importance of autonomous vehicles—we published the book more than four years ago—yet I realized that Guy was ahead of us in many ways. Then I saw Guy speak at an industry conference and was totally sold.

Guy's long history of identifying winners in the insurance industry will help us greatly as we at ITL, in turn, help you figure out which of the more than 1,000 insurtechs we track at the Innovator's Edge will be important and which will not. 

He will address an even bigger problem, too—many companies think that identifying winning technologies and companies is their biggest issue with insurtechs these days, but there's actually a bigger problem out there. That problem is: Once you identify a promising technology or company, how do you bring that inside your company in a way that produces an important new product or even a new business model?

Every successful business is practically designed to stifle innovation brought in from the outside, and, even if you somehow neutralize those corporate antibodies that let existing business units protect their interests, there are many, many ways to fail at innovation. Guy has seen them all and has often even overcome them. Although he doesn't name names, he has consulted on some of the most successful innovation programs I've seen in the industry. 

He will share his expertise through a program we're calling the Innovator's Studio, as part of the Innovator's Edge. Please join me in welcoming Guy to the ITL team. (His email is here, in case you want to contact him directly.) And please share this note with anyone you think might benefit from a conversation with Guy.

Cheers,

Paul Carroll,
Editor-in-Chief 

Most insurers are using some form of predictive modeling, but it can be difficult to know if it will remain effective over time. Evaluating a predictive model can be tricky because, while there are many ways data can be measured, there is no accepted standard. With the considerable investment that’s involved in predictive analytics, the C-suite understandably wants to hold certain yardsticks to the models and see if they are performing well, and to make sure every stakeholder is using it correctly. Having a forward-looking evaluation can make all the difference when making key decisions, especially if there is trust in the measuring mechanism. Below are three new ways that insurers can evaluate the impact of predictive models, based on a model currently in production for a regional workers’ compensation insurer. The graphs below provide real-time insights that can help predictive modeling avoid becoming a black box, meaning that you can only see the output of the predictive model, not the input or how that output came to exist. The first two graphs separate out 10 equal portions of either premium or policy count, with each portion referred to as a "bin." 1. Monitoring that a model is still current and accurate You need to be able to regularly check if the model you have in production is still up-to-date and providing accurate scores. This graph illustrates the overall model lift on the book for a regional workers’ comp insurer in 2015 and 2016. The insurer’s model is generating a low score on business that’s running very profitably -- the lower-risk bins 1, 2, 3 are approximately 30% better than average. Policies getting a score in the higher-risk bins 8, 9, 10 are all running at twice the average loss ratio. This provides a clear indication of what to target and what to avoid. Bottom line: This model is still current and accurate. See also: Top 6 Myths About Predictive Modeling   2. Tracking the impact of a model on decision-making To realize the benefits of analytics, your staff needs to leverage the insights to make more informed decisions that create improved results. This is a graph of “decision data” from Valen’s InsureRight Manage application. Orange represents policies that were declined, red is quoted and lost, green is quoted and bound and yellow represents non-renewals. It’s evident that declinations are low on the good business -- less than 10% -- and high on the other end, approaching 50% for bin 10. The insurer is not renewing policies in bins 9 and 10 and, most importantly, retaining more than 50% of business in bins 1, 2, 3. Bottom line: Underwriters at this insurer are using the model to make more profitable risk selection and pricing decisions. 3. Measuring if the overall risk quality of a portfolio is improving with a model in production. If you’ve established that your model is accurate and your people are using it, the next question is what kind of impact it’s making to the quality of your portfolio. Are we lowering the risk of our book of business? This view shows the insurer’s risk-selection trends, with an overview of how risk-selection decisions have been influenced by a model and the resulting change to the portfolio. The blue bars represent premium volume by month, and the orange line represents average risk score (i.e., loss ratio prediction) by month. Though there is some variability from month to month, the overall downward trend indicates improvement over the course of the year. There is a small uptick in December 2016, which provides an indication that further analysis is needed. Bottom line: The risk quality of this portfolio is improving, though still requires careful monitoring. See also: Survey: Predictive Modeling Lifts Profits   Not only is it crucial to measure before an implementation takes place, it’s vital to do so both during and after, as well. Predictive modeling only works well if it is aligned with stated business goals, and knowing how to measure that is key to an insurer’s bottom line. With these three new ways to measure, insurers now will have different yardsticks to see whether it is successful and if they are using the actionable insights.

More than a half century ago, Ted Levitt transformed the strategic marketing agenda by asking a seemingly simple question. In his classic Harvard Business Review article "Marketing Myopia," Levitt declared that truly effective executives needed the courage, creativity and self-discipline to answer, "What business are we really in?" Were railroads, he asked, in the railroad business or the transportation business? Are oil companies in the oil business or hydrocarbon or energy business? The distinctions aren’t subtle, Levitt argued, and they subverted how companies saw their futures. Marketing myopia blinded firms to both disruptive threats and innovation opportunities. Levitt’s provocative question remains both potent and perceptive for marketers today. But my research in human capital investment and "network effects" suggests that it, too, needs a little visionary help. Increasingly, successful market leaders and innovators – the Amazons, Apples, Googles, Facebooks, Netflixs and Ubers– also ask, "Who do we want our customers to become?" That question is as mission-critical for insurance and financial services innovators as for Silicon Valley startups. The digitally disruptive influence of platforms, algorithms and analytics comes not just from how they transform internal enterprise economics but from their combined abilities to transform customers and clients, as well. Successful innovators transform their customers. See also: The 7 Colors of Digital Innovation   The essential insight: Innovation isn’t just an investment in product enhancement or better customer experience; innovation is an investment in your customer’s future value. Simply put, innovation is an investment in the human capital, capabilities, competencies and creativity of one’s customers and clients. This is as true for professional services and business-to-business industries as for consumer products and services companies. History gives great credence to this “human capital” model of innovation. Henry Ford didn’t just facilitate “mass production,” he enabled the human capital of “driving.” George Eastman didn’t just create cheap cameras and films; Kodak created photographers. Sam Walton’s Walmart successfully deployed scale, satellite and supply chain superiority that transformed "typical" shoppers into higher-volume, one-stop, everyday-low-pricing customers. Similarly, Steve Jobs didn’t merely “reinvent” personal computing and mobile telephony; he reinvented how people physically touched, stroked and talked to their devices. Google’s core technology breakthrough may appear to be “search,” but the success of the company’s algorithms and business model is contingent upon creating more than a billion smart “searchers” worldwide. The essential economic takeaway is that sustainable innovation success doesn’t revolve simply around what innovations “do”; it builds on what they invite customers to become. Simply put, making customers better makes better customers. Successful companies have a “vision of the customer future” that matters every bit as much as their products and services road maps. Insurance, fintech and insurtech industries should be no different. The same digital innovation and transformation dynamics apply. That means financial services firms must go beyond the "faster, better, cheaper" innovation ethos to ask how their innovations will profitably transform customer behaviors, capabilities and expectations. In other words, it’s not enough to answer Levitt’s question by declaring, "We’re in the auto/property/life insurance business." The challenge comes from determining how insurance companies want their new products, innovative services and novel user experiences to transform their customers. How can insurance companies invest in their customers in ways that make them more valuable? Who are they asking their customers to become? So when insurers innovate in ways that give customers and prospects new capabilities -- like Progressive’s price-comparison tools and Snapshot vehicle-usage plug-ins or Allstate’s mobile-phone-enabled QuickFoto claims submission option -- they’re not just solving problems but asking customers to engage in ways they never had before. Who are these companies asking their customers to become? People who will comparison shop; allow themselves to be monitored in exchange for better prices and better service; collaboratively gather digital data to review and expedite claims. These are but the first generation of innovation investments that suggest tomorrow’s customers will do much more. This is of a piece with how a Jeff Bezos, Steve Jobs, Mark Zuckerberg or Reed Hastings innovates to make their customers -- not just their products -- more valuable. Today’s Web 2.0 "network effects" business model — where a service becomes more valuable the more people use it — are superb examples of how smart companies recognize that their own futures depend on how ingeniously they invest in the future capabilities of their customers. Their continuous innovation is contingent on their customers’ continuous improvement. Call it “customer kaizen.” How rigorously and ruthlessly fintech, insurtech and insurance companies champion this innovation ethos will prove crucial to their success. Being in "the blockchain business" is radically and fundamentally different than asking who we want our blockchain users to become. See also: ‘Digital’ Needs a Personal Touch   Giving better, faster and cheaper advice on risk management via digital devices is different than fundamentally transforming how customers perceive and manage risk. It’s the difference between “transactional innovation” and innovation based on more sustainable relationships of mutual gain. The insurance industry needs to transform its innovation mindset. Start thinking how innovations make customers and clients more valuable. If your innovations aren’t explicit, measurable investments in your customers’ futures, then you are taking a myopic view of your own. Today’s strategic marketing and innovation challenge is how best to align "What business are we in?" with "Who do we want our customers to become?"