The most active players in the fledgling but fast-growing cyber insurance market are hustling to differentiate themselves. The early adopters and innovators are doing so by accelerating the promotion of value-added services—tools and systems that can help companies improve their security postures and thus reduce the likelihood of ever filing a cyber damages claim. As more businesses look to purchase cyber liability policies, insurance sellers are striving to dial up the right mix of such services, a blend that can help them profitably meet this pent-up demand without taking on too much risk. The incentive is compelling: Consultancy PricewaterhouseCoopers estimates that the cyber insurance market will grow from about $2.5 billion in 2014 to $7.5 billion by 2020. European financial services giant Allianz goes a step further with its prediction that cyber insurance sales will top $20 billion by 2025. This anticipated growth in demand for cyber liability coverage—coupled with the comparatively low level of loss claims—has created strong competition in this nascent market. The Insurance Information Institute estimated last year that about 60 companies offered standalone cyber liability policies. In total, more than 500 insurers provide some form of cyber risk coverage, according to a recent analysis by the National Association of Insurance Commissioners. “There are quite a few players, so they are looking for ways to differentiate themselves and find competitive edges,” says David K. Bradford, co-founder and chief strategy officer for Advisen, an insurance research and analysis company. Insurance companies make adjustments Insurance carriers hot after a piece of this burgeoning market are beginning to offer value-added services to make their cyber offerings stand out. See also: 8 Points to Consider on Cyber Insurance   Rather than growing these services in-house, most are partnering with vendors and consultants that specialize in awareness training, network security and data protection. Services that boost the value of cyber policies are being supplied for free, or offered at a discount.  Typical cyber insurance valued-added services include:

• Phishing and cyber hygiene awareness training
• Incidence response planning
• Security risk assessments
• Best practices web portals and software-as-a-service tools
• Threat detection services
• Employee and customer identity theft coverage
• Breach response services

One measure of value-added services gaining traction comes from the Betterley Report, which recently surveyed 31 carriers that offer cyber policies. Betterley found that about half offered “active avoidance services,” while nearly all offered some sort of pre-breach planning tools. Rick Betterley, president of Betterley Risk Consultants, which publishes the Betterley Report, says there is still a long way to go. “There’s much more that can be done to help the insureds be better protected,” he says. Betterley is a big proponent of adding risk-management services to cyber policies. He calls the approach Cyber 3.0, adding that it’s akin to the notion of insuring a highly protected risk in a property insurance policy. Cyber value-added services, he says, are the equivalent of fire insurance companies requiring sprinklers. “It’s not required that insurance companies provide the services, but it’s required that they help insureds identify what services are likely to generate a reduction in premiums,” Betterley says. Sector faces new challenges That said, the cyber insurance sector is still finding its way. With auto crashes, fire or natural disasters, losses are well defined and fully understood. Cyber exposures, by contrast, are hard to pin down. Network vulnerabilities are extremely complex and continually evolving. And historic data on insurance claims related to data breaches remains, at least for the moment, in short supply. An added challenge, Betterley says, is that insurance companies are unable to satisfactorily measure the effectiveness of security technologies and services in preventing a data breach. Advisen’s Bradford agrees. “It’s a rapidly evolving area that changes day to day, and underwriters are definitely wary of recommending a particular vendor or approach,” he says. Eventually, the insurance industry will figure out how to make meaningful correlations and separate the wheat from the chaff. “In bringing in these value-added services, we can help shore up some of those areas where we’re seeing human error,” observes Dave Wasson, cyber liability practice leader at Hays Cos., a commercial insurance brokerage and risk management consultancy. “We’ll be at a point where we’ll know what makes a difference, and we can put our money, time and efforts into those solutions.” Eric Hodge, director of consulting at IDT911 Consulting, part of IDT911, which underwrites ThirdCertainty.com, concurs. One ironic result of the recent spike of ransomware attacks aimed at businesses, Hodge says, is that more hard data is getting generated that is useful for calculating loss profiles. See also: Another Reason to Consider Cyber Insurance   Along the same lines, settlements of class-action lawsuits related to breaches of high-profile retailers, such as Target and Sony, is helping amass data that will help the industry flesh out evolving actuarial tables. “Losses from cyber attacks and data breaches are becoming easier to quantify,” Hodge says. “And market forces are absolutely lining up to reward the wider use of these activities. It’s harder to ignore the fiscal argument for an insurer to go the extra mile in helping the insured organizations make sure that a costly breach doesn’t occur.” AIG blazes trail One notable proponent leading the way is multinational insurance giant AIG, which is nurturing partnerships with about a half-dozen cybersecurity vendors. AIG services—some of which are offered to policyholders at no cost—range from threat intelligence and cyber risk maturity assessments to active detection and vulnerabilities assessments. RiskAnalytics, one of AIG’s partner vendors, provides threat intelligence services, including a service that detects and shuns blacklisted IP addresses. Any AIG insured with a minimum $5,000 policy can participate at no additional cost. The company’s partnership is exclusive to AIG, and appears to be very popular. “We’re bringing in multiyear contracts, and the average sales price is on an impressive trajectory,” says RiskAnalytics Chief Operative Officer Kurt Lee. “It’s all born out of (customers) using that (introductory) service through the policy.” Recognizing the trend, more vendors are seizing the opportunity to market their services to insurance carriers. Vendors are willing to jump through the many hoops because a partnership with an insurance company is an opportunity to get a soft introduction to a potential client, says Mike Patterson, vice president of strategy at Rook Security, a managed security services provider (MSSP) that is reaching out to carriers. Dismantling roadblocks As with any new approach, broad adoption of cyber insurance value-added services isn’t without hurdles. One major obstacle is the “’this-isn’t-how-we’ve-always-done-it’ way of thinking,” says IDT911’s Hodge. “It’s like trying to change our election processes—people resist altering a system that has been in place for a couple hundred years.” Another barrier is cost. Insurance companies tend to reserve free or discounted added services for heavyweight clients that spend small fortunes on annual premiums, says John Farley, vice president and cyber risk practice leader at insurance brokerage HUB International. “Carriers can’t give away a lot of resources, so the smaller premium payers are not getting a lot of these services,” Farley says. “But if they can streamline and automate resources and figure out how to get customizable, usable information to the insurance buyer, that insurance carrier will probably stand out.” Brian Branner, RiskAnalytics’ executive vice president, says that’s exactly one of the benefits that AIG derives from their partnership. “If we can get the insureds to use the services we provide, we should lower AIG’s loss ratio because they’ll be safer organizations, and AIG should receive less claims,” he says. Hidden costs of a breach can affect a large enterprise for years, and prove catastrophic to a small business. So insurance companies in the vanguard are looking to find business clients that are taking information security seriously. See also: The State of Cyber Insurance   As more companies buy cyber policies, and use any attendant services, the result could be a halo effect, says IDT911’s Hodge. “This is certainly something that the insurers are counting on,” Hodge says. “A more secure buyer is a lower actuarial risk to the insurer.” Meanwhile, policyholders should steadily become better equipped to securely do business in an internet-centric economy riddled with evolving exposures. Hodge says: “In my experience, the buyer is often pleasantly surprised by the improvement that can come about quickly in terms of knowing their risk, being compliant with their industry standards and being able to indicate to the marketplace that they are taking good care of their customer’s information.” This post originally appeared on ThirdCertainty. It was written by Rodika Tollefson.

In 2016, there were about 190 million registered passenger vehicles on the road in the U.S. More than 15 million auto accidents occurred, involving 18.5 million vehicles. Stated another way, about one out of every 10 cars on the road was involved in an accident. Most were minor, but others involved serious injury or even death. Sadly, there were 40,200 traffic fatalities in 2016. A traffic accident is unnerving and disorienting. A battery of questions immediately appear – how much is this going to cost me? – was this my fault? – could I have prevented it? – how will I get where I was going? – who should I notify first? – is anyone hurt, including me? and so on. Historically, a police officer would typically show up, review the scene, ask the drivers several questions and direct the vehicles off the roadway to a safe location or, if necessary, call a tow truck or an emergency vehicle. See also: Predictive Analytics, Text Mining, And Drug-Impaired Driving In Automobile Accidents   Then you would need to follow the often frustrating, protracted claims and repair process; call your agent or carrier; get the car to a body shop; arrange a rental car; make numerous calls to the shop and the adjuster to see when your car will be ready; and then reach into your pocket to pay your deductible even after paying your insurance premiums faithfully for all those years. But things are rapidly changing, and this scenario will soon be a thing of the past. For one thing, police in many urban markets are no longer responding to auto accident calls. Law enforcement budgets are shrinking, and officers are busy handling higher-priority tasks such as criminal investigations. So don’t expect the police to show up after an accident in the future. Insurance companies are addressing challenges by using new technologies that make the auto claim and repair process simpler and faster. Many carriers offer smartphone apps that include claim reporting capabilities enabling drivers to take photos or videos of the accident damage at the scene (or later from home) and upload them to the carrier, which assesses the damage and schedules the repair, often in minutes. Some companies are paying drivers electronically on their smartphones and closing out the claim in mere hours. However, for those who believe that younger policyholders prefer technology to human contact, the recent J.D. Power 2016 U.S. Auto Claims Satisfaction Study reveals that only 7% of millennials prefer digital channels to report their claims and concludes that technology cannot fully replace humans during the claims process, even among millennials. The one missing piece is what happens immediately after an accident occurs and before your insurance company starts to handle your claim. Not everyone has a smartphone, is tech-savvy enough or understands the importance of reporting the accident immediately to the insurance company. Auto accidents can be traumatic. Many people can be involved, in your vehicle and in other vehicles. Differences of opinion between drivers about the facts or what caused the accident are not unusual. Without the presence and authority of a police officer, people are left to cope with all of these issues on their own. And, because almost 80% of vehicles damaged in auto accidents are safely driveable, there’s no logical reason to have to stay at the scene once your information is exchanged with the other driver(s). To address these new realities, innovative programs have evolved to bridge the gap between the accident and the claim report. One such solution is Collision Reporting Centers (CRC). It provides drivers with assistance, advice and the support they need at this critical time. The CRC is a partnership between local police departments and privately managed reporting centers. The model initially emerged in Canada 20 years ago when the insurance industry and police joined forces to solve a mutual challenge. Today, the operation manages 32 Collision Reporting Centers in partnership with 53 police departments across Canada and serves 80% of the Canadian auto insurance industry. Recently, the operator expanded into the U.S., opening its first Collision Reporting Center in Virginia in the fall of 2016, with plans to open many more soon. See also: The Sharing Economy and Auto Insurance   At the Collison Reporting Center, drivers involved in an accident provide their individual accounts of what happened and other information while professional staff take digital images of any damage. The information is reviewed by an on-site police officer and is immediately sent to the driver’s insurance company, where a claim is initiated and the claim is processed. Drivers are provided with a customized instructional guide from their own carriers describing what to do next and a private area where they can make phone calls to the insurance company or family members. The Collision Reporting Center provides a comfortable and safe environment, eliminating the need for drivers to wait on the roadway. As we move toward self-driving automobiles and the elimination of all accidents,, we will see many innovative accident and claim management programs emerge that can bridge the gap between the auto accident and resolution of the claim process. Collision Reporting Centers are an excellent solution to these needs – they provide personalized customer service and a human touch with the power of technology making the auto accident reporting process as non-intrusive as possible on our busy lives.

This year, mid-sized insurers continue to face significant challenges, but these challenges can be treated as opportunities for organizations to distinguish themselves from competitors. As the digital economy continues to spur change, insurers would be wise to get in front of the curve by taking steps to improve underwriting and increase profitability. Here are five questions mid-sized insurers should ask themselves to help guide their business transformation. 1. How well do we leverage our data? The days of the actuary as the primary data interpreter are waning as data analysts with access to an ever-increasing set of tools are leaving actuaries in their wake. Insurance companies are starting to take notice, and those that are leveraging their data to make informed decisions are enjoying faster growth and increased profitability. A data innovation strategy must come from the top of an organization and go down. However, the scope of the endeavor and the multitude of choices can be daunting. For example, a predictive model can provide great insight, but it may be more prudent to design a model that enhances your organization’s decision-making capabilities rather than one that replaces current methods. Management information, underwriting, pricing, claims management, claims reserving and actuarial reserving should all be informed by your organization’s data, which makes developing and implementing a smart data strategy imperative. See also: A Closer Look at the Future of Insurance   2. Is regulation an opportunity or an obstacle? Regulation is useful when it promotes strong digital protection standards, the advantages of which are best illustrated when the inevitable cyber breach hits the press. Your organization may not be directly subject to General Data Protection Regulation or New York State Department of Financial Services (NYDFS) cybersecurity regulations, but the standards are illuminating, nevertheless. At a minimum, your firm should be reviewing compliance standards and determining which ones it should be implementing as a function of industry best practices. Since the National Association of Insurance Commissioners currently produces a less-comprehensive standard, a company may someday find itself on the defense, arguing it did only what was required. NYDFS standards could easily become the de facto standard, especially over the next few years as third-party vendors doing business with New York-based financial institutions will need to ensure compliance with NYDFS requirements. The reality is that data is an asset, and insurance companies rely heavily on data to run their businesses. Insurers will be collecting and using even more data in the future. They must take steps to protect this valuable, growing business asset and be prepared to adopt the highest standards of protection for their insureds. 3. Will our organization be the next to be disrupted? For the past few years, venture capital dollars have been flowing into insurance disruptors such as Cyence, Metromile and Lemonade. Certainly, we won’t see complete disruption overnight, but small changes will likely occur more frequently than expected, and, over time, the effects will have a significant impact on current business models. Your company could be disrupted by a current competitor using advanced machine learning algorithms in the underwriting process. Or perhaps an insurtech startup will begin to capture all your new insurance prospects through its new mobile app and lower price point, halting your growth. Similarly, consider non-insurance-specific disruptions, such as developments in the “Internet of Things.” What if a new device is rolled out by a competitor that protects its insureds from meaningful injuries by using sensors to alert workers and their employers of dangerous conditions — providing a distinct advantage to their workers’ compensation insurance rates. Will your firm be the disruptor or the disrupted? Regardless of the answer, what is your firm doing to prepare for the impact? 4. Are we transferring risks to the capital markets? The reinsurance market has been transformed over the past decade by insurance-linked securities (ILS), alternative reinsurance instruments like catastrophe bonds and collateralized reinsurance contracts, whose value is affected by an insured loss event. ILS investors are typically willing to accept a lower rate of return than traditional reinsurance companies because of the diversifying effect on the insurance-linked investor’s broader portfolio. That incentive has drawn more investor capital to the reinsurance market, putting pressure on reinsurance rates and even causing reinsurers to start their own investment funds. And while long-term relationships between insurers and reinsurers have tremendous value, your organization should be looking at all efficient opportunities to lay off excess risk and protect your company from earnings volatility. See also: Can Insurance Be Made Affordable?   5. Why do we need a digital innovation strategy? For many, innovation is inherently uncomfortable and volatile. Technology is changing rapidly, and the insurance industry is already starting to evolve. Managing an insurance transformation process triggered by a digital revolution will not be easy, but it must begin with identifying your current value proposition: Why do your clients value your insurance? Identify what you do well as an organization and what you can improve upon. By incorporating your starting point into a change plan that recognizes current strengths and explores future possibilities, your firm will be better prepared to navigate the coming industry transformation and will be better positioned to thrive on the other side of change.

President Trump's speech to a joint session of Congress on Feb. 28 covered his commitment to repeal and replace the Affordable Care Act. What did he say, what did he mean and what will be the impact on the ACA? What He Said The president said, “I am also calling on this Congress to repeal and replace Obamacare with reforms that expand choice, increase access, lower costs and, at the same time, provide better healthcare.” Then, he proclaimed, “We must act decisively to protect all Americans. Action is not a choice — it is a necessity. So I am calling on all Democrats and Republicans in the Congress to work with us to save Americans from this imploding Obamacare disaster.” He cited five principles that “should guide the Congress as we move to create a better healthcare system for all Americans. “First, we should ensure that Americans with pre-existing conditions have access to coverage and that we have a stable transition for Americans currently enrolled in the healthcare exchanges. “Secondly, we should help Americans purchase their own coverage through the use of tax credits and expanded Health Savings Accounts — but it must be the plan they want, not the plan forced on them by the government. “Thirdly, we should give our great state governors the resources and flexibility they need with Medicaid to make sure no one is left out. See also: What Trump Means for Health System   “Fourthly, we should implement legal reforms that protect patients and doctors from unnecessary costs that drive up the price of insurance — and work to bring down the artificially high price of drugs and bring them down immediately. “Finally, the time has come to give Americans the freedom to purchase health insurance across state lines — creating a truly competitive national marketplace that will bring cost way down and provide far better care.” What He Meant I hesitate to try interpret what the president means when he, well, uses words. We’re talking a moving target here. However, given the gravity of the speech, I assume what he said was thoroughly vetted and intentional. So, I’ll go try to interpret the president’s message. Full disclosure, however: Republicans are already fighting over the meaning of his five healthcare reform principles, so there’s clearly room for differing interpretations. Pre-existing Conditions: In the past, Trump has expressed the desire to keep the ACA’s guarantee-issue provisions that prevent insurers from declining coverage because of a consumer’s health status. Last night, however, he used different wording, stating that pre-existing conditions should not bar Americans from having “access” to coverage. These are two different things. The ACA requires that carriers accept consumers, even those with expensive medical conditions, into any plan for which the consumer is eligible. Calling for access means that, as an alternative, these Americans could be shunted into high-risk pools or plans designed specifically for high-cost insureds. Offering access to high-risk pools means Americans with existing medical conditions would have fewer choices and limited benefits and would pay higher premiums than their healthier neighbors. In testimony before a California legislative committee, I once referred to high-risk pools as “a ghetto of second-hand coverage.” The author of the legislation establishing the state’s pool sat on the committee. Oops! But I stand by my description. The president's indicating a willingness to accept high-risk pools was good news for House Speaker Paul Ryan, who supports them. However, there are millions of Americans with pre-existing health conditions. How will they react to being removed from the “normal” market? And how will they, and their family and friends, express those feelings at the polls? Tax Credits and HSAs: Health Savings Accounts have long been a staple of Republican healthcare reform proposals. In a draft of Speaker Ryan’s Obamacare replacement bill, tax credits are the primary means of making health insurance premiums affordable. Conservatives have pushed back against tax credits, calling them a new, non-means-tested entitlement program. The president’s backing of this approach will give the speaker some leverage in negotiations with these members of the GOP caucus in the House. Medicaid: President Trump’s call for giving governors more say in how their states implement Medicaid seems to support efforts to move federal payments for the program into block grants, which aligns the White House with Republicans in the House. Currently, states receive funds based on Medicaid enrollment (subject to a host of adjustments for a variety of factors, but let’s keep it simple for now). Block grants would give states a fixed amount to spend within very broad federal guidelines. This approach enables the federal government to cap their spending on the program and leaves it to states to manage the program. Lowering the Cost of Care: Too often, the debate over health insurance affordability ignores a harsh reality: The major driver of health insurance premiums is the cost of medical care. Most of the president’s principles concerning healthcare reform focus on healthcare coverage. But he’s also seeking to lower costs through malpractice reform and through taking steps to drive down the cost of prescriptions. That the president is addressing medical expenses at all is a good thing. Let's hope that, as a replacement to the Affordable Care Act moves through Congress, there will be an even greater emphasis placed on reducing the cost of medical treatments and services. Interstate Sales: Trump and many Republicans invoke letting consumers buy out-of-state coverage with the same passion as Hogwarts students learning their first spells. Republicans proclaim out-of-state coverage will increase competition and lower premiums across the country. Like that school of witchcraft and wizardry, however, this proposal is, unfortunately, a fantasy. I’ll write a post on why soon, but for now consider just one factor: Virtually all health insurance policies sold today rely on discounts offered by “in-network” doctors, hospitals and other providers of care. Plans sold in State A may look good to a consumer in State B, but if that carrier doesn’t have a strong network in State B, what good is that policy? The Impact Let’s assume I’ve interpreted what the president said correctly. What will be the impact of his position on whatever Obamacare repeal-and-replace bill emerges from Congress and lands on his desk to sign? See also: Is the ACA Repeal Taking Shape?   First, it is very significant that the president’s healthcare reform principles align as closely as they do with those of Speaker Ryan. This gives the speaker a powerful card to play when herding his splintered caucus behind his preferred legislation. Second, it seems to signal that the White House is ceding the responsibility to develop an ACA replacement to Congress. The president carved out no bold vision for what he wants, nor are his principles in conflict with longstanding Republican positions. The only exception is his call for federal action to lower prescription drug costs. But would Trump veto a bill that meets all of his principles except for this one? Doubtful. Third, we’re only at the beginning of a long, arduous march to reforming or replacing the Affordable Care Act. Many more parties will be heard from, including Senate Republicans, insurers, pharmaceutical companies, doctors, hospitals and other special interest groups. The public will have a lot to say on this subject, too. Plus, any reform package will likely require support from Democrats, and negotiations for those votes have not yet begun. As I’ve written previously, what Republicans are putting forward now may bear only a passing resemblance to the healthcare reform we will get at the end of what will be a very long, messy slog. This article was originally posted on Alan Katz's blog.

The rise of artificial intelligence is the great story of our time. Leaving the laboratory after decades in the making, artificial intelligence, or AI, is infusing itself into many aspects our daily lives – from homes and phones to cars and offices. Machines are now able to perform tasks that previously required human intelligence across various industries. Insurance, once perceived as highly resistant to change, has now accelerated the race for innovation. Placing AI at the forefront of the innovation agenda, insurers have been separating the hype from reality to reinvent business models. Insurance has accepted the fact that AI isn`t coming -- it's here. Companies are racing to apply artificial intelligence to find a 10X improvement. The following case studies provide a first-hand look at how today’s pioneering insurers are advancing strategic growth and transformation with artificial intelligence: AI in Consumer Engagement Insurers are constantly seeking opportunities to enhance the trust and relationship with customers, as the industry has always suffered from a lack of frequent and direct engagement. Today, AI is increasing being applied to collect large volumes of real-time data at very high velocity, recognize patterns of customer behavior and engage in deeper interactions for a more personalized and engaging overall experience with customers. As AI is vying to become an indispensable part of customers' everyday life, intelligent personal virtual assistants like Amazon’s Alexa, Microsofts’s Cortana, Google’s Now, Facebook’s M and Apple’s Siri are evolving to learn customers' preferences and behavioral patterns and then making recommendations and potentially acting on behalf of the customer. Using just voice services, customers are now able to interact with insurers through a more intuitive channel, from asking everyday insurance questions to getting an insurance quote, or simply navigating the insurance process. See also: Insights on Insurance and AI   AI bots' are becoming the new user experience (UX). Chatbot technologies are engaging customers on websites, mobile apps and messaging services such as WhatsApp, Facebook Messenger and SMS using natural language. The advancements in conversational AI agents, including their ability to adapt to speech patterns, vocabulary and personal preferences, have driven insurers to take things to the next level with full conversational interactions powered by AI bots throughout the customer journey. From a customer perspective, it`s truly a game-changing experience as we could now simply ask a question through speech or text and have insurers resolve problems or attend to an inquiry, at any point in time from any digital interfaces (including websites and mobiles apps) instead of navigating our way around complicated websites or time-consuming contact centers. Some insurers have successfully launched Alexa-integration, allowing customers to quickly access important information such as policy premium status, as well as make payments and recommend additional coverage based on lifestyle changes. Although these advancements won`t be able to replace an agent in the short term, AI agents are learning at unprecedented speed, and this is just scratching the surface of what's coming. A recent Gartner study predicts that, by 2020, the customer will manage 85% of its relationship with an organization without human interaction. While we know analyst projections may at times be over-optimistic, the reality is that AI likely will be the basis for competing on customer experience from here onward. There’s no turning back. AI in Automated Advisory Some insurers will leapfrog the innovation race with automated insurance advisory. With robo-advisers, insurers can now offer real advice without the need for any human intermediaries, anytime and anywhere. The complexity of insurance often frustrates customers and leads to mistrust. It is also hard to decouple decisions from emotional and social reasons or agent bias. Robo-advisers can build a consolidated financial portfolio, often aggregating data from various insurers and financial providers including life and health coverage, annuity accounts, savings, brokerages, etc. Robo-advisers then combine behavioral and external data to simulate future risk preferences, running future scenarios to infer cradle-to-grave financial plans and investment management advice. AI in Underwriting and Claims Management Increased automation in claims management and underwriting holds the promise of delivering a more customer-centric experience. Today, AI-based agents are building predictive models for processing and settlement of claims expenses and high-value losses with far lower costs and heighten levels of efficiency. Tasks that took typically months are now accurately achieved in a matter of minutes, allowing insurers to focus on value-added activities. In early 2017, tongues started wagging when Lemonade used AI to settle a claim in three seconds and Fukoku Life of Japan displaced 34 employees with IBM’s Watson Explorer AI, for a 30% productivity increase. See also: Seriously? Artificial Intelligence?   Software developed using machine learning gathers all the details that underwriters need, while also identifying hidden risks. Insurers are racing to routinize more work with artificial intelligence automation in core insurance business process areas such as fraud detection, policy services and contract administration, claims administration and risk compliance. We foresee increased application of artificial intelligence in any task that’s high-volume and highly repetitive and demands low human judgment, reaping sizable costs savings. AI in Pricing Risk Traditionally, insurers use generalized linear models (GLM), with predefined variables such as age, sex, location and occupation class, then fitted with additional factors/variables for predictions. Today, modern machine learning techniques have increased speed, sophistication and accuracy, accelerating the adopting of usage-based and behavior-based pricing. Motor, alone, has seen a constant stream of telematics data ingested into machine learning models; driving patterns are not only used for accurate pricing of risk but also to prevent accidents by alerting drivers with behavior tips and with information about traffic and road conditions. Health insurers are capitalizing on wearable technologies such as Fit Bits and Jawbone to drive individuals toward better health. By linking incentives to customers with healthy lifestyle characteristics such as regular exercise, walking, running, cycling, swimming and a healthy body mass index (BMI), insurers are lowering risk -- and premiums. With shorter modeling response time, increased actuarial simulation and the capability to learn, machine-based pricing is marching toward becoming an industry standard much quicker than we anticipated. The Future The work in artificial intelligence is just beginning. Insurers are aggressively exploring opportunities. See also: Convergence: Insurance in 2017   Winners will be determined by the velocity and scale of their use of AI and by the ability to go beyond pure business results. After all, the fundamental promise of an insurer is to help customers live their lives with peace of mind -- healthier and safer.

Recently, I wrote an article where I outlined a simple modeling framework I use when I try to predict how a new insurance product or new insurtech startup is likely to perform. In this article, I will walk through an example to give you a play-by-play on how to put this simple mental model to use. Can Peer-to-Peer Insurance Succeed? Peer-to-peer business models really came into their own in the financial arena, where companies such as Prosper and Lending Club were able to create platforms that allowed individuals to loan funds directly to one another. As a Prosper investor, I still recall how neat it was that I could loan a family $25 and be part of a pool of like-minded people who were looking to help others and make a little bit more money than a bank account. (Disclaimer: You can lose your money, too. I have had several borrowers default, and you will need to make up for it on those accounts that don’t default). Investors, always a group looking for the next unicorn, have applied principles of P2P to others businesses, as well, such as car sharing and file sharing. Even digital currencies such as Bitcoin are P2P-based. Not surprisingly, investors and entrepreneurs are looking into whether P2P would work well in the seemingly tattered insurance industry. Companies such as Lemonade, Guevara and Friendsurance are already selling policies and making a name for themselves. InsNerds.com was very lucky to have Dylan Bourguignon of So-sure insurance, a complete P2P insurer, write an article for us on the topic (be sure to read this article if you want a breakdown from the point of view of an insurer). See also: 3rd Wave of P2P Insurance   Let’s walk P2P insurance through the model framework and see what all stakeholders need to see.

Exposure

The exposure component is the one that deals with claims; past, present and future. The P2P model looks to reduce the frequency and severity of losses by reducing the desire among policyholders to make bogus claims. Because policyholders in a P2P model have some affiliation with each other, the hypothesis is that this connection will prevent policyholders from harming their peers. This seems intuitively possible. If it is true, what would that mean to the insurance coverage? Fraud is estimated to add 10% to losses in property/casualty insurance. That would equal approximately $34 billion a year! Fraud is most typically investigated in workers' compensation, auto and health insurance (not necessarily in this order). Traditional insurers spend a lot of money rooting out fraud. Big data vendors such as Verisk and Valen have commercial models available for both workers' compensation and auto -- even homeowners insurance isn’t immune. Reports of widespread false claims after Hurricane Katrina were documented. The difference between what traditional carriers do and what P2P offers is that P2P subtly promises to remove the fraud BEFORE it happens, while today’s fraud is only caught during the fraud or afterward. If P2P can fulfill this promise, there is a tremendous amount of value it can provide to the market. If I were an investor, I would look for companies that can show that their P2P network has very tight ties. As the network gets larger, it seems unlikely that the strong ties can be maintained, and you begin to lose the ability to have shame or other social pressures keep fraud under control. Any technology that can strengthen the ties to large portfolio scale could be immensely valuable. I’ve written about Lemonade, and while the company no longer considers itself P2P, the initial “technology” was to group like-minded homeowners or renters together, and give any excess year end profits to a charity of their choice. If you are following along with where I am going with this, you may see some of the flaws in the model. First, homeowners insurance isn’t in the big three for fraud, so the potential benefits are not nearly as big as they would be in auto or workers' compensation. Second, I didn’t really see any proprietary technology that could give Lemonade a leg up on any competitors. From all of the press releases, the P2P networks seemed easy to copy, as is Lemonade's charity angle. That Lemonade dropped its P2P marketing seems to have confirmed that that part of the business model probably would not have produced worthwhile value. As an investor, I’d like to see a direct line to fraud reduction and truly big potential to drop the investments now being committed to detecting fraud, post-event. P2P needs to bring some new type of configuration of insurance that meets needs not currently being met. The insurers mentioned above are tackling industries with heavyweight competition. I see an opportunity for P2P to unite common insureds in a way that provides coverage or risk reduction in areas where coverage is difficult to obtain or just doesn’t exist. In California, earthquake deductibles are very large. It seems reasonable that property owners could unite to buy coverage to protect each other against losses arising from the combined deductibles. There’s a similar case to be made for flood. I imagine these P2P insurers almost acting as public captives covering very niche risks for similar insureds. Distribution The distribution component of the framework deals with how companies market to and sell to customers. In the P2P model, there is a heavy emphasis on the social element, like-minded insureds telling other like-minded insureds to join. Most P2P insurers are direct to consumer. Thus, P2P insurers must depend heavily on their insured network to do much of the heavy lifting for them, whether that’s through word of mouth or via social media. If I were an investor looking into this area, I’d want to see some proof of concept that value can be created here to some scale. Brokers get paid well for a reason: it is expensive to find and maintain insurance customers. Advertising on Facebook is more expensive than you think, and, if you are using Adwords, you are competing against GEICO, State Farm and other large insurance companies. Good luck with that. See also: Is P2P a Realistic Alternative?   Ultimately, I think distribution will directly depend on the product development and what was discussed in EXPOSURE above. P2P insurers must be able to differentiate themselves. Take Lemonade. As a home and rental insurer, is Lemonade different than a traditional home insurer? Yes. Is it 10x better? I don’t think so. The product is nearly identical; only the customer experience is truly different. It is exceptional, but will that alone be enough to drive customers to buy policies? I think it will, but not by enough of a margin for Lemonade to deliver Uber-like returns. That’s not happening. Capital Insurance is a capital-intensive business. To start a plain-vanilla company in most states requires $5 million to $10 million in surplus capital. This is capital that is above and beyond capital that is used to pay for claims. That capital must be invested into the highest-quality securities (generally government bonds and AA corporates). Any startup that is more complicated than “vanilla” needs more capital. And any expansion into other states will require still more capital.All of this capital is needed even if you only have one on your books and even if you are ceding all of your business to reinsurers. Startup insurers are behind the eight ball right from the get go and are at a massive disadvantage when compared with the big guns. State Farm has surplus in the tens of billions of dollars. Those are funds State Farm can invest and through which it can generate investment income that can be used to offset other costs in their. Startup insurers can’t do that and are very vulnerable to any large loss and thus require heavy partnerships. And that isn’t cheap! For startups, cost of capital is very high, and those costs must be reflected in the premium. This is why Lemonade’s expansion across the U.S. is head-scratching. Though Lemonade is not a P2P, as a startup much of its newly acquired capital for this expansion is sitting in bonds. Unless there is some other news that we are not privy to, using B-round capital as a portfolio does not seem to be a great use of funds. This is a lesson for other P2Ps. An entire P2P strategy can collapse if the capital structure is not maximized. If I were an investor looking at this field, I’d want the P2P to be partnering with a capital source that already has scale, so that the P2P can focus on product differentiation and distribution. Operations P2P insurers have a terrific advantage in this area. Being born in the digital age means that these insurers can skip over legacy systems and go directly to an entirely modern platform. I would want to see seamless integration and movement of data between marketing, binding, policy issuance, accounting and claims management. I would want to see the ability to easily capture data at the front end, augment data during the lifecycle and put that data to work in integrated plug-and-play models. See also: P2P Start-Ups From Around the World   For P2P insurers, Lemonade is providing the blueprint for how this should be done. (By the way, big-time kudos to Lemonade for being so transparent and allowing curmudgeons like me to nitpick the business model). Lemonade’s integration of chatbots to eliminate human intervention in the purchasing of and the filing of claims seems to be an operations winner thus far. In this model, we should expect to see overhead expenses drop. Expenses associated with losses should also drop. If the P2P was not able to show significant decreases in expense, then something is terribly wrong. Summary I love the concept of P2P. But I don’t think it will ultimately become a great way to invest venture funds. I just don’t think the returns will justify the risks. P2P insurers should be able to provide significant value in operations. If they can differentiate product development, they should be able to attract customers who would be interested in their products. BUT…I think P2P insurers are not going to find very large markets for their niche products. Because of this, distribution costs will be higher than they expect, and they will suffer from capital costs unless they form the right partnerships. Those really inexpensive Lemonade rates likely won’t last. P2P prices may not end up cheap as capital and distribution costs overwhelm advantages obtained in potential decreases in fraud costs and operational efficiencies. P2P insurance is full of potential, and as a model, will behave more like traditional MGAs. The potential for supersized returns is not high. This article first appeared at InsNerds.com.

Building a business around speed and convenience is nothing new. Fast food drive-thrus, cell phones and FedEx overnight delivery services were just some of the predecessors to today’s Ubers, apps and same-day Amazon orders. But in most of these cases, purchase decisions were based upon simple factors — “I’m hungry,” or “We need delivery of a legal document,” or “Of course it would be nice to be able to make a call from my car.” There were other services for which people understood that immediacy wasn’t an option. Many financial decisions took time. If you wanted to earn a little extra interest by using a certificate of deposit instead of savings, you would have to wait months or years for maturity. Securing life insurance was a multi-week (sometimes multi-month) underwriting process. Applying for a home loan with multiple credit and background checks took time. For the most part, people accepted these elongated processes and delays with resigned and good-natured patience. This was life. Important decisions required time, not only in the preparation, but also in the education and execution. Two hours with a life insurance agent would allow you to learn about all of the products available and understand their complexity, and it would help the agent to fit products to your needs. You valued the time spent learning, understanding and choosing based on the trusted relationship with your agent. The convergence of generational shifts and technological advancement created a new mindset that rewrote expectations and priorities for many. Patience is no longer always considered a virtue. Insurance relationships are no longer always valued. Time-crunched people seek time-saving services. Value is seen in immediacy, uniqueness and ease. See also: Innovation: a Need for ‘Patient Urgency’   Enter the new generation of insurance companies redefining the insurance engagement. Lemonade, TROV, Slice, Haven Life and others who are redefining speed and value to a new generation of buyers … are placing traditional, existing insurers on notice.  From purchasing a policy in less than 10 minutes to paying a claim in less than three seconds … speed and simplicity are the new competitive levers. Out of necessity, this has changed an insurer’s view of competition. Insurers used to know their competitors. They understood their distinctive value propositions. They debated on what were the real product differentiators. Insurers understood the reach of their agents, their geographic limitations and the customer and agent loyalty they could count on because of their excellent service. While all of these factors still guide insurance operations, the competitive landscape has shifted to different factors critical to acquiring and retaining customers. Insurers are feebly groping for just a tiny bit of space in consumer minds —enough to plant the seed of need and just a little more to water the plant into engagement and completing a transaction — because today’s consumer isn’t going to listen well enough to grasp distinctive details. He or she is looking for an easy and quick fit. A 2015 study of Canadian consumers estimated that the average attention span had dropped to 8 seconds from 12 seconds in 2000, driven at least in part by consumers’ constant connections through digital devices. Need. Purchase. Done. Happy. A 2012 Pew survey of technology experts predicted what is now coming true, “the impact of networked living on today’s young will drive them to thirst for instant gratification, settle for quick choices and lack patience….trends are leading to a future in which most people are shallow consumers of information.” Only five years later, insurers are feeling the impact. A key reason many of the new, innovative companies are appealing to consumers and small and medium-sized businesses (SMBs) is because they simplify and remove some of the cognitive effort required to make decisions about insurance. In his book, Thinking, Fast and Slow, the Nobel Prize-winning behavioral economist Daniel Kahneman described human decision making and thinking as a two-part system. Greatly simplified, System 1 thinking produces quick (i.e. instantaneous and sub-conscious) reflexive, automatic decisions based on instinct and past experiences. These are “gut” reactions. System 2 thinking is slow, deliberate, reason-based and requires cognitive effort. In general, most of the decisions we make each day are through System 1, which can be both good and bad; good because it increases the speed and efficiency of decision making, and because in most instances the outcomes are acceptable. However, not all outcomes are good, and many could have been improved had System 2 thinking been engaged. The problem with System 2 is that it takes effort, and humans naturally try to minimize effort. See also: Insurtech: Unstoppable Momentum   So, a traditionally complex industry is intersecting with a cognitive culture that is mentally trying to simplify, reduce effort and be more intuitive. This has consequences for decisions throughout the customer’s journey with an insurance company. Good decisions about complex issues like insurance should be based on System 2 thinking. However, during the research and buying processes, the cognitive effort to do so can lead many people to choose other paths like seeking shortcuts to in-depth research and analysis or delaying a decision altogether. In a recent report, Future Trends 2017: The Shift Gains Momentum, Majesco examined how impatience is driving a shift in behavior that is causing insurers to look at the anatomy of decisions. What behaviors are relevant to purchase? To renewals? To service? How can insurers still provide risk protection to individuals who won’t take the time to learn about complex products? We’ve drawn some of these insights out of the report for consideration here. For one thing, insurers clearly recognize that the trends affecting them are far broader and bigger than the insurance industry. Businesses and startups across all industries are capitalizing on the lucrative opportunity afforded by meeting the ever-increasing demands for speed and simplicity made possible by technology and re-imagined business processes. Amazon Prime, Netflix, Spotify, Uber/Lyft, ApplePay/Samsung Pay, Rocket Mortgage (Quicken Loans), Twitter, Instagram and other technology-based businesses represent contemporary offerings that have simplified the customer journey. Retailers such as Walmart, Best Buy, Staples, Amazon and even eBay are testing same-day delivery for items ordered online. Simplifying a customer’s entire journey with a company by making it “easy to do business with” is more critical than ever for insurers. What is the good news in the world of impatience? Insurers are quickly finding ways to counter the disparity between the need for speed and the need for good decisions. They are also using a bit of psychology to positively influence decisions, and they are buying back some brain space with techniques that both inform and engage. In Part 2 of this series, we will look at these techniques as well as product adaptation, framework preparation and planning for transformation that will meet the demand for quick decisions. For more in-depth information on behavioral insurance impact, download the Future Trends 2017 report today.

It’s safe to say that the vast majority of companies can, and probably should, be doing a lot more to improve the security posture of their business networks. What most organizations probably do not realize is that there is an entity paying very close attention to just who is consistently following security best practices—and who isn’t. That entity is BitSight Technologies, a six-year-old risk assessment vendor that does this by analyzing a variety of sources that monitor which companies regularly update encryption certificates, patch system vulnerabilities in a timely manner and generally adhere to other best security practices. Keeping tabs on security BitSight goes through all of this trouble to assign a security rating to each company it reviews. Ranging from 200 to 900, a BitSight security rating is much like a credit score. BitSight has issued security ratings for some 80,000 companies, and is adding 500 more each week. Why does BitSight do this, and, perhaps more importantly, why should any organization care about a BitSight security rating? Two reasons: third-party partnerships and cyber insurance. See also: Urgent Need on ‘Silent’ Cyber Risks   First of all, BitSight’s primary customers are large enterprises that factor security ratings into decisions on which third-party suppliers they will choose to do business with, says Jake Olcott, vice president of business development at BitSight. “Today, if you’re a first party doing business with a third party, the idea of doing cyber diligence prior to entering into a business relationship is certainly on your mind,” Olcott told me, when we met at the RSA cybersecurity conference recently. Monitoring business partners Olcott says, “Once you’ve decided to enter into that business relationship, you also care about the cybersecurity performance of that third party during the lifetime of the business relationship. That’s really why a lot of folks are using our ratings today—to continuously monitor their critical third parties mostly throughout the lifetime of the business relationship.” I asked Olcott if third-party suppliers were clued in to this trend, and thus finding themselves compelled to improve their security postures in order to earn higher security ratings. “We’re absolutely seeing that,” he says. “Organizations want to represent good cybersecurity hygiene to their customers, and one way to do that is by showing a quantitative, objective measurement of their cybersecurity posture.” The second reason BitSight’s security ratings are gaining traction is because of the rapidly emerging cyber insurance market. Allied Market Research projects that the cyber insurance market is on track to climb to $14 billion by 2022, representing a compound annual growth rate of 28% during its forecast period of 2016-2022. Help for insurance companies Clearly, a lot of companies would love to offset rising cyber exposures by purchasing a cyber liability policy. However, cyber risks are unlike any other business risk to come down the pike previously. Cyber risks are complex, constantly evolving and seemingly impossible to quantify. BitSight is in the vanguard of security vendors focused on solving that problem, something that’s necessary for the cyber insurance market to fully bloom. “Seven of the 10 largest cybersecurity insurance companies are using BitSight ratings to underwrite cybersecurity insurance policies,” Olcott says. “An insurance company will collect information from the applicant about their cybersecurity posture, and also look at a BitSight security rating. Taking those data points together, they will come to a premium assessment for the applicant and issue a policy.” See also: Protecting Institutions From Cyber Risks   I asked Olcott to explain how a good vs. poor rating actually affects premium prices and policy coverages. He said: “I would say a good rating in our system would be 700 and above, and I would look at it this way: An organization that we rate a 500 or lower is actually five times more likely to experience a breach than an organization that we rate a 700 or above. So if you’re an insurance company, it’s not that you wouldn’t underwrite a policy for an organization that is a 500 or lower. It’s that you want to understand the risk that you’re taking. You don’t want your entire book of business to be of companies that are performing below a 500." This post originally appeared on ThirdCertainty.

Silicon Valley has been a worldwide hub for innovation for so long that its name is practically a synonym for “innovation.” A recent Brookings Institution study found that the GDP of the Silicon Valley region alone would rank 12th in the world, and its per-capita GDP would rank third—trailing only the Swiss financial hub in Zurich, and the Norwegian capital, Oslo. Recently, we at Novarica had the opportunity to lead a tour through some of the Valley’s most innovative companies to gain insight and learn best practices in operationalizing enterprise-wide innovation. As insurers look to the future and begin to integrate innovative practices, the network of companies in Silicon Valley provides a fascinating prototype for success. See also: The Real Powerhouses in Silicon Valley   One corporate board member we spoke to described the diversity and density of the network in the Valley as a key enabler of innovation. The combination of people, funding, technology, education and opportunity creates a virtuous cycle that is neither accidental nor easily replicated. The most successful forces of disruption in this space tend to be headed by experienced founders who possess the requisite mix of industry knowledge and entrepreneurial savvy. Whereas past industry changes were motivated by competition from incumbents, the source of today’s threat comes from new entrants who are using their industry knowledge to solve targeted issues around customer experience and operational efficiency. These new entrants will not signal the immediate demise of traditional insurers. However, as one executive from the Plug and Play Accelerator shared, insurers may face “death by a thousand cuts”--not unlike what the banking industry faced as many new fintech startups disrupted different parts of the value chain simultaneously. Insurers can stay ahead of the curve by collaborating with insurtech startups and keeping a finger on the pulse of this community. Startups can offer access to talent and ideas, unencumbered by internal cultural barriers, that insurers otherwise would not be able to access; likewise, insurers can offer startups insight and capital. As technological shifts continue to push the industry forward and disrupt the value chain, the most successful insurers of the future will be those that can recognize the upside potential in investing and partnering with up-and-coming insurtech startups. A key learning from the time in Silicon Valley is that innovation should not be an isolated experiment that only takes place in a lab setting; rather, it should begin at the top of an organization and permeate throughout. It is a continuing investment that focuses on empowering an entire organization and consistently absorbing new people and the ideas they bring. As another executive at Plug and Play noted, it’s not enough to “throw money” at startups and innovation: Insurers must be active participants in creating a culture of innovation, and in operationalizing best practices within their organizations. This includes managing talent properly. For a rising generation of engaged employees, work is much more than just a place to "punch a time clock." It is a place of learning, collaboration, ideation, fun and social interaction. Organizational investment in employees pays dividends by giving a sense of ownership, and consequently a vested interested in the stake of a company and its success. Carriers will need to step well outside of their comfort zones to be able to support having a “seat at the table” as the technology-driven economy goes through significant changes in both demographics and technology acceptance. Products will need to evolve as customers become ever more comfortable with technologies that change how we perform basic functions (e.g., keeping a home safe, using a motor vehicle for transportation, getting advice on lifestyle issues). In addition, carriers will face challenges related to talent management because legacy internal business processes may not be consistent with changes in expectations for employees who have come of age in the 21st century. Carriers may also face the uncomfortable truth that the geography associated with traditional home office environments may not be consistent with attracting the caliber of talent required to effectively compete in a faster-paced and more transparent world. See also: What Silicon Valley Says on Insurance   While a variety of actions should be considered by carriers, a key next step should include gaining a better understanding of their own operations from an external (rather than an internally focused) perspective. It is also imperative that insurers find ways to more effectively participate in the rapid evolution of capabilities being delivered through a broad ecosystem that is focused on disrupting traditional business models to drive economic value.

Explaining customer needs through the theory of Maslow is common practice. Marketers often apply the principles to attract new customers. However, if you fail to continue to do this once you have attracted a customer, your ability to retain her will be compromised. In this article, the authors suggest an approach that takes into account the position of the client within the needs pyramid. After all, if you understand the initial need that has led to a buying decision, you can continue to apply this to retain your customers. Maslow’s theory of needs - again? Humans are predominantly driven by universal needs. The original motivational theory of Abraham Maslow (1943) arranged those needs in a pyramid, sometimes referred to as the pyramid of needs. According to the model, people will only strive for gratification of the higher needs in the pyramid after the lower ones have been fulfilled. For this article, we use a three-layer, simplified version of the needs pyramid. At the top of the pyramid, Maslow placed the need for self- actualization; the desire to develop your personal self and realize your full potential. The middle part of the pyramid describes the desire to belong somewhere and to be valued. The bottom part of the pyramid represents the basic physiological needs for survival: food, shelter, safety and security. See also: How to Get Broader View of Customers   Maslow always remained critical toward his own model. But in this article, we assume Maslow sticks to his own theory and acts accordingly. We use a mortgage product in the narrative, but the argument applies to financial services products in general. Level 1: Customers need safety and security Suppose it is the day that a young Abraham Maslow leaves his parental house to start his adult life. Maslow is looking to buy a house to fulfill his basic needs for security and safety and requires a mortgage to do this. His demands are simple: basic, cheap and something he doesn’t have to worry about. Most financial products will answer to these basic needs. Some insurance products are simply required by law. You’ll need a debit card for making payments, at least for now. Customers looking for these products to fulfill their basic needs receive a warm welcome. However, once a prospect has become an existing customer, the approach often changes. For instance, after choosing a mortgage Maslow would like to be informed about the suitability in terms of risk and costs. It would be great to receive confirmations that his mortgage still fits his profile and that he has made the right choice, or if better alternatives are available. Often, this doesn’t happen. Instead, Maslow is being approached with offers made by competing mortgage providers, arguing he could be better off elsewhere. And while Maslow’s current mortgage provider receives payments on time and assumes Maslow is a satisfied customer, Maslow has not been able to resist the temptation and switches to a competitor offering more security and safety, as soon as his contract allows him to do so. So what could Maslow’s original provider have done differently? First, it should have acknowledged Maslow’s primary buying motivation. As a next step, it should have contacted Maslow periodically to evaluate his choice of product. Providing customers with a regular check on their product portfolio builds relevant customer contacts and ensures some control at the provider. Level 2: Consumers want to belong and be valued Maslow, who has advanced in his career and now is a doctor, is looking for a place that allows him to build a practice at home. He learns about a mortgage provider that specifically serves the medical community. A provider like that should be able to exactly serve his needs. Many financial products can be connected to a specific field of expertise or area of interest. Customers benefit from the specialty expertise offered by their bank or insurer. This may be realized through targeting specific customer groups or customers sharing a common interest. These customers expect a close relationship with their financial services provider. Often, existing customers do not receive the same treatment as prospects. Maslow would like to remain informed about developments that relate to his profession. And he would like to share his experiences and insights with his financial services provider and colleagues. Because he now belongs to a specific target group, Maslow receives regular marketing messages and newsletters. However, these are often generic, and Maslow lacks the opportunity to share his ideas and suggestions to improve services. During the course of his mortgage, Maslow is actively approached by competing mortgage providers, arguing he could be better off elsewhere. They may offer more expertise, additional services and other customer engagement activities. Maslow may not resist the continuous temptation and decides to switch to a competitor offering more of the services he is looking for. So what could Maslow’s original provider have done differently? Again: Acknowledge Maslow’s primary motivation for buying in the first place. If his financial services provider had realized why Maslow had chosen it, the provider could have engaged him through activities and programs aligned to his interests and needs, e.g., by giving Maslow the opportunity to provide feedback and tips, and by actually recognizing his contributions. Companies like Tesla provide an amazing customer experience by acknowledging customers' contributions to a new software release. Level 3: Customers strive toward self-actualization As a doctor, Maslow treats a set of patients suffering from post-traumatic stress disorder. Being confronted daily with the struggles of his clients, he finds it increasingly difficult to stop thinking about global politics and the causes of his patients’ condition. This afternoon, he has a meeting about a new mortgage. It would make him feel a lot better if his financial services provider demonstrates social responsibility and awareness. Connecting financial services to social themes, lifestyle or trends may not be that difficult. Nobody cherishes a mortgage, savings account or insurance policy, but these are means to an end: the pleasure of owning your own home, to realize dreams or to take care of your loved ones. Managing the carbon footprint and supporting fair trade while avoiding child labor are increasingly the themes to reach younger generations. Only a small part of financial services providers embrace these themes. See also: 5 Technologies That Connect to Customers   As an engaged customer, Maslow hopes to hear how his bank or insurer is contributing to making the world a better place. He expects a regular confirmation that he has made the right choice and is very much prepared to pay extra or settle for less service as long as his bank supports his ideals. Conclusion Many financial service providers apply Maslow’s theory to seduce customers. Campaigns and commercials cleverly play on human needs. However, as soon as a customer has become part of a back-office system, the urge to leverage these data disappears. This is partly understandable, as many organizations lack a focused customer-retention approach. However, we believe significant steps can be made in customer retention by applying Maslow’s theory. As a first step, you need to define your pyramid. What are the needs that make up the layers in your customer pyramid? There might be a link to a specific distribution channel. Leveraging all data from the customer on-boarding process is an obvious approach. Next step is to assess in which layer a customer resides. All customer interactions provide valuable data. Next to questionnaires, interviews and feedback, actions and responses are a tell-tale. Once a Maslow profile has been determined, the individual customer contact approach can be selected. This step should involve some level of experimenting. By analyzing all customer contacts, financial service providers will gain valuable insights. An active customer may be involved in product development or asked to become an ambassador. For less active customers, it is important to periodically get in touch and re-assess their product choice. What’s next? The motivational needs theory of Maslow is not undisputed. The thought that individuals only strive for higher needs once the basics have been fulfilled, has not been tested by Maslow. To his great disappointment, his theory has been used widely while nobody ever has had the urge to thoroughly analyze or test this. However, we do have this ambition. Will the Maslow approach add value in the area of customer retention? Is it possible to better understand customer needs through this approach? Is it possible to create a formula based on customer contact data predicting in which level a customer resides in the needs pyramid? Marketers are convinced of the relevance of the theory in analyzing initial buying decisions. Applying the same principles to customer retention doesn’t seem like a particularly big step. We therefore are confident that this approach may provide value for retention programs. We are interested to discuss the potential of this model with you in more detail and would love to hear from you! For this article, Onno Bloemers has joined forces with Leon Veenhuijzen, associate partner at Improven.