Digital, data and core capabilities have changed dramatically over the last decade and continue to evolve rapidly. To help insurers track these capabilities and their progress, we created the Novarica New Normal 100 benchmark, which we’ve conducted for the last few years. In this article, we’ll discuss the role of digital, data and core capabilities in key functional areas -- product development, marketing, distribution, underwriting, customer engagement, billing, claims and finance/operations -- and review our findings on the current state and near-term plans of insurers. Product Development Most insurers don’t think of digital as having a big impact on product development, but streamlining can have a real impact on speed to market. Considering digital distribution and underwriting during the product development process is also important. Data and analytics have always been at the center of product development. As third-party data has become more abundant, and analytical tools and data management capabilities have become more advanced, product developers and actuaries can leverage new capabilities to optimize both pricing accuracy and ease of underwriting and distribution. Products need to be instantiated into core processing systems to be offered and managed. Flexible core systems enable better product development and management. See also: It’s Time to Accelerate Digital Change The majority of P/C insurers report designing at least some products to be optimized for streamlined underwriting, omitting unnecessary questions and using pre-fill data. Use of machine learning in developing rating algorithms is still very uncommon, with fewer than 10% of insurers having any capabilities. However, more than 25% have current or planned pilots in this area. Only about a third of life/annuity insurers have a digital workflow for product development. More than half are designing products to leverage the availability of pre-fill data. While only a third are currently using analytics to drive product design, an equal number are piloting that capability. A little more than a third have at least some centralized product modeling capabilities. Marketing With the exception of direct personal lines writers, few insurers have really advanced digital marketing capabilities—most of the attention in digital marketing is focused on distribution. Data and analytics are at the heart of marketing. Being able to profile target customers, model behavior and analyze effectiveness of marketing programs is important for engaging with potential customers. Insurers are even using existing data about prospects to “pre-underwrite” risk and offer price indications without engaging with customers. While this capability is not yet mature, a significant number of insurers report having some capabilities in this area. Few P/C insurers see themselves having mature capabilities in any digital or data marketing area, but use of analytics and profiling is fairly widespread, with 30% of 50% of insurers reporting some capabilities. The most common area for planned pilots is customer profiling and modeling, with a quarter of insurers exploring this area further. Smaller insurers are less advanced in aggregate but have more current or planned pilots. Among life/annuity insurers, household-level customer analysis is still unusual, but is a very common area of pilot activity. Customer profiling and behavior modeling is increasingly common, with more than a third of insurers reporting at least some capabilities. Distribution Distribution has been the focus of most insurers’ digital strategies, and there are many digital distribution capabilities that insurers should consider. This includes providing both information and transactional capabilities to distributors or end buyers via Web and mobile. Data capabilities in this area are a combination of interactive analytics to maximize the effectiveness of distribution channels and effective use of third-party data to streamline the buying experience. Core systems have a critical role to play in managing distribution forces and enabling rapid service to both distributors and customers. Insurers have divergent digital capabilities to support their distributors. Fewer than half of P/C insurers have mobile new business, commissions or interactive sales materials. About half use pre-fill data to streamline application submission, and similar numbers offer quick quotes with minimal data entry. Use of analytics to drive next-best offer is rare, but about a third of larger insurers have current or planned pilots in this area. Digital distribution maturity levels at life/annuity insurers are comparatively high. More than half of insurers report e-signature capabilities, mobile-optimized new business systems and interactive sales materials. Self-service licensing and appointments management is common at large insurers, but no midsize insurers report current capabilities. Insurers in both size classes report active pilots in this area. Underwriting While many insurers think of digital primarily in terms of external communications, both streamlining underwriter workflows and improving internal knowledge sharing depend on digital capabilities. Data and analytics capabilities are obviously important for underwriting, as well, and depend on core underwriting systems that support their workflows and models. Data and analytics capabilities in underwriting are widespread, with more than two-thirds of large P/C insurers claiming some capabilities in nearly every area, including predictive scoring. But fewer than 10% claim mature functions. More than two-thirds of insurers report having paperless underwriting workflow capabilities, but fewer than half of those claim mature capabilities. More than half of life/annuity insurers report at least some paperless underwriting workflows, and another quarter report current or planned pilots. Predictive scoring is also in use at more than a third of insurers, with more than 40% reporting pilot activity in this area. Customer Engagement Customer engagement is a major focus for insurers’ digital strategies. These cover engaging with customers via Web, mobile and social media or providing analytics-driven recommendations. Data and analytics-related capabilities in this area are closely related to those used in marketing. These involve both effective data consolidation and reporting as well as offline analytics to improve service levels and engagement. Insurers continue to expand their digital customer engagement capabilities, but even basic functions like same-day email responses to customer inquiries are not universal. Only half of P/C insurers support self-service change requests or have mobile customer applications. Fewer than a quarter have online chat or co-browsing with clients, or offer policyholders a 360-degree view across different product sets. Life/annuity insurers’ digital capabilities in customer engagement are uneven. Online chat is not widely deployed today, but more than half have current or planned pilots. While close to a quarter of insurers report mature customer mobile capabilities, more than one-third still do not have same-day e-mail response to inquiries. Online video and co-browsing with service representatives are still rare. Analytics usage in customer engagement is also rare, with fewer than a quarter of life/annuity insurers reporting current capabilities in using analytics for retention modeling or service tiering. Billing Digital billing capabilities are all related to electronic communications and payments using current and emerging channels and payment mechanisms. Data capabilities are focused on analytics, both internal performance analytics and analytics to drive customer messaging, while insurers’ abilities to meet customer expectations in billing, which include consolidation and customization, are highly dependent on flexible core billing systems. Electronic bill presentment and payment is widespread but still not universal, with only about 60% of P/C insurers supporting this capability. Credit card payments are also not universal. Using analytics to prevent premium leakage is in place at 30% to 40% of insurers, but more than a quarter of insurers are piloting this application of analytics. Only about half of large life/annuity insurers report supporting electronic bill presentment and payment, and fewer than a third accept online or mobile credit card payments (although mail/phone card payments are more common). Analytics usage in billing is negligible, and large life/annuity insurers’ ability to customize billing schedules or present consolidated bills is very limited. See also: Key Trends in Innovation (Parts 4, 5)   Claims Applying digital capabilities to claims means streamlining communications across the value chain from claimants and adjusters to third-party service providers. Claims data and analytics capabilities are primarily focused on building and applying predictive models across multiple areas. Most of the digital and data/analytics capabilities involved in claims depend on core underwriting systems that support their workflows and models. Claims is the area with the highest pilot activity among large P/C insurers. More than a third are piloting just about every digital and data/analytics capability, especially predictive fraud scoring and severity scoring. Core capabilities like skills-based routing and triaged straight-through processing are common among P/C insurers but not universal, and maturity levels are still relatively low. About a quarter of life/annuity insurers are using predictive modeling for fraud scoring, and there are a handful of pilot programs in using analytics in claims areas. Digital capabilities like role-based third-party access are extremely limited, and few large insurers have or are investing in paperless claims processes. Skills-based routing of claims is fairly common. Finance/Operations While most insurers think about data and digital capabilities primarily in outward-facing roles, and most recent core investments focus on products and speed to market, insurers are also deploying technology-enabled capabilities to manage their finance and operations more effectively. Capabilities include internal self-service, more advanced reporting and more flexible and powerful core systems that enable faster responses and better internal service levels. About half of P/C insurers report at least some current capabilities in this area. Larger insurers are generally more advanced, and pilot activity is low across the board. Digital and data capabilities in finance and operations are increasingly common at life/annuity insurers, but still not universal. Nearly a third of insurers still are unable to allocate monthly P&Ls by product or channel, and more than two-thirds lack enterprise-wide customer data analytics capabilities. Concluding Thoughts While keeping an eye on the technology developments of tomorrow, insurers need to consider the capabilities available today and the impact of delaying deployment of those capabilities. Our research paints a picture of a continuing digital divide between have and have-not insurers, as well as a data divide and a core capabilities divide. In a market where growth is hard to come by, insurers need to develop better digital capabilities to serve customers and streamline processes among all stakeholders, better data and analytics capabilities to model risk and customer behavior and better core capabilities to support more agile processes and a more agile product portfolio.

In the age of the fourth industrial revolution, risks are changing. The advent of technology has made digital assets more valuable than physical ones. In this scenario, the insurance sector has been increasingly left to deal with technological change and disruption and is having to reconsider the way it defines itself. Having had the opportunity to discuss this transformation in more than 15 countries, I have seen that insurtech is helping to redefine the way the insurance industry is perceived. Insurance is about providing protection for people in life and in employment. It is about providing a contract where someone promises to indemnify another against loss or damage from an uncertain event, as long as a premium is paid to obtain this coverage – the concept has been around since 1347. It’s unthinkable for an insurer today not to ask how to evolve its business architecture by thinking which modules within the value chain should be transformed or reinvented via technology and data usage. I believe all the players in the insurance arena will be insurtech – that is, organizations where technology will prevail as the key enabler for the achievement of the strategic goals. See also: Core Systems and Insurtech (Part 1)   Insurtech startups have received more than $18 billion in funding to date, according to Venture Scanner data. Fantastic teams and interesting new insurance cases have been grabbing the attention of analysts. Full-stack insurtech startups are generating a lot of excitement in the investor community and attracting relevant funds, and some have achieved stellar valuations, with Oscar, Lemonade, Sonnet, Alan, Element, Zhong An some of the most fascinating players. It looks like the aim of disrupting the status quo, combined with a skepticism about the incumbents’ ability to innovate, is focusing the attention on players to create new insurance products. A business model adopted by more and more players is the MGA/MGU approach (Managing General Agents/Managing General Underwriter), a way to satisfy investor appetite for players covering a large part of the activities in the insurance value chain and partnering only with an incumbent for receiving underwriting capacity. Trov, Slice, so-sure, Insure the Box, Root, Bought By Many and Prima are some examples of this approach. I am positive about the ability of the incumbents to innovate, and about the potential for incumbents and insurtech startups to collaborate. This view is based, for example, on the impressive international success of players such as Guidewire and Octo Telematics. I believe service providers for the insurance sector will be more successful in scaling at an international level than the other models described above. This kind of collaboration is leveraging on the incumbents’ technical knowledge and their customers' trust, which has frequently been underestimated by insurtech enthusiasts. The most relevant opportunity is the collaboration between incumbents and specialized tech players capable of enabling the incumbents' innovation in the different steps of the business model. Denim for the awareness, Digital Fineprint for the choice, Neosurance for the purchase, MotionCloud for the claims, Pypestream for the policy management – these are a few players innovating on each step of the customer journey, based on my map to classify the insurtech initiatives. For insurtech startups to outperform traditional insurance companies, they need to have their business models concentrated in what I call the four axes (4 Ps): productivity, profitability, proximity and persistency. https://youtu.be/AicEHTdaTlY?t=10m7s An excellent example is Discovery Holding, with its Vitality wellbeing program. This has been replicated in different business lines and countries with different business models – they are carriers in some countries, operate joint ventures with local insurers in other regions and are a service provider in other nations. They are using state-of-the-art technologies such as wearables and telematics to create a model based on value creation outperforming on all the four Ps, enabling them to share value with their customers through incentives and discounts. See also: What’s Your Game Plan for Insurtech?   Insurtech adoption will make the insurance sector stronger and in that way more able to achieve its strategic goal: to protect the way people’s lives and organizations work.

On June 26, Waymo (Google’s autonomous car firm), signed a deal under which Avis Budget Group will provide “fleet support and maintenance services” to Phoenix-area Waymo vehicles. Waymo uses Chrysler Pacifica minivans to autonomously shuttle Phoenix residents around town. Its first fleet of 100 minivans quickly grew into an order for 500 more. The Waymo/Avis agreement may only be a pilot, but the implications are enormous. Not unlike standard cab companies, Waymo realized that a fleet of autonomous vehicles would need cleaning and maintenance throughout the day and storage throughout the night. When practical matters like auto cleaning and storage become news enough for a press release, something big is going on. Here are some fun facts:

• According to USA Today, Avis’ stock rose 14% on the news.
• The Chrysler Pacifica was chosen, in large part, because it could close its own doors. Waymo usage experts theorized that riders might often hop out and forget to close the door.
• Within hours of the Waymo announcement, Apple likewise unveiled a deal where Hertz Global would manage its autonomous fleet.

Autonomous vehicles have picked up the pace of disruption over the last two years. What will life be like when the Autonomy of Things takes on many of our everyday behaviors or occupations, like driving? Will we be safer? Will we need insurance? Will auto manufacturers cover accidents via product liability? Who will cover bodily injury or property damage? How will risk products be changed to fit this new model? Is there an insurance right-road to surviving autonomy? See also: The Evolution in Self-Driving Vehicles   Is Autonomy Impact Still Underrated? There has been a lot of talk and certainly a wealth of words written on the impact of auto autonomy, and safety is at the top of the concerns and promises of autonomous vehicles. Insurers are, of course, focused on how autonomous vehicles might cause a decline in the need for auto insurance. The pace of development, rollout, experimentation and expansion of autonomous vehicles has far exceeded original expectations. In his blog, Peter Diamandis (XPrize Founder) noted that a former Tesla and BMW executive said that self-driving cars would start to kill car ownership in just five years. John Zimmer, the cofounder and president of Lyft, said that car ownership would “all but end” in cities by 2025. The Wall Street Journal reported in July 2016 that auto insurance represents nearly a third of all premiums for the P&C industry, with projections that 80% could evaporate over the next few decades as autonomous vehicles are introduced, some of them replacing legacy vehicles and some created for shared transportation. At the same time, U.S. government support strengthened in September 2016 when federal auto safety regulators released their first set of guidelines, sending a clear signal to automakers that the door was wide open for driverless cars and betting that the nation’s highways will be safer with more cars driven by machines instead of people. Those statements, among others, might cause some scrambling. Manufacturers are working frantically to partner with AI providers, cab services and ridesharing services such as Uber, Lyft and Waymo. Naysayers will note that rural areas will be highly unlikely to use autonomous vehicles soon, and it’s true that the largest impact may be in urban areas. But if car ownership were even cut by 5% by 2030, a tremendous number of auto manufacturers and auto insurers would be affected. Autonomy and its insurance impact isn’t limited to personal autos. Truck company Otto is testing self-driving commercial trucks — a necessary automation that could help alleviate the growing lack of truck drivers. Husqvarna has several models of autonomous lawn mowers on the market. Yara and Rolls Royce are among companies working on autonomous ships. Case, John Deere and Autonomous Tractor Corporation have all been developing driverless tractors. In nearly every one of these cases, there are safety benefits and disruptive insurance implications, but there are also revenue growth opportunities for those that think more broadly and “outside the box.” From developing partnerships with automotive companies to leveraging the autonomous vehicle data for new services, each offers alternative revenue streams to counter the decline of traditional auto insurance. The key is experimenting with these technologies to find alternative “products and services” and develop an ecosystem of partners to support this, before the competition does. Share and Transportation as a Service — Insurers May Like In our report, A New Age of Insurance:  Growth Opportunity for Commercial and Specialty Insurance in a Time of Market Disruption, we cite a report from RethinkX, The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, which says that by 2030 (within 10 years of regulatory approval of autonomous vehicles), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transport-as-a-service” (TaaS). The report says the approval of autonomous vehicles will unleash a highly competitive market-share grab among existing and new pre-TaaS (ride-hailing) companies in expectation of the outsized rewards of trillions of dollars of market opportunities and network effects. Welcome to the adolescence of the sharing economy and transportation as a service. Autonomy isn’t the only road for vehicle progress. Vehicle sharing is growing and will remain in vogue for some time. Just as Airbnb and HomeAway have given rise to new insurance products, Zipcar and Getaround and Uber have given rise to new P&C products. At the same time, a merging of public and private transportation and a pathway to free transportation is in the early stages of being created in the TaaS model. This will shift risk from individuals to commercial entities, governments or other businesses that provide the public transportation, creating commercial lines product opportunities beyond traditional “public transportation.” Vehicle users, whether they are riders, borrowers, sharers or public entities, are going to need innovative coverage options. Tesla and Volvo may be promising some level of auto coverage for owners of autonomous vehicles, but that kind of blanket coverage is likely to mimic an airline’s coverage of passengers and cargo — it will be limited. Those who lend their vehicle, through a software-based consolidator, such as Getaround, will need coverage that goes beyond their auto policy. In the past few weeks, we’ve also seen how cyber attacks can undermine freight and shipping, not to mention systems. Nearly all of these service-oriented options will require new types of service-level coverage. Autonomous freight may be safer in transit, but in some ways it may also be less secure. The lessons appear to be found in brainstorming. Technology is breeding diversity in service use and ownership. There will be new coverage types and new insurance products needed. See also: Will You Own a Self-Driving Vehicle?   Up Next … Flying Vehicles Remember the movie "Back to the Future" and the Jetsons flying cars that were so cool? Well, they are quickly becoming a cool reality. A June 2017 Forbes article says flying cars are moving rapidly from fiction to reality, with the first applications of flying vehicles for recreational activities in the next five years. The article says that, in the past five years, at least eight companies have conducted their first flight tests, and several more are expected to follow suit, indicative of the frenzied activity in this space. Companies such as PAL-V, Terrafugia, Aeromobil, Ehang, E-Volo, Urban Aeronautics, Kitty Hawk and Lilium Aviation completed test flights of their flying car prototypes, with PAL-V going further by initiating pre-sales of its Liberty Pioneer model flying car, which the company aims to deliver by the end 2018. This sounds like Tesla and its pre-sales move! Not to be left behind … ride-sharing companies are aggressively entering the space. Uber launched the Uber Elevate program, with a focus on making flying vehicles transport a reality by bringing together government agencies, vehicle manufacturers and regulators. Google and Skype are entering the space by investing in start-ups: Google in Kitty Hawk and Skype in Lilium Aviation. Not to be left behind, Airbus has unveiled a number of flying car concepts, with plans to launch a personal flying car by 2018. Airbus also plans to build a mass transit flying vehicle…the potential next TaaS option. So, it pays for insurers to keep their attention on autonomous vehicle trends … because it is more than the personal autonomous vehicle … it is the transformation of the entire transportation industry and will have a significant impact on premium and growth for auto insurers. As we recently found in our commercial and specialty insurance report, the transportation industry is rapidly changing and new technologies may be lending themselves to safety, but the world itself isn’t necessarily growing any safer. Risk doesn’t end. Insurers will always be helping individuals and companies manage risk. The key will be using the trends to rapidly adapt to a shift to the new digital age. Insurers will need to understand and value new risks and offer innovative products and services that meet the changing needs in this shift during the digital age.

The startups are the talk of the town today. Fintech, insurtech, retailtech, regtech, autotech, edtech are the new vocabulary for enterprises. Innovation is on the priority list of most executives globally. Many are getting worried about the risks, disruption and impact of startups. With more than $80 billion of investment funding already injected into the startup ecosystem in the last three years, it would be foolish for companies to overlook startups. There are more than 4,000 startups globally active at the moment across various categories that are challenging incumbents across industries. A good number of companies across financial services, insurance, retail, travel and healthcare segments are already exploring partnership with startups. But many executives are confused about how to deal with startups. Buying a startup not the right answer for innovation There are still questions on how effectively companies can leverage and integrate startups into their ecosystem. A few companies are exploring selective startups for purchase while many others are keeping their options open. While buying a startup may sound like a good move, it does not guarantee success. Companies can buy a startup -- but not the innovation. Companies must innovate internally first. While startups can help to bridge the innovation gaps to some extent, they cannot solve the basic innovation challenges. There is a need to build innovation culture. See also: Startups Take a Seat at the Table   Many large organizations today struggle with innovation. If a startup coming from nowhere can innovate, drives passion within teams and delivers incredible value, what is stopping the large companies to excel? The problem is with the traditional, tactical approaches. Many executives, used to stringent financial measurements, measure innovation with a similar yardstick. The results are obvious. When innovation initiatives fail to deliver quick results, executives back away. It is time for executives to revisit their approach on innovation. Get the basics right before fixing the organization Innovation demands commitment, agility, perseverance, collaborative culture, hard work and passionate teams. Innovation is mostly achieved as a result of failures and continuous learnings. There is no company in the world that has delivered disruptive innovation without witnessing failure. 90% startups fail, proving that innovation is not easy. Today’s dilemma is that executives hate failure. The quarter-on-quarter pressure, macro-economic conditions and competitiveness in business hinders them from committing 100% to innovation. Organizational complexities, silos, bureaucracy and rigid culture add more pain in delivering innovation. Startups are no longer a bubble, but an ongoing challengers Many see the growth of startups as a bubble that may bust soon. But startups are not going away, so companies must exercise caution and develop a symbiotic relationship with startup ecosystems. The best strategy is to partner for co-existence. While many startups operate on the periphery of business, they will move into the core part of business across industries. We are already seeing many examples in banking and insurance, where startups are getting licenses to manage end-to-end business. London-based startup Monzo, Berlin-based Number26 (N26), Atom and Tandem in the U.K. and Klarna in Sweden signal the backing of banking regulators for startups globally. Similarly, Lemonade in New York, Oscar in New York, Zhong An in China and Acko in India are examples of insurtech startups licensed for business. Soon, companies will find startups snatching portion of their business. The only way to respond is to become a startup. Companies must start thinking like startups and act and deliver value like startups. Without building an innovation culture, this is not going to happen. Innovate or pay the price: Choice is yours Startups will continue to be a challenge for companies of all sizes. Companies must innovate continuously and develop tailored strategies to manage the growing influence of startups. While partnership with startups or even a purchase of a startup can fast-track innovation efforts, these are not sufficient to transform a company or ignite its culture. Companies must simplify complexities and structure and invest in people to develop an innovation-centric culture. See also: Innovation: ‘Where Do We Start?’   Innovation is not a commodity that can be purchased using financial muscle. Innovation will never be up for sale and cannot be purchased or mimicked. It has to be built from the ground up.

In our previous post, we addressed the reasons for transforming producer management and compensation processes. In this post, we will cover key considerations when planning a transformation. The transformation process begins with defining a clear and comprehensive compensation strategy to confirm the key functions of producer lifecycle and compensation management. Licensing, reporting hierarchies, contracting, commissions plan rationalization and debt management are some of the most critical functions that require enterprise level alignment and can lead to a significant change in the producer experience. Early discovery of such complexities can help you identify areas that may require strategic enterprise alignment and business champions. It also can help you identify your organization’s top priorities and pain points. Take the contracting process. At face value, onboarding producers to sell your products is seemingly straightforward: recruit, onboard, appoint and help sell. However, upon closer examination, many organizations find this process cumbersome for both field and back office employees because it burdens them with a highly manual, paper-based data entry workflow that is subject to human error and inefficiencies. See also: Agents: Here’s How to Differentiate   One of the the first touchpoints with your organization for producers is the onboarding process, which sets the tone for the field’s expectations of how easy it is to do business with you. Looking just a little beyond the producer experience, onboarding and contracting processes are anchored by licensing and appointment criteria that have immediate compliance implications. When taking into account the regulatory and state-specific rules governing insurance producer eligibility, as well as your organization’s own requirements and offerings (e.g., backdating appointments, just-in-time appointments), the contracting process typically is quite nuanced and complex. Neither a technology solution nor an operating model adjustment is a silver bullet to improve vague, inconsistent, poorly documented or non-compliant rules and processes. The same concerns hold true for other aspects of producer lifecycle management, like reconciling producers’ debt or maintaining a producer’s reporting and compensation hierarchy. For example, when a producer is advanced for business with one line of service, do you recoup earnings from other lines of service to repay company debt? Is there a time window or debt threshold before cross-company recoupment occurs? Are there legal limitations? And, at an even more basic level, how do you want to manage debt, and is it something the field is interested in or concerned about? And, for hierarchies, do production and compensation follow the same arrangement? What exceptions do you currently allow, and what will you permit in the future? Without first answering such questions, incorporating field perspective or the organization’s long-term roadmap, you run the risk of 1) limiting the impact and quality of transformation you will ultimately undertake and 2) replicating current functionality in future-state platforms as a quick fix. Before looking to the vendor marketplace for ideas on available products and services, take the time to fundamentally understand how your organization operates today and, perhaps more importantly, how you’d like to operate in the future. In doing so, you can first define where your organization is going and how you will differentiate yourself with producer servicing before selecting the best solution to get you there. Transformation partners can be especially helpful during this strategic phase, offering market insights that can help your organization plan for the future while promoting enterprise alignment and exceeding market parity. This type of holistic, forward-thinking, business-led exercise can prepare your organization to make the most of a transformative journey without feeling rushed into strategic decision making in the midst of implementation. See also: The New Agent-Customer Relationship   In summary, the entire insurance industry is undergoing disruption from changing producer demographics, decreasing agent population, tighter margins, greater pressure on expense reduction, increasing producer expectations for service resulting from digital disruption and evolving customer segments that are always on the lookout for the “cheapest and best” way to buy insurance. Accordingly, the need to differentiate yourself with producers is more crucial than ever and managing the vital producer and compensation management function is critical. After all, doesn’t a happy producer get you a happy customer? What are the other key areas within producer management and compensation that you think will improve your producer experience?

Very short note this week, as I've been on a wonderful but chaotic vacation with my seven siblings and families at the Jersey shore.

Although we all are still enjoying summer, time goes quickly and we are only about 8 weeks out from InsureTech Connect 2017, which is the world’s largest insurtech event, offering unparalleled access to the largest and most comprehensive gathering of tech entrepreneurs, investors, builders and forward thinking insurance industry companies.If you care about insurance innovation, plan to attend to increase your knowledge and connections at this event, scheduled for Oct. 3-4 in Las Vegas. As an official partner of InsureTech Connect, we are happy to provide our subscribers with a discounted registration link. Use the link to save $300 on the cost of registration. 

As another benefit of attending, ITL’s Innovator’s Edge and InsureTech Connect are planning several enhanced experiences before and during the 2017 conference that are exclusively for members of   Innovator’s Edge.  The enhanced experiences include:

• "Meet the Market," a pre-conference opportunity for Innovator’s Edge innovators and insurance industry incumbents to have in-depth meetings that advance their relationship.
• In collaboration with the National Assn. of Insurance Commissioners, a panel of regulators will provide informal, non-binding feedback for Innovator's Edge members on their innovative business plans. This pre-conference session will provide a great chance to identify any potential issues that could trigger regulatory concerns and impact market adoption.
• And throughout the conference, Innovator's Edge and InsureTech Connect will also be conducting live video interviews of insurance innovation thought leaders and luminaries.

For any questions about the above opportunities, please contact us at   info@insurancethoughtleadership.com.  We hope to see you in Las Vegas this October!

Cheers,

Paul Carroll,
Editor-in-Chief

We are in the midst of the shift from the information age to the digital age, which is realigning fundamental elements of business that require major adjustments to thrive, let alone survive. As we noted in our new report, Greenfields, Startups and InsurTech: Accelerating Digital Age Business Models, new greenfield and startup competitors are rising from within and outside of every industry, including insurance, to capture the post-digital age business opportunities of the next generation of buyers. By shifting to meet the forces of change, these companies are positioning themselves to be the market leaders in the post-digital age. Those that do not make the shift risk not only the loss of customers but also market share and relevance in the coming new age of insurance. See also: 6 Charts on Startups, Greenfields, Incubators   Sometimes, the next big thing isn’t easy to spot. The disruption of the insurance industry is in the early days, so predictions are difficult. Will the new greenfields and startups become the next market leaders? If history is a guide, the answer is yes … some will. Just consider Progressive and how many dismissed it early on. Now it is a top 10 insurer in the U.S. Or consider what has happened in other industries with companies that are defunct because they missed the shift:

• Streaming video: Blockbuster failed to see this trend. It filed for bankruptcy in 2010 and Netflix is now worth more than $61 billion.
• Mobile games: In 2011, the president of Nintendo North America suggested that mobile game apps were disposable from a consumer perspective. Today, Pokemon Go has 65 million users. Is that disposable?
• Apple iPhone: Former Microsoft CEO Steve Ballmer reportedly commented that the first Apple iPhone would not appeal to business customers because it did not have a keyboard and would not be a good email machine. Apple iPhone single-handedly disrupted and redefined multiple industries and continues to do so.
• Autonomous vehicles: In 2015, Jaguar’s head of R&D stated that autonomous vehicles didn’t consider customers’ cargo. Since then, Jaguar Land Rover has invested $25 million in Lyft to join the autonomous trend.
• On-premise enterprise software vs. cloud-based SaaS platforms: In 2003, Thomas Siebel of Siebel Systems said Microsoft would roll over Salesforce in the CRM market. In 2005, Oracle acquired Siebel Systems for $5.85 billion. Salesforce’s market cap, in contrast, is more than $60 billion.

Insurance Industry Change and Disruption At no time in the history of insurance can we find as many game-changing events and a rapid pace of advancement occurring at the same time. At the forefront is the increased momentum for insurtech, and the greenfields and startups within, creating high levels of activity, excitement and concern on the promise and potential of insurance disruption and reinvention. When you add it all up, the insurance industry has many characteristics that make it an attractive target for aggressive investments in innovation. First, its size is enormous – based on industry data, it is estimated that premiums written are more than $4.7 trillion globally. Second, it faces multiple challenges that offer opportunities for exploitation by nimble, efficient and innovative competitors. Insurtech advancements and the forces of change see no significant slowdown. The momentum for change that has been building is unstoppable. Industry advancements, cultural trends and IT reactions are gaining speed as they gain strength and a framework for stability and growth. It is pushing a sometimes slow-to-adapt industry by challenging the traditional business assumptions, operations, processes and products, highlighting two distinctively different business models: 1) a pre-digital age model of the past 50-plus years based on the business assumptions, products, processes and channels of the Silent and Baby Boomer generations and 2) a post-digital age model focused on the next generation including the Millennials and Gen Z, as well as many in Gen X. Greenfields and Startups Make the Boardroom Agenda The market landscape is rapidly changing. During 2016, Lemonade launched. Metromile decided to become a full-stack insurer, leaving its MGA days behind. New MGAs entered the picture, including Slice, TROV, Quilt, Hippo and Figo Pet Insurance, to name a few.  Existing insurers made market debuts with new startups including Shelter’s Say Insurance with auto insurance for millennials, biBerk from Berkshire Hathaway for direct small commercial lines and Sonnet Insurance as the digital brand from Economical Insurance in Canada, among others. Add to this the projected shrinking of insurable risk pools due to the emergence of autonomous vehicles, connected homes and wearables and the domino effect of these on other industries, and it’s not hard to imagine a future with traditional carriers fighting over a much smaller pool of customers where only the most efficient, effective and innovative will survive. As a result, discussion surrounding greenfields, startups and insurtech moved into the board room of every insurer and reinsurer trying to understand how to leverage the shift to the digital age and develop strategies and plans to respond. Yet some insurers have a blind spot in recognizing the competition both from outside and within the industry, and the critical need to begin planning a new post-digital age business model. The result is a growing gap between knowing, planning and doing among leaders and fast followers or laggards, which is rapidly becoming insurmountable due to the pace of change. Closing the Gap with Greenfield and Startup Business Models Assuming that most insurers grasp the need for a greenfield and startup mentality to grow, what remains is to aim all efforts toward accomplishing an organizational shift. How do you move your company from the pre-digital age to the post-digital age and close the gap? It requires leadership to build consensus. It requires vision to aim in the most market-ready direction. And it requires a new business paradigm that will allow for change. We must redefine and re-envision insurance to enable growth and remain competitive. While many have made progress in replacing legacy systems and traditional business processes, this is not enough. These systems, while modern, were built around pre-digital age business assumptions and models, not to support the range of needs in a post-digital age model driven by a new generation of customers. Like other industries, today’s insurance startups and greenfields need and want options that do not require investment in significant infrastructure or upfront costs and therefore seek a cloud business platform solution to maximize options and minimize costs and capital outlay. See also: How to Plant in the Greenfields   A modern cloud business platform provides an advantage for greenfields and startups, breaking down traditional boundaries, IT constraints and age-old business assumptions about doing business, while building up the ability to rapidly develop and launch new products and services. The platform is a robust set of technology, mobile, digital, data and core capabilities in the cloud with an ecosystem of innovative partners (many insurtech technology startups) that provides the ability to launch and grow a business rapidly and cost effectively. Will established insurers suffer at the hands of tech-savvy, culture-savvy competition? Some may, but only if they allow themselves to. There will be constant pressure from greenfields and startups to outdo each other in the race to better meet the needs and demands of a new generation of buyers in a post-digital age for insurance. For traditional insurance companies, the need to re-invent and transform the business is no longer a matter of if, but of when.  Insurance leaders should ask themselves: Do we have a strategy that considers transformation of both the legacy business and creation of a new business for the future? Who are our future customers and what will they demand? Who are our emerging new competitors? Where are we focusing our resources…on the business or on the infrastructure? A new generation of insurance buyers with new needs and expectations creates both a challenge and an opportunity that a greenfield and startup business model can capitalize on to incubate, launch and grow. The time for plans, preparation and execution is now — recognizing that the gap is widening and the timeframe to respond is closing.

Many critical infrastructure systems, such as those that control the electric grid, oil and gas refineries and transportation, are now getting linked to the internet. That makes them easier to manage and maintain but also could put them in the line of fire for cyber attacks. I recently discussed the issues involved in upgrading and protecting these critical industrial control systems with Patrick McBride, chief marketing officer at Claroty, a startup that intends to secure the operational technology networks that run companies’ infrastructure systems. A few big takeaways from our conversation: Old systems, new protections When industrial systems were built, sometimes decades ago, no one considered the need for digital protections. “The systems were never designed, especially 10, 15, 20 years ago, with cybersecurity in mind,” McBride told me. Their primary design goals were the safety of the workers and the resilience of the systems, he said. “Security wasn’t even an afterthought. It wasn’t a thought.” See also: How Tech Created a New Industrial Model   Now, a new class of tools is coming online to help monitor these legacy systems. Using behavior analysis and anomaly detection, they are designed to catch intruders early in the attack life cycle. “Monitoring technology is going to play a huge part in this environment,” McBride said. Mishmash of systems leaves exposures Big industrial plants are careful about what they put on their networks, but some are putting wireless and other access points on systems as time-saving techniques to gather data more efficiently. When organizations began to recognize the need for cybersecurity, some traditional IT security vendors repurposed existing technology, McBride said.That didn’t work particularly well, because in the industrial control systems, the networks speak to other kinds of protocols.“You’ve got a whole set of overwhelming business value from pulling data out of those plant systems and being able to provide that information back to the executive,” McBride said. For example, there are a lot of Windows XP machines in industrial environments that keep air conditioning going, or run chemical manufacturing plants and refineries. Potential for escalating industrial attacks In December 2016, attacks on the Ukrainian power grid cut off a fifth of all electrical power in the capital city of Kiev. The purposeful takedown was attributed to Russia. The troubling fallout: Threat researchers around the world have found indications of the type of malware used in Ukraine on other energy and industrial companies’ networks, McBride said, showing that hackers are at least probing for vulnerabilities. See also: It’s Time to Accelerate Digital Change  

But threats from nation-states are only one issue. “There are other categories that people are really starting to worry about. If you combined the ease at which it is to gain a foothold on these networks and the relative ease you can attack these systems, it’s not hard,” McBride said. “You don’t have to squint too hard to say … ‘Terrorist organizations might want to do this or buy expertise to help them do that.’”

This post originally appeared on ThirdCertainty.

WannaCry was a wake-up call. Petya is a wake-up call. Last I checked, wake-up calls were meant to bring about change. After WannaCry, we saw a massive surge in patching around the globe, not to mention a 22-year-old “accidental hero” in the U.K. who helped halt the malicious software. It’s proof that beating the drum continuously to public and corporate institutions about serious cyber defense tactics doesn’t seem to do the trick, and once again we will see a tangible drop in cybersecurity activity until the next big attack. It will only keep getting worse. See also: 5 Best Practices in Wake of WannaCry   The question is quite simple—why aren’t organizations doing more about this? We witness the answer every day: Most organizational leaders refuse to support their internal teams when asked for procedural change or proper funding for cybersecurity defenses—which cuts their bottom line. In practice, it’s quite easy to see the lack of emphasis given to cybersecurity when it warrants only 3-6 percent of IT budgets, and oftentimes that number includes risk management. Moreover, our community just now is scratching the surface of providing tangible cybersecurity reports to the organizational board level, meaning its level of import is still not equal to that of numerous other reporting requirements. There are strict physical safety measures imposed on numerous industries, like seat belts and airbags, yet we need look only at the current U.S. administration and its public stance on cybersecurity to see an instance of unbelievably insufficient governmental policy. The entire intelligence community and the cybersecurity community that supports the government knows and has known the Russians have sophisticated teams and methodologies that have been used to attack us for years. This administration seems to have turned a blind eye on our national defense given their consistent refusal to admit Russia’s complicity. See also: WannaCry Portends a Surge in Attacks   This makes a bold statement that the White House has no intention of preventing, at a policy level, cyber attacks. There are still gaping holes in the federal CISO and White House CISO positions and we haven’t received any movement in policies or executive orders of any substance. This article originally appeared on ThirdCertainty. It was written by Paul Innella.

Insurance companies have long faced obstacles in optimizing their asset portfolios as the balance sheets of highly regulated, complex operating companies providing various financial products. Traditional one-size-fits-all methods to solve agency problems and hesitancy toward adopting new technologies have held them back. Over- or underutilization of quant models as well as the absence of a clear process to manage multiple tradeoffs have also prevented insurers from achieving optimal returns and customization. On the other hand, investment professionals and third-party managers have avoided insurance company asset management due to strict and multiple layers of industry regulation, and their complex capital/liability structure. The pressure to get better returns, along with structural changes and emerging financial technologies, has caused insurers and asset managers to reassess their strategies and look for ways to transform their old ways of investing. That’s where the practice of Enterprise Driven Investing can help. See also: A New Way of Thinking on Assets   Enterprise Driven Investing (EDI) for insurers is a business management process that attempts to address several pitfalls, improve decision-making and enhance results. The goal of EDI is to achieve a high level of portfolio customization in the most financially efficient manner. This is done through a four-step process. Step 1: Establish the full set of financial variables and set priorities EDI begins by establishing and prioritizing the complete set of financial considerations. The fact that there are multiple business factors that affect each other is the principle characteristic that distinguishes Enterprise Driven Investing from Liability Driven Investing and creates this first step. These considerations include form of ownership, liabilities from a global encyclopedia of risk, actuarially complex policy terms and product options, taxes, liquidity requirements, colliding capital objectives, affiliate structures, competing rating agencies and several regulatory regimes that are rarely coordinated and, in combination, are the most complex in business. EDI’s first step captures the complete set of these variables and then challenges the board and senior management team to establish those that are primary, secondary and less relevant to their organization. Step 2: Design a portfolio objective, and related performance measures, from the financial priorities Insurance asset management in any form is as much a design challenge as an investment one. Careful design of the primary objective is the gatekeeper to successful EDI. Portfolio objectives for these entities are no different than for other portfolios in that they are two-dimensional measurements of risk and return. The definition of each, however, has financial attributes linked to an operating company. Return can be total, net investment income (NII), cash flow, a combination or something else entirely. Risk can be portfolio volatility, CVaR, TVaR, economic shortfall, Solvency II capital charges, etc. Even the best selection will have shortcomings. A poorly conceived objective alone can offset, entirely, the talents of a high-performing investment team. Success in the design phase will occur if four guide rails are in place:

1. Company-specific customization – Investment objectives should be dictated by market segment based on lines of business, ownership structure, scale and domicile.
2. Clarity of timeframe – This should be longer term but explicit (e.g. three years).
3. Proper selection and calibration of constraints. Sensitivity analysis is the radar that is used to navigate through changing circumstances and costs.
4. Establishment of investment skill metrics - Legitimate performance evaluation of both internal and external managers remains one of the most challenging and increasingly important design requirements in insurance asset management.

Step 3: Establish a strategy to meet the portfolio objective with full consideration of the impact on factors not directly expressed in this objective A portfolio objective expresses an insurer’s most important return and risk measurements. The challenge is balancing the portfolio objective with other dynamic financial parameters. One response to this challenge has been portfolio optimization with multiple constraints. While helpful, relying on a single output from these analyses has weaknesses. For example, it introduces black box risk and naïve precision. It also fails to consider important variables and masks the relative significance of various assumptions and financial relationships. As a practical decision-making tool, EDI avoids these weaknesses by highlighting the collateral impact on key trip wires from changes motivated by the portfolio objective. While all companies estimate the changes in portfolio strategy against the portfolio objective, many do not grasp the shadow-pricing sensitivity of the objective to variation in constraints or, conversely, are blind to the impact of rebalancing on the full set of financial variables. For many companies, this sensitivity is both substantial and unknown. Managing sensitivity, to self-imposed limits, in particular, advances EDI from a passive to an active philosophy. Step 4: Explore ways to improve tradeoffs through higher order changes EDI begins by creating a comprehensive set of company-specific financial considerations, then establishes priorities (including the portfolio objective), and forms investment strategy after highlighting relationships between these variables regarding direction and leverage, through sensitivity analysis. In its most advanced form, creative reengineering resets trade-offs to a more favorable state and forms new ones. A few categories for these ideas are summarized below, but the opportunities are by no means confined to these topics:

• Improved capital and tax efficiency – Developing strategies to increase returns, reduce volatility, improve portfolio diversification and reduce capital charges.
• Bifurcation of assets based on line of business volatility rather than asset class volatility – Organizing the balance sheet by reserves and capital based on the volatility lines of the business.
• New approaches to asset/liability management (ALM) - Structured finance experts should create bespoke products that improve ALM, in the same way they have used their expertise for capital efficiency.

See also: How to Manage Strategic Relations  While EDI is the future of insurance company investing, it is also a framework for all investors to manage the tradeoffs of hyper-customization and pure investment efficiency. Also, because EDI explicitly recognizes, rather than avoids, the full set of enterprise variables, it represents a major advancement in balance sheet management from LDI and one-size-fits-all quantitative methods. As such, EDI reveals otherwise hidden paths to significantly better results. Finally, as a stable, but dynamic business management process, EDI principles accommodate the full spectrum of emerging financial theories and technologies.