While the number of usage-based insurance (UBI) policies reached 14 million at the end of September 2016, most insurance companies are still overwhelmed by the challenge of using collected data to rate their customers’ driving habits. This conclusion is based on analyzing the world’s 27 largest UBI programs, including those of Admiral, Allianz, Allstate, AXA, Generali, Desjardins, Direct Line, State Farm, the Hartford, Unipol, Uniqa and Zurich. See also: Why Exactly Does Big Data Matter?   Progressive, the No. 1 telematics insurer globally, still uses a temporary device and does not collect GPS data. Unipol, the No. 2 player, still only collects mileage data from its customers. We believe, however, that the prehistoric age of connected insurance analytics is ending. The era was based on the premise that all policyholders are reluctant to be “tracked." But with most of us giving daily credit card, fingerprint, driving speed or location details to companies such as Apple, BMW or Vodafone, how to make sense of the self-censorship that insurers apply to their programs? The truth is that more data benefits insurance companies… and the careful drivers! At the center of this change is advanced data analytics – the ability to extract insights from real-time data sources and discover risk-predictive patterns. Our analysis, detailed in the Connected Insurance Analytics report, shows that the glaciation period’s ice is melting and that all the key insurers are now moving. See also: Data Science: Methods Matter (Part 3)   Progressive started a vast recruitment plan to attract data scientists. Generali also made a strong move by acquiring MyDrive, an analytics provider with early footsteps in smartphone UBI. Allstate just created Arity, which will collect data on drivers and sell analytics products to third parties. Simultaneously, Unipol created Alpha, a self-standing analytics and telematics operation. The bulk of insurance companies is yet to act. To help them adapt to this new climate, Ptolemus published the Connected Insurance Analytics (CIA) report as a step-by-step guide to advanced analytics. It describes, analyzes and illustrates the process by which advanced analytics companies take raw driving data and transform it into real-time, individual risk profiles. The investigation shows that acceleration, braking and mileage are the most used -- unsurprisingly -- but also that the range of factors is much wider and illustrates the complexity involved in selecting the correct criteria. To offer a predictive driving score, the report demonstrates that insurers must gain a deep understanding of driving conditions. Adding contextual data, such as road type or relative speed, is a necessary step to price customers fairly. The full article from which this is extracted is available here.

The insurance industry is a $4.6 trillion market worldwide that lags when it comes to digitization and providing consumers with a great experience and service. We are looking at the five main challenges that startups face. We have covered Challenge No. 1 here and Challenge No. 2 here. In this article, we will look at Challenge No. 3. Challenge No. 3: How do you create an insurance structure that supports disruption, dynamic operations, high-quality service and the relationship with (re)insurers. Most startups will begin as a broker or, more likely, a managing general agent (MGA), acting like an insurer without having a fully licensed underwriting insurance vehicle. MGAs are the fastest way to start, but they can quickly become constraining. See also: 5 Challenges Facing Startups (Part 1)   Some of the issues that may arise and, therefore, need to be managed as an MGA include:

• Cultural challenges: Insurers that are established organizations are used to working on different timelines than startups, and this could slow the innovation. In addition, having an outside partner may restrict the flexibility to innovate or differentiate over time.
• Challenges of product innovation: Startups need to get to market as soon as possible and test their value proposition and customer engagement. Starting as a MGA means they will rely on third-party insurers or reinsurers for support in the product development process. This, by definition, will be time-consuming (how time-consuming will depend on the in-house expertise of the startup.) This approach may ultimately result in limited differentiation because products or variations will need to be available to multiple startups.
• Restrictions in the speed to learn and adjust: Most critically for innovation, scaling, operating flexibility and profitability are the people capacity and IT systems. It is very important to be able to adjust the product, pricing and marketing from actual operational experience and performance in a dynamic way. This is more challenging when the startup does not control the complete value chain and decision-making and when expertise is external to the organization.
• Challenges of meeting service standards: With key elements of the insured service resting with outsourced parties (including traditional insurers), the challenge of ensuring timely, fully automated and friendly service will be great. For example, buying or changing an insurance policy with a startup provider is one thing, but receiving a poor claims experience from a third party partner could hurt the brand and reputation of the startup.

The alternative to an MGA is creating a fully licensed insurance carrier, which is cumbersome. This involves regulatory approval, up-front committed capital from investors, assurance that the processes are in place for compliance (e.g Solvency II), that there are funds to absorb initial startup losses and that there is a detailed business plan. In addition, while becoming a fully licensed insurer gives more options and flexibility to address the issues for MGAs, it does not remove the problems entirely. The greater danger is that this process will distract from the startups' focus on customer testing and on providing a compelling minimum viable product. Takeout Getting to market and focusing on customer testing is key — and an MGA allows this. An MGA setup ensures speed to market at minimal regulatory hurdles and low capital needs. Reinsurers and large insurers are increasingly open to offering products and underwriting capacity directly to startup MGAs, as well as policy administration, renewals and claims services and access to a network of claims partners. Do not forget to talk also to small insurance companies. There are some players that could be very helpful in product development and when it comes time to market. See also: Startups: How to Find the Right Partner   Long-term scaling and profitability require a company to set up its own insurer — plus build a full-stack platform and service capability. We believe that, to be a really successful startup, you will quickly need to employ specialists in pricing, claims and marketing as well as have a full-stack technology platform. In addition, you will need to assess whether the MGA or licensed insurer route gives you the right structure over time to achieve your goals. The benefits of being a fully fledged insurer are full control of product manufacturing and operational flexibility, as well as greater access to reinsurance capital and protection. We are curious about your perspective.

Connected insurance represents a new paradigm for the insurance business. This new insurance approach is based on the use of sensors for collecting and transmitting data on the status of an insured risk and the deployment of big data capabilities that transform raw information into actionable knowledge along the insurance value chain. The insurance sector, which is considered to be fairly traditional and resistant to change, is currently being overtaken by this transformative paradigm. Connected insurance represents one of the most relevant trends, considering its potential impact on the profitability of the insurance business, the productivity of each carrier, proximity to clients and portfolio persistency. Analysis by the Connected Insurance Observatory—a think tank created by Bain & Company and Italy’s National Association of Insurance Companies (ANIA)—shows how this new approach is starting to pay off. The auto insurance sector is being transformed by auto telematics, a technology undergoing experimentation in business-insurance lines, specifically the Internet of Things (IoT). See also: The Future of Insurance Is Insurtech   Let's look at the Italian market’s experience and the key elements of the business opportunities presented by connecting an insurer with its customers and their risks. The experiences on the Italian market Italy is recognized as the most advanced auto insurance market at the global level for telematics. Leveraging the experience of the auto business, the country is affirming its position as a laboratory for the adoption of this new paradigm by other business lines. The fact that the Italian insurance market represents the state of the art for connected insurance gave rise to the idea of creating the Connected Insurance Observatory as a think tank to help generate and promote innovation in the insurance sector, offer a strategic vision and stimulate debate. More than 70% of Italians show a positive attitude to auto telematics insurance solutions, and 26 different insurance carriers in the Italian market are currently offering this product. Telematics-based insurance contracts represented 16% of the personal cars insured in Italy in the first quarter of 2015, according to data from IVASS. This relevance of telematics was highlighted by insurer members of the Observatory responding to a question about the maturity level: 65% affirmed the “the way to manage day by day the auto insurance business was already impacted by the telematics.” This kind of telematics adoption is a complex process requiring many years, due to the cross-functional impacts and the involvement of multiple parties (tech vendors, insurers, distributors, clients). It is important to consider the evolution path shown by the Italian market:

1. Incubation phase: It began in the early 2000s, when first-mover players were studying the feasibility of combining the insurance product with the technology. The main question among carriers was, “Does the approach make sense?”
2. Exploration phase: This commenced in the late 2000s, when pioneers started to achieve volumes from the solution rolled out on the market. In this phase, the average level of awareness in the markets was low, and other players started with pilots based on a “me-too approach”; their main question was, “What is the ROI of this program?” At the end of this phase, in 2012, the Italian market accounted for about 1.3 million black boxes.
3. Learning phase: A few players started to move from focusing on “quick wins” to a more holistic approach. They were able to exploit the potential of the solution and were thus in a position to start pushing the selling phase. Some differentiation began to appear; the approaches became more articulated: Carriers also introduced insurance covers based on self-installed devices— moving away from the myth of the Italian telematics business case only being linked to anti-theft and anti-fraud—and this new approach represented around half of the telematics market’s growth through those years. The key question on the market was, “What is the best way to do it for my company?” Telematics have become mainstream, and this phase was completed by the Italian market in 2015.
4. Growing phase: Currently, the Italian auto insurance sector has reached the point where telematics solutions have traction in the market. Each player will develop its own approach and experiment with further upgrades, introducing multiple segmented products with its offer. The 4.8 million insurance contracts with a black box fitted in the car—a statistic gathered by ANIA in December 2015—is expected to grow to almost 14 million by 2020, based on the Connected Insurance Observatory’s projections.

Figure 1 below highlights the current level of telematics maturity by country and the current leadership of the Italian market: At the end of 2015, 4.8 million Italian contracts accounted for more than 45% of all the insurance contracts active globally, with sensors sending data to an insurer. This sequence of stages seems to be the necessary evolution path for the offering of connected insurance in a new business line. Connected insurance applied to other business-insurance lines have been a hot topic in the last 12 months. Insurance applied on personal lines like home and health is currently on top of the innovation agenda of many insurance carriers. In recent years, five pioneers in the Italian market have introduced house-insurance coverage with sensors and a gateway that sends data to the carriers. More than 75% of the insurer members of the Observatory consider connected insurance to be the most relevant innovation expected in home insurance in the next year. This potential is confirmed by the consumers’ voice: Connected home insurance use cases appear to be able to double the penetration of home insurance in Italy. See also: Not Your Father’s Insurance Industry   The connected home insurance sector is currently moving from the incubation to the exploration phase. The connected health sector is less mature. Some carriers are currently running pilots, and only a couple are already selling a connected health product. Around 40% of the insurer members of the Observatory consider connected insurance to be the most relevant innovation expected in the health insurance industry over the next year. What's in it for the carrier? The connected insurance paradigm opened incredible opportunities in the insurance sector, which underwent a tremendous digital transformation. Insurers can play a new, active role in their relationships with their customers. In a world where analysts project 10 connected things per person by 2020—a figure projected to grow to 200 by 2030–2040, we can calculate the house-insurance value proposition:

• An active prevention service for all the risks that could occur in the house, based on the data coming from the sensors;
• Actions to limit the damages and fix them, when the prevention was not enough; and
• The guarantee of monetary reimbursement limited to the cases of “service failure,” meaning when the two services above were not working as expected.

The three business opportunities The key business opportunities for the insurance carriers are:

1. Achieve a direct impact on the insurance profit and loss;
2. Enlarge the proximity and increase the interaction with clients by delivering a vastly superior customer experience, a proven way to achieve enlarged loyalty; and
3. Create and consolidate knowledge about the risks and the customer base.

The value generation on the insurance P&L was the area more exploited in these years, and one of the key lessons learned was: There is no “one-size-fits-all” approach. Each carrier needs to design its own connected insurance journey based on its own strategy and specific characteristics. See also: Key to Understanding InsurTech   The five value-generation levers The value-generation levers each player must combine to deploy its own approach are:

• Risk selection. Telematics can be used to select risks either indirectly or directly at an underwriting stage. There is the opportunity to generate value with the sole goal of supporting the underwriting phase; without any telematics, the tariff will adjust the insurance rate base on the data gathered. This can be achieved in two ways: 1) Directly, using a set of information coming from sensors to improve the overall quality of the underwriting process; and 2) Indirectly, leveraging the ability of the value proposition to auto-select the customer base. The analyses of the ANIA actuarial department of all the Italian insurance telematics portfolios have shown a claim frequency risk-adjusted 20% lower than the non-telematics one;
• Risk-based pricing monitoring the quantity and level of risk exposure on the basis of information monitored continuously. This personalized price requires the development of new risk models based on the fusion of the traditional insurance parameter with the connected insurance information and the contextual information.
• Value-added services (VAS). It is about enriching the value proposition by adding services built upon data provided by connected insurance. The driver’s journey was already reinvented by innovative services delivered by insurers—beyond the well-known exceptional emergency response and help to the client through a critical situation—enabling many carriers to earn fees for these services. The importance of this aspect will grow exponentially with the volume of claims-reductions due to new-car safety systems in the next couple of decades. VAS could be the insurance sector’s way to stay relevant in the future age of semi-autonomous and autonomous cars.
• Loss control. This impact can be observed from two different perspectives. The first is risk-prevention. Many carriers have this target as a challenge for the next years. Instead, the second area can be one of the most relevant impacts in the short term on profit and loss for the insurers that will adapt their claims processes in a consistent way, as proven by the auto telematics experience. Crash detection and the related anticipation of the FNOL (first notification of loss), as of the stolen vehicle recovery service, have demonstrated their effectiveness in the loss mitigation. Connected insurance reinforces the entire claims-handling process: The carrier can streamline claims-management using the structured and objective information extrapolated from the sensors’ raw data.
• Loyalty and behavior-modification programs. This mechanism generates value from the insurance perspective by engaging clients and directing them toward less-risky behaviors, (mechanisms to manage client engagement and retrocession prizes other than insurance premium discounts), but also by indirectly creating a multi-year reward mechanism to reinforce customer loyalty.

For the full report from which this article is derived, "Connected and Sustainable Insurance," click here.

The Risk Management Association has published Key Principles of Operational Risk Management. Designed by practitioners at financial services organizations, the document makes a number of good points. But let me start with what is missing: guidance on when to take risks. When an organization is focused on avoiding failure, it is very hard to be successful. Operational risk is basically about the things that can go wrong in day-to-day processes that can trip you up. It is impossible to eliminate such risk. The best you can hope for is to take a level of risk that is appropriate given the business and what it takes to be successful. The issue is not even about “balancing” risk and reward. The potential for reward should always be higher than the potential for loss – but the key is to use the same assessment methods to understand the potential range of positive effects or outcomes as is used to assess the potential harms. See also: A Revolution in Risk Management   Recognize that it’s not either/or, reward or loss. It is highly likely that both will occur! Anyway, the guidance makes some good points:

• Risk management is an integral part of business management and should be incorporated into overall business and financial planning.
• Business culture within institutions must embrace the value of risk escalation and welcome independent challenge of risk decisions. Soliciting multiple points of view and engaging in debate result in better, more informed decisions.
• Senior management should provide direct oversight of current and emerging exposures. Meanwhile, risk management should be part of the normal management process and governance, not be made a separate, adjunct function.
• Risk teams should be established with qualified, high-performing professionals who are closely integrated with business operations and the decision-making processes.
• Effective risk management is a basic responsibility of business leaders and managers.
• Risk management activities dictated solely by remote oversight functions lacking detailed execution experience are highly prone to error and inefficiency.

But I have a problem with the traditional perspective in this section: As part of sound business and strategic decision-making, operational risk implications must be assessed and considered to determine whether to

• Manage the risk.
• Tolerate the risk.
• Transfer the risk (for example, by insuring against the risk).
• Decline the risk.

To be successful, sometimes you need to take the risk, even to embrace the risk because of the potential for reward. See also: Risk Management, in Plain English The attitude of tolerating or even accepting the risk is simply wrong. Take it happily! If financial services organizations fail to take the right level of the right risks, they will fail and fade away. I welcome your comments.

Sometimes stories in the news are simply that: stories. You read them; you ponder the significance for those strangers who are affected by the news; and then you move on. Other times, you find yourself directly affected by the news of the day, and it leaves you with a slightly greater awareness as to the potential impact the story might have. Such is the case here in Florida with our most recent twist in the winding tale of workers’ compensation reform. My company has used the services of a professional employer organization (PEO) for much of its 17-year existence. However, due to growth and multi-state employment needs, we are extricating ourselves from that relationship and taking payroll, benefits and HR administration in-house. That change includes securing a direct workers’ compensation insurance policy for our company. Now, workers’ compensation in Florida has become anything but mundane, as court decisions in recent months have stripped key sections of the comp code. The two primary cases that have driven the storyline are Westphal and Castellanos. Westphal ended a 104-week cap on temporary benefits. In reality, that decision will only affect a very small percentage of claims in the state. Castellanos, on the other hand, is having much broader impact. It found that income caps on attorneys for injured workers created an imbalanced level of representation, and declared the limits unconstitutional. To make a long story short, there is now a huge unfunded liability for attorneys' fees that may be due from any cases still open from much of this past decade. Some estimates are that employers and carriers will shell out as much as $2 billion for past cases alone. Litigation is expected to surge, resulting in a recommended and approved rate increase of 14.5% effective Dec. 1. That is where the news of the day potentially affects my firm. See also: How Should Workers’ Compensation Evolve?   My agent sent me a quote for coverage effective Jan. 1, 2017. The quote, of course, included the approved rate increase that would be effective at that time. Just two hours later, a Circuit Court judge in Tallahassee blocked the approved rate increase, declaring that NCCI, which had generated recommendations for the state, violated state sunshine laws by not conducting the analysis in public meetings. This is going to be a mess. Litigation is already starting to increase in Florida. According to Deputy Chief Judge David Langham, petition filings rose 12% in 2016 (ended June 30, 2016), and thus far in 2017 (beginning July 1) the petition volume is up an average of 6%. Ironically, while everybody and their brother knows that an increase in lawyer fees WILL drive litigation and costs up in Florida, it was a lawsuit brought by a plaintiff’s attorney, acting as an employer, that brought a screeching halt to the rate increase. If that group is looking to avoid its share of blame and divert attention for the increasing costs, that strategy is not going to work. However, there is plenty of blame to go around. As I’ve said previously, these court decisions “were largely the result of some really shortsighted legislative decisions, which were largely the result of greedy actions on the part of a select few who exploited the system for their own selfish gain, which was largely the result of some people screwing around with claims that should have just been paid to begin with.” There is little doubt that abuse existed in Florida. Before reform, attorneys were entitled to fee awards any time they brought action that “benefited” a client. Stories abound of cases where, technically, benefit was obtained, but it was in no way substantial. There was the case where an attorney gained an increase in weekly indemnity of 10 cents for a client, and received a $16,000 fee for the filing. Yet another (that one of my employees witnessed) where an attorney received a decision that awarded an injured worker $5. The attorney got $2,500 for his efforts. There is little doubt that the reforms, starting back in 2004, had their intended effect. Fees for attorneys for injured workers, which were $215 million in 2003-04, fell to $136 million in 2014-15. However, the ratio of legal fees between plaintiffs and defense attorneys indicatted future problems. In 2003-04, Florida attorney fees were near parity, with 49% going to plaintiffs’ attorneys and 51% going to defense counsel. By 2014-15, however, that ratio had shifted dramatically, with 37% for plaintiffs and 63% for defense counsel (Source: Judge Langham’s Blog). There was indeed a representation imbalance created, and that caused a lot of problems here for some injured workers, particularly those with very temporary lost time and lower-value cases. The real problem here in Florida was that our legislature took a very broad brush to stop a few bad actors, and ended up painting everybody into a corner. But now, attorneys who will be the most immediate financial beneficiary have played a role in blocking the rate increase many know is needed to finance the reversal. Left unresolved, this portends big problems for the state. Carriers, facing certain cost increases but prevented from preparing for them, may simply choose to stop issuing new policies. Longer term, some could leave the state. At a minimum, those employers with a less-than-stellar experience level are most certainly facing the chopping block for their coverage. See also: Healthcare Reform’s Effects on Workers’ Compensation   As for my company, we’ve had one workers’ comp claim in 17 years. Our current loss run over that time shows zero dollars. We are in pretty good shape, but I do find myself wondering what our agent will be telling me when we chat later today. In the movie O’Brother Where Art Thou, when the boys find themselves surrounded by the law and trapped in the loft of a barn with no apparent way out, Everitt, played by George Clooney, kept repeating the obvious by saying, “Oh, we’re in one heckuva tight spot.” I know how they felt. Let’s hope that someone comes along to re-write a sensible ending to this scene.

Voltaire once said that "if God did not exist, it would be necessary to invent him." Could you say the same about insurers today, I wonder? It is striking that, as organizations have sought to come to terms with the pace and scale of change now confronting them, the story of Kodak's rapid decline from controlling 90% of U.S. film sales and 85% of camera sales to eventual bankruptcy has emerged as the cautionary tale of what can happen when you fail to keep pace with technological change. The corporate equivalent of the man who failed to sign the Beatles. However, what many people forget is that Kodak actually invented the world's first digital camera -- in 1975. Far from being some sort of industrial dinosaur, therefore, Kodak was an innovation-driven company operating right at the cutting edge of photographic technology. And while endless books and articles have been written about the reasons for Kodak's demise, in my view, the principal issue was less the failure to keep pace with change and more a lack of imagination. See also: Matching Game for InsurTech, Insurers   Kodak could not imagine a world where a digital camera would be for anyone but the dedicated professional, given its (at the time) prohibitive cost. Kodak could not imagine a world where processing speeds, image resolution, battery life and storage capacity would increase exponentially, at a fraction of the cost. Kodak could not imagine a world where people would not wish to take rolls of film down to the chemist to get them developed, pick them up a few days later and then diligently stick that "Kodak moment" in an album. Kodak could not imagine a world where everyone would carry a mobile phone that contained a camera that allowed images to be instantly shared on vast online networks. If Kodak hadn't been helping invent this new world, the failure would have perhaps been more understandable. At the time, such a world must have seemed to have been drawn from the pages of a science fiction novel. And executives' lack of imagination was compounded by a fatal cocktail of arrogance -- Kodak famously saw little point in sponsoring the Los Angeles Olympics in 1984 given its dominant position, allowing Fuji to gain a foothold in the U.S. market and grow its market share from almost nothing to 17% by 1997 -- and a complete failure to articulate and execute a plan once the scale of the threat to the core business had become clearer. Fuji, faced with the same market dynamics and yet without the benefits of Kodak's pioneering R&D, did not fall into the same trap. To my mind, there is a clear read-across to the financial services industry, right now. There is no shortage of activity. Market commentators and the media are lining up to sell their vision of both the El Dorado that lies just over the horizon and the sixth circle of Hell (heresy, for those of you who don't know you Dante!) that awaits those who fail to convert to this new religion based on innovation. Every large player has got some sort of incubator or lab or chief innovation officer, whatever that is. Joint ventures are being formed. Data scrubbed. Analytics teams hired. Digital strategies unveiled. Billions of dollars is pouring into fintech and insurtech startups, most of which will likely not survive the first round of funding. But does the innovation go far enough? Are the incumbents correctly reading the signs but merely agitating the surface in response, while deep down changing nothing? Are they like Kodak, incapable of imagining what tomorrow's world could look like, because to do so conjures up an image so terrifying that it implies that they should torch their existing business so as to give birth to a new one from its ashes? This question is of particular relevance to the insurance market, an industry whose often-archaic business practices and antiquated operating models, not to mention huge frictional costs and under-investment in IT systems, must have the financiers and techies in Silicon Valley licking their chops in anticipation. Show me another industry where a U.S. client, say, will find its risk placed via a local broker, via a U.S. wholesale broker, via a London wholesale broker, via an MGA, into a Lloyd's syndicate, only to be reinsured via a FAC reinsurance broker to a reinsurer and then potentially via another treaty reinsurance broker to another reinsurer, with each stage of the chain clipping the ticket. How much of every dollar of premium goes to providing the actual cover versus feeding a serpent in danger of swallowing its own tail? It doesn't take much imagination to see the huge potential for eliminating or automating steps in this chain, creating value for the disruptor and hugely improving client outcomes in terms of cost and service levels. But the real winners here will be those who have the scale, firepower and smarts to invest in the analytics and systems to drive not just marginal efficiency improvements in discrete parts of the value chain but to challenge the very basis of the way things are done. Traditional small to medium-sized players, therefore, unless they are operating in very specific niches, may find themselves at a long-term, structural disadvantage to larger and smarter players with more access to data and more ability to invest in the people and systems required to drive insight from it. More critical than ever, however, will be client relationships and access. Improved analytics and slick systems is all fine, but if you don't have the customer or the products and marketing skills to get to them, you're wasting your time. That, at least, has not changed. In fact, if anything, in a more clinical, automated, digital world, client contact and warmth is set to become more important than ever. This, is turn, raises an interesting question, though. While for years, brokers have operated under the somewhat existential threat of disintermediation, is the boot not now very firmly on the other foot? Unlike the insurers, who only know what they underwrite, the larger brokers, in particular, potentially have access to vast swathes of client and claims data across every single class of business and geography. Armed with this and the client relationships, and with a wall of capital looking to be deployed in the market (the rise of the ILS market bears potent witness) why do they need the insurers at all? Why not just rent the capital, underwrite the best business themselves and use the traditional market for the rest and to reinsure out the peaks? And if the brokers can do that, why not Google or Amazon, which have huge client reach and brand loyalty, unmatched analytical ability and the firepower to build, buy or hire in whatever insurance expertise they might need? See also: 3 Ways to Improve Agent/Insurer Links   Of course, the situation is not that simple. The market has not evolved in the way it has by accident. Large, complex and long-tail risks require huge balance sheets and often syndicated underwriting and reinsurance towers, to be written at all. Shareholder returns vary massively between brokers and insurers for a reason. In the rush to embrace the new, we risk ignoring all that works and that is good about the old. And because of this, change, when it comes, is likely to be more gradual and evolutionary. But change it will, and, as the Kodak story shows, the key risk may well not be that people fail to recognize that the change is coming -- I believe most do -- but that they fail to imagine quite how radical that change could be and therefore fail to plan accordingly. Henry Ford famously said that, "If I had asked people what they wanted, they would have said faster horses." The danger is that many risk now falling into the same trap.

For the past 10 years, the insurance industry has been handcuffed by the weather data that’s been available to it – primarily satellite and radar. Although important, these tools leave insurers with a blind spot because they lack visibility into what is happening on the ground. Because of these shortcomings, insurance companies are facing unprecedented litigation and increases in premiums. To solve the problem, we must first review the current situation as well as what solutions have been proposed to resolve this data blind spot. Why Satellite and Radar Aren’t Enough While satellites and radar tell us a lot about the weather and are needed to forecast broad patterns, they leave large blind spots when gathering information about exactly what is happening on the ground. Current solutions only estimate what’s happening in the clouds and then predict an expected zone of impact, which can be very different than the actual zone of impact. As many know from experience, it is common for storms to have pockets with more intense storm damage, known as hyper-local storms. See also: Why Exactly Does Big Data Matter?   The Rise of the Storm-Chasing Contractor In recent years, the industry has also been beleaguered with a new obstacle: the storm-chasing contractor. These companies target areas that have been hit by a storm with ads on Craigslist and the like. They also exploit insurer’s blind spots by canvassing the area and making homeowners believe there was damage, regardless of whether damage actually occurred. This practice can leave the homeowner with hefty (and unnecessary) bills, hurt the entire industry and lead to higher litigation costs. Attempts to Solve the Data Blind Spot Many companies have proposed solutions that aim to solve the insurance industry’s data blind spot. Could a possible solution lie in building better algorithms using existing data? Realistically, if the only improvement made is to the current models or algorithms using existing data, there’s no real improvement because the data the algorithm is using still has gaps. Algorithms will continue to create a flawed output and will have no improved ability to create an actionable result. The answer must lie in a marked improvement in the foundational data. If better data is required to solve this blind spot, one might think that a crowd-sourced data source would be the best alternative. On the surface, this solution may appear to be a good option because it collects millions of measurements that are otherwise unavailable. The reality is that big data is only relevant when you can build true value out of the entire data set and, while cell phones provide millions of measurements, the resulting cleaned data remains too inaccurate for crowd-sourced weather data to provide a reliable dataset. The alternative crowd-sourced weather networks that use consumer weather stations to collect data also lead to huge problems in data quality. These weather stations lack any sort of placement control. They can be installed next to a tree, by air conditioning units or on the side of a house – all of which cause inaccurate readings that lead to more flawed output. And although these types of weather stations are able to collect data on rain and wind, none are able to collect data on hail – which causes millions of dollars in insurance claims each year. The Case for an Empirical Weather Network To resolve the insurance industry’s blind spot, the solution must contain highly accurate weather data that can be translated into actionable items. IoT has changed what is possible, and, with today’s technology, insurers should be able to know exactly where severe weather has occurred and the severity of damage at any given location. The answer lies in establishing a more cost-effective weather station, one that is controlled and not crowd-sourced. By establishing an extensive network of weather stations with controlled environments, the data accuracy can be improved tremendously. With improved data accuracy, algorithms can be reviewed and enhanced so insurers can garner actionable data to improve their storm response and recovery strategies. Creating an extensive network of controlled weather stations is a major step toward fixing the insurance industry’s data blind spot, but there is one additional piece of data that is required. It is imperative that these weather stations measure everything, including one of the most problematic and costly weather events – hail. Without gathering hail data, the data gathered by the controlled weather stations would still be incomplete. No algorithm can make up for missing this entire category of data. See also: 4 Benefits From Data Centralization While technology has improved tremendously over the past 10 years, many insurers continue to use traditional data that has always been available them. Now is the time for insurers to embrace a new standard for weather data to gain insights that eliminate their blind spot, improve their business and provide better customer experiences. Understory has deployed micro-networks of weather stations that produce the deep insights and accuracy that insurers need to be competitive today. Understory’s data tracks everything from rain to wind to temperature and even hail. Our weather stations go well beyond tracking the size of the hail; they also factor in the hail momentum, impact angle and size distribution over a roof. This data powers actionable insights

Entrepreneurs are doers. One of the strengths of successful entrepreneurs is that they get things done. However, relying solely on their own capabilities is limiting. We only have so much time, energy, creativity and intelligence; it is a finite game. To realize the fullness of our potential, we have to harness the time, energy, creativity and intelligence of others. We need to be playing an infinite game. To do so, we must learn to lead and manage. In this complex and ever-changing world in which we live, we typically are dependent on others to get the results we want. As an entrepreneur grows his or her business, the interdependencies multiply. Entrepreneurs have to trust others — and other people have to trust them. See also: 6 Tech Rules That Will Govern the Future   The starting point is leadership. My friend and colleague Dr. Herb Koplowitz defines leadership as follows: “Leadership is the ability to set a direction and coordinate the actions of others in implementing it.” Leadership is primarily concerned with vision and strategy. Vision is the direction toward which you want to take your business. Strategy is the clear plan of action to get there. Management is concerned primarily with accountability and authority. The challenge for many entrepreneurs is that they lack clarity around their vision; they lack strategy to build the right structure; and they have never learned how to exercise authority or hold people accountable. For the entrepreneur, the ability to create highly productive working relationships that can fulfill their vision depends on three factors:

• Effectiveness: Doing the right things to reach their strategic goals.
• Efficiency: Doing things right to optimize the use of resources and to reduce costs.
• Trust: Creating a positive working environment where people feel safe, respected and valued for their contributions.

As a leader and manager, it is important to take the time to develop and implement a business plan that includes:

• A well-articulated vision (where do you want your business to be in five years?)
• A clear strategy to reach that vision (what needs to happen to fulfill your vision?)
• A formal organization structure designed to implement your strategy (who and what do you need to support your strategy and achieve your vision?)
• Staffing and managerial leadership practices to maximize effectiveness, efficiency and trust (how do you need to transform the way you lead your business?)

See also: Incumbents, Insurtechs Must Collaborate   To take your business to the next level, you need to be a leader and a manager.

Asia will be the key pillar in the coming revolution of insurance and in all likelihood will become the hottest market for insurance technology (insurtech) globally. It's no longer just a pipe dream, as this time all the stars are aligning. Take the sheer population size and rapidly emerging tech-savvy middle class, together with low effectiveness of traditional insurance distribution. Combine that with a destabilizing wave of political populism, making its rounds across much of the developed world, and you’ve got most of the ingredients for a region that will take on a leading global role for insurtech. So what, if anything, is missing to really ignite insurtech in Asia? It turns out that while the region is ripe for insurtech, the actual quantity and quality of startups in Asia is nowhere near that of other regions… at least not yet. Share of investments in insurance startups can be used as a good proxy to the overall level of insurtech activity around the world. According to the figures, the U.S. takes 63%, with Germany (6%), U.K. (5%) and France (3%). China is at 4% - which doesn’t account for Zhong An’s massive investment in 2015 -- and India at 5% (Source: CB Insights). See also: The Future of Insurance Is Insurtech   So the logical question is, why aren’t there more startups in Asia, considering the substantial opportunity and funding that exists in the region? Is it due to a shortage of experienced entrepreneurs, difficulty of starting a business, lack of access to investment or something else? The answer is that it’s likely a combination of a few factors, including a weaker early-stage entrepreneurial ecosystem, which doesn’t yet effectively support startups, and a cultural aspect of lesser tolerance for failure. Both of these are changing fast, though, and entrepreneurs across Asia are starting to identify and test innovative insurtech solutions. The following are just a few recent notable insurtech startup examples across Asia that have already reached beyond Series A funding: Zhong An (an $8 billion Chinese insurtech startup), Connexions Asia (Singaporean flexible employee benefits platform with a U.S.$100 million valuation), and two large insurance aggregators out of India-- Policybazaar and Cover Fox.

So why am I convinced that Asia insurtech startups will not end up dominating their regional home turf ?

Probability and “Survival of the Fittest” The lack of critical mass of startups in the region means that they will not enjoy the same quality filters and network effects of the larger entrepreneurial ecosystems of the U.S., Europe and to a somewhat lesser degree China. "Surviving" U.S. and European startups have to fight their way across a lot more competition to reach scale in their home markets. Hence, where a weaker startup in Asia could get repeated life support simply because there aren’t that many others to invest in, natural selection weeds out the weaker models in EU/U.S. much quicker in favor of more robust ones. Stronger startups then get to attract the best talent from the entrepreneurial ecosystem, including talented entrepreneurs whose models didn’t work as well, further reinforcing successful EU/U.S. startups. Home Market Advantage Success in a large home market like the U.K., Germany or a few U.S. states gives a substantial boost to any startup. It provides both credibility and cash flow to allow a much more aggressive expansion into other regions. This also gives a startup flexibility to develop the necessary adjustments to the business model to adapt it for Asia. The U.S. and EU have a deep domain level of insurance expertise, which gives EU/U.S. startups from those regions a further edge to tap advisory expertise locally, because most of the largest global insurers are based in these two regions. Lastly, considering that most startups adopt a collaborative approach with insurance companies, having a relationship that originates close to the top decision maker at headquarters gives an added advantage to EU/U.S. startups when they are looking at expanding to new regions. I’ve personally experienced examples of relationships developed in Europe that later carried over in creating a pre-warmed partnership with the insurer’s operations in Asia. Regulatory Complexity Asia is made up of a large number of countries, where each has its own insurance regulator, who possess views on how things should be run. This means an additional potential growth hurdle for Asian startups. For example, a startup out of Singapore will need to figure out how to navigate the neighboring Asian country regulatory regimes pretty early in its growth cycle. Thailand, Malaysia, Indonesia and Vietnam markets all have diverse regulatory requirements. This lands the Singaporean startup at a disadvantage vs. a more mature startup out of EU/U.S. – which not only has experience dealing with regulators in its home market but also possesses a proven track record and a larger resource pool that it can use to overcome any regulatory issues. Meet Future Leaders of Asia InsurTech Here are  35 insurance startups from across the U.S., Europe and China that have a real shot at collaboratively shaping the future of Asia’s insurance . Granted that not all of these startups will successfully adapt their models for Asia, a few would and will go on to successfully dominate Asia’s insurtech landscape in the foreseeable future.

The future of insurance in Asia is coming fast, and it's looking pretty exciting! See also: Insurtech Has Found Right Question to Ask   Below are links/brief description of each of these 35 ventures. U.K.

• Guevara - People-to-people car insurance
• Bought by Many - Insurance made social
• Cuvva - Hourly car insurance on-demand
• SPIXII- AI insurance agent
• Gaggel - A better alternative to mobile phone insurance.
• ClientDesk - Digitizing the insurance industry
• Insly - Insurance broker software

Germany

• SimpleSurance - World's leading e-commerce provider for product insurances
• Friendsurance - The future of insurance (P2P)
• Getsafe - One-stop digital solution for all your insurance matters
• Finanz-chef24 - Germany's largest digital insurance for entrepreneurs and self-employed
• Money-Meets - Save money and improve finances
• Clark - Insurance as easy as never before
• MassUP - White-labeled platform for online insurance sales
• FinanceFox - Your insurance hero

USA

• Metromile - Pay-per-mile insurance (usage-based auto insurance)
• Oscar - Smart, simple health insurance.
• Zenefits - Online HR Software | Payroll | Benefits - All-In-One (EB distribution)
• Policy Genius - Insurance advice, quoting and shopping made easy
• Embroker – Business insurance in the digital age
• Slice - On-demand insurance for the on-demand economy.
• Trov - On-Demand insurance for your things
• Cover Hound - Compare car insurance quotes from top carriers
• Insureon - Small-business insurance
• Bunker - The marketplace for contract-related insurance
• Lemonade - Peer-to-peer renters and homeowners insurance
• Cyence - Comprehensive platform for the economic modeling of cyber risk

China

• Zhong An - China's first complete online insurer
• Cheche Chexian - Online auto insurance platform
• Tongjubao - P2P community risk sharing platform
• Huize Insurance - Leading online insurance agency platform in China
• Xishan Information Technology - Discount insurance e-tailer

Insurance technology was once the red-headed stepchild of financial technology. But with more than 800 insurtech startups garnering almost 150 deals totaling $3.5 billion of investment since 2015, insurtech is a force to be reckoned with. With this infusion of new blood have come some interesting and provocative pronouncements about this great industry. Some have come from people who are smart, insightful and engaged, while others are just plain arrogant, full of hubris, with their feet firmly planted in the air. Some of these observations have been eye-opening and challenging, others benign, some uninformed, some just plain dead wrong. Of all the things said, one is downright wrong. This pronouncement of misinformation is that insurance is a commodity, that all insurance policies are the same, that there is no real difference between policies issued from different companies. What is a commodity? The best definition of a commodity that I can find reads: a product or service that is indistinguishable from ones manufactured or provided by competing companies and that therefore sells primarily on the basis of price rather than quality or style. The key word in that definition is "indistinguishable." The products or services when put side by side act the same, delivering the same results. A perfect example is a battery. When I need a AA battery, I go to the store and buy one. Now it does not matter what store I go to or what brand I buy. As long as it was labeled AA, I knew that it would both fit and work by delivering just the right amount of electricity (provided I put it in the right way, but we’ll save that story for another time). See also: Has Auto Insurance Become a Commodity?   Another example is gasoline for our cars. It really does not matter which gas station I go to, or which grade I select; the gas goes into the gas tank, and the car runs. Yes, we can debate the benefits of different additives and octane grades: regular (usually 87 octane), mid-grade (usually 89 octane), and premium (usually 92 or 93) and their impact on engine knock. But the simple truth is that I put any gas into my car and it runs. In one sense, I understand that insurance can be thought of as a commodity. Go to a website, enter a handful of fields, and multiple quotes are presented for you to choose from. In this narrow and limited perspective, insurance can look like a commodity on the front side of the transaction. But the real question is not if a handful of fields can get you a number of quotes, but if those policies are the same? Do they cover the same things? Will claims be paid at the same amount? If insurance truly is a commodity, policies will all pretty much look the same, covering the same things. A Personal Example I was in Las Vegas for InsureTech Connect when Hurricane Matthew came up the Florida coast. I got a text message from the airline that my return flight to Orlando was canceled, and I would be contacted about rebooking. Quickly looking at the Orlando airport website, I read that it was going to be closed starting Thursday noon and at least all day Friday. Once Matthew passed, airport personnel would assess the damage and then determine when to reopen and at what capacity. I was now in full scramble mode, calling the hotel to extend my stay. The agents was very empathetic and most willing to help. This made me feel somewhat relieved until the agent cheerfully informed me that I certainly could extend my stay another night for $780! I almost said, “Is that with or without dancing girls?” But remembering that I was in Las Vegas, I found myself wondering if that might be an actual option. Holding my tongue, I thought best not to say anything other than to thank the agent for the kind offer. Yes, I was able to find another hotel room that was less expensive. Hurricane Matthew passed without doing much damage in the Orlando area. The airport reopened on Saturday, and I was able to get home without much trouble. The reason for telling you this story is to use it as a backdrop to see if insurance is a commodity, using perhaps the simplest form of insurance: trip insurance. Go to a trip insurance website, enter four pieces of information, get a bunch of quotes, select one and pay for it via credit card. Very simple, very straightforward. Trip insurance certainly walks and talks like a commodity. The question is, when did my trip insurance start? What was covered? What compensation was I due? How much could I expect? This is where our journey really begins. Trip insurance will run you on average between 4% and 9% of the trip cost. But a survey of 10 different trip insurance policies found that the terms and payments were very different. Also, the most expensive policy did not have either the lowest deductibles or the highest benefits. As a matter of fact, one carrier that was priced around 5% of the trip cost had many of the highest benefits. Here are some details of the different policies.   As you can clearly see, the coverages differ significantly in both their cost and potential benefit. Let’s walk through Delay Compensation as an example. One policy costs 4% of the trip and pays as much as $500 for a delay of 12 hours or more (not even covering the cost of my hotel room)/ Another policy costs 5% of the trip yet pays as much as $2,000 for a delay of five hours or more. The most expensive policy costs 9% of the trip but only pays as much as $1,000. Pricing, coverage and benefits are not just mildly different, they are wildly different based on product differentiation and competition. This example is based on a simple trip insurance model. When it comes to healthcare choices, “Comparing plan premiums and deductibles only scratches the surface of what you should evaluate before selecting a plan this fall. Policy details can make an important difference in coverage and costs, but it may take some digging to uncover them.” This caution also applies to personal insurance sold directly to the public. I’m familiar with one person who selected a personal auto carrier because it was the low-cost policy. However, when he had an accident, he discovered that the policy had no collision coverage. The few dollars he saved on the premium were insignificant compared with the $3,800 repair he had to pay for. See also: A Brave New World: Move Away From the Commodity Trap   Differences in coverage and payment, inclusions and exclusions across different types of insurance are as numerous as options on a Rubik’s Cube. There are a number of other ways that insurance is not a commodity.

• Users – a commodity does not care who is using it; it just works. The fuel in your car does not care who is behind the wheel or in passenger seats. Insurance, however, does care who is using it. With insurance, depending on circumstances and policy wording, not all drivers of your car are covered by your personal auto policy.
• Ownership – a commodity does not care who owns it; it works. With insurance, a vehicle may be owned by a company with a commercial auto policy, but that does not guarantee that the vehicle is covered.
• Termination – a commodity works until it stops; the battery runs out of energy, the car runs out of fuel. That’s it. Insurance, however, is still in effect beyond its expiration date. Florida victims of Hurricane Matthew have five years to file a claim.
• Location – a commodity behaves the same regardless of where it is used. Put a battery into a device, and it provides energy no matter where you go. With insurance, the location matters greatly. While most states have either two or three years to report a real estate property claim, the timeframe varies wildly from a low of one year to a high of 10 years depending on the state. Also, when you drive your car into Mexico, the gas still works, but your auto insurance stops at the border.
• Consistency – a commodity does what it does; its specifications or requirements do not change over time. A battery is designed to deliver so much power over time based on its design. Batteries can lose their charge, and gas can degrade, but their basic function does not change. The same cannot be said about insurance, even if it is written into policy wording or legislative edict. Two recent court cases have dramatically changed the cost and coverage of workers' compensation policies in Florida. The first removed limits on how many billable hours and cost can be accumulated by claimant attorneys. The second changed the duration that temporary total disability claims are to be paid, from two years to five years. Both these decisions were made long after the policies they affect were sold.
• Cost – when a commodity is produced, its costs are known. You know all the parts of the battery, you source them, assemble the battery, distribute and sell them. The same can be said for gas. With a commodity, costs cannot suddenly go up for products already sold. But when you price and sell an insurance policy, you cannot predict all the costs or even what is to be paid and for how long. Think about the two Florida workers' compensation examples above; policies were priced and sold based on “known” limitations on both claimant attorney fees and temporary total disability payments. Insurance companies will now pay unanticipated claim costs above and beyond what was originally covered, even though they were not factored into the original pricing. And there is no way to go back to the customer and charge extra for the added claim costs that are above and beyond the original policy.
• Importance – if a battery fails, you throw it out and get another one. If fuel is old or contaminated, your car may sputter for a while, but that’s it. However, insurance is oh so much more important. Insurance gives stability to our financial markets. Insurance encourages entrepreneurial investment and risk taking. Insurance helps people rebuild their lives when tragedy happens.

Insurance is vitally important to our economy. Virtually no commerce is conducted without it. Insurance is also wildly complex, varying from state to state, company to company, policy to policy. It requires attention to detail, rigorous and serious thought. For additional information on this topic, follow the links below;

• Virtual University
• Independent Agent Magazine