Take a look at the financials of the insurance industry and industry projections, and it may seem like business as usual. But peek just under the surface at many insurers, and you’ll find a great deal of activity aimed at transformation. Typically, this activity takes the form of strategic initiatives—enterprise-wide programs that require sustained commitment and investment.

Our research reveals that the top strategic initiatives remain virtually the same as 2015: customer experience, analytics, new products and core replacement. This is an indication that the commitment to transformation aligned with these four initiatives is rock solid. However, the manner in which these initiatives are being funded is changing, with more funding coming from new sources outside the IT budget. In 2015, about a third of the funding for strategic initiatives came exclusively from capital investments. In 2016, funding from new sources will increase to more than 40%.

These are the questions to explore: Why change? Why all the investment and resources devoted to rethinking and reshaping the company? The answers are straightforward. Many recognize that we are entering a new digital era, one with technology rapidly advancing and increasingly in the hands of customers and competitors. Emerging trends such as the sharing economy and the rapid adoption of technologies such as cloud and mobile are creating opportunities (and risks) for insurers. In fact, SMA predicts that the introduction of new products, business models and business optimization will accelerate as insurers leverage maturing technologies and capitalize on emerging technologies such as wearables, the Internet of Things and drones. Technology really is driving a lot of the conversation and action at the senior levels these days.

Ultimately, many insurers have a vision of building a company that is agile and able to respond rapidly to market opportunities and threats. The common threads running through the strategic initiatives are the need to be digital and the key role of innovation. Although not the end games in and of themselves, digital and innovation are the enablers that form the foundation for future success. SMA has created the Next-Gen Insurer Model to describe what the future insurance company and what any future success will look like. The 12 initiatives that many insurers are pursuing are the mechanisms that insurers are using to become Next-Gen Insurers. There may be choppy waters under the visible tip of the iceberg, but the activity is very focused and taking individual companies and the industry as a whole in a new direction. In the not-too-distant future— within five years. by our estimate—the visible part of that iceberg will change, as well, and a new industry will emerge.

SMA has just released a new research report identifying strategic initiatives, “Insurers’ 2016 Strategic Initiatives: Advancing Industry Transformation.” The report covers the priorities of these initiatives, sources of funding and their role in helping insurers attain the future as a Next-Gen insurer. 

The insurance industry has been talking a lot about disruption over the past couple of years. But, as with many things, insurance is a late arriver to the disruption party. Clayton Christensen helped kick off an earnest discussion of the topic back in 1997 with his first book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. In his 2003 book, The Innovator’s Solution: Creating and Sustaining Successful Growth, he proposed this question as part of a litmus test for the disruptive potential of ideas: “Is there a large population of people who historically have not had the money, equipment or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?” While Christensen has recently gotten some flak for being too dogmatic in his criteria for what constitutes a truly “disruptive innovation” (perhaps succumbing to his own definition of disruption?), the question actually describes very well how insurance has historically operated. It is a complex, mysterious product that has forced consumers to rely on the expertise of an agent or company rep to buy, understand and use it. The increasing transparency and empowerment afforded by data, the Internet and digital technologies have helped level the playing field. Yet the majority of insurance buyers still rely on a live person, usually an agent, to make sure they’ve made the right decisions and to close the sale. The ever-growing field of companies and investors eyeing the insurance industry sees this issue as one of the greatest opportunities for disrupting the industry’s incumbents. Some companies still take comfort in the fact that the insurance industry has difficult and unique barriers to entry, chiefly its complex regulatory environment and huge capital requirements to cover losses. But the size of the opportunity — $1.1 trillion in net written premiums in the U.S. in 2014, according to SNL Financial – is an incentive that is spurring a lot of creativity, innovation and investment that will help overcome these barriers.  It’s a question of when, not if. But it’s also still a question of how. How will the insurance business model change to at least meet the litmus test described by Christensen? It's clear that changes are unfolding because of ambitious outsiders as well as creative and forward-thinking industry insiders. So what should insurers do? How should they respond? Majesco’s newly released research report (based on a survey conducted in late 2015 with its customers), 2016 Strategic Priorities: Impactful Pace of Change, reveals that many insurers are monitoring potentially disruptive technology and business trends, but, unfortunately, few are actively preparing for the changes coming. Four overall themes emerged from the survey responses:

• First, there is a clear recognition of the shift to the customer being in control and the importance of being customer-driven.
• Second, there are significant barriers and limitations on current business capabilities that must be overcome to survive — let alone to grow and compete — starting with transformation of legacy systems that were built around products rather than customers.
• Third, there are potential blind spots around customer expectations, technology and competition that are lurking around the corner of the not-too-distant future, creating forceful disruption.
• Fourth, the pace and impact of change have intensified the need for agility, innovation and speed.

While business transformation progress is being made, significant work is necessary to compete in a customer-driven age. At the same time, the world is changing rapidly, and new expectations, risks, technologies, competitors and innovations threaten to significantly disrupt the insurance business landscape. For those unprepared, the change could be devastating. The insurance industry is recognizing more and more that it is a target for potential disruption, because consumers are demanding – and getting – more transparency and responsiveness from company after company. Changes are being driven from both inside and outside the insurance industry along several different dimensions like technology, products, new players and partnerships. There are formidable hurdles for new entrants, but the incentive is huge for those who can remove the complexity of insurance and increase the value proposition for customers. Insurance companies need to move beyond monitoring these developments to actively determining how the future will look. To prepare and respond, insurance companies must adroitly do two things simultaneously: modernize and optimize the current business while reinventing it for the future. It’s like changing the tire on a car while you’re driving at full speed down the freeway. Those companies that can do this will transcend merely surviving in an increasingly competitive industry and become the new leaders of a re-imagined insurance business. Read more about how companies view these and other strategic priorities in Majesco’s research report, 2016 Strategic Priorities: Impactful Pace of Change.

When we started PolicyGenius, an independent digital insurance broker, last summer, we braced ourselves for a high-speed education on the finer points of the consumer insurance market--and boy did we get it. We previously consulted for the industry, but even that doesn’t prepare you for all the work that happens on the ground, like filing for licenses on a state-by-state basis, or spending a holiday manually preparing and sending out illustrations because of a last-minute surge in quote requests. (Or dealing with fax machines.) But learning all the nuances, even the bewildering ones, has been an amazing experience. It’s exciting to be involved in an industry right at the start of its transformation into the next phase of doing business. We hung out our digital shingle in July 2014, and thanks to our smart shopping and decision-making tools, as well as some extremely positive exposure from the national media, we’ve enjoyed 30% month-over-month growth in our user base. In the process, we’ve had 12 months to learn a lot about the modern digital insurance customer. Here are six takeaways that agents and carriers can benefit from. 1. Babies are still the No. 1 trigger for buying life insurance--which means there’s still plenty of opportunity to educate consumers about other equally important life events. It’s no surprise that having a baby motivates a person to buy life insurance. Our own data shows that among customers who take our Insurance Checkup (our online insurance advice tool), the number of those who already have life insurance jumps by 20% if the customer has a child. In a survey we commissioned last year, we found that consumers place insurance fourth in line behind saving for retirement, paying off debt and following a budget. Life insurance should be a key part of any long-term financial strategy, but a lot of people still don’t realize that. The survey also suggests people don’t recognize the financial challenges that accompany other big life events like marrying, buying a home, starting a business or becoming a caretaker for aging parents. Our takeaway: Buying life insurance for your baby is a given. Now we need to focus on bringing these other invisible triggers to our customers’ attention. 2. Couples do it together. A State Farm survey a few years ago found that 74% of people rarely talk about life insurance, in part because it’s an uncomfortable subject to bring up with one’s spouse. But we’ve repeatedly seen one half of a couple begin a life insurance application with us, and then shortly thereafter we get an application for the other half. In fact, around 20% of our life insurance applications have a partner application associated with them. Our takeaway: Once an applicant sees how easy we’ve made it to shop for a policy, she decides to take care of her partner’s policy while she’s at it. It saves time, and it prevents couples from having to talk about the subject too much or revisit it again any time in the near future. 3. Digital insurance consumers are thoughtful shoppers who appreciate honest advice. Our average customer spends 9 1/2 minutes exploring her PolicyGenius Insurance Checkup report. According to Adobe’s Best of the Best Benchmark report from 2013, the average time spent on a site in the financial services category is just more than six minutes! Our takeaway: If you give the customer intuitive educational tools and advice tailored to her financial needs, and you don’t ask for anything intrusive in return (like a phone number), she’ll become more engaged. We’ve seen this later in the shopping cycle, too, when customers look into the reputations of prospective insurance companies. But more on that below. 4. Digital insurance consumers are happy to do most of the work on their own. If you’ve been a part of the insurance industry long enough, you’ve probably heard the saying, “Insurance is not bought; it’s sold.” In other words, industry veterans believe that you have to sell (and often pressure) consumers, who wouldn’t otherwise purchase on their own. We founded our company on the theory that this isn’t true, and now we know that there are people out there who independently come to the conclusion that they need life insurance. We’ve found that customers who come to our site want to go all the way through the application process on their own, with no agent intervention. They self-navigate through decisions about coverage and carrier selection on our site, using the jargon-free content and tools we’ve built to make the path easy. It may not be as easy and fast as buying a pair of shoes from Zappos, but we’ve worked hard to make the process reliable and trustworthy. But not every self-serve life insurance experience is smooth, which is why it’s important to have human help when needed. One client told us in a follow-up thank you that it was “comforting to have someone on my side in evaluating different insurance carriers and working to get me approved when the first insurer turned me down.” Our takeaway: If you make insurance easy to shop for, you don’t have to focus so much on the hard sell. 5. Digital insurance consumers are not just Millennials. Everyone likes to talk about the Millennial consumer these days, but we’ve discovered that the digital insurance consumer isn't defined by any one generation. It’s true that Millennials (< 35) make up about 50% of our user base; however, Baby Boomers (50+) make up 20% of our user base, and Generation X (35-50)--who spend more online than Boomers do, according to a recent BI Intelligence study--fill out the rest. Our takeaway: To reach such a wide range of online consumers, we have to focus on values that have universal consumer appeal--honesty, speed and self-service that’s backed by amazing customer support. 6. Insurer financial strength and reputation are important. When you’re shopping online, you’re used to seeing reviews and ratings. It’s one of the ways online consumers compare products or services that they can’t see face to face. Customers frequently ask us for insurance company ratings and customer reviews. And they ask for help choosing a carrier when all the ones they’re considering have approximately the same rating, or if customer reviews are inconclusive. We’ve been asked, “Who is the largest insurer or has been around the longest? I don’t want anyone that will go out of business.” They take financial strength ratings, brand strength and reviews seriously, and factor them in when deciding which policy to buy. It’s so important that we’ve added one-page “report cards” into our life insurance quoting process to help answer these questions. Our takeaway: Insurance companies don’t have to worry about digital platforms like ours commoditizing their policies and encouraging consumers to shop only on price. While price is important, it’s not the only factor that consumers consider when buying a life insurance policy. As an industry, we still have a lot to learn about selling insurance to the digital consumer. And as an online broker, we’re still learning valuable customer insights from fellow brokers and agents throughout the industry. It’s true that everything we’ve learned in the past year has helped us confirm many of our initial propositions, but it’s also helped us better understand how to win over today’s insurance shopper. We can’t wait to see what the next 12 months brings.

My most recent post generated many questions, mainly about my definition of “value” in healthcare purchasing. My definition of value is the highest quality of care provided in the most efficient manner, i.e. not too much care, not too little care, delivered in a “lean” way and paid for in a mutually satisfying way. Walmart’s Centers of Excellence Program (COE) is the closest model we have. In the COE program, Walmart has selected clinics and hospitals that do a superior job of diagnosing high-cost cases and providing the best treatment plan, not the treatment plan that generates the most profit to the provider but the one that is best for the patients sent their way. This program has been very successful for Walmart, but it has been especially so for the company's associates (employees) and their covered family members. In Walmart’s benefit plans, a small number of covered lives account for a huge share of healthcare plan expenses. The company provides incentives for our associates and their covered family members to use our COEs. Eliminating fee-for-service was a big part of my previous post. Walmart’s COEs are not paid fee-for-service. Rather, the company has negotiated global fees, one flat fee for an episode of care for all surgery, testing, anesthesiology, hospital costs, etc. This is an alternative to fee-for-service, and it is working quite well. I urge other self-insured companies to find similar ways to bypass fee-for-service payments. Again, the time to act is now. If you feel your company cannot successfully negotiate direct deals with first-class providers like the ones we use, there are aggregators who can do that for you for fairly modest fees. This piece was written with Sally Wellborn, senior vice president of benefits at Walmart.

Today, the insurance industry is healthy and strong, with high levels of organic revenue growth and rising profit margins across the independent agency and brokerage channel. According to Swiss Re, mergers and acquisitions (M&A) activity continues to trend upward in terms of both the number of acquisitions and the average price paid per agency. As we start a new year, it’s important to keep in mind how much the insurance industry has evolved since it first began. From the first policy to protect shipments at sea, to coverages for new risks like cyber security that were unimaginable in years past, insurance has always been a critical component in human progress. It has allowed people to follow their dreams and take risks. No one would purchase a house or build a new industrial complex with the underlying belief they could lose it all. What’s Ahead We’ve seen how insurance has adapted over the years, but what’s next? With organic growth and acquisitions higher than ever, now is the time for your agency or brokerage to fully embrace digital technology to take advantage of every business opportunity in a market primed for profitability. Why go digital?

1. Your clients expect it Today’s insurance consumer is fundamentally changing business and customer service models. Consumers are more mobile than ever. Media and news are now consumed on the go, and personal and business transactions via mobile apps are part of everyday life. The demand for 24/7 access to information is requiring nearly every industry to reevaluate how it operates to meet these new customer expectations – and the insurance industry is not immune. In fact, in a recent survey conducted at this year’s Applied Net conference, agents and brokers ranked changing customer demand as the main catalyst to increasing their technology investments.

Agencies and brokerages should also consider that the next generation of tech-savvy insurance consumers will also be the next wave of insurance employees. They bring a new set of expectations to the workplace as insurance professionals from the baby boomer generation begin to retire. Delivering a digital customer experience has become table stakes for the next-generation trusted adviser. The insurance experience of yesterday is no longer sufficient with today's demands and tomorrow's expectations.

2. Your business requires it The increased pace of business to keep up with consumer demand can make staff feel like there are not enough hours in the day. Digital technology simplifies processes and eliminates manual tasks. In the Applied Net 2015 survey, when asked which technology most improves productivity, respondents strongly indicated that standardized workflows and agency-insurer interface are seen as the greatest source of efficiency gains.

Advanced software, such as Applied Epic, delivers pre-built, best-practice workflows to streamline processes and reduce time spent on duplicate tasks. Additionally, end-to-end transactions between a business and insurers need to happen within the management system for optimal productivity and efficient business operations. For agents using IVANS Download, employees save an average of two hours per employee per day. The Makings of a Digital Agency or Brokerage Digital transformation reflects the transition of taking manual, paper-filled processes to digitally automated workflows powered by software and the Internet. A "digital agency" is one that has undergone a digital transformation to drive growth and profitability across its lines of business. It experiences many digital, paperless interactions and transactions per day with insurers and insureds and among staff. A digital agency is built on 5 pillars:

1. A single agency or brokerage management system to serve as the operational foundation. Your system should be able to manage every type of business from personal lines, commercial lines, benefits and risk management, and it should connect all of your staff within your agency or brokerage including CSRS, producers, accountants and principals. Consider this: 50% of the insurance industry’s workforce will retire in the next decade. Can new staff be efficiently trained on your agency management system?
2. Big data evaluates ways to mine and analyze the rich transactional data in management systems. There is an abundant amount of data in your management system, but do you have the technology to quickly gain insights? Data analytics uses advanced technologies to analyze vast amounts of data and produce analytic insights in visual representations much more rapidly than traditional tabular reports. Consider this: Companies that use data analytics are five times more likely to make faster decisions than their peers.
3. Insurer connectivity creates a digital connection between your management system and your chosen insurer partners. It’s important that agencies and brokerages have access to the best products and the best insurers to meet the risk needs of each client, and connectivity allows just that. Consider this: 69% of survey respondents found the availability of automated insurer interface to be very important when selecting insurers to do business with.
4. Mobility gives agents and brokerages the ability to interact with prospects, clients and employees in the field via insurance-specific mobile apps and client portals. It becomes much easier to obtain information when you have your smartphone or tablet in a time of need. Consider this: 76% of Millennial survey respondents believe access to information via a mobile app is important.
5. The Cloud allows your staff access anytime, anywhere, as well as full security and data backup. Hosting your software in the cloud leads to increased flexibility, security and business agility. Consider this: Today, 77% of organizations cite agility as the primary reason of moving to the cloud. Whether you are scaling up via organic growth or M&A or scaling down to be sold, the cloud allows your business that flexibility.

Step into the Digital Age With today’s customers expecting more and increased competition redefining the insurance industry, digital technology simplifies and amplifies current processes. It expands communication channels – to clients and insurer partners. It mobilizes your staff from their desk to the field. Digital technology elevates your role as a trusted adviser, making you present at all moments of opportunity – any time, anywhere. As each year goes by, we strive to be better and do more for our customers. Business as usual is no longer enough. The strategy? Your foundation has to be more advanced, your communication channels need to be open and your business must be mobilized. Growth-minded agencies and brokerages have a great opportunity ahead.

In today’s American healthcare system, employers can’t order Lipitor directly from Pfizer fortheir employees. Instead, employers and employees are forced to buy drugs through a middleman, the pharmacy benefits manager (PBM). Fingers have long been pointed in both directions to blame the other for the high cost of prescription drugs. The PBMs blame the drug manufacturers, and the drug manufacturers blame the PBMs, not unlike two children arguing on the playground. Eli Lilly, one of the world’s largest drug manufacturers, recently claimed that the average price increase on Humalog, its injectable insulin used to treat diabetes, has only been a modest 1% to 2% annually over the last five years. Tim Walbert, the CEO of small drug manufacturer Horizon Pharmaceuticals, said in a recent interview, that he expects the company's actual price increases to be 4% or less over the next year. PBMs, on the other hand, portray the drug manufacturers as greedy price gougers that fail to keep prescriptions costs under control. Anthem, one of the nation’s largest health insurers, works hard to convince its employer clients to leverage the buying process by joining Anthem's negotiated PBM program with Express Scripts Inc. (ESI) instead of negotiating a direct deal with a PBM. This month, however, Anthem came out swinging, accusing its partner ESI of more than $3 billion in overcharges – all of which were passed along and paid by clients. Who should the employers believe is at fault? Employers are aware of their prescription benefit bills. They clearly see that costs are escalating at an unprecedented rate. What can they do about the problem? How can they succeed if a buyer as large as Anthem failed for its thousands of employer clients? Today’s healthcare market only permits employers to buy the employee drugs from two different platforms. They can choose to buy through a PBM partnership (Anthem partnered with ESI) or a large benefits broker’s partnership with a PBM. Secondly, they can choose to work with a consultant for high-level advice and contract directly with a PBM. Regardless, the employer always gambles that it knows more about the PBM’s 120-page contract, pricing calculations and methodology than Anthem apparently did. It is a monumental sign of the times that Anthem publicly blamed ESI for its failure to contract effectively with the company, leading to overcharges for its clients. Our healthcare system today is broken by design – not necessity – and virtually everyone in the chain lacks the incentive to fix it. In fact, people are financially motivated to maintain the status quo. Until drugs can be purchased directly from the manufacturers for a direct discounted price, employers are trapped in our national prescription benefit system.

2015 was a year in which cyber criminals continued to innovate and expand their activities. As 2016 commences, look for insider threats to take center stage and for leading companies to respond. Meanwhile, cybersecurity and privacy issues will continue to reverberate globally. Here are a few predictions for the coming year: Cyber threats and elections– Threat actors targeted the websites and emails of presidential candidates in 2008 and 2012. Campaign websites continue to be used to raise money, making them targets for hacktivists and cyber criminals alike. Expect to see U.S. primary frontrunners and eventual nominees successfully targeted and to see at least one campaign undermined by a data breach. IoT spurs new rules– This will be the year consumers awaken to security and privacy concerns attendant to the Internet of Things. A major physical disruption — through the breach of a connected car or medical device or weak security in a connected toy — will spur regulators and consumers to demand action. Expect companies to spend untold amounts on testing and retrofitting IoT devices to meet hastily approved “privacy and security by design” rules. Insider threats get addressed– Insider threats — current or ex-employees with knowledge of, and access to, the corporate network — will take center stage in 2016. This will push human resources leaders onto cross-functional cybersecurity teams in many organizations. Expect leading-edge companies to invest in technologies that identify and, in some cases, prevent insider threats before they cause material damage. International data flows narrow– Uncertainty arising from the demise of the EU-U.S. Safe Harbor pact will disrupt international data flows. Expanding European nationalism, distrust of U.S. surveillance and subpoena power, the prospect of triggering huge fines for transborder transfers and political disputes over alternatives will drive some U.S. companies to avoid doing business with Europe altogether. Meanwhile, other multinationals will opt to segregate business functions geographically by building local cloud services and data centers that protect them from penalties. Boardroom shuffle– With concern mounting over cyber risks, organizations will evaluate fresh approaches to ensure boards are well-informed and comfortable making strategic decisions. Expect the appointment of specialist, non-executive cyber directors and the formation of dedicated cyber-risk committees (similar to audit committees) with independent advisers. Regulators may also pursue the concept of “cyber competent” people as a requirement for boards. Cyber insurance spike– Demand for cyber liability coverage will continue to rise. Expect premiums to also rise because of constantly evolving threats, immature risk models and an underdeveloped reinsurance market. This will affect retailers, healthcare providers, banks and others that are considered high risk. Uncertainty about the concentration of exposure will lead regulators to impose cyber incident “stress testing.” This is a way to model the impact of multiple, simultaneous incidents on cyber insurance carriers — and potentially stop those that fail these tests from writing new policies.

Blockchain, blockchain, blockchain! What does that mean for insurance? No one knows yet, but that doesn’t stop blockchain from being one of the hottest topics in the insurance industry right now. This week, I take a look at the direction this puck is heading. Hype or reality? Last September, the World Economic Forum published a report titled, Deep Shift – Technology Tipping Points and Societal Impact. The report is based on surveys with more than 800 executives and experts about new technologies and innovations. The point of the report is to identify deep shifts in society that result from new technologies. These include areas such as 3D printing, driverless cars, wearables and artificial intelligence. I was drawn to shift No. 16, simply called “Bitcoin and the blockchain.” By 2025, 58% of these experts and executives believed we would hit the tipping point for Bitcoin and blockchain. This was defined as: “10% of global gross domestic product will be stored on blockchain technology.” To put that into context, the total worth of Bitcoin today in the blockchain is about 0.025% of today’s $80 trillion global GDP. Also of interest, especially given that it looks like Tunisia will be the first country to issue a digital currency on a blockchain, shift No. 18 was called “Governments and the blockchain.” Here, almost three out of four in the survey group expected that “governments would collect tax via a blockchain by 2023." It’s a reality then! It’s certainly looks that way. And $500 million of venture capital money in 2015 can’t be wrong, can it? The prospect of a seismic shift on a par with the impact of the Internet is compelling. That explains all the attention, predictions and excitement about blockchain. But, if we use the evolution of the Internet as a benchmark, the development of blockchain today for commercial use is equivalent to the Internet in, say, the mid-1990s, at best. The debates on Bitcoin, on whether private or public blockchains will be used, on Sybase vs Oracle (oops, wrong century) are yet to play out. The ability of the Bitcoin blockchain to scale to handle massive volumes at lightning speed remains unproven. Now, just as it was in 1995, blockchain technology is at an embryonic stage. Still finding its way, it has yet to prove it is a viable, industrial-strength, large-scale technology capable of solving world hunger. That is why I am going to focus on the use case for insurance rather than the technology itself. (For one explanation of how blockchain works, go to Wired.) The smart insurance contract This is getting the most attention right now. The notion of automating the insurance policy once it is written into a smart contract is compelling. The idea that it will pay out against the insurable event without the policyholder having to a make a claim or the insurer having to administer the claim has significant attractions. First, the cost of claims processing simply goes away. Second, the opportunity for fraud largely goes away, too. (I hesitate here simply because it is theoretical and not yet proven.) Third, customer satisfaction must go up! One example being used to illustrate how these might work came from the London Fintech Week Blockchain Hackathon last September. Here, a team called InsurETH built a flight insurance product over a weekend on the Ethereum platform. The use case is simple. In the 12 months leading up to May 2015, there were 558,000 passengers who did not file claims for delayed or canceled flights in and out of the UK. In fact, fewer than 40% of passengers claimed money from their insurance policy. InsurETH built a smart contract where the policy conditions were held on blockchain. Using the Oraclize service to connect the blockchain with the Internet, publicly available data is used to trigger the insurance policy. In this case, a delayed flight is a matter of fact and public record. It does not rely on anyone’s judgement or individual assessment. It is what it is. If a delayed flight occurs, the smart contract gets triggered, and the payout is made, automatically and immediately, with no claims processing costs for the insurer and to the satisfaction of the customer. Building on this example and applying it to motor, smart contracts offer a solution for insurers to control claims costs after an accident. A trigger that there has been an accident would come to the blockchain via the Internet from a smartphone app or a connected car. Insurers are always frustrated when customers go a more expensive route for repairs, recovery and car hire. So, with a smart contract, insurers could code the policy conditions to only pay out to the designated third parties (see related article by Sia Partners). So long as the policy conditions are clear and unambiguous and the conditions for paying are objective, insurance can be written in a smart contract. When the conditions are undeniably reached, the smart contract pays. As blockchain startup SmartContract put it, “Any data feed trusted by a counterparty to release payment or simply complete an agreement can power a smart contract.” To understand this better, I asked Joshua Davis, the technical architect and co-founder at blockchain p2p InsurTech Dynamis, to explain. He said: “You need well-qualified oracle(s) to establish what 'conditions' exist in the real world and when they have been 'undeniably reached.'  An oracle is a bridge between the blockchain and the current state of places, people and things in the real world.  Without qualified oracles, there can be no insurance that has any relation to the world that we live in. “As far as oracles go, you can use either a single trusted oracle, who puts up a large escrow that is lost if they feed you misinformation, or many different oracles who don’t rely on the same POV [point of view] or data sources to verify that events occurred. “In the future, social networks will be the cheapest and most used decentralized data feeds for various different insurance applications.  Our social networks will validate and verify our statements as lies or facts.  We need to be able to reliably contact a large enough segment of a claimant’s social network to obtain the truth.  If the insurance policy can monitor the publishing or notification of our current status to these participants and their responses accurately confirm it, then social networks will make for the cheapest, most reliable oracles for all types of future claims validation efforts.” Is this simply too good to be true? Personally, I don’t think it is. Of course, a smart contract doesn’t have to be on the blockchain to deliver this use case. However, what the blockchain offers is trust. And it offers provenance. The blockchain provides an immutable record and audit trail of an agreement. The policyholder does not have to rely on the insurer’s decision to pay damages because the insurer has broken its promise to keep the client safe from harm. As the WEF report states, this is an “unbreakable escrow.” The insurer will pay before it even knows what happened. There’s another reason for going with the blockchain: cybersecurity! With the blockchain sitting outside the corporate firewall and being managed by many different and unconnected parties, the cyber criminal no longer has a single target to attack. As far as I’m aware, blockchain is immune to all of the conventional cyber threats that corporations are scared of. What happens when you put blockchain and P2P insurance together? In December, I published a two-part article on Peer 2 Peer Insurance (here are Part 1 and Part 2). When you put the P2P model together with the blockchain, this creates the potential for a near-autonomous, self-regulated insurance business model for managing policy and claims. Last year, Joshua Davis wrote an interesting white paper called “Peer to Peer Insurance on the Ethereum Blockchain." He presents the theory behind blockchain and the creation of decentralized autonomous organizations (DAO). These are corporate entities with no human employees. The DAOs would be created for groups of policyholders, similar to the P2P group model with the likes of Guevara and Friendsurance. No single body or organization would control the DAO; it would be equally “controlled” by policyholders within each group. All premiums paid would create a pool of capital to pay claims. And because this is a self-governing group with little or no overhead, any float at the end of the year would be distributed back among the policyholders. Arguably, this makes the DAO a non-profit organization and materially increases the capital reserve for claims costs. The big question mark for this model is regulation. There still is no answer to who will maintain the blockchain code within each DAO when regulations change. But, what does seem a dead certainty is that someone, somewhere is figuring out how to solve this. Blockchain offers the potential for new products and services in a P2P insurance model. It should also open insurance to new markets, especially those on or near the poverty line. For now, we must watch to see what comes from the likes of Dynamis, which is using smart contracts to provide supplementary employment insurance cover on Ethereum. Innovation will come from new players It has been my belief for some time that, in the main, incumbent insurance firms will not be able to materially innovate from within. As with Fintech, the innovation that will radically change this industry will come from new entrants and start-up players, such as: Dynamis SmartContract Rootstock Everledger (see previous article on Daily Fintech) Tradle Ethereum Frontier Codius (Ripple Labs) (update: Codius discontinued) This is particularly true with blockchain in insurance. These new age pioneers are unencumbered by corporate process, finance committees, bureaucracy and organizational resistance to change. Besides, the incumbent insurance CIOs have heard this all before. For decades, software vendors have promised nirvana with new policy administration, claims and product engines. So, why should they listen to the claims that blockchain is the panacea for their legacy IT issues? But,  that is a subject for another post … watch this space!

How do you eat an elephant? One bite at a time. What an old joke with a great premise. No matter how big the task, taking things one bite at a time makes any daunting task seem easier to swallow. Take the big data challenge. By and large, insurance companies and traditional businesses are used to relying on paper files, mailrooms, fax machines and call centers as incoming data streams. Designed to handle internal data collected from limited sources, the systems showed their first hint of trouble with an inability to incorporate emails and SMS text messages into policyholder and claim files. Inefficiently integrated best-of-breed IT environments further complicated the issue by putting data in silos and restricting access to users. Today, integration of systems has improved, and the move toward suites has enabled additional collaboration and data sharing benefits. However, big data, marked by its volume, velocity and variety, still has insurers stymied. And the move toward omni-channel distribution, the Internet of Things (IoT) and the connected world has amplified the need for insurers to incorporate even more data streams (both internal and external) into the risk assessment process. Cue the analytics software and reporting solutions, neither of which alone will make a legacy system more able to digest information from new data sources for rating and underwriting purposes. Meanwhile, the big data behemoth is growing into the proverbial elephant in the room. The problem is no longer just Incorporating this data; analyzing it and acting on it are equally incomprehensible. Buying data from traditional data sources –including motor vehicle reports (MVRs), historical flood data and credit reports on the property and casualty (P&C) side or health and medical records or test results on the life and health side is expensive. Furthermore, traditional data sources don’t allow insurers to pick and choose what may be most useful based on line of business, let alone product or policy type, geographic area or purchasing preferences. Alternative data sources such as social data exist, but the unstructured nature of the information makes it especially difficult for insurers to internalize. Consider that today’s consumers, who are both existing and potential new policyholders, are creating mountains of data that could contribute to better risk decision making, but right now that data doesn't make it to the underwriter’s desk. Social data is a silver bullet that can provide a predictive enhancement layer for traditional data sources, leading to more accurate underwriting and making insurers better able to select the best risks. By breaking the traditional data collection and utilization mold as it relates to risk assessment, insurers can integrate social data with core administration systems, making unstructured social data both accessible and actionable across all industry segments and lines of business. By capitalizing on the explosion of social data as a resource for better insurance risk assessment, insurers can improve underwriting, streamline the claims investigation process, decrease loss costs and potentially make insurance relevant to a whole new generation of insurance consumer. The scope of the big data problem is just dawning on insurers. In an effort to not bite off more than can be chewed at one time, insurers can start to consume and absorb big data by incorporating social data into rating and underwriting. But keep in mind that social data is just the first bite of a very important meal.

Workers’ comp insurers are applauding wearable tech initiatives as a potential way to monitor and reduce workplace accidents and injuries. But some observers are asking at what cost to privacy. AIG recently announced its strategic investment in tech startup Human Condition Safety (HCS). The start-up, a spin-out of Human Condition Labs, develops wearable technology that incorporates artificial intelligence, building information modeling and cloud computing to try to prevent workplace injuries. The company is targeting industries that hold the highest risk for workers, including heavy manufacturing, energy, warehousing and distribution, mining, transportation and construction. Because state laws require businesses to provide medical coverage, rehabilitation services and lost wages to injured employees through workers’ compensation programs, coverage in this area is one of the insurance industry’s largest product lines. By decreasing employee injuries and deaths through wearables, the industry believes it may be able to lower costs and increase profits for itself and its clients. Employers have many incentives to test these products in their work environments. But before concussion-detecting sensors in hard hats or fatigue-monitoring wristbands become widespread for workers, the tipping point may be that issue of privacy. Experts in workers’ comp say companies must first investigate employment legalities and may need to negotiate with labor unions. As a result, insurance defense law firms that defend workers' comp claims will want to pay close attention to emerging technology trends such as wearable tech and other similar innovations for the following reasons:

• Any safety initiatives that may reduce the number and severity of claims will reduce the number of claims that need to be litigated.

• There will be privacy implications for both employees and employers. When it comes to granting access to individuals’ behavior and health information, law firms need to familiarize themselves with the type and purpose of data being collected, as well as the protection of that data.

• Insurance carriers will continue to evaluate how new technologies might eliminate claims and reduce claims costs.

Wearable tech is still in its infancy because employees need to be convinced that the information collected for the safety of the greater good is worth it. Pilot programs underway may take a year or more before they are actually put into practice in workers’ compensation insurance programs, but insurance defense law firms will want to demonstrate an understanding of these technology trends to better serve the needs of insurers and their insureds. Read more news about the insurance defense market at www.insurancedefensemarketing.com.