December 19, 2017
Observations on insurance industry’s innovation journey
by Paul Carroll
The annual EY Insurance Executive Forum in New York City last week crystallized some thoughts about the complexity of the innovation journey that insurance and risk management professionals face. So, as we head into the holiday season, while kidding ourselves about watching our eating, here is some calorie-free food for thought:
I often say that I’ve been watching the same movie on digital transformation for more than three decades, since I started covering IBM for the Wall Street Journal in 1986 and saw it implode, followed by disruption to the whole computer industry, followed by Internet-driven upheaval for retail, journalism, music, you-name-it. But I now think that the path for insurance and risk management will be more complicated and not just because of the complex regulatory environment. One would be remiss to overlook a fundamental reality: The convergence of technological capabilities, business acumen, and risk management resulting in the reinvention of an industry has become highly refined and remarkably well capitalized.
There are really four plot lines happening simultaneously within insurance and risk management.
First, as usually happens, every part of the value chain is being reexamined. Distribution has been a particular focus for innovators, but underwriting, claims, operations and everything else are also up for grabs. Given that nearly 40 cents of every premium dollar go to expenses, including loss adjustment expenses, there is an awful lot of room for innovation at a time when every industry faces extreme pressure for efficiency. But one person’s efficiency is another person’s revenue, so the push is never easy. Based on innovators tracked via the Innovators Edge platform, nearly 2,000 firms spanning 178 countries are “insurtechs” focused on transforming some aspect of insurance.
Second, the core of the product itself is changing, even more than typically happens when, say, music goes digital or when something like car rides or hotel rooms become based on sharing, coordinated through a digital overlay from an Uber or Airbnb. Increasingly, innovators are finding new ways to manage risk and prevent losses, rather than just compensating for losses after they’ve occurred. New business models have only peeked their heads out thus far, but some are surely coming and will drive great change while creating great angst. The number of early stage technology firms that focus on areas we refer to as reinventing the actual risks managed by insurers—areas such as artificial intelligence, genomics, robotics and more—tops 68,000 worldwide, per Innovator’s Edge.
Third, the nature of work is changing. This is happening in every industry as robotic process automation (RPA) takes over routine tasks. For insurers, the complication is that the change is happening at the same time that they’re wrestling with the sorts of fundamental issues that other industries have been adjusting to for 15 or 20 years now. In many ways, automation should be welcome in insurance both because it cuts expenses and because it could reduce the pain that is surely coming as so many in insurance professionals reach retirement age. But the change will require adjustment and create uncertainty.
Fourth, customer expectations are being reset in ways that are shocking insurers. They are finding themselves forced to conform to the sort of expectations that Apple’s “there’s an app for that” and Amazon’s one-click have created in consumers. Again, every industry has had to confront these new expectations from customers who just “aren’t going to take it” any more, but the change is happening unusually quickly in insurance, which intuitively makes sense given the sheer volume of customer experiences being reinvented every day. Having groceries and recipes delivered weekly was unknown globally 24 months ago and now boasts a market cap exceeding $2B. The industry pretty much remained in a cocoon until a couple of years ago but now must snap into line, not with the fledgling Amazon of 20 years ago, but with the overpowering Amazon of today. When customers begin asking Alexa for a quote on their car insurance, the train will have long since left the station on a stellar experience coming from within the industry.
Personal computer pioneer Alan Kay says that “everybody likes change – except for the change part.” And change in insurance looks like it will follow an unusually convoluted series of plot lines. That said, the entire EY team is to be applauded for creating an EY Insurance Executive Forum experience that was rich with lessons learned and powerful advice.
As a supporting partner on the 2017 event, here are our top 6 important things we choose to highlight from this year’s conference:
- C-Suite insurance leadership need not worry about having the in-house talent to succeed executing a systematic approach to innovation. If sleep is to be lost over innovation and talent, then let the discomfort come with the issue of retaining that talent while the company contemplates a systematic approach to innovation. A strategy to identify and hire the talent that doesn’t fit historic cultural norms is another priority requiring attention. This message came through loud and clear in remarks from Eric Steigerwalt of Brighthouse Financial, Andrew Robinson of Oak HC/FT, Donna Peeples of Pypestream and Progressive Insurance CEO Tricia Griffith.
- A cornerstone of success for world class innovation-based growth strategies is having a C-suite who command truth, unfiltered honesty and constructive conflict. No better examples can be cited than the rapid fire, at times thundering, fact based presentation from ACORD’s Bill Pieroni, the candid and humorous words of Wisconsin Commissioner Ted Nickel, and the quietly direct advice from Piyush Singh, founder of Terrene Labs.
- The common thread that connected every speaker thriving amidst what many see as chaotic noise is the leveraging of constraints to drive innovation. The laser-like focus on a well-defined customer segment, a problem for that segment (also known as the Job To Be Done) and a well-developed solution yields growth. This convergence was embodied in the comments of Andrew Beal and Mike Consedine of the NAIC, Marcus Cooper of Zurich North America, and Gina Papush of QBE.
- The core mission of insurance is to enable economies. Such is the role that insurers have played through history, from opening Europe to the shipping trade with the Far East, to the launch of a new nation in the 1750s, to transforming mobility in the 1920s. The opportunities to harvest exponential growth by enabling this innovation economy bring the equally compelling opportunity to literally make the world a better place. Lyft’s Kate Sampson captivated the participants with her description of the culture of innovation at Lyft and the future of mobility. ITL’s Chief Innovation Officer Guy Fraker shared this message with explicit optimism, as did EY’s Global Insurance Lead, David Hollander, and Philip Edmundson of Corvus Insurance.
- Innovation requires sponsorship of the CEO. However, what is often missed is the stark reality that consistent success of innovation lives and dies in the middle of established cultures. The conference offered more than a few speakers reinforcing this message including Barbara Turner of Ohio National, Terrance Williams of Nationwide and Charlie Mihaliak of EY. This notion of how best to harness and foster cultural diversity as part of an organization’s strategy to grow through innovation, is a theme we at ITL believe is critically important.
- Success in achieving growth by executing an innovation system is unique in the insurance industry. That said, best practices and valuable lessons learned can come from anywhere, which was echoed by innovation leaders Scott Sanchez of Nationwide and Dan Reed of American Family. Important, too, were the comments and experiences of industry innovator Barbara Humpton of Siemens, providing an outside-the-industry look at how organizations like Siemens approach and foster innovation.
We would love to hear any reactions/additions/corrections on the above.
Paul Carroll and The ITL team