If I were a young actuary or underwriter, I’d be worried — because the Insurer of the Future won’t have much need for my skills.
What do these professionals do for a living? They rely on their personal experience and various data sources to understand and price a risk more accurately. Sometimes they carry out complex statistical calculations in support.
But the Insurer of the Future will have its experience data captured on its internal systems. It will also tap into vast amounts of additional data available from external sources, some structured, some unstructured. And it will channel all of this data — far more than a human actuary or underwriter could ever handle — to its artificial intelligence (AI) engines.
These AI engines will examine the data for patterns, apply multiple statistical models and add their own experience from previous analyses to come up with a much more accurate price, massively quicker than a human ever could.
And for the Insurer of the Future, the AI engines will be wired directly into the sales and underwriting processes, which will operate “straight through,” with no involvement from humans.
There will be room for some human oversight roles to ensure that the AI engines don’t “go rogue” and generate crazy pricing — but the vast majority of actuaries and underwriters will no longer be required.
This year, mid-sized insurers continue to face significant challenges, but these challenges can be treated as opportunities for organizations to distinguish themselves from competitors. As the digital economy continues to spur change, insurers would be wise to get in front of the curve by taking steps to improve underwriting and increase profitability. Here are five questions mid-sized insurers should ask themselves to help guide their business transformation.
1. How well do we leverage our data?
The days of the actuary as the primary data interpreter are waning as data analysts with access to an ever-increasing set of tools are leaving actuaries in their wake. Insurance companies are starting to take notice, and those that are leveraging their data to make informed decisions are enjoying faster growth and increased profitability. A data innovation strategy must come from the top of an organization and go down. However, the scope of the endeavor and the multitude of choices can be daunting. For example, a predictive model can provide great insight, but it may be more prudent to design a model that enhances your organization’s decision-making capabilities rather than one that replaces current methods. Management information, underwriting, pricing, claims management, claims reserving and actuarial reserving should all be informed by your organization’s data, which makes developing and implementing a smart data strategy imperative.
Regulation is useful when it promotes strong digital protection standards, the advantages of which are best illustrated when the inevitable cyber breach hits the press. Your organization may not be directly subject to General Data Protection Regulation or New York State Department of Financial Services (NYDFS) cybersecurity regulations, but the standards are illuminating, nevertheless. At a minimum, your firm should be reviewing compliance standards and determining which ones it should be implementing as a function of industry best practices. Since the National Association of Insurance Commissioners currently produces a less-comprehensive standard, a company may someday find itself on the defense, arguing it did only what was required. NYDFS standards could easily become the de facto standard, especially over the next few years as third-party vendors doing business with New York-based financial institutions will need to ensure compliance with NYDFS requirements. The reality is that data is an asset, and insurance companies rely heavily on data to run their businesses. Insurers will be collecting and using even more data in the future. They must take steps to protect this valuable, growing business asset and be prepared to adopt the highest standards of protection for their insureds.
3. Will our organization be the next to be disrupted?
For the past few years, venture capital dollars have been flowing into insurance disruptors such as Cyence, Metromile and Lemonade. Certainly, we won’t see complete disruption overnight, but small changes will likely occur more frequently than expected, and, over time, the effects will have a significant impact on current business models. Your company could be disrupted by a current competitor using advanced machine learning algorithms in the underwriting process. Or perhaps an insurtech startup will begin to capture all your new insurance prospects through its new mobile app and lower price point, halting your growth. Similarly, consider non-insurance-specific disruptions, such as developments in the “Internet of Things.” What if a new device is rolled out by a competitor that protects its insureds from meaningful injuries by using sensors to alert workers and their employers of dangerous conditions — providing a distinct advantage to their workers’ compensation insurance rates. Will your firm be the disruptor or the disrupted? Regardless of the answer, what is your firm doing to prepare for the impact?
4. Are we transferring risks to the capital markets?
The reinsurance market has been transformed over the past decade by insurance-linked securities (ILS), alternative reinsurance instruments like catastrophe bonds and collateralized reinsurance contracts, whose value is affected by an insured loss event. ILS investors are typically willing to accept a lower rate of return than traditional reinsurance companies because of the diversifying effect on the insurance-linked investor’s broader portfolio. That incentive has drawn more investor capital to the reinsurance market, putting pressure on reinsurance rates and even causing reinsurers to start their own investment funds. And while long-term relationships between insurers and reinsurers have tremendous value, your organization should be looking at all efficient opportunities to lay off excess risk and protect your company from earnings volatility.
For many, innovation is inherently uncomfortable and volatile. Technology is changing rapidly, and the insurance industry is already starting to evolve. Managing an insurance transformation process triggered by a digital revolution will not be easy, but it must begin with identifying your current value proposition: Why do your clients value your insurance? Identify what you do well as an organization and what you can improve upon. By incorporating your starting point into a change plan that recognizes current strengths and explores future possibilities, your firm will be better prepared to navigate the coming industry transformation and will be better positioned to thrive on the other side of change.
There are two high-level motivators in the case for actuarial transformation.
First, there is insurance profitability. Insurance profitability has its roots in actuarial precision and efficiency. Insurers stand to lose profits (and reserves) if they do not properly understand risk and price it accordingly. Actuarial precision (and profitability) can be dramatically improved through better data management and the right technology tools. An insurer’s actuaries may be doing everything “right,” but they are hindered by their inability to tap into a well-organized warehouse of recent data that has been cleaned and structured.
Second, there is actuarial expertise. Actuaries are trained to thrive on insurance’s unique mathematical challenges, but they commonly find themselves saddled with the mundane motions of finding the right data, reconciling the data and manually updating reports, spreadsheets and databases. For those actuaries who are wondering, “What is there left to be done that I haven’t done before?”— today’s actuarial responsibilities may give them a higher level of enterprise-wide value. Most insurers aren’t tapping deeply enough into their actuaries’ capabilities and expertise. Expanding their roles can happen once an insurer has reduced their manual processes.
So, why do some insurers continue to postpone efforts that will make better use of their actuaries while giving their business increased precision and profitability? It may be that insurers DO know many of the benefits, but they don’t understand them well enough to make them a priority.
If insurance profitability and better use of actuarial expertise aren’t enough to push insurers into actuarial transformation, there is a relevant third dimension to actuarial need — actuarial speed. Faster actuarial answers are needed to meet the growing demand for quick product development, testing and rollout. But faster answers won’t work if they can’t be based on the best and most recent data available. Data integrity and quality are crucial to any modernization.
Striking actuarial gold at the end of data rainbow
The answer to accelerating actuarial processes is to begin by acknowledging that the insurer’s data house may not be in order. Starting from there, a program of process discovery, simplification and modern tool implementation will bring insurers into the proper actuarial realm to meet today’s business needs. In July 2016, Majesco released a white paper titled, Accelerating Actuarial Processes, that outlines some of the steps insurers need to take to create real actuarial innovations. Without going into the deep detail given in the paper, we can discuss what some of those steps are and how well they fit within an overall strategy for competitive preparedness.
An evaluation of the actuarial environment is deep because there are many facets of the current process to consider. Where does actuarial data come from? What tools are used, if any? What manual processes exist? Roles and functions need to be outlined. In some cases, observation or recording may be needed to grasp how long tasks take and where inefficiencies lie. It is important to recognize the value in this step. To create solutions that “fit like a glove,” insurers need to know both what they have now and where they would like to be when the process is over. Evaluation is also where the excitement begins to build for all of the opportunities in actuarial transformation.
The core of a technology-based solution to actuarial modernization will be a unified data architecture that will improve reporting, collection and manipulation of data. The data will need to come from varied sources: the policy administration system, claims, reinsurance and other systems. But added to those core insurance systems will be the ability to accept data from all entry points, including external data sources. From various APIs to the Internet of Things and connected people, cars, homes and businesses — actuaries will develop a thirst for using the most up-to-date, relevant data. To meet the need, insurers will need to define standards and formats while building a framework for analysis that is easy to use.
It is worth mentioning that the updated data architecture will bring value and relief to the entire organization…not just actuaries. The full range of benefits will start to be uncovered during evaluation, but they will continue to be found long after transformation is complete.
The speed of actuarial processes is not merely a goal unto itself, but it is a contributor to interdependent strategic goals for the business. Actuarial transformation’s success will be measured against its support for meeting those strategic needs. Throughout all measurement, planning and implementation, it is important to keep business impact at the forefront of conversations and decisions.
Accelerating actuarial processes is really a win-win-win for actuaries, the business and an insurer’s data management program. As the company gains precision in risk and pricing, along with faster decisions that will support the business, actuaries themselves are able to open new doors of opportunity to provide impact and value throughout the enterprise.
U.S. life-annuity insurers will enter 2016 in relatively good financial condition but facing exponential changes from rapid advances in technology, rising customer expectations and growing competition. These market shifts will require insurers to reinvent their strategies, services and processes, while coping with nagging financial, economic and regulatory uncertainty. Fortunately, after years of bolstering their balance sheets, life-annuity firms are in a strong position to invest in the innovations and technologies needed to fuel future growth.
Growing customer expectations
Digital technology will continue to transform the life-annuity industry in the coming year. From anytime, any-device digital delivery to customized services, today’s diverse insurance customers will demand flexible solutions that go beyond one-size-fits-all product offerings. To take advantage of these trends, insurers will need to adopt a customer-centric approach that relies on deeper relationships, more personalized advice and more rigorous information. At the same time, life-annuity insurers must integrate emerging distribution technologies to reach customers through multiple channels, all without disrupting traditional distribution.
Millennials and mass-affluent consumers, in particular, are seeking the latest digital tools, such as on-demand insurance apps and robo-advisers for automated, algorithm-based financial advice. Meanwhile, insurers are establishing omni-channel platforms to reach and service customers more effectively and exploring the use of wearables and health monitors for usage-based life insurance. Advanced analytics, such as predictive models, combined with cloud and on-demand technologies, will provide insurers with the instruments to re-engineer front and back offices.
To fast-track digital transformation, insurers are turning to partnerships and acquisitions. For example, in 2015, Northwestern Mutual purchased online planner LearnVest to provide more customized support to customers. Other insurance firms, such as Transamerica and Mass Mutual, have set up venture capital firms to invest in digital service providers.
But digital innovation also carries greater risks. Digital technologies make insurers more vulnerable to financial fraud, data theft and political activism. Privacy breaches are becoming a bigger concern as insurers gain wider access to sensitive financial and health data. Even the use of social media is exposing firms to risks from reputational damage.
Competitive pressures are building
As digital technology becomes more pervasive, insurers will face greater competition from new digital start-ups. Although much of the recent innovation in financial services has occurred in the banking and payments sector, insurance is now squarely in the cross-hairs of new digital providers. One example is PolicyGenius, which is offering digital platforms to help consumers shop for insurance. With the recent launch of Google Compare, the rise of InsuranceTech will gain momentum in 2016.
But competition will also come from existing insurers leveraging new digital solutions and business models. For example, John Hancock recently launched Protection UL with Vitality, which rewards life-insurance policyholders for health-related activities monitored through personalized devices. In 2016, more insurance stalwarts will jump on the digital bandwagon through new product development, acquisitions and alliances. At the same time, changing insurance attitudes and practices among Millennials will spread to other age groups. Insurance firms reluctant to embrace innovations for fear of cannibalizing their own market space may be overtaken by more nimble firms able to capitalize on a shifting insurance landscape.
Uncertain economic and regulatory conditions
Life-annuity insurers are operating in a tenuous economic and financial environment with sizable downside risk. In 2016, global economic weakness will continue to be a worry, particularly as emerging market growth decelerates, financial volatility escalates and the U.S. economy muddles through a presidential election year. Regulatory and monetary tinkering will further complicate macro conditions.
The political landscape is likely to remain gridlocked at the federal and state levels as the election cycle concludes. Tax policies are unlikely to change in 2016, but insurers should prepare for new post-election regulatory headwinds in 2017. Insurers should also stay on top of the Department of Labor’s evaluation of fiduciary responsibility rules, which will remain a disruptive force in 2016.
Regulations originally designed for other industries and jurisdictions are being extended into the U.S. insurance market. International regulators are moving ahead with further development of Solvency II and IFRS. The NAIC and state insurance departments are adjusting risk-based capital charges and will react to the first year of ORSA implementation.
Mixed impact on life-annuity insurers
Premiums will grow moderately in 2016. Individual life premium growth will be particularly sluggish, as consumers remain focused on retirement savings. Faced with equity market volatility, consumers will continue to invest in fixed and indexed annuities and avoid variable annuities.
To cope with torpid market conditions, insurers will focus on growing premium and investment income, managing risks and controlling costs. Companies will continue to identify opportunities to improve return on equity through active balance sheet and back-book management. Among the strategies are investments in organic and inorganic growth, seeking reinsurance and capital market capacity and returning excess capital to shareholders. M&A activity will likely accelerate in 2016 as Asian insurers and private equity firms continue their interest in U.S. insurance companies.
Margin compression will dictate sustained emphasis on cost management through centralized control, technology upgrades and better integration of business units. With mission-critical information becoming more accessible, data-driven business decisions are moving to the C-suite. At the same time, regulatory demands and business imperatives are elevating risk management responsibility to the C-suite and board.
STAYING IN FRONT OF CHANGE: PRIORITIES FOR 2016
In 2016, life-annuity insurers will need to take decisive measures to cope with market upheavals – or risk the consequences. By staying in front of change, insurers can strengthen customer relationships, build market share and gain competitive advantage. Tapping their strong capital positions, insurers will invest in new technologies, systems and people that will allow them to capture their future.
Specifically, leading insurers will focus on the following pathway to change:
1. Pick up the pace of business transformation and innovation
Time to reboot
The life and annuity industry has never been considered highly innovative or nimble. But the convergence of technological, regulatory and customer trends is creating a perfect storm, with the power to upend the industry. EY’s 2015 Retail Life and Annuity Survey of senior executives identified the need to embrace new market realities in 2016, highlighting innovation as a top strategic priority. To cope, industry leaders must act now to rethink their business approach:
Priorities for 2016
Create a company-wide culture of innovation. To foster transformation, insurers will need to break away from their conservative leanings, and create a culture that encourages new thinking. Such a culture should allow for greater experimentation, and even short-term failures, to achieve long-term success. Senior leaders through to middle-managers should champion change and avoid the danger of the status quo.
Drive innovation through cross-functional teams. In 2016, life and annuity insurers will need to cut across organizational silos to drive innovation. Establishing cross-functional teams of sales, underwriting and policy administration can lead to new ideas
that enrich the customer and distributor experience. Similarly, a cross-functional team of actuarial, finance and risk management can help build consensus around new analytical and risk approaches.
Share information openly. Overcoming departmental silos will not be easy. Executives should ensure that information-sharing occurs at the right time and that teams are working from the same set of high-quality data. To avoid time-consuming reconciliations, managers will want to address data discrepancies across business units. Using skilled program managers to track progress against timelines and budgets can help.
2. Reinvent products and services for the new digital consumer
Addressing ever-rising customer expectations
In 2016, life insurance and annuity products will need to come to grips with tectonic shifts in consumer expectations and behaviors. Driven by their experiences in other industries, customers will demand greater digital access, better information and quicker service. Failure to respond will make it difficult for insurers to acquire and retain customers. Fast-moving insurers are redefining their customer relationships and products and services to cope with these new market dynamics.
Priorities for 2016
Offer anytime, anywhere, any-device access. Banks now provide customers with unprecedented 24/7 access and self-service on multiple devices, from PCs to smartphones. In 2016, life insurance customers will expect a similar anytime, any-device experience from insurers from point of sale and throughout the relationship.
Provide greater transparency to customers. In today’s digital world, customers expect clearer product information and pricing transparency. To respond, insurers should reduce the complexity and definitional rigidity of current life insurance products, while providing a more streamlined and transparent issuance process.
Deliver more flexible solutions. Insurers will need to emphasize product flexibility to cost-conscious customers and offer hybrid products that combine income protection, such as long-term care and disability insurance, with life and retirement coverage. For high-net-worth customers, insurers should stress the tax advantages of life insurance and annuities and develop features to compete with alternative investment products.
Build continuing engagement with customers. The life and annuity industry has long suffered from “low engagement” with customers following the initial sale. More customer engagement will minimize the risk of customer indifference and potential disintermediation. Developing an integrated, personalized digital experience that leverages the latest mobile and video technology will be a key to success.
Move toward a service orientation. To differentiate themselves, insurers will want to shift from a product placement to a trusted adviser approach. With established personal relationships in place, and access to more flexible products and services, new sales will occur more naturally in response to customer needs.
3. Adjust distribution strategies for technological and regulatory shifts
The rise of omni-channel distribution
Technological and regulatory changes are prompting life and annuity insurers to think beyond traditional distributors. For example, robo-advisers, growing in popularity in the wealth industry, could offer insurers a way to reach the underserved mass-affluent market. Yet, unlike property and casualty carriers, life and annuity insurers have made little progress in selling through digital channels. Looking ahead to 2016, life and annuity insurers may find themselves losing market share if they fail to adapt to an omni-channel world.
Priorities for 2016
Prepare for new fiduciary standards. In 2016, the Department of Labor’s proposed fiduciary rule could upend existing distribution models. The rule strengthens consumer protection, constrains distributors and alters compensation for advisers providing retirement advice. Similar changes in the UK widened the gap in personal financial guidance between wealthy and mid-market customers – a potential impact in the U.S. The ability to recommend specific products may become more difficult, creating a ripple effect on retirement sales and advice.
Adapt services for new distribution models. Insurance firms, particularly those focusing on retirement services, will find themselves under pressure to transform their distribution platforms. In 2016, insurers should consider developing products for an “adviser-less” distribution model that delivers financial and product information directly to consumers through digital platforms. Insurers will need to adjust compensation systems to meet new fiduciary requirements, while maintaining existing distributor relationships.
Explore the use of robo-advisers. Robo-advisers represent a new self-service channel aimed particularly at younger, tech- focused consumers. In 2016, insurers will need to consider the best way to incorporate robo-advisers into their current distribution platforms-through internal development, partnership or acquisition. To help make that decision, insurers should ask themselves: Would the robo-adviser be a new distribution channel, a supporting tool for current distributors or some combination of the two approaches? Insurers will need to evaluate the costs and potential impact of integrating systems to improve sales and service. And with regulations in flux, firms will want to give compliance and suitability careful attention.
4. Reengineer processes to drive efficiency and market growth
Building operational agility
Changing customer expectations are opening up new opportunities for life-annuity insurers to grow their business through innovative products, solutions and go-to-market strategies that focus on the customer experience. However, existing process silos and legacy systems can restrict operational flexibility, so insurers may need to focus on reengineering processes and systems in the year ahead.
Priorities for 2016
Determine if your systems are ready for rapid market change. Today’s assembly line approach to policy quoting, issuance and administration can slow application turnaround and detract from the customer and distributor experience. Once a policy is issued, legacy administrative systems can limit the ability of customers and distributors to access current account information, especially policy values, and to self-service their accounts. This problem can be exacerbated as customers purchase additional products from the insurer, particularly if those purchases are on different platforms.
Ensure that your systems can stand up to new regulatory rigors. Policy issuance and administration are not the only areas affected by process silos and legacy systems. Regulatory changes and risk management imperatives are putting pressure on finance to improve the quality and speed of reporting, as well as the use of advanced analytics for predicting and stress testing trends. As companies expand into new geographic markets and lines of business, the complexity of reporting and analyzing data is multiplied. A review of your systems through a regulatory lens could be helpful.
Invest in next-generation processes and analytics. Recognizing the importance of operational excellence to future strategies, insurers will continue to invest in straight-through-processing in 2016 to speed application turnaround times. They will also use more advanced analytics to enable underwriters to minimize the amount of required medical data, slash decision- making time and improve accuracy. Data consolidation projects will remain a high priority for many IT departments.
Revamp IT systems built for simpler times. During 2016, insurers will need to improve and replace IT systems that have reached the end of their useful life and are no longer fit for purpose. Unlike past investment cycles in IT systems, when one generation of hardware replaced another, the emergence of cloud technologies and on-demand solutions create new flexible options that can be implemented more quickly.
Consider partnerships that will facilitate transformation. To support critical business data processes, life-annuity insurers should explore creating strategic alliances with outside specialists. Insurers have already worked on consolidating legacy information systems and integrating data from around the firm, which will facilitate their transition to cloud and on-demand platforms. However, management must clearly understand the auditing, control and business risks of taking that leap.
5. Bring in the right talent to lead innovation
A growing talent gap
Life and annuity insurers are finding that driving innovation will take fresh ideas and new talent. As they age, distribution teams are falling out of sync with emerging consumer demographics.
The result: Life insurance and annuity sales to younger generations are declining, a trend that will only build momentum over time. In 2016, insurers will want to meet this challenge head-on by developing initiatives to attract young, diverse workers.
Priorities for 2016
Take concrete actions to compete for talent. The talent shortage affects every layer of the organization, from gaps in senior executive roles to deficiencies in technical skills. At the same time, the industry’s image as staid and risk-averse often does not appeal to the brightest and most promising young people, who view fast-growing technology companies as their employers of choice. Insurers will need to compete fiercely for the talent required to build the next-generation insurance company.
Go beyond image-building to attract fresh blood. Executives recognize that simply burnishing the industry’s image will not be enough to draw in new talent, such as data scientists and digital experience designers. In 2016, insurers need to offer greater flexibility in work locations, find creative ways to motivate and reward employees and fine-tune talent management programs.
Make diversity a strategic imperative. Workforce diversity is more than a compliance exercise; it offers a powerful way to achieve key strategic objectives. An employee base that reflects the customer universe is better-equipped to respond to changing customer needs. Diverse teams make better decisions by avoiding groupthink. In 2016, life and annuity insurers will broaden their efforts to attract a workforce representing a mix of cultural, demographic and psychographic backgrounds.
6. Put cybersecurity high on the corporate agenda
Escalating cyber risks
Leveraging social media, the cloud and other digital technologies will expose life and annuity insurers to greater cyber risks in 2016. These risks can run the gamut from financial fraud and corporate terrorism to privacy breaches and reputational damage. To protect their businesses and their clients, insurers will need to take strong measures to keep their technical platforms air-tight.
Priorities for 2016
Make cybersecurity a priority. Inadequate cybersecurity can cause a serious financial, legal and reputational fallout. In today’s digital age, hacking often involves organized crime looking to steal data and trade secrets for financial gain. Cyber attacks can also be politically motivated to disrupt organizations. Whatever the motive, insurers will want to ensure that growing digital connections between their systems and outside parties are well-protected.
Take a broad view of the potential risks. Cybersecurity is not the only data-related risk for insurers to consider. Privacy issues surrounding consumer and distributor information are a mounting area of concern, especially as insurers use that data in product pricing, underwriting and target marketing. In addition, social media can make insurers vulnerable to reputational risks – in real time.
Safeguard customer data from misuse. Although consumers have grown accustomed to providing personal information to third parties, there is still uneasiness over usage, especially when it involves sensitive consumer medical and financial information. Insurance firms, particularly those with a global client base, need to stay abreast of emerging privacy regulations that could affect the use of digital technology and analytics. Crucially, insurers must invest in internal firewalls that protect personal data from misuse.
Assess your exposure to data sovereignty risks. As insurers move toward cloud computing and on-demand solutions, issues surrounding data sovereignty are becoming more complex. In a hyperconnected world – where a U.S. insurer might partner with a Dutch firm using a data service in India – the concept of data residing in one jurisdiction is difficult to apply. To cope, insurers will want to set up processes to monitor changing data regulations around the world and their impact on their businesses.
This piece was written by Doug French and Mike Hughes. For the full white paper, click here.
Overheard at “Insurance Disrupted 2015,” held Nov. 18 and 19 in Palo Alto, CA, cosponsored by Silicon Valley Innovation Center and Insurance Thought Leadership:
From The Sun Also Rises, by Ernest Hemingway:
“How did you go bankrupt?”… ‘Two ways. Gradually, then suddenly.’
Paul Carroll, CEO of ITL:
“Insurance has been in the ‘gradually’ phase of disruption; the ‘suddenly’ phase is here.”
Tongue-in-cheek lines from others:
“The future always happens.”
“Moving at the speed of insurance”
There were many loud-enough-to-be-heard, smart, rational and innovative voices calling for change to the historic model for insurance at last month’s gathering of insurance disruptors in Palo Alto. Most encouraging is that these voices were coming from both traditional players and entrepreneurs behind an emerging insur-tech start-up sector.
Close to 200 of these folks (as well as several hundred more via live streaming) converged at an Elks Lodge of all places to share insights and ideas about how to create new business models, more compelling and engaging client experiences that meet overlooked marketplace needs, new products and new distribution methods. All are taking advantage of technological possibilities that may seem old-hat in other sectors, whose digital maturity is further along on the curve.
This post captures the main messages delivered by several dozen speakers and panelists during the event:
Insurance businesses able to see themselves in the prevention business, not just in the protection business, will be the ones that thrive. The potential to shape strong, compelling offerings that help people anticipate and avoid risk has great, untapped commercial potential and holds the possibility of truly improving people’s lives. But one of the biggest challenges for historically successful executive teams is being able to reframe a company’s purpose away from its past greatness toward a different future. So many businesses end up dead or among the walking dead because they are unable to leave behind an outmoded definition of how they created value vs. what it now takes to succeed. Technology is just the enabler — success is about mindset, vision, leadership and conviction.
Value beyond the product sales transaction will create massive opportunity for those able to act upon the possibilities. Many examples exist of companies in other sectors (and are beginning to emerge within insurance) that add value before and after the transaction. Think of any brand you love because of the experience leading up to and following the actual purchase event. These same opportunities exist in the insurance sector. As one of my favorite, preeminent global innovators likes to say, “There’s gold in them there hills.”
Does anyone really want to buy insurance? No. People buy insurance to solve an “end-game” problem. We are entering the era where winners will be those who show they understand this. It’s about clients, not products. Client-centricity is too often a fashionable mantra, but in reality is relegated to lip service. Insurance grew up as a sector engineered to push product through a distribution system where the incentives were to push more product. The connection between client-focus and both a healthy P&L and balance sheet is well-established in other sectors, and is no less true here. Incumbents face cultural, infrastructure, regulatory, metrics and talent challenges to execute this shift. In contrast, start-ups unencumbered by legacy issues are hard at work pursuing client-focused business models with such intensity that there will be breakthroughs at scale. It’s only a matter of how soon. The winners will combine digital technologies and advanced analytics and insight to define their future and not be tied to a rear-view mirror perspective.
Think emergent knowledge, not big data. Does anyone really think they need more, bigger data? Frankly, as I meet with executives and discuss the challenges of competing in our world, no one complains about lack of data. A mentor taught me years ago that it’s most important to know what questions to ask. In the big data era, too many people are going backward from the data, setting themselves up to amass as much as they can and then trying to figure out what to do with all of it. Meanwhile, they’ve increased their costs and security risks, and bogged down always-scarce analytics and IT talent in misguided exercises. Insurers possess via their actuarial capabilities some of the most analytically intense talent anywhere. Is it possible to redirect some of this incredible capability and use it to ask the right questions? Don’t worry about obtaining more data. Assume any data you want will be available at some point. These sorts of mindset shifts will set insurance sector participants on the path to accelerating knowledge that will lead to new opportunities.
The cloud is not about automation, The cloud is about the incredible possibilities enabled by data transparency and availability, and by the synthesis of formerly unimaginable kinds of disparate data accessible through increasingly improving user-interface layers powered by smart algorithms and machine learning. Insurers that approach the cloud as mere automation driving cost savings will be left behind, not only by competition but by clients who are becoming empowered by their own ability to get their hands on their data, and as a result gain more understanding and control over what their insurance needs really are, and how best to meet them.
Data synchronicity can be an opportunity or a threat. Insurers have earned their keep by taking advantage of the fact that they had intelligence and insights that clients and distributors could never access. Think about it: The pooling of risk is built upon carrier ability to bring together disparate data about scale populations to foresee risks and price against the odds of them occurring. That advantage is eroding as data become more widely distributed and accessible. The habit of looking back at a decade’s worth of data to assess risk and create actuarial tables will be replaced by constant testing in small chunks that drives continuous learning. Behavioral modeling will become real time, and acting with speed to execute on constant new knowledge will be the basis for competitive advantage.
Usage-based insurance – UBI – is driving toward hyper-specialization and personalization in underwriting, sales and service. The industry will move away from the whole notion of insuring a pool, toward being able to price an individual based on her driving, health, property care and behavioral record, and insure her neighbor entirely differently. If the notion of pooling of risk goes away, the entire structure of the industry will evolve to something new. Don’t just stay tuned. Tune in.
The smart home, smart car, smart-everything-in my-life is creating data sources contributing to UBI capabilities, giving insurers the ability to help me anticipate and even prevent risk. The insurance sector in total probably knows more than just about anyone else about so many aspects of your life — this is the sector’s opportunity to realize or squander. The sensors becoming embedded in every aspect of our lives will have profound implications for every aspect of the insurance sector, many of which are not identified, yet alone understood. See first point above; insurers must shift to being in the prevention business, not just the protection business.
Compared with Congress, whose overall approval rating is at about 14%, the industry’s average Net Promoter Score of 46% may not look that bad. But it’s a sorry state of affairs. One major carrier has an NPS that is actually negative, and others are in competition with the government for setting a low bar. One can only imagine the upside from raising the propensity to be recommended to others by current clients. Acting upon the points already shared above will directly contribute to achieving acceptable satisfaction levels. Action to create true multi-channel sales, service and claims experience aligned with how clients really behave will take focused work and investment. And time. It’s time to start, now.
In the U.S., a full 87% of people under 35 have no contents insurance. What is the societal risk of leaving a generation unprotected from the risks that invariably befall some among us? Insurance ownership has traditionally been part of the bedrock of an economically healthy society. If the under-35 crowd is not connecting with the traditional offerings of the industry, given the consequences, how will the industry step up and move to a position of relevance motivating enough for this important demographic to see it as worthy of a piece of their wallet?
Will you be an insurer that leverages marketing and technology, or reframe your self-image to that of a technology and marketing company that happens to sell insurance? One of the greatest inhibitors of transformation is the inability to reshape your business model and all of its many elements to align with where the world is going, not to where the world has been. As yet another mentor taught me early in my career, “You are who you say you are.” Who are you?
The future always happens. What I overheard in Silicon Valley suggests that for some it will happen to be an exciting time of growth and renewal. Others continue to scratch their heads. Many (understandably) feel a bit bewildered. The good news about being late to the game vs. peers in industries in the throes of disruption — think media, music, retail and the insurers’dw cousins in banking — is that there are meaningful models, execution paths and stories of success and failure that can enable leapfrogging in a position of leadership and strength toward what this sector will become.