The thought of a major insurance company, and its brand, disappearing from the market seems impossible to comprehend and more like the stuff of an attention-grabbing headline. But that’s probably what everyone once thought about Atari, Commodore, Kodak, Nokia, Polaroid, Blockbuster, The Sharper Image, Enron, Blackberry, DeLorean, Radio Shack, Motorola, Toys ‘R’ Us, Tower Records, HMV, Palm, AOL, Compaq, Borders, Circuit City, Pan Am, Netscape, Nortel – and now Sears.
As I was reviewing the NAIC 2018 insurance industry rankings and market share, I could not help but notice that some significant trends were accelerating. In the private passenger auto insurance line of business, Geico has overtaken Allstate to take the #2 spot with a 13% market share and continues to close in on State Farm, whose share has dropped to 17%. In fact, Geico has publicly stated its intention to overtake State Farm soon.
Now this does not mean that State Farm or Allstate is at risk of going out of business anytime soon, but it does underscore the power of market trends that could over the longer term displace carriers that are not paying attention.
Consolidation among top tier insurers is one of the many ways that insurance brands will disappear. According to Deloitte’s 2019 Insurance M&A Outlook report, the aggregate deal value of P&C acquisitions grew by 316% to $34.1 billion in deal value, up from $8.2 billion in 2018. American Family, the 10th largest U.S. auto insurer, recently acquired a number of smaller competitors, including Ameriprise Auto & Home, Main Street America, the General and Homesite. And #13 Kemper recently acquired Infinity. Also, in 2018, #19 Hartford Insurance acquired specialty insurer Navigators.
Just as Amazon’s direct-to-consumer model disrupted brick-and-mortar retailers, insurers that deliver and service consumer products and services digitally and on mobile devices will continue to outpace competitors that operate in a “middleman” distribution model. Auto insurance insurtechs such as Metromile, Root and now others will not displace tier 1 auto insurers but will further erode their customer base, particularly those in indirect distribution models.
The Internet of Things, consisting of an estimated 50 billion “always on” sensors in connected cars, property and factories and on people by 2030, is enabling the development of very different on-demand and other types of insurance products that lend themselves to fulfillment by smaller, technology-driven companies, further displacing traditional insurers.
As if these threats were not enough, look for car manufacturers to pile on by leveraging connected cars to exert greater control over the sale and design of auto insurance as well as the collision repair claims process. And the potential nail in the coffin – autonomous (self-driving) cars will shift risk and responsibility from “drivers” to manufacturers and software developers – ultimately eliminating auto insurance as we know it.
Insurance carriers that recognize the implications of all of these trends are already making strategic plans to defend themselves. State Farm is in the midst of a long-term restructuring plan that will see it shed thousands of jobs and consolidate its facilities into three major U.S. operational hubs and in 2015 sold its substantial Canadian business to Desjardins. But eliminating overhead alone will likely not be sufficient.
Others are pursuing strategies to alter product offerings to focus on risk prevention and avoidance, to diversify out of traditional insurance into protection products, alternative transportation and travel services and to develop strategic partnerships with auto manufacturers. Others are restructuring and positioning their companies for eventual acquisition, merger or sale.
The insurance industry has operated with great consistency and clear processes for many years. People may not always like or agree with how things work, but nearly everyone from the consumer to the provider essentially goes with it — no uprisings to drive change, no big shakeups. That is until recently. Seemingly all of a sudden, artificial intelligence (AI) is infiltrating the insurance industry, which may be a bit scary to those devoted to long-established practices.
In reality, we are witnessing relatively quick developments and sparks of innovation, considering the overall life cycle of the insurance industry. And what AI offers — now and promises to in the future — is anything but scary. It’s actually quite exciting as the industry enters a truly transformative period that will result in greater efficiency, significant cost savings, and far better service and care.
What Constitutes AI
AI has become one of the biggest buzzwords in the tech landscape, so I want to define what it really means, particularly as it pertains to the insurance industry. AI is a computerized system that exhibits behavior that is commonly thought of as requiring human intelligence. Taking this a step further, it essentially translates to machines acquiring a certain level of “human-ness” so that interactions with software become more like interactions with real people. It also mandates that a system has the ability to learn and improve on its own.
Advances in AI come because of a number of factors, but, undoubtedly, consumer-based technologies have led the charge. Voice, machine learning, computer vision and deep learning have been refined in consumer products, services and platforms, but they are now being combined to create really powerful automated solutions for some of the biggest issues organizations face.
Specific to the insurance industry, novel AI-based applications can shift the workforce and advance what companies are able to assess and offer as well as how quickly they can do it. And this is just over the short term. McKinsey predicts that AI “has the potential to live up to its promise of mimicking the perception, reasoning, learning and problem solving of the human mind. In this evolution, insurance will shift from its current state of ‘detect and repair’ to ‘predict and prevent,’ transforming every aspect of the industry in the process.”
The Rise of Insurtech
This may sound a bit abstract and futuristic, but AI advances have already led to a whole new market segment: insurtech. A slew of new companies have popped up, showcasing strong growth by bringing AI and machine learning to market with the industry’s very specific and nuanced needs in mind. For example, Cyence, which was acquired by Guidewire Software, developed a platform to ascertain the financial impact of cyber risk and management of risk portfolios; and Cape Analytics provides a service to property insurers that combines AI and geospatial imagery to analyze property and streamline the underwriting process — and these are just two examples. Other AI-based companies have emerged to reduce costs in claims operations, identify various insurance protection options, and transform mobile and social media marketing for insurance companies.
The insurtech segment is not defined by new players alone. Several incumbents have also dipped their toes into the AI waters to develop innovative applications. State Farm developed Distracted Driver Detection that uses dashboard camera images. Allstate has ABIE, a virtual assistant to help agents with information regarding Allstate’s commercial products, and Progressive now applies machine learning on top of data collected from client drivers through the “Snapshot” mobile app.
What Does It All Mean?
First and foremost, the rise of insurtech indicates that the insurance industry is changing profoundly as it modernizes. The ability to analyze countless data points in mere seconds opens ways to assess and predict that humans simply cannot hope to accomplish. This does not mean that humans are no longer needed in the industry. Quite the contrary. People still possess higher-level thinking skills that machines are not equipped to gain. The capacity to factor in intangibles, to make judgment calls, to see and interpret what lies beyond the screen — these are human skills that will always be in demand.
In this light, AI and machine learning applications should be leveraged to streamline and better inform the decisions that humans must make. When this happens, workers are freed to focus on the facets of their jobs that matter the most. In addition to benefits to workers, organizations experience multiples of improvement in cost savings by increased efficiency, accuracy and better predictions generally. Simultaneously, customer service and patient care improve by providing answers and resources tailored to their specific case in a fraction of the time.
Perhaps the most exciting impact of insurtech, however, will be the new business models that arise. The notion of how we administer care will change, as will the way we construct policies for individuals and companies. Essentially, what has never been possible before is suddenly on the table. The options may appear overwhelming or even threatening to the existing way of life, but AI and insurtech have arrived. The advancements that will occur over the next decade will be extraordinary for all constituents. Pay attention and embrace the innovation long needed in the insurance industry.
For anyone involved in vehicular transportation, it’s accepted that distracted driving is a deadly problem that needs continued attention. Earlier this year, the National Highway Traffic Safety Administration (NHTSA) published a detailed research report on Distracted Driving in 2016. According to the NHTSA’s statistics:
Nine percent of fatal crashes in 2016 were reported as distraction-affected crashes
In 2016, there were 3,450 people killed in motor vehicle crashes involving distracted drivers.
Six percent of all drivers involved in fatal crashes were reported as distracted at the time of the crash.
Nine percent of drivers 15 to 19 years old involved in fatal crashes were reported as distracted. This age group has the largest proportion of drivers who were distracted at the time of the fatal crashes.
In 2016, there were 562 nonoccupants (pedestrians, bicyclists, and others) killed in distraction-affected crashes
Notice that teen drivers are the largest proportion of drivers who were distracted at the time of fatal crashes. However, a recent Arity survey shows that millennials are significantly less likely than the general population to say that “I never multi-task while driving” (48% vs 57%). What does this say about that demographic? With National Teen Driver Safety Week approaching at the end this month, it’s important to fuel this age range with the danger that distracted driving imposes on them.
Here at Arity, we used our own data to compare the rate of smartphone penetration in the US, with distracted driving activity of telematics users and industry losses. Our research goes a step further to demonstrate that this problem is only getting worse. The percentage of losses attributed to distraction over the last several years has tripled, costing the industry an estimated $9 billion annually.
The insurance industry has taken a multi-pronged approach to reduce distracted driving. In addition to high-profile campaigns designed to raise general awareness of distracted driving, such as AT&T’s #ItCanWait initiative, distracted driving solutions have been developed by insurance providers, OEMs and shared mobility and telecommunications companies.
As these solutions get closer to reality, there are a few core elements to consider. Here is a five-step process for the creation of a superior recipe for distracted driving detection:
Mobile Phone, No Substitutes: While embedded systems and OBD devices are the gold standard for assessing vehicular motion and risky driving patterns, today there is no substitute for the mobile phone in distracted driving detection. The mobile phone is the leading culprit fueling higher rates of distracted driving accidents. Pinpointing mobile phone movement and interaction is the most robust way to identify and prevent these risks.
One Part Movement, One Part Interaction: Phone movement only reveals part of the story. Distracted driving algorithms that rely solely on sensor information―accelerometer for translational motion, gyroscope for rotational motion, gravitometer for orientation, etc.―will be subject to false positives and false negatives. For instance, a motorcyclist with a phone safely in his pocket could be unfairly penalized each time he puts his foot down at a stop for balance.
Measure Each Ingredient Carefully: Not all forms of distracted driving are equally risky. Checking navigation while stopped at a traffic light is generally less risky than taking a selfie while speeding down the beltline during rush hour. To effectively assess relative risks, there are two fundamental considerations: context and mode. Context means, what were the conditions present at the time of the distracted driving behavior? At what speed was the car being driven; what was the weather like; was there traffic? Mode means, what distracted driving behaviors were taking place? Phone call; texting; navigation; gameplay; etc.
Monitor Continuously: Discrete or instantaneous markers only tell part of the story. For instance, counting only moments of large phone movement omits important information about the behaviors that took place interstitially. We can conceptualize distracted driving in terms of continuous sessions and endeavor to identify the starts and ends of these sessions. The total duration of distracted driving will provide the most predictive metrics for risk.
Modeling Bakeoff: Distracted driving models can be founded on logic and intuition, but they should be developed and validated with a data-driven approach. For the best solution to emerge, many alternatives should be assessed relative to their performance on labeled data sets―data sets composed of both telematics data as well as reliable labels for the periods of distracted driving. An example of this blended approach would be the Arity and Allstate research that estimated the cost of distracted driving for the insurance industry at $9 billion. This insight was derived from data sourced from national smart phone usage, vehicle telematics and incident claims data.
At Arity, our mission is to make transportation smarter, safer and more useful for everyone, and understanding and eliminating distracted driving is central to why the company was founded. What’s important is that we don’t see this solely as a technical problem. Aside from understanding the true behaviors that are causing insurance loss, we must also provide a meaningful experience to the driver to eliminate the behavior. It’s important that we don’t stop learning and experimenting; there’s so much more we can do to #enddistracteddriving.
Amazon has made no secret of its intent to disrupt virtually every industry on the planet, most recently announcing a partnership with JPMorgan Chase and Berkshire Hathaway to create an independent healthcare company. Reportedly, the retail giant has also begun to explore the idea of setting up an insurance price comparison site in the U.K.
The formula is now clear. Amazon and other consumer-first digital disruptors like Google set their sights on a conventional industry with aging distribution and marketing channels, then things start to change rapidly. With an insurtech revolution already starting to brew in the home insurance marketplace, how long will it be before the likes of Amazon and Google enter the market in a serious way? And, if they do, will customers welcome them?
While industry incumbents like State Farm, Allstate and Progressive have begun to speculate on potential scenarios for this kind of digital disruption, J.D. Power’s P&C insurance industry practice went right to the source – the consumer – to ask how real home insurance customers would feel about the presence of tech companies in this space.
20% of Consumers Would Use Amazon or Google for Home Insurance
The data revealed that 20% of consumers would use an Amazon or Google for their home insurance. Millennials showed even higher interest at 33% for Amazon and 23% for Google. Of those who indicated that they would be willing to switch, 80% currently have insurance with a large national carrier.
While most of the media’s attention has focused on the future of automation technology in automobiles, the disruption to your home experience – and by extension your home insurance – through smart home technologies is likely to have an equal or greater impact.
Smart home technologies are revolutionizing many areas of the home, from simple comfort features that can now turn lights on and off or access in-home entertainment by control of your phone to home security and emergency support with automatic shutoffs and alerts.
The insurance industry wants in on the action. Insurers see smart home technologies as an opportunity to deepen their relationships with customers, while improving home coverage options and underwriting. While leading home insurance carriers have begun to venture into these areas, not much research has been done to understand the consumer’s demand as these features become available. Based on the J.D. Power Pulse Survey, following are insights into the current consumer appetite for this type of technology:
Top areas for insurtech disruption: Among consumers polled, following are the top area of their relationship with their home insurance provider that needs the greatest improvement:
Product Options/Coverages – 20%
Underwriting Sophistication – 15%
Claims – 14%
Top insurtech technologies: Among consumers polled, following are the top technologies consumers are most excited about coming to the insurance industry:
Cybersecurity – 36%
Blockchain – 25%
Internet of Things (IoT) – 24%
75% of consumers are interested in home telematics. While the bulk of talk on telematics has been focused in the automotive space, home insurance customers are overwhelmingly interested in getting discounts on their homeowners insurance for proper home maintenance and security.
46% of consumers would be willing to allow their home insurance company access to smart home sensor technology in appliances, such as refrigerators and air conditioners to help prevent loss and malfunction (smart tech loss prevention). 56% of consumers who currently have “smart” tech in their home would allow access
34% of consumers would likely switch to a home insurance company that offered smart home technology loss and protection options:
57% of millennials would likely switch
40% of consumers who currently have “smart” tech in their home would be likely to switch (64% of consumers reported having some sort of smart tech in their home, such as a smart thermostat, doorbell, etc.)
P&C insurance carriers have witnessed a lot of changes in the past decade, but few have been as surprising as the shift of power currently taking place across the industry.
According to Dennis Chookaszian, the former CEO and chair of CNA, carriers maintain only 40% of profits today, representing a drop of 20 to 25 points from the 1960s. An equal share now goes to the distribution system, as carriers line up to acquire and maintain more customers.
What’s behind this shift in profitability can’t be summed up in a single word, but increasing competition, new market entrants, improving technology, changing customer expectations and continued consumer price sensitivity all play a role.
To remain competitive, carriers will need to gain more control over distribution, a goal that even Chookaszian admits will not be easy to achieve.
Why the Power-Shift Toward Distribution
In the mid-part of the last decade, insurance carriers required two primary competencies to operate: data and capital. Because neither was easy to acquire, competition was less robust, and incumbent carriers found greater profitability, taking in roughly two-thirds of insurance transaction profits.
Today, data is everywhere, and through the use of analytics, simpler than ever to understand and use. Capital is also easier to acquire, as is evidenced by the growing number of insurtech players in the industry. According to Willis Towers Watson, $2.3 billion was invested in new insurance tech companies in 2017.
According to Chookaszian, the core competency for insurers now lies in distribution and control of the customer.
“It’s become so competitive that the carriers basically are always out looking for new accounts,” Chookaszian says.
That means higher commissions are paid to agents as carriers battle it out for market share, resulting in shrinking margins.
“Given the shift in profitability to distribution, the carriers that will be better off will try to regain some control over distribution,” Chookaszian says.
Admittedly, that is not an easy thing to do. The agent enterprise is part and parcel of most insurance operations. Directly selling insurance to consumers will require insurers to set up their own distribution systems, while still supporting their vast networks of independent or captive agent forces.
When Benjamin Franklin started the first successful U.S.-based insurance company in 1752, he was dealing with a localized Philadelphia population, but, by the end of the 18th century, citizens were moving westward, making it necessary for insurers to expand their distribution networks.
The Hartford made the first foray into direct distribution by offering insurance through the mail, but few consumers of the time were willing to give up the personal services of an agent when it came to purchasing something as critical as insurance. Carriers of the time faced a similar dilemma as carriers do today: how to acquire customers in a changing marketplace.
According to the J.D. Power 2018 US. Insurance Shopping Study, insurers are aggressively courting customers with new options and amenities as auto insurance rates remain stagnant and the number of consumers seeking coverage declines.
“We’re entering an era of consumer-centric insurance that will likely be marked by a surge in new digital offerings and serious efforts by insurers to improve the auto insurance shopping experience,” says Tom Super, director of the property and casualty insurance practice at J.D. Power.
This shift is happening across all lines of coverage, even small commercial.
While citizens on the new 17th-century frontier may have been hesitant to buy coverage without the guidance of an agent, many 21st-century buyers have no such qualms. Nearly half of consumers responding to a survey conducted by Clearsurance said that they would purchase an insurance policy online, while 65% believe this will be the primary channel for purchasing coverage within the next five years.
According to research conducted by Accenture, consumers are open to a number of new possibilities when it comes to buying the policies they need:
Power in the form of profits may have shifted to distribution, but consumers are making a power play of their own, demanding greater service and amenities and taking their business to the carrier most capable of meeting preferences and price points. In a world of shifting power, creating an active, online distribution channel puts more of the profit back into the carrier’s bottom line and allows it to attract more customers in three distinct ways.
Cutting Transaction Costs
According to a report from the Geneva Association, the leading international insurance think tank for strategically important insurance and risk management issues, 40% of P&C premiums are absorbed by transaction costs, leading to inflated policy pricing that drives away potential customers. PwC pegs distribution as a heavy culprit, reporting that 30% of the cost of an insurance product is eaten up in distribution.
On the other hand, Bain predicts that insurers could cut the cost of acquisition by as much as 43% through digitalization. Underwriting expenses could drop as much as 53%.
Reducing these costs allows insurers to present a more attractively priced product to consumers, an important consideration given that 50% of customers base their loyalty with an insurer on price.
To understand how costs are reduced through digital distribution, it helps to understand how a leading digital distribution platform works to raise efficiency. According to PwC, up to 80% of the underwriting process can be consumed by administrative tasks that require manual workarounds, such as re-entering information into multiple systems.
Much of this re-inputting of data is due to the siloed nature of insurers’ administration systems. Digital distribution platforms create a layer between the front-end online storefront, where customers enter application data, and the back-end systems used to store information.
As consumers enter their personal details into the online application, all back-end systems are populated automatically, eliminating the need for manual work-arounds. Everyone across the organization has the same view of the customer and access to any information that has been provided.
Digital platforms are also masters of straight-through processing, automating the quote-to-issue lifecycle and reducing the need for manual underwriting. By automatically quoting, binding and issuing routine policies, insurers reduce costs and also provide a more “informed basis for pricing and loss evaluation,” according to PwC.
As costs drop, insurers are also able to more competitively price insurance coverage. Lower prices win more customers allowing insurers to take back some of the profitability of distribution.
Improving Customer Experiences
When it comes to insurer-insured relationships, there is a gap between what consumers want and what insurers provide. Consumers rate the following points as very important aspects of the insurance buying experience:
Clear and easy information on policies
Access to information whenever it is needed
Ability to compare rates and switch plans
A wide range of services
But few consumers agree their insurer is meeting these expectations:
27% see clear and easy information on policies
29% report access to information whenever they need it
21% say there is the ability to compare rates and switch plans
24% see a wide range of services
The customer experience is becoming a key differentiator across the insurance industry. McKinsey reports two to four times higher growth and 30% higher profitability for insurers that provide best-in-class customer service, but here’s the rub. Only the top quartile of carriers fall into this category.
Becoming a customer experience leader requires insurers to understand that the separate functions associated with policy sales and distribution appear as a single journey to consumers. They expect to quote, bind and issue multiple policies through a single application, using as many channels as they feel necessary to get the job done.
While 80% of consumers touch a digital channel at least once during an insurance transaction, 45% of auto insurance shoppers use multiple channels when making a purchase. They expect to be recognized across these channels, picking up in one where they left off in another.
The multiple back-end systems employed by most insurers present a strategic dilemma here, as well as in the area of cost containment. Without transparency between channels, consumers are forced to restart a transaction every time they change their engagement method.
“It amounts to a great deal of frustration for the consumer,” says Tom Hammond, president U.S. operations, BOLT. “You start an application online and then call the customer-facing call center, and they can’t see what you did through the online storefront.”
Hammond explains that digital distribution needs to be omni-channel distribution, seamlessly integrated with a single view of the customer. It’s the only way to meet consumer experience expectations now and into the future.
Thanks to advances in analytics and artificial intelligence, the amount of data that is available to carriers has grown significantly, and consumers expect that information to be leveraged for their benefit. Eighty percent of consumers want personalized offers and pricing from their insurers.
Progressive is one of the 22% of carriers currently making strides to offer personalized, real-time digital services, having recently released HomeQuote Explorer. From an app or computer, consumers can enter information once and receive side-by-side comparisons from multiple homeowners insurance providers. According to the company, they leverage a network of home insurers to make sure customers can find the coverage they need at a comfortable price.
Oliver Lauer, head of architecture/head of IT innovation at Zurich, believes these collaborative networks are an integral part of the digital future of insurance.
“Digital innovation means you have to develop your insurance company to an open and digitally enabled platform that can interface with everybody every time in real time – from customers to brokers, to other insurers, but also to fintechs and insurtechs,” Lauer says.
Using a digitally enabled market network, insurers can fill product gaps and even meet customer needs when they don’t have an appetite for the risk. The premise is simple. By offering coverage from other insurers, they maintain the customer relationship and reap the rewards of loyalty.
As society changes and consumer needs evolve, the ability to personalize bundled coverage to the needs of the individual will become increasingly important. Consumers are now looking for coverage to mitigate risk in previously unheard-of areas, such as cyber security, identity theft and even activities related to legalized marijuana.
When an insurer is unable to provide the coverage a customer needs, it risks forfeiting that relationship, and any other policies bundled with it, to another carrier. But when the carrier takes part in a market network, it can bundle the appropriate coverage from another insurer with its own products, personalizing the coverage to better fit the needs of the customer.
Digital platforms offering market networks also set the stage for insurers to offer ancillary services, such as roadside assistance, that make their insurance products more attractive to consumers. We see this happening with increasing frequency as carriers seek to improve the customer experience and lift their acquisition efforts.
DMC Insurance, a provider of commercial transportation insurance solutions, recently announced a partnership with BlackBerry Radar. The venture would provide transportation companies with real-time data on vehicle location, as well as cargo-related information, such as temperature, humidity, door status and load state. Information like this will help companies better manage risk.
In the personal lines market, insurers are partnering to offer services that enhance the life of their customers. Allstate’s partnership with OpenBay allows consumers to review repair shops and schedule an appointment from an app. Allianz is helping home owners safeguard properties by partnering with Panasonic on sensors that monitor home functions and report issues. Customers can even schedule repairs through the service.
Digital Distribution Benefits All
J.D. Power reveals that digital insurers are winning the intense battle for market share in the insurance industry, starting a shift that could help level the profitability field between distributors and carriers. In a recent insurance shopper survey, overall satisfaction was six points higher for digital insurers over those that sell through independent agents. This lead grows to 12 points when compared with carriers with exclusive agents.
According to research by IDC, digital succeeds on the strength of its data. The ability to collect and analyze the vast stores of data available through these interactions, including such variables as the time of day the consumer shopped for coverage, the channel the consumer used, and stores of information collected from third-parties as part of the automated application process, provides the key to improved customer service.
“By analyzing this data, insurers can understand each customer’s lifestyle, behaviors and preferences in order to engage with them at the right time and place, offer personalized service and offers and more,” says Andy Hirst, vice president of banking solutions, SAP Banking Industry Business Unit.
As insurers create omni-channel engagement, they’re strengthening distribution from every angle, giving consumers the option to quote coverage online when it’s most convenient for them, and then buy it right then and there or to seamlessly call an agent to discuss their options and their risk.
Customer experience is rapidly becoming the foundation of success in the industry, and digital distribution provides the first link in building that base of core customer satisfaction. By providing consumers with multiple channels of engagement and the ability to meet more of their needs at any time, day or night, carriers are taking back the lead on profitability.