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Will Technology Kill Auto Insurance?

The auto insurance industry has been experimenting with technology and tools that are completely changing the way we think about cars.

Self-driving vehicles, ride-sharing and vehicles that include their own insurance in the sticker price are all recent innovations — innovations whose long-term effects are not yet known.

With the rise of autonomous vehicles and ride-sharing came questions about liability and its related coverage: Who will insure self-driving cars? Who is liable in a ride-sharing accident scenario? As vehicle fleets replace individual ownership, who should carry the coverage necessary to pay medical bills, repair costs and other losses in case of a crash?

The changes on the horizon have prompted some commentators, like Deutsche Bank’s Joshua Shanker, to predict that today’s auto insurance industry simply won’t exist in 20 years.

Is the demise of auto insurance imminent? Is it likely? Here, we explore the pressures on traditional auto insurance and the ways the field may shift in the next one to two decades.

Self-Driving Cars: Who Will Insure Them?

Self-driving cars are predicted to change the driving habits of entire nations — and to significantly reduce the cost of auto insurance. A 2015 study by Metromile and Ferenstein Wire estimated that self-driving vehicles would save their owners nearly $1,000 a year on insurance premiums on average, according to Gregory Ferenstein.

The study was based in part on data showing that, as of 2015, none of Google’s self-driving vehicles had been in an accident caused by the technology, only by human error, reported Adrienne LaFrance at The Atlantic. Since then, there have been notable instances of tech errors leading to accidents, including the March 2018 death of a pedestrian. More on that in a minute.

Still, many commentators have drawn the same conclusion from the data: Prevented accidents mean prevented claims, which will reduce premiums. Even big name investors like Warren Buffett have made such predictions with regard to self-driving vehicles, CNBC’s Elizabeth Gurdus reports.

See also: Industry 4.0: What It Means for Insurance  

The Reality on the Ground

Yet the reality may not be so easy to achieve. For one thing, self-driving cars have yet to be tested in the same wide range of conditions human drivers face daily, says Peter Hancock, a professor of psychology and engineering at the University of Central Florida. Seeing how these cars handle bad roads, inclement weather and similar challenges is essential to understanding whether they’ll really replace human drivers — and how to insure them if they do.

In 2015, Volvo CEO Håkan Samuelsson said that Volvo would accept “full liability” for any losses occurring when a Volvo vehicle was in full autonomous mode, indicating a future in which liability coverage for self-driving vehicles is a question of product liability, not driver behavior.

Yet, to date, other automakers haven’t rushed to join Volvo in making a similar promise. While Google and Mercedes have self-insured, as a rule “auto manufacturers are not that keen on taking on the insurance risk,” says Rick Huckstep at the Digital Insurer. Automakers have spent billions of dollars on developing automated technologies, and “they didn’t do this to then have to carry 100% liability for whatever happens on the road.”

Revising Timelines

Even if self-driving cars adopt a commercial liability or product liability approach to coverage, thus eliminating the need for individual drivers’ coverage, a 10- to 15-year timeline may still be ambitious, says Simon Walker, group chief executive at First Central Group. The technology, while ever more widely tested, is not yet commonplace.

Determining regulatory, licensing and liability questions will likewise take years; attempts to start that process now have met with uncertainties because the tech isn’t in common use. Customers will need to gain confidence in autonomous vehicles, and their driver-required cars will have to age their way onto the scrap heap.

All this is unlikely to happen in just 10 years, or even in 20. And with 10 to 20 years, auto insurers have time to adapt. Some have already begun, in fact. Julia Kollewe at the Guardian cites Adrian Flux, a U.K. insurer, which in 2016 announced what it called the first-ever auto insurance policy for driverless vehicles. The policy covers not only the conventional situations other policies address, but also autonomous-vehicle-specific topics like software updates, satellite or navigation system failure and loss or damage from hacking.

If this U.K. company can do it, says Julia Eddington at the Zebra, so can U.S. companies, although they may face more complexity due to the overlapping world of state and federal regulations. As of mid-2018, however, 29 states had enacted driverless vehicle liability laws, according to the National Conference of State Legislatures, which could pave the way for faster adaptation by existing auto insurers.

Improved Safety Features: Are Crash-Proof Cars Possible?

Self-driving cars aren’t the only way that technology may end the need for auto accident coverage. Safety technology is improving, as well, and Volvo’s promise to cover liability for its cars while in autonomous mode isn’t the only goal the automaker has set to change the vehicle liability landscape.

In 2008, Volvo announced an ambitious plan: to create a crash-proof vehicle that would result in zero injuries or deaths, and to do it by 2020. In 2013, according to Viknesh Vijayenthiran at Motor Authority, and again in 2016, Volvo announced its intention to stay on track to create its injury- and death-free vehicles by 2020.

Volvo still has a little more than a year to reach this goal, and its statistics indicate the company is on the right track. Volvo won a 2018 Which? Award in the U.K. for “the company’s solid safety record that put it ahead of other short-listed candidates.”

Awards and strong statistics are evidence that Volvo is moving in the right direction when it comes to safety, but until this technology is perfected, insurance coverage remains a necessity — and completely autonomous driving technology still has a long way to go.

A Car and Its Coverage: A Package Deal?

Tesla is also betting on the safety of its technological advances, and in a way that presents an additional challenge to traditional insurance companies: by including auto insurance coverage in the sticker price of their vehicles.

Tesla is experimenting with selling “insurance and maintenance included” vehicles in Asia, according to Business Insider’s Danielle Muoio. The price for insurance and maintenance incorporates Tesla’s data about the car’s safety features, including its autopilot system. By including the insurance price in the car, Tesla says, the company believes it offers a better deal to consumers, because many auto insurance companies don’t account for the autopilot system in the same way Tesla does.

Tesla may have a point. “If you’re hoping to shave down your premiums, buying an automated vehicle might not be the right move,” Shift Insurance head of business development Raphael Locsin tells Entrepreneur. However, some companies do consider certain other driver assistance features, like electronic stability, when calculating discounts.

Insurance companies’ hesitation may be prudent at the moment. A March 2018 Tesla crash with the autopilot turned on proved fatal for the driver, according to Jack Stewart at Wired.

Selling vehicles, autonomous or otherwise, with the insurance included in the sales price offers a hybrid approach between purchasing coverage from traditional auto insurers and placing the burden on automakers to cover their vehicles as consumer products. While Tesla has gambled on the approach, it remains the only automaker to do so; even the products-liability model has had more buy-in from the makers of self-driving vehicles and their technology.

“Insurance included” models seem the least likely of the self-driving insurance options to threaten the traditional auto insurance industry in the next two decades. Yet they indicate a willingness of companies to take risks to try new models, which are worth noticing.

What to Expect in the Near Future

Self-driving vehicles piloted by technology that prevents accidents is a powerful vision of the future. It provides a sense of excitement and hope.

It also provides challenges to traditional auto insurance companies, many of which are already struggling with auto insurance premiums in a world where many people have eliminated vehicles from their lifestyles. For a $220 billion industry that supports more than a quarter million jobs, the threat is significant, says Patrick Lin at Forbes.

Yet technology’s death knell for auto insurance may not be as close as it appears.

Driver involvement in vehicle operation is likely to be a necessity for many more years, and drivers will need insurance as long as they must take the wheel. Human error will continue to be a factor in accidents. And demand for insurance against theft, acts of nature and technological glitches will persist even in a world where cars do their own driving.

What Will Operations Look Like in 2028?

In a 2011 article in Insurance and Technology, Kathy Burger enumerated several big technological changes in the insurance industry since 2001, including the rise of big data, the ubiquitous nature of cell phones and social media and an increased emphasis on data security and privacy.

Seven years later, these once-big innovations are par for the course. P&C insurers and insurtech companies are now positioned to use these tools — which scarcely existed in 2001 and which were only beginning to be broadly embraced in 2011 — as the foundation for the next wave of major changes in the insurance industry.

Now, let’s look at some of the biggest rising insurtech trends today to get an idea of where they’re likely to take us 10 years from now.

Auto Insurance

In July 2015, Jayleen R. Heft published an article at PropertyCasualty360 with the provocative title, “Will the auto insurance industry be obsolete in 20 years?”

Heft cited the work of Deutsche Bank research analyst Joshua Shanker, who argued that by 2030 self-driving cars and ride-sharing services would occupy so much of the automotive market that setting rates based on driving data would no longer be necessary. Instead, the companies behind these vehicles and services would simply “insure their cars like any other product,” Heft said.

While self-driving cars and ride-sharing services like Uber and Lyft are already shaking up the auto industry, predicting the demise of auto insurance by 2030 — or by 2028, even — may be premature. Pay-per-mile auto insurance is gaining popularity. Spearheaded by companies like Metromile and Esurance, the pay-per-mile model charges a base rate, plus a specified rate for each mile driven.

“Each mile usually costs a few cents,” Craig Casazza explains in an article for ValuePenguin. “So if you drive 200 miles per month at a rate of five cents per mile, you would be charged $10.” In addition, Metromile only charges drivers for the first 250 miles driven in any given day in most states.

Tracking Mileage With Telemetrics

Both Metromile and Esurance use telemetrics to track miles driven to calculate each month’s rate. Metromile calls its program the “Metromile Pulse,” and it uses the car’s OBD-II port to track mileage.

Other insurance companies have experimented with telemetrics for a number of years but haven’t connected rates directly to miles driven. Instead, they use the vehicle’s data to adjust rates in a more complex, less transparent manner, Casazza says.

See also: Future of P&C Tech Comes Into Focus  

The pay-per-mile model is increasingly popular with younger drivers, who often have the option to abandon their cars entirely for the convenience of Uber or public transportation, but who are happy to keep the freedom of their own vehicle when they feel they can more directly control its costs. For these drivers, who include a growing number of those currently under age 40, auto insurance may survive into the 2030s — although it may operate in a very different way.

Shanker’s prediction that auto insurance will fade into product liability insurance over the next decade, however, may be prescient. In an October 2017 article in Business Insider, Danielle Muoio explored Tesla’s partnership with Liberty Mutual to sell insurance as part of the purchase price of the company’s vehicles. The plan, called InsureMyTesla, factors in the car’s autopilot feature while setting rates and comes up with a lower cost than other insurance plans as a result, Muoio reports.

Insuring Shared Rides

Similarly, while ride-sharing company Uber currently requires drivers to carry their own auto insurance coverage while also providing supplementary insurance, the company may switch to providing all insurance coverage on its cars as it continues to move into the self-driving vehicle market.

Given Uber’s bumpy ride in producing self-driving vehicles, however, the company’s total abandonment of conventional auto insurance expectations for human drivers may be more than 10 years out, Tech Radar’s Leif Johnson and Michelle Fitzsimmons said in May 2018.

Adding Value and Processing Claims

“Digital technology destroys value,” warned a March 2017 article by Tanguy Catlin, Johannes-Tobias Lorenz, Christopher Morrison, and Holger Wilms at McKinsey & Co. According to the authors, “although digital technology propels some companies to become clear market winners, for many more its impact depletes corporate earnings and the overall value of an industry. Consumers, not companies, are often the ultimate winners.”

To stay relevant, the authors said, insurance companies must “meet customers’ expectations, which have been transformed by digital technology.”

In 2018, insurance companies seeking to stay ahead of the curve often accomplish this task by breaking down their own silos and presenting a quick, clean digital interface that makes it easy for customers to interact with the company and for staff to understand customers’ needs and provide clear, consistent answers.

Bridging Human and Automated Workflows

By 2028, companies are likely to have struck a balance between automation and human intervention — a balance that many insurers are currently struggling to find, Rick Huckstep writes in an article in The Digital Insurer. Automation offers both the opportunity to improve claims response and the challenge of providing the “human touch” that customers also demand, as Roger Peverelli and Reggy De Feniks put it in a December 2017 piece for Insurance Thought Leadership.

The goal will be to use automation in a way that doesn’t feel automated. As AI technology continues to develop, this goal may be fully realized within 10 years.

The automation of many of the current day-to-day tasks faced by insurance agents will, in turn, change agents’ jobs. Some commentators are already predicting that today’s field agents will be obsolete by 2023, replaced by “bionic agents” who have fully integrated digital tools, including AI and machine learning, into their work.

How Automation Influences Customer Expectations

Customers are already demanding the knowledge and flexibility a bionic agent exemplifies. As Jason Walker writes at PropertyCasualty360, “Consumers today want the ability to conduct insurance business anytime, anywhere for simple transactions, while at the same time be able to have a relationship with a professional to discuss complex policy questions or walk them through the claims process.” As this option becomes ever more normalized for customers, the demand for the same experience in insurance will rise. as well.

The result? By 2028, “digital natives” won’t only be insurance customers — they’ll also be insurance agents who leverage technology not only to serve customers but to demonstrate real value in the insurance process.

See also: Key Strategic Initiatives in P&C  

Automation and Claims Processing

Field agents aren’t the only insurance industry professionals who will see their work change dramatically by 2028. The ways insurance companies process claims will change, as well, driven in large part by customer expectations.

For instance, Ben Rossi writes at Information Age that about a fifth of young adult customers (ages 18–24) expect insurance companies to use drone technology to survey property damage and gather information for claims.

This idea “would have been unthinkable as recently as a couple of years ago,” Rossi says. Ten years from now, sending a drone to a damaged building or factory site may be as commonplace as sending a human adjuster has been for the past 10 years.

For many of us, 2008 feels like it was yesterday. In 2028, our memories of 2018 will feel the same — yet the insurance industry is poised to be eons ahead of where it currently stands, and insurtech will lead the way.

Why Risk Management Is a Leadership Issue

From product scandals to data breaches to natural disasters, companies are dealing with constant risk. But how they prepare for those risks can make the difference between riding the roughest wave — or drowning in it. The field of risk management, once an afterthought for many companies, is getting renewed attention with a new book by two Wharton professors who want to help business leaders think more deeply about worst-case scenarios. Michael Useem, management professor and director of the Center for Leadership and Change Management, and Howard Kunreuther, professor of operations, information and decisions as well as co-director of the Risk Management and Decision Processes Center, recently spoke with the Knowledge@Wharton show on SiriusXM channel 111 about their book, Mastering Catastrophic Risk: How Companies Are Coping with Disruption.

An edited transcript of the conversation follows.

Knowledge@Wharton: How did the two of you come to collaborate on this book?

Useem: If you think about the two terms that Howard has referenced, risk and leadership, they go together in this case. Often, we think of those as something separate. Risk — we’ve got to be analytical and disciplined, and it’s often technical. Leadership — it’s all about having a vision and setting a strategy. But we concluded, after talking with quite a few people and companies’ directors, executives and senior managers that the time has come for the conjoining of these two terms. Many companies now are self-conscious about appraising risk, measuring risk, managing risk and ensuring the company is ready to lead through a tough moment the risk has caused.

Knowledge@Wharton: Is this a recognition that has developed recently, compared with the executive mindset of the 1950s, ’60s, and ’70s?

Useem: Yes. I think what really got us going on the book in terms of the timing is exactly what you’ve referenced. Ten or 15 years ago, no companies had a chief risk officer. Risk was barely mentioned. The term “enterprise risk management” (ERM) was not even around. But if you look at any trend line out there, what do people worry about when they get together at watering holes for senior management? Risk now is on the agenda just about everywhere, for good reason: Because the risk that companies have faced in recent years has gone up. The catastrophic downside of big risk also has increased. More risk, more downside, more people are paying attention.

Kunreuther: One of the really interesting issues associated with the study and our interviews with senior management is that, before 9/11, there was very little emphasis by the firms on low-probability events — the black swan events. Starting with 9/11 and continuing through to today, these issues now have become more important, and black swans are now much more common than before. As a result, firms are paying attention. When we interviewed people, they were very clear with us that now that the events have occurred, they are putting it high on the agenda. As Mike has indicated, the boards and all of senior management are now paying attention to it, so it’s a big, big change.

Knowledge@Wharton: Certainly, 9/11 was an impactful event on the country, but it was followed a few years later by the Great Recession. How did that change the view of risk?

Useem: We raised the question in these in-depth interviews with people inside the company, whether on the board or in the management suite, and they consistently said that four events became a wake-up call or an alarm bell. First, 9/11 got us thinking about the unthinkable. A couple of hurricanes came through, including Sandy, which was a huge event. The recession or the near-depression back in 2008, 2009. Who thought that the Dow was going to lose 500 points in a day? Who thought Lehman was going to go under? But it all happened. And finally, the events in 2011 in Japan with the enormous tsunami after a 9.0 earthquake that left probably 25,000 people dead and set a fire in a nuclear plant.

Even if you were a company that was not touched, just look at the four points on a graph. The costs are high. Many companies are impacted. Everybody thought, let’s get on with enterprise risk management. Let’s make it an art.

See also: How to Improve ‘Model Risk Management’  

Knowledge@Wharton: How have business leaders changed their thinking about risk management because of those four events?

Kunreuther:  Leaders are now saying, “We have to put risk on the agenda. We have to think about our risk appetite,” which they hadn’t thought about before. “We have to think about our risk tolerance.”

Financial institutions played that role, and they were very clear about that right after the 2008-2009 debacle. They had to ask themselves very explicitly that question. But I think this is now much broader than that. Leaders have recognized that they also have to think longer-term. This is one of the issues. We have a framework that we’ve developed in the book that tries to combine some of the work that has come out of the literature that Daniel Kahneman has pioneered on thinking fast and slow — by indicating that intuitive thinking is the mindset that we often have. Thinking myopically. Thinking optimistically. Not wanting to change from the status quo. Leaders have now recognized that they have got to put on the table more deliberative thinking and think more long-term. That is a change, and they tie that together with risk.

One of our contributions, with respect to the book, is to try to put together a framework that really resonates with the leaders and the key people in the organization so that they can respond in a way that makes sense.

Useem: We asked a lot of people who are in the boardroom, if they go back 15 years, was risk, cyber risk or catastrophic risk in board deliberations? The answer typically was no. Ask the same people about today, and they say, “Of course.” We watched with horror what has happened with some of the cyber disasters at Target and elsewhere, and no board worth its pay is these days unconcerned about risk. Now, you’ve got to be careful. The board works with management, sets the vision, does not micromanage. But what boards are increasingly doing is saying to management, “Let’s see what your risk tolerance is. Let’s see what your risk appetite is. Let’s see what measures you already have in place. Nobody wants to think about the unthinkable, but let’s think about it.”

Knowledge@Wharton: The fake accounts scandal at Wells Fargo and the emissions controversy at Volkswagen are two recent examples of risk that you document in the book. Can you talk about that?

Useem: We don’t mean to pick on any company, and we don’t mean to extol the virtues of any company. But we can learn from all. Howard and I took a look at the events at Wells Fargo, which were extremely instructive. No. 1, the company put in very tough performance measures. They told employees, you’ve got to get results, otherwise you’re not going to be here in 12 months. But there was not a recognition that very tough performance indicators without guardrails against excess of performance was a toxic mix. We’ve seen what happened to Wells Fargo. They’ve paid billions in fines. The Federal Reserve has a stricture right now that Wells Fargo cannot accept one more dollar in assets until it can prove to the Fed that it has good risk measures in place.

We also document in the book the events with Volkswagen, which had the so-called defeat devices intended to report if a VW vehicle was brought in for an inspection, that the emissions were meeting U.S. standards. In fact, the software just simply was fooling the person looking at the dials. That, apparently, went all the way up to the top. We’ll see what’s finally resolved there.

Wells Fargo and Volkswagen took enormous hits in terms of reputation, brand, stock price and beyond. We also document a bit the BP problems in the Gulf…. They’re instructive.

Kunreuther: We didn’t interview anyone with respect to Volkswagen, but we did have public information, and it’s included in the book. The reason that we felt it was so important is that VW felt that this was a low-probability event that they would be detected, and they put it below their threshold level of concern. They emphasized the optimistic part of this, which was to say, “Let’s see what we can do as a way of really improving our bottom line.” What we do in the book is give a checklist to people, to companies and to individuals. We see it as a broad-based set of checklists on how they can do a better job of dealing with that.

What we really say is: Pay attention to these low-probability events. If you think not only in terms of next year but over the next 10 years, what you can see as a very low-probability event would actually be quite high over a period of time. If you begin to think long-term, which is what firms want to do, you pay attention to that.

Knowledge@Wharton: There’s such an economic impact on the company when these issues can’t be resolved quickly. Toyota, for example, has been dealing with its airbag problem for several years.

Kunreuther: You tie the issue of getting companies and directors to pay attention to the low probability, and then you say to them, “Construct a worst-case scenario.” Put on the table what could happen if it turns out you were discovered, or if there is an incident that occurs, or an accident, as Mike was saying on the BP side. What’s going to happen to the company? What will happen to its reputation, its survival, its bottom line? Our feeling is that, if you can begin to get people to think about the appetite and tolerance in the context of these low probabilities that could be quite high, then I think you have an opportunity for companies to pay attention. And they’re doing that, as Mike and I have found out in our interviews.

Knowledge@Wharton: What about when the disaster is a natural phenomenon, such as the volcanoes in Hawaii and Guatemala? Companies have to be prepared, but they can’t control what happens.

Useem: As we’ve watched the events unfold in Hawaii and Guatemala, it’s a great warning to us all that the impact of natural disasters worldwide is on the rise. There’s just no other way to describe it except a graph that’s going up, partly because people are living closer now to some of the places that historically are seismic. Hurricanes are possibly being intensified by global warming. There are more people along the Florida coast. All that being said, natural disasters are obviously in a much bigger class of disasters.

[Since] we wrote this book for people to be able to think through their own catastrophic risk management, we offered [examples] from the experience of other large companies, mainly in the U.S. We have a couple of German companies that we focused on: Deutsche Bank, Lufthansa and so on. We suggest that the vigilant manager, the watchful director, ought to be mindful of 10 separate points. One is, be alert to near-misses. What we mean by that is, “There but for the grace of God go I.” If I’m an energy producer, watch what happened to BP in the Gulf. Let’s learn from what they went through.

The A-case for me is Morgan Stanley, which had been in the South Tower of the World Trade Center when 9/11 hit. Because of the events eight years earlier — in 1993, a bomb had gone off in the basement of the World Trade Center — the risk officer at Morgan Stanley said, “Who knows what else might happen? That was a near-miss.”

Rick Rescorla, [vice president for corporate security,] insisted that Morgan Stanley every year practice a massive drill of evacuating the tower. When 9/11 occurred, the North Tower was hit first. Morgan Stanley is in the South Tower. Rescorla said, “Let’s get out of here,” and he managed to evacuate almost all 4,000 people. He was one individual who did not get out. He went back in to check. He is a hero for Morgan Stanley and many other people, but the bigger point taken from that is: Learn from the world around us, because these developments are intensifying. The threats are bigger. The downside is more costly.

See also: 3 Challenges in Risk Management  

Kunreuther: Near-misses are important in any aspect. But the other point that I think is important for today is another part of the checklist: Appreciate global connectedness and interdependencies. That point really became clear with Fukushima and with the Thailand floods. We asked each company what was the most adverse event that they faced? They had the complete freedom to say anything they wanted. The death of a CEO could have been one. Kidnapping was another. But as Mike indicated earlier, Fukushima was a critical one, and so were the Thailand floods. These were companies in the S&P 500, but they were concerned about how they were getting their parts, so supply chains were very important. They recognized after Fukushima that they were relying on a single supply chain that they couldn’t rely on for a time.

Knowledge@Wharton: How can a company prepare for the unexpected death of a CEO?

Useem: From looking at the companies that are pretty far into it, all we’re calling for is getting those risks figured out, then having in place a set of steps to anticipate. It’s like insurance. The best insurance is the one that never pays off because the disaster has not happened. The best risk management system is the one that’s not invoked.

In the book, we get into the events surrounding a fatal Lufthansa crash. Within minutes, they were in action. Within minutes, they had called the chancellor of Germany. Within minutes, they had people heading to the scene, not because that’s what they do but because they had thought about the unimaginable, and they had in place a system to react quickly. You have to deal with an enormous amount of uncertainty when disaster strikes. Premise No. 1: Be ready to act. Premise No. 2: Be ready to work with enormous uncertainty, but don’t let that pull you back from the task ahead.

7 Symbiotic Ties With Insurtechs

Our previous blogpost introduced the Top 10 insurtech trends for 2017. We received a lot of requests to share more of our view with regard to the last trend we mentioned: symbiotic relationships with insurtechs. Banks and insurers are looking for ways to learn much more from the fintechs and insurtechs they are investing in and partnering with. This is indeed a critical issue to accelerate innovation in banking and insurance.

In our new book “Reinventing Customer Engagement: The next level of digital transformation for banks and insurers,” we actually included seven best practices — seven examples of banks and insurers that created very different ways of working with fintechs and insurtechs. (The book will be available Feb. 23, but you can already pre-order at Amazon).

Corporate Venturing

Virtually every bank and insurer is organizing competitions and hackathons or supports one or more accelerator programs. Some have started their own corporate venture arm. Obviously, corporate venturing should not be the main way for financial institutions to reinvent themselves. It is a means but not an end in itself. The challenge of the digital transformation is essentially a cultural one that involves the whole company, not just the technology. Working with fintechs and insurtechs offers the opportunity to rethink and accelerate innovation. Innovation is not about asking customers in focus groups what they want. It is about understanding new technologies and how they will interact with consumer behavior. And that is one of the things fintechs and insurtechs are much better at than incumbents. Therefore, financial institutions need to really immerse in the fintech community to stay on pace or maybe even a step ahead in a rapidly changing technology environment, or, better still, to shake up the status quo and accelerate change in the stagnant financial industry.

Minh Q. Tran (AXA Strategic Ventures). Key note address at DIA Barcelona in 2016

Banks and insurers are looking for ways to learn much more from the fintechs and insurtechs they are investing in and partnering with — whether it is about specific capabilities or concrete instruments they can use in the incumbent organization, or whether it is about the culture and the way of working. (At last year’s edition of our Digital Insurance Agenda, Minh Q. Tran, general partner at AXA Strategic Partners, and Moshe Tamir, global head of digital transformation at Generali, shared their view. Check here for the interview with Tamir. Obviously, expect more such keynotes addressing this critical issue at DIA Amsterdam, which will take place May 10-11, 2017.)

We have come across quite a few different models in which relationships between financial institutions and fintechs/insurtechs seem to flourish. In this blogpost, we included seven examples. This is not meant to be exhaustive. New kinds of symbiotic relationships evolve every day, and of course they can be combined.

1. DBS Bank: Fintech Injections

Neal Cross, chief innovation officer at DBS Bank, involves fintechs in his own distinctive way: “I don’t do innovation, I do sales. I sell programs that solve business problems inside the bank. We always start with their problems, around business model innovation or around KPIs. The start-up community plays a key role in our programs. I often tell our business units: ‘Give us 20 of your staff, we will split them into teams and pair them with startups.’ By embedding our staff in this agile, lean mean way of working, everyone benefits. We make sure our teams work within structured processes that include research, experimentation and prototyping, followed by implementation. Everything we do is focused, and we get senior sponsorship before embarking on a project, so we don’t have problems with innovations that end up not being implemented.”

Neal Cross

2. Aviva: Icons

This is the best practice that we included in our previous blogpost. Andrew Brem, chief digital officer at Aviva: ‘In our view, ‘icons’ are needed to spearhead the digital transformation process. Our digital garages in London and Singapore are such icons. They are a very concrete and visual manifestation of our digital journey – for everyone across Aviva. The garages are not just idea labs to house ‘skunk works’ teams. They are real places, where we make and break things. We run digital businesses from the Garages, and we design and build our digital ecosystems such as MyAviva. Anyone from Aviva is welcome to come and hold workshops and meetings there, to see and feel our digital capabilities at first hand. The garages also help us engage with insurtechs and inject their culture into our organization; by launching startups ourselves, but also by partnering, mentoring and investing. Aviva Ventures, with a fund of £100 million, is also housed in the garage, and so are some of the startups they invest in, such as the IoT home security startup Cocoon.”

Aviva Garage, Shoreditch, London

3. Deutsche Bank: Digital Factory

In the summer of 2016, Deutsche Bank started its “digital factory.” More than 400 IT specialists and banking experts from the private, wealth and commercial clients division are working on a specific site in Frankfurt to develop new digital products and services for the bank’s customers. In addition, there are 50 places for external partners from the fintech community. The digital factory is obviously also connected with the Deutsche Bank’s innovation labs in Berlin, London and Palo Alto CA.

4. Munich Re: Interfaces

Andrew Rear, CEO of Munich Re Digital Partners: “To avoid a culture clash, we have set up a separate Digital Partners unit in 2016. To make the interface between the two worlds work, two things are vital: The first is speed. Startups move fast and don’t accept the limitations of a corporate diary: ‘Time is money’ is literally true for them. We therefore need to move with the same sense of pace. The second is decision-making: Start-ups make decisions; they don’t arrange committees. Therefore, we don’t do that, either. All the key decisions from Munich Re’s side are in our hands. In our model we do the things startups don’t need to control, to make their proposition live. That can include policy administration, compliance, reporting and product pricing; the ‘boring insurance’ stuff. We have stakes in our start-up partners but we don’t interfere in the way they engage their customers. The positive effects on our ‘regular’ organization are noticeable. For example, people in compliance and risk management were not used to these new speeds but are already adapting and finding new ways to fulfill their responsibilities in a way that is manageable for the start-up.”

Example of an interface between Munich Re and startups at regional level is Mundi Lab. Mundi Lab is an accelerator partnership between Munich Re Iberia & Latin America and Alma Mundi Ventures. Augusto Diaz-Leante, senior vice president of Munich Re Life, Spain, Portugal and Latin America, explains how the cross-fertilization with startups works: “We select startups from all over the world, such as RiskApp from Italy and Netbee from Brazil. Twenty Munich Re executives mentor these startups one-on-one. The best-performing companies with the highest potential to disrupt the insurance industry have the opportunity to work on a pilot program in one of the Munich Re Iberia or Latin America markets. In this way, the sharing of knowledge, experience and expertise is made very concrete.”

The Munich Re Mundi Lab team

5. Zurich: Open Innovation

Zurich created a platform to bring together the innovation initiatives and projects in the group. Xavier Tuduri, CEO of ServiZurich Technology Delivery Center: “In the Zurich Innovation Lab, we generate disruptive ideas and strategic R&D projects for the global Zurich group. We believe in open innovation, a collaborative model that means combining the internal knowledge, for example regarding markets with external talent and disruptive technologies. In this way we are always at the forefront of the latest disruptive fintech and insurtech developments, while being able to quickly develop tangible prototypes that fit and inspire our businesses. These are prototypes, without risky high investments, for example regarding using drones for risk assessment. Each prototype project is led by an employee of ServiZurich who works together in a team with several start-ups, universities and institutions. In this way, our people and organization get injected with new ways of working and thinking.”

6. Chebanica!: Co-Opetition

If a financial institution wants to behave like a fintech, it needs to open up, think of what the ecosystem could look like, be at the forefront to see what is happening and partner with fintechs to accelerate innovation, to learn or to advance the sector as a whole. Roberto Ferrari (CheBanca!) is a protagonist of this mindset: “We believe in a ‘co-opetition’ model. There will be things in which we will be competing with fintechs and other banks, and areas where we will be cooperating with the same parties. Therefore, we try to make the Italian fintech community grow. Building a larger cake will be for the good of the whole financial ecosystem, innovation is key and startups will always be the lifeblood of any sector. We among others launched the Italian fintech awards and the Smartmoney blog, which is now the most important vertical innovation in banking blogs in Italy. We now have a very strong presence in the Italian fintech community, and we are close to all developments and connections. I and other C-level executives at our bank speak to at least five to six fintechs each week, and we have already launched two new services – award-winning Mobile Wallet and Robo Adviser — thanks to our partnership with some specialized Italian fintech startups. We help them by partnering, but also we want to help them to go abroad as scale is key to succeed.”

Roberto Ferrari (right) with Matteo Rizzi (left, one of the most influential fintech experts)

7. Metlife: Capability Building

Lee Ng, vice president and COO of LumenLab, MetLife’s innovation center in Singapore: “LumenLab and our new businesses are distinct from MetLife’s core business. Our mission is to create a growth engine that launches disruptive new revenue-generating businesses for MetLife, targeting the needs of Asian consumers across health, aging and wealth. But we do work with in-country experts to develop plans for testing the new business ideas and assess market potential. In our first year we, for instance, launched BerryQ, a quiz app that rewards users for their health knowledge; Rememory Stories, a platform to capture intergenerational stories; and developed CONVRSE, virtual reality experiences around service and sales for financial services. We notice a real mindset shift within MetLife because of this cooperation. The people we work with develop skills about new ways of testing new ideas, new toolkits and new ways of thinking. Our core insurance business thus improves their performance, through adopting new behaviors like curiosity, velocity, experimentalism and bravery. In others words, we are lighting a path for innovation at MetLife.”

MetLife’s LumenLab, Singapore

We believe that it will be increasingly important to adopt a culture of constant innovation, to stay in sync with all that is going on out there. Rather than trying to change their DNA, which is quite impossible, banks and insurers should think that constant innovation is the only way to adapt the DNA to the change that is taking place. You can, for example, buy great algorithms, but if you are not able to transform your culture, the implementation of these algorithms will fail. A banker shared with us: “I see working with fintechs like vaccinations in biology: these injections in our cytoplasm help us prepare ourselves for new attacks and adapt to changing environments. If you acquire new fintech companies, you could destroy them if you don’t adapt to them as an organization. You have to adapt the mindset of your own people. It is like playing a piano. Some people sit down on their piano chair and move their chair to the piano. Other people don’t want to change their position and try to pull the piano to their chair. We should therefore teach people to move their chair after sitting down. How to move the chair will depend upon the situation, but should always deliver value to our customers.”

Working With Fintechs and Insurtechs at DIA Amsterdam

Maximizing the results from working with insurtechs is an essential subject on the Digital Insurance Agenda. So definitely expect us to pay ample attention to this at DIA Amsterdam: our two-day conference connecting insurance executives with insurtech leaders. Check out www.digitalinsuranceagenda.com for more information.