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Are You Fit Enough for Growth?

When it comes to scrutinizing costs, most insurance companies can say, “Been there, done that. Got the T-shirt.” Managers are familiar with the refrain from above to trim here and cut there. The typical result is flirtation with the latest management trends like lean, outsourcing and offshoring. However, the results tend to be the same. Budgets reflect last year’s spending plus or minus a couple of percent.

Meanwhile, managers attempt to develop strategies to capitalize on the trends reshaping the industry – customer-centricity, analytics, digital platforms and disruptive delivery and distribution models. Yet, after all of the energy companies exert to reduce expenses, there is often little left over to spend on these strategic initiatives.

Why do you need to look at your expense structure?

A variety of pressures have led carriers to improve their cost structures. In all parts of the market, low interest rates and investment returns are forcing carriers to scrutinize costs to improve return on capital, or even to maintain profitability to stay in business.

After all of the energy that companies exert to reduce expenses, there is often little energy left over to spend on strategic initiatives.

P&C carriers with lower-cost distribution models have been able to channel investments into advertising and take share, forcing competitors to reduce costs to defend their positions. Consolidation in the health, group and reinsurance sectors have forced smaller insurers to either a) explore more scalable cost structures or b) put themselves up for sale. For life and retirement companies, lower interest rates have taken a toll on the competitiveness of investment-based products.

This spells trouble for companies that have not adequately sorted out their expense structure. And a shrinking insurance company sooner or later will run afoul of regulators, ratings agencies, distributors and customers. Even if expenses are shrinking, if revenue is declining more quickly then the downward spiral will accelerate. It is virtually impossible to maintain profitability without growth. Expenses increase with inflation, tick upward with each additional regulatory requirement and can spike dramatically when attempting to meet customer and distributor demands for improved experiences and value-added services.

The reality is that companies have to grow, and that’s difficult in a mature market, especially in times when “the market” isn’t helping. What’s the key to success, then? In short, growth comes from better capabilities, service, customer-focus and products – all of which require continuing investment in capabilities.

See Also: 2016 Outlook for Property-Casualty

The math doesn’t work unless you’re finding ways to spend less in unimportant areas and allocate those savings to more important ones. If your answer to any of the following questions is “no,” then it’s important that you look at your allocation of resources for capital, assets and spending:

  • Are you making your desired return on capital?
  • Are your growth levels acceptable?
  • Do you have an expense structure that lets you compete at scale?

The transformation of insurers from clerk-intensive, army-sized bureaucracies to highly automated financial and service operations has been a decades-long process. The industry has invested heavily enough in standardization and automation that one would expect it to be a well-oiled machine. However, when we look under the covers, we see an industry with a considerable amount of customization and one-offs. In other words, the industry behaves more like cottage industry than an industrial, scalable enterprise.

We know that expenses are difficult to measure, let alone control. But why are they so intractable?

The industry’s poorly kept secret is that insurers, even larger ones, have sold many permutations of products with many different features. All of these have risk, service, compensation, accounting and reporting expenses, as well as coverage tails so long the company can’t help but operate below scale.

Why are expenses so intractable? The issue is scale.

What defines operating at scale for you? A straightforward way to answer this question is to consider whether you’re operating at a level of efficiency on par with or better than the best in the marketplace. Where do you draw the line? The top 10% to 15%? The top 20% to 25%? Next, ask yourself if you, in fact, are operating at scale. Remove large policies and reinsurance that disguise operating results, then sort out how many differentiated service models you are supporting. Are you in the bottom half of performers? Are you in the top 50% but not the top quartile? Are you in the top quartile but not the top decile?

Every insurer needs a more versatile and flexible expense structure to fully operate at scale and be more competitive.

Competition is changing

Customers now have access to a wealth of information and are increasingly using it to make more informed choices. New market entrants are establishing a foothold in direct and lightly assisted distribution models that make wealth management services more affordable for more market segments. Name brands are establishing customer mind-share with extensive advertising. FinTech is shifting the way we think about adding capabilities and creating capabilities in near real time. Outsourcers are increasingly proficient and are investing in new technologies and capabilities that only the largest companies can afford to do at scale.

See Also: Don’t Do It Yourself on Property Claims

The competitive landscape will continue to change. More products will be commoditized – after all, consumers prefer an easy-to-understand product at a readily comparable price. As they do now, stronger companies will go after competitors with less name recognition and scale and lower ratings. Customer research and behavioral analytics will more accurately discern life-long customer behavior and buying patterns for most lifestyles and socio-demographic groups. The role of advisers will change, but customers of all ages will still like at least occasional advice, especially when their needs – and the products they purchase to meet them – are complex.

Table stakes are greater each year and now include internal and external digital platforms, data-derived service (and self-service) models, omni-channel distribution models and extensive use of advanced analytics. The need to improve time-to-market has never been more important. Scale matters. Because they can increase scale, partners also matter even more than in the past. If they have truly complementary capabilities, new partners can help you improve your cost curve because you can leverage their scale to improve yours (and vice-versa).

In conclusion, all companies – regardless of scale – need to ensure that their capital and operating spending aligns with their strategy and capabilities and the ways they choose to differentiate themselves in the market. In this transformative time, the ones that can’t or won’t do this will fall increasingly behind the market leaders.

Implications: Leave no stone unturned

  • Managing expenses is a job that is never finished. Even if you’ve already looked at expenses, it doesn’t mean that you get a pass from scrutinizing them afresh. You will always have to keep rolling that particular boulder up the hill. Acknowledging that you could always manage expenses better is the first step to doing it well.
  • Identify and commit to the cost curves that get you to scale. This may require new thinking about sourcing partners and which evolving capabilities hold the most promise for the future of the company. How transformative do your digital platforms need to be? Can the cloud help you operate more efficiently and economically? How constraining is your culture, management and governance?
  • Every company needs to invest. Every company needs to be “fit for growth.” You will need to increase expenses where it helps you compete and decrease it where it doesn’t. Admittedly, this is hard to do, but the companies that don’t do it successfully will be left by the wayside.

Waves of Change in Digital Expectations

In the first of this three-part blog series, titled “Bringing Insurance Distribution Back Into Sync Part 1: What Happened to Insurance Distribution?”, we talked about the seismic shifts that have rocked traditional insurance distribution and about how insurance companies need to adopt a 2D strategy to thrive in this new environment.

There are four fundamental drivers of the seismic changes:

  • New expectations are being set by other industries—the “Amazon effect”;
  • New products are needed to meet new needs, and risks are distributed in new channels;
  • Channel options are expanding;
  • Lines are blurring between insurance and other industries.

In this blog post, we’ll discuss how the final three fundamental drivers have contributed to an environment of challenges and great opportunities. Those who adopt a 2D strategy will be better-prepared to seize the opportunities:

  • First, by optimizing the front end with a digital platform that orchestrates customer engagement across multiple channels
  • Second, by creating an optimized back end that effectively manages the growing array and complexity of multiple distribution channels beyond the traditional agent channel

New Products

Customer expectations, behaviors and risk profiles are evolving thanks to technology, social trends and other changes happening around us. These are driving the need for new insurance solutions and, consequently, new distribution methods, such as:

  • We all know about autonomous cars and increasing car safety technology. Autonomous cars have created questions about where liability lies in the event of an accident involving one of these vehicles. Volvo has laid down a challenge to the auto and insurance industries with its recent announcement that it will assume liability for crashes of its Intellisafe Autopilot cars.
  • The sharing economy—whether it’s for transportation, lodging, labor or “stuff”—has created a multitude of questions regarding coverages. People have realized they don’t need to buy and own cars or pay for hotel rooms when they can use someone else’s stuff for a cheaper price. People who own these items can monetize them when they’re not being used.
  • Cyber risk has been around for a long time, but numerous high-profile hacks have made it a hot topic again.
  • And, finally, the Internet of Things: Connected cars, homes and personal fitness trackers are generating lots of data with tremendous potential to improve pricing and create products and services, while at the same time reducing or eliminating risk.

The seismic impact has resulted in companies developing and offering new products to meet the changing needs, preferences and risks being driven by consumers. There are several relatively new peer-to-peer companies that have entered the market, such as Friendsurance, insPeer, Bought by Many and the recently announced start-up Lemonade. Metromile addresses the sharing economy trend with its product for Uber drivers, and addresses the niche market of low-mileage drivers.

Google Compare, with its focus of “being there when the customer wants it,” has rapidly expanded from credit cards (2013) to auto insurance (early 2015) and now to mortgages (December 2015), all the while expanding to new states and adding product providers to its platform with a new model that leverages customer feedback.

John Hancock is using Fitbits as part of the company’s Vitality program, which started in South Africa and which uses gamification to increase customer engagement and lead to potential discounts. Tokio Marine Nichido is using mobile (in an alliance with NTT Docomo) to distribute “one-time insurance” for auto, travel, golf and sports and leisure. HCC, which was recently acquired by Tokio Marine, has a new online portal for its agents to write artisan ontractors coverage for small artisan contractor customers.

The overarching theme in all these examples is that each company is pioneering ways of distribution, not just new products or coverages. Many companies are direct e-commerce because they are low premium, quick turnaround/short duration and potentially high volume; they are not well-suited for agent distribution.

Expanding Channel Options

Channel options and capabilities for accessing insurance are expanding rapidly. New brands are entering the market, giving customers new ways to shop for, compare and buy insurance.

Comparison sites, online agencies and brokers—such as Bolt Insurance Agency, Insureon, PolicyGenius, CoverHound, Compare.com and the Zebra—are relatively new to the market and are gaining significant market interest and penetration. There are also new brands in the U.S. selling life and commercial direct online, like Haven Life, Assurestart and Hiscox. Berkshire Hathaway will jump into the direct-to-business small commercial market in 2016, a potential game-changing move for the industry.

Finally, there are some intriguing new players that are focusing on specific parts of the insurance value chain.

  • Social Intelligence uses data from social media to develop risk scores that can be used for pricing and underwriting.
  • TROV is a “digital locker” with plans to use the detailed valuation data it collects to create more precise coverage and pricing for personal property.
  • Snapsheet is the technology platform behind many carriers’ mobile claims apps, including USAA, MetLife, National General and Country Financial.

Blurring Lines

The insurance industry is so valuable that outside companies are trying to capture a share. This has created a blurring of industry lines. Companies like Google, Costco and Wal-Mart are familiar brands that have not traditionally been associated with insurance, but they have offered insurance to their customers. The first time most people heard about these companies’ expansions into insurance, it probably struck them as unusual, but now the idea of cross-industry insurance penetration has become normal.

In addition, insurance products are blurring and blending into other products. For example, Zenefits and Intuit are considering bundling workers’ compensation with payroll offerings.

So, what does all of this mean?  There are two key implications from all of this for insurance companies.

First, multiple channels are now available to and are expected by customers. There are many ways for customers to research, shop, buy, pay for and use insurance (as well as almost all other types of products and services). Most customers demand and use multiple channels depending on what they want or need at the time. They are more ends-driven than means-driven and will pick the best channel for the task at hand.

Second, multiple channel options give customers the freedom to interact with companies anywhere, anytime, in just about any way.  But this only works if these channels are aligned and integrated. An organization can’t just add channels as new silos; they must be aligned, or they will do more harm than good.

So, while distribution transformation and digital capabilities promise an easier, better experience for customers, they actually result in increased complexity for insurers. Orchestrating all these channel options is hard work and can’t be done with legacy thinking, processes or systems. This expansion of channels requires insurers to optimize both the front end and the back end of the channel ecosystem.  In my next blog post, we’ll discuss these in more detail.

What Happened to Insurance Distribution?

A bright market pundit could probably offer up her ideas on just which day it was that insurance distribution fell markedly out of sync with retail technology and consumer expectations. Was it the day Amazon was launched? Was it the day that the first app was purchased on the app store? Did it involve Google search engine optimization or the switch from print to email or social media marketing?

It is interesting and a little painful to think about, but most experts would say that, of course, it wasn’t just one day or one event. It has been building slowly, silently and stealthily…where the insurance industry allowed the friction of change to impede modernization and place itself at risk. Shifting consumer mindsets and rapidly evolving markets, like tectonic pressures, built up along a fault line, and then one day the ground shakes.

And it didn’t stop shaking.

Now the industry is waking up and finding itself on a precipice in the midst of continual, seismic shifts. A new business environment has arrived. The environment is different because of the complexity, breadth and depth of converging factors and global changes. To an industry steeped in centuries of tradition, this new business environment represents significant disruption. The shifting and realigning of fundamental elements of the business require us to erase the idea that we can ease our organizations into the new era with minor adjustments. Instead, we need to match the rhythm of perpetual aftershocks with a model that sways to the beat of a new agenda.

We need to reinvent the insurance business model so that it is built to predict seismic activity and capture future opportunities. Today’s insurers are moving from product-driven to customer-driven strategies; from reliance on limited distribution channels (such as agents) to an array of channels based on customer choice; from line of business silos to customer experience threads for all products across all lines; from simply containing risk to providing personal risk management; and from siloed solutions focused on transactions to a platform portfolio that bridges together real-time interaction across all products and services for customers, giving them an Amazon-like experience.

Together the changes represent a disruption in the industry’s traditional market rhythm. The industry’s response demands two concerted efforts:

  • First, it requires optimizing the front end with a digital platform that orchestrates customer engagement across multiple channels.
  • Second, this multi-channel environment must be supported by an optimized back-end that effectively manages the growing array and complexity of multiple distribution channels beyond the traditional agent channel.

Together, these two efforts compose a “2D Strategy” for insurers to succeed in this new business environment of customer engagement and channel choice. What composes the 2D Strategy? It is simply digital and distribution. Majesco’s new thought leadership report, “A 2D Strategy: Distribution and Digital for High Performance,” discusses this two-pronged strategy in more detail.

But first, let’s spend some time diagnosing the developments that have led the industry to this point. We see four fundamental drivers:

• New expectations are being set by other industries; the “Amazon effect”
• New products are needed to meet new needs and risks distributed in new channels
• Channel options are expanding
• Lines are blurring between insurance and other industries

New Expectations

Customer expectations based on their experiences with other companies and industries are setting a new bar for customer experience and are a key driver in expanding distribution choice. What are these companies doing that customers like so much? Fundamentally they offer choice, create delight and surprise and make both a personalized and emotional connection.

– Amazon and Netflix have a huge variety of products and use data and analytics very well to know what customers would like, before they even know it themselves.
– Southwest makes things simple and transparent and has a great culture that creates a welcoming environment for customers.
– Google is the very essence of surprise and delight – every time you do a search you never know what you’ll find.
– Costco customers experience a “thrill of discovery” every time they go there and have access to “members only” deals on a large variety of products and services – including insurance. Availability creates a seamless line between online and in-store.
– Apple designs all of its products and services to create a feeling of simplicity, function and elegance and makes shopping, buying and servicing available through multiple channels.

Underpinning these new expectations is the use of technology, with mobile as a key enabler. Why? Simply put, mobile empowers customers. It used to be called the third screen (behind TV and the PC), but now it’s the first screen. Pew says that 68% of all American adults have a smartphone now, and some younger age groups are hitting saturation levels. Other studies show that more than 40% of organic search engine traffic now comes from mobile devices, and 50% of insurance shoppers start their shopping process using mobile.

We frequently talk about mobile enabling ANYTIME and ANYWHERE interactions. Recent Google research quantified the times and places consumers use mobile for researching and purchasing products. Usage levels generally increase as the day progresses, peaking in the late evening. But if you look at the first two and last two parts of the day together, an estimated 46% of mobile research time is spent in the early morning, late evening or when customers are in bed — not an ideal time to meet with an insurance agent. A majority of this activity is done at home, but almost as much is done outside of the home.

Customer experiences created by other companies and customer empowerment created by technology are powerful forces shaping customer expectations and driving the need for insurance companies to adopt a 2D strategy. In my next blog I’ll explore the other drivers on our list: new products, expanding channel options and blurring industry lines.

Top 10 InsurTech Predictions for 2016

2015 was the year that InsurTech emerged from the shadow of Fintech. This story has been told through my last 40 research notes published on DailyFintech.com over the past eight months. Including 28 interviews with the CEOs and founders of InsurTechs, this story spans the globe from the U.S. to China, from South Africa to Estonia, and a few stops in between.

So, what does this tell us about the next chapter of this story? Here, I give you my Top 10 InsurTech predictions for 2016.

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In no particular order…

Prediction #1

Insurers will create lifestyle apps that provide additional consumer value on a continuing basis. Continuous consumer engagement will start to replace price as the key buying criterion. The result will be sticky insurance with strong brand loyalty.

Prediction #2

The person-to-person (P2P) insurance business model will struggle to reach scale in its current form. This will drive the P2P insurers to find new ways to replace the traditional carrier model, and we will see signs of a completely new business model for insurance. That will scale.

Prediction #3

Much greater levels of personalized rating will become widely available using new sources of data from technology such as wearables, the Internet of Things and smartphone apps. This will lead to variable premiums over the policy term to encourage better behavior (although insurers will hold back and not introduce corresponding punishments in 2016).

Prediction #4

“All in one policy” cover (aka, all-risks insurance) will emerge for consumer protection. Policyholders will be able to insure their lifestyle (their home, motor, dog, holidays, iPhone, treasures, travel) in a single policy based on highly personalized risk assessment through a digital platform.

Prediction #5

“All in one place” platforms (aka a concierge service) will replace traditional intermediaries with a digital broker. These services will consolidate multiple policies, converge with financial planning tools and provide robo-advice on gaps and duplication in cover.

Prediction #6

New entrants will come into the market with highly sophisticated data modeling and predictive analytics solutions. They will exploit mass-scale technologies, high-performance computing and techniques developed in high-frequency trading.

Prediction #7

Convenience and the ability to digitally turn insurance cover on and off as needed will be steadily accepted and adopted. As will microinsurance, sharing insurance and pay-per-mile. Unit premiums will be higher, but this will be outweighed by Millennial attitudes toward insurance cover and paying a price for convenience.

Prediction #8

The poorest in our world are the ones who need insurance the most. In 2016, the insurance industry will (finally) start to better serve the massively underinsured populations in developing countries. This will be driven by a combination of the massive market opportunity that exists for insurance, global economic forces and a socio-political agenda.

Prediction #9

There will be widespread deployment by traditional insurers of new digital solutions to reduce cost of claims and loss handling. Serving both ends of the insurance workflow, these tech solutions will enable better collection of data and evidence to improve risk rating at the front end and the claims handling processes, especially at first notice of loss (FNOL), at the back.

Prediction #10

2017 will be the year of block chain and insurance. No list of predictions would be complete without reference to block chain, but IMHO it is going to take all of 2016 for the insurance industry to get to grips with what block chain is, what it can really do for insurance and (most important) why we should use block chain as opposed to any other database or enabling technology.

Don’t get me wrong, for I am squarely in the camp that believes “block chain is the next Internet.” And we will continue to see a lot of block chain insurance activity throughout the year. But adoption in insurance won’t take hold until we’ve seen 2016 out.

New Insurance Models: The View From Asia

Recently, I chaired the 4th annual Asia Insurance CIO Technology summit in Jakarta, Indonesia. The experience brought me into contact with an entirely different set of insurers and insurance technology players. I was rewarded with a fresh view on the challenges and opportunities of insurance during an era of disruptive innovation, as well as a new perspective on how Asian insurers are creating and launching products, defining new channels and new models to out-innovate the competition.

I should state at the outset that Asian insurers aren’t doing everything differently than North American and European insurers. It is a global era. In many ways, their competitive issues are similar. We are all having the same conversations. As I considered the similarities, however, it made the small differences stand out. Just as Asia is hours ahead of the Western world throughout the day, I had the strange feeling that I was listening to the ends of conversations that are only beginning in other parts of the world. Because populations, cultures, use of digital technology and the nature of businesses vary, I thought I would share a short list of insights from my eavesdropping in an effort to shed light on how disruption is being embraced elsewhere and how it could ripple through the industry. I’ll center my thoughts on models, mandates and marketing.

Models

Everyone is discussing models. Business models. Technology models. Distribution models. Transaction models. There is good reason. It’s a model v. model world, and Asia-Pacific insurers know that the model is the center of a business. For the outer layer to be responsive, the business model can’t be a slow-moving leviathan. Disruption has the disturbing tendency to render perfectly good models obsolete. Creating a responsive, obsolescent-proof business model is of great interest to Asian insurers, which are responding to radically different consumer expectations and competitive models than in prior decades.

Traditional insurers at the conference (as well as challengers) are aggressively rethinking the insurance business model. Some believe that insurance will be run more in an open ecosystem, becoming more fragmented and niche-focused, building on the micro concept. If an insurer can embed products in other business models/industries, especially those with high-frequency transactions, then they capture the opportunity for both a new distribution channel and a new product. New Distribution Channel + New Product = New Market Opportunity.

These are areas where insurers can see quantum leaps in growth, yet they are also the areas where insurers are most susceptible to start-ups beating them to the punch.

Mandates

Three clear mandates stood out above all others for Asian insurers – the role of CIOs, the necessity of new cyber security solutions and a new, enterprise-wide look at analytics.

For CIOs, the clarion call was for a rapid advancement and widening of scope for their role within the insurance organization. CIOs must become change agents and grow in influence. They must be active in technology review and adoption, more collaborative with CMOs regarding digital platforms and data sharing and more effective at translating business vision into system and process transformation.

Cybersecurity is a never-ending mandate that also seems to never have the perfect solution. It was universally agreed-upon that today’s security measures have the frustrating trait of being mostly temporary solutions. Blockchain technology (currently in use by Bitcoin, among others) was discussed as a more permanent solution for many security issues. Blockchain use makes transaction fraud nearly impossible. Verification of transaction authenticity is instant and can be performed by any trusted source, from any trusted location.

On a broader note, however, it was conceded that security is no longer just an IT issue, but it is a board-level, organization-wide imperative because security concerns the full enterprise. Boards must fund and address cybersecurity across three aspects: confidentiality, availability and integrity.

Enterprise-wide analytics was another organizational mandate. Some Asian insurers are moving toward using end-to-end analytics solutions that cross the enterprise in an effort to gain a single client view and execute a targeted pipeline, with unified campaigns and advertising. Analytics will also give them risk- and assessment-based pricing, improved predictability for loss prevention and better management of claims trends, recovery and services.

Marketing

Insurers are rapidly moving from product-driven to customer-driven strategies and from traditional distribution channels (such as agents) to an array of channels based on customer choice. At the same time that Asian insurers are looking at relevant business models, they are diving deeply into how marketing tactics may completely shift from a central hub to a decentralized “micro” model. The industry spark has been a short list of both established insurers and start-ups that are capturing new business through new marketing methods, new partnerships and new market spaces.

ZhongAn, for example, is selling return insurance for anything bought on Alibaba. Huatai Life is promoting unit-linked policies on JD.com and selling A&H insurance via a WeChat app. PICC Life has found a distribution partner in Qunar.com, an online travel information provider. These examples require a completely different, high-volume, interaction-based, data-rich, small-issue marketing plan. That kind of marketing will prove to be of great value to insurers that have added flexible, transaction-capable core insurance systems…that are cloud-based to scale rapidly.

Aggregators are now commonplace in insurance, and Asian insurers are looking at how this channel will affect their business, as well as how to use aggregators as a tool for competitive advantage. GoBear, currently selling in Singapore and Thailand, was given as a prime example of how aggregators represent the future of insurance shopping. GoBear isn’t just an aggregator. It is an innovator, revamping the concept of insurance relationships. GoBear Matchmaker, for example, will allow a prospect to pick insurance but also allow the insurer to pick prospects/clients. GoBear Groups will leverage groups/crowd sourcing.

What do these M’s add up to?

Insurance business models, mandates and marketing are all ripe for inspection and change. In some ways, Asian insurers are in a better position for these ground-shaking industry changes because so many of them recognize the stakes involved and the cultural shift required to thrive. Asian populations and culture are ready to embrace technology solutions to meet consumer demands. As all insurers globally address their models, mandates and marketing, it will be fascinating and educational to see how quickly the different markets adapt and are emerging as innovative leaders and how these regional innovations will influence other regions as they turn into global solutions.

One thing was clear to me in my time in Jakarta – Asian insurers are optimistic, active and excited about the road ahead.