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Gradually and Then Suddenly…

Excerpted from MSA’s Q1-2018 Outlook Report (June 2018)

The insurance industry has been compared to the proverbial frog in the pot of ever hotter water. While things appear on the surface comparable to what they were like 10 years ago, perhaps with some nuanced variations, there appears to be little in the way of differences. Yes, mergers continue happening at the carrier level, and direct insurers are slowly gaining market share, but the band plays on. Industry associations continue holding conventions, insurers, reinsurers and brokers continue their traditions and year-end pilgrimages to London, Monte Carlo, Baden-Baden, NICC and the Aon Rendezvous, and the various other stations still welcome a familiar crowd. But signs that fundamental changes are afoot are becoming ever harder to ignore.

In Ernest Hemingway’s 1926 novel, “The Sun Also Rises,” there’s a snippet of dialogue that seems apropos:

How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

The primary driver of the change is technology. The less noticeable catalyst, but no less important, is changes in regulatory mindsets. Let’s tackle both.

The two most influential market conduct regulators in Canada are readying themselves for technological disruption of the industries they oversee.

Quebec’s regulator, the AMF, has publicly expressed that it is “open for business” in terms of insurtech/ fintech under CEO Louis Morisset and Superintendent of Solvency Patrick Déry.

FSCO has recently moved to be more flexible within the tight bounds of its mandate, and its successor, FSRA, will be a modern independent agency purposely built for adaptability; it emerges from its cocoon under the guidance of a professional board and the stewardship of its CEO, Mark White, in April 2019.

FSRA and the AMF are positioning themselves to allow experimentation via regulatory sandboxes, whereby players can test initiatives in the field. This sandbox methodology is modeled after the Ontario Security Commission’s LaunchPad initiative.

See also: Global Trend Map No. 19: N. America (Part 1)  

You may not have noticed it, but the regulatory ground in two of Canada’s largest provinces has shifted, and the stage is being set for ever-faster innovation in the Canadian insurtech space. In fact, in conversations with Guy Fraker, chief innovation officer at California-based Insurance Thought Leadership and emcee for the InsurTech North Conference in Gatineau in October, he advises that Canada is being looked at as a regulatory innovation hub by the global insurtech community.

Even under the old FSCO regime, Canada’s largest insurer, Intact, pulled off what might be a master stroke in July 2016 when it issued a fleet policy to Uber, providing coverage to tens of thousands of Uber drivers when engaged in Uber activities. So, in one fell swoop, a single insurer swept up tens of thousands of drivers. Intact pulled another coup by partnering with Turo in Canada. Turo is a peer-to-peer car-sharing marketplace that is busy disrupting the sleepy and sloppy car rental industry. This again gives Intact access to thousands of drivers with the stroke of a pen. Further, Intact may be able to leverage the access it has to those drivers to provide full auto coverage and even residential coverages. When these risks are gone, they’re lost to the rest of the market. Striking deals with the likes of Uber and Turo changes the game. In the U.S., Turo partners with Liberty Mutual, and with Allianz in Germany. Uber partners with Allstate, Farmers, James River and Progressive in the U.S. Aviva has pulled off a similar deal in Canada with Uber’s nemesis, Lyft.

Further afield, B3i, the industry blockchain initiative has been established with the support of 15 large insurers/reinsurers. It is just starting up, but its mission is to remove friction from insurer/reinsurer transactions and risk transfer. When friction goes, so will costs. It is starting out slowly, but things may change suddenly – reshaping whole segments of the market. In addition to the original 15, the initiative has been joined by 23 industry testers.

In the U.S., The Institutes (the educational body behind the CPCU designation) launched a similar blockchain consortium called RiskBlock, which currently counts 18 members:

  • American Agricultural Insurance
  • American Family Insurance
  • Chubb
  • Erie Insurance
  • Farmers Insurance
  • The Hanover Insurance Group
  • Horace Mann Educators
  • Liberty Mutual Insurance
  • Marsh
  • Munich Reinsurance America
  • Nationwide Insurance
  • Ohio Mutual Insurance Group
  • Penn National Insurance
  • RCM&D
  • RenaissanceRe
  • State Automobile Mutual Insurance
  • United Educators
  • USAA

There is talk of establishing a Canadian insurance blockchain consortium, as well. You can hear from leaders of B3i, RiskBlock and parties involved in the Canadian initiative at the NICC in October.

Even further afield, if one was to look for an industry that makes the insurance sector look futuristic, one need not look further than the global supply chain shipping industry, with antiquated bills of lading, layers of intermediation and massive administrative overheads. Well, that industry is getting a serious wakeup call thanks to determination and drive of the world’s largest shipping company, Maersk. The company is taking its industry by the scruff of the neck and pulling it into the future whether it likes it or not – long-standing tradition, relationships and methods notwithstanding.

First, in March 2017, Maersk teamed up with IBM to utilize blockchain technology for cross-border supply chain management. Using blockchain to work with a network of shippers, freight forwarders, ocean carriers, ports and customs authorities, the intent is to digitize (read automate/disintermediate) global trade.

More recently (May 28, 2018) and closer to home, Maersk announced that it has deployed the first blockchain platform for marine insurance called insurwave in a joint venture between Guardtime, a software security provider, and EY. The platform is being used by Willis Towers Watson, MS Amlin and XL Catlin (got your attention?). Microsoft Azure is providing the blockchain technology using ACORD standards. Inefficiencies, beware! Microsoft and Guardtime intend to extend insurwave to the global logistics, marine cargo, energy and aviation sectors.

See also: How Insurance and Blockchain Fit  

Insurers that find themselves locked out of these types of large-scale initiatives will be left out in the cold.

We’re witnessing “SUDDENLY,” and we’d better get used to it.

3 Myths That Inhibit Innovation (Part 1)

As the pace of change accelerates, the chances that incumbent businesses will be affected or displaced grows. According to a recent CB Insights report, insurance is one of the top five industries facing disruption risk; 85% of surveyed corporate strategists believe that innovation is critical for their organizations. Yet the vast majority are focused on incremental changes.

In other words, while the insurance industry is in the business of mitigating risk, too many insurance companies aren’t taking advantage of innovation to address disruption.

A number of innovation myths foster complacency among market leaders. While the myths aren’t unique to the insurance vertical, our industry may have embraced them more fully than others. These myths can be grouped into three main areas: strategic complacency, financial concerns and misperceptions of the innovation process.

Over the course of three articles, we will explore each of these areas in detail, starting with strategic complacency.

Strategic Complacency

Great Changes

The insurance industry is at a crossroads. A number of significant trends are converging to change our customers:

  • Their behavior,
  • The risks they experience,
  • The technologies they use,
  • And, most importantly, their expectations.

Add to those challenges the changes in underwriting, pricing and service delivery allowed by new technologies and analytic capabilities. Both the opportunities and the challenges presented by the intersection of these trends are significant for senior leadership in all segments of our industry. Yet, too often, the insurance industry hides behind our perception that “insurance is different,” or that “we’re regulated” or that “it’s complicated.”

Other industries have faced similar situations, and things haven’t always gone well for the established companies, even in a complicated industry computers and software or a heavily regulated one like automotive manufacturing.

Some market leaders such as IBM are often written off as roadkill, but they reinvent themselves time and again. Others like Blockbuster mistakenly believe that their position provides them with unassailable advantages and end up either dramatically changed or out of business. In Blockbuster’s case, the high water mark in their valuation was in 1996, the year before Netflix was launched. In 1998, their valuation was 50% of what it had been two years prior. They mistakenly believed that breadth of location and depth of inventory were walls that couldn’t be scaled by the competitive hordes.

One thing is certain:

The client views his or her needs and wants as primary. That client neither understands nor cares how difficult transformation is, what the backroom challenges are or whether we’re addressing the issues as fast as we can.

See also: Innovation Imperatives in the Digital Age   

Clients just want to solve their problems now. If the incumbent can’t or won’t provide what the client requests, then the client goes elsewhere.

In times of great change, strategic complacency kills.

Customer Intimacy

Ask any insurer about its strengths, and one knee-jerk response will be, “We take great care of our customers.” If that is the case, why does such a significant portion of our customers respond negatively to the industry and our efforts?

Explore customer experience with insurance industry leaders a bit further, and the responses will be more nuanced, perhaps to the point of admitting the poor job the industry actually does. The good news is that some of the problem isn’t our fault.

Our industry provides irreplaceable products and services of which we can be rightly proud. We regularly step into the breach in some of the most trying times our customers will ever face. But, thankfully, those events are rare or even nonexistent for the average customer, and many insureds don’t recognize that a valuable service was provided by risk transfer even during a period when they experienced no losses.

Insurers’ job is to see the big picture, and to connect disparate facts. We have increasing amounts of data about those customers, which provide insights into behaviors and opportunities.

These factors lead many organizations to profess that they deeply understand their customers, and that, when the customer is looking for additional products or services, the insurer will immediately know and develop the appropriate response. Dig a bit deeper, and another story emerges. Perhaps we don’t have the intimate relationship that would inspire those insights.

Unfortunately, in many corporate cultures, it is hard to be a dissenting voice on customer intimacy and experience when others are professing the “common wisdom,” no matter how misguided. Finally, both improved customer experience and more intimate customer relationships are difficult, multifaceted problems and easy to put off.

Carriers rightly see the relationship as one insurer to many insureds. On the other hand, customers see the relationship as one to one. While insurers think in terms of spread of risk across a pool of clients, customers are only interested in what’s in it for them.

In many instances, because of these differing perspectives, the carrier-customer bond is weak. A recent Bain & Co. report said that, worldwide, only half of insureds have been in contact with their insurer for any reason in the past 12 months.

The result is that customers don’t have any real relationship with their carrier and are likely to focus on price. Rarely will they share their needs and wants with a services provider with whom they have a tenuous relationship.

Strategic complacency can appear when shorthand expressions of customer intimacy and experience prohibit open dialogue on customer priorities, or efforts designed to address problems are short-circuited because of their complexity. Even though insurers have gigabytes of data on their insureds, the data doesn’t translate into information and insight.

Lack of Urgency

Another myth among insurers is that there is no great urgency to change. Organizations survey the competitive landscape and don’t see any discernible threats on the horizon.

There are two primary reasons. First, most innovation efforts are quiet, so insurers don’t necessarily see what potential competitors are doing until a product or service hits the market. Second, many lauded innovation efforts are taking place in lines or niches that don’t appear to be a threat to incumbents.

So what if one new insurer is writing usage-based insurance for the gig economy, or another specializes in coverage for renters? Either those aren’t lines of business that “real” insurance companies want to write, or they aren’t a key component of the carrier’s book.

See also: Digital Innovation: Down to Business  

The insurance innovation landscape is large and convoluted. Most early innovation efforts are small, and the “signal” is easily mis-categorized as noise. Because of this, potential competitors and collaborators are easy to miss. But the lack of urgency is a key factor in Harvard Professor Clayton Christensen’s seminal work on industry disruption.

His model states that innovators find a segment of unserved or underserved consumers that represent low profit potential. These startups then offer an inferior product or service to these consumers. It doesn’t have to be perfect because these consumers aren’t being appropriately served prior to the innovator’s arrival.

The crude nature of the solution is derided by incumbents, because their customers “wouldn’t want to purchase something that limited.” Because the unserved or underserved segment is low-profit, and may have other undesirable characteristics, the market leaders have no urgency to respond.

But while the existing players ignore or disparage the newcomers, the disruptors refine their offerings. Once innovators win the low-profit segment, they move upstream by repeating the process with more profitable and desirable customers.

Often, by the time established industry players figure out that they are under threat, it is too late to reverse their fortunes.

Guy Fraker, chief innovation officer at Innovator’s Edge, says, “Ignore this innovation activity, whether from incumbents or new entities, at your peril.”

This lack of urgency, and the willingness to either accept as fact, or blithely repeat, mistaken beliefs and put off difficult, needed changes to address customer problems contribute to strategic complacency. Recognizing these problems and opening dialog within your organization is a key to formulating a strategic response to the onslaught of changes affecting the insurance industry.

The next post will further explore common myths with a focus on financial concerns surrounding innovation.

Innovation: ‘Where Do We Start?’

Before “insurtech” becomes the next over-used buzz-phrase to hate, let’s step back for a moment and consider the truly unprecedented scope of opportunity for growth facing those in the various risk management sectors who embrace the inevitable reinvention of this trillion-dollar industry.

As the whirlwind of start-ups and innovation occurring across insurance business models evolved into viral global gold rush, many existing insurers and VCs still struggle with how to participate. Many who understand the reality of disruption as a means of growth struggle even more with the most basic questions:

  • Where do we start?
  • Do we have the expertise?
  • How can we pick the best among the thousands of startups and “smart-ups?”

Most of the established firms I coach are consistently surprised by two lessons learned that have been captured at some point after working through these key strategic questions.

First, they are surprised at the ease with which they were able to answer the one question that can be truly paralyzing: “Where do we start?” Second, they often voice relief at how easily the rest of the core, up-front answers seem to just fall into place. These experiences can be distilled down to a rather straightforward single question: “How do we get unstuck?”

See also: Insurtech and the Law of Large Numbers  

Two timeless bits of wisdom can provide the first steps toward converting chaos into actionable clarity:

  1. A picture is worth a thousand words. Frameworks and models do help create clarity.
  2. A little education goes a long way. This is code for: check as many assumptions as possible at the door and ask, “What if..?”

Here are some pictures that can be useful:

Source: Startupbootcamp, what is an insurtech? [Infographic], 2015

The “4 Ps” model from Matteo Carbone and the Insurance Observatory

Insurtech Landscape by AGC Partners

All three frameworks for understanding insurtechs are solid models by which an audience, subscriber group or client company can gain greater insights. But insurance companies, venture capitalists and regulators need to understand how to use them.

The insurtechs in these models represent but the center of a much larger landscape of forces requiring consideration if you want to be an insurer that defines the rules that all others will have to follow.

Innovation Framework

The reinvention of insurance is simultaneously happening from the inside-out (insurtechs) as well as from the outside-in (exponential technologies). In other words, insurtechs are revolutionizing HOW insurers will manage risk and consumers. Exponential technologies will fundamentally redefine the WHAT—i.e., the very risks that insurers manage.

Now, this raises an important question: How do we define these larger external forces? One organization influencing many of these breakthrough, or exponential, technologies is Singularity University in Sunnyvale, CA. Singularity U coined the phrase “10(9)” Opportunities.” These are opportunities to leverage a technological capability, or domain, to improve 1 billion lives (9 zeros) within a single decade.

Some may question whether this vernacular is more aspirational than attainable. But among the best-kept secrets in the insurance industry is the reality that exponential markets waiting to be discovered outnumber those currently being addressed by existing insurance product lines. So, here is a possible goal: “By year-end 2027, we will have grown by improving the lives of 1 billion or more people by creating products that leverage the technological application of___________________.”

Incumbent insurers must understand how these converging forces relate to discover clarity and scalable growth. A short list of essential questions leading to viral growth strategies needs to include: Which insurtechs will feed my strategy to grow _________ opportunities?

These types of questions can map the insurtechs within the industry and near term to the longer-term, much broader landscape of opportunities. Clarity of these exponential forces—then mapped back to the products, services, and new business models among insurtechs—will open the door to achieving four significant deliverables:

  1. Improve the solicitation, selection and vetting of new ideas generated internally and collaboratively;
  2. Improve the returns on early-stage investments;
  3. Improve the vision, focus and identification of M&A opportunities;
  4. Improve the expectations and returns on new products and services developed and launch by internal innovation teams.

Strategic Framework for Member Services

The world outside of insurance looks into this industry with skepticism with respect to innovation. What is so often misunderstood is that three of the most significant societal shifts of the past 200-plus years were essentially enabled by insurance innovation: homeownership in the late 18th century, the viral adoption of the car and advances in medical treatments as an outgrowth of adoption of health insurance. The DNA for exponential innovation resides within this industry.

Seeing insurtechs as a means to fulfill a longer-term innovation strategy is where the opportunities are being discovered by those who will lead this industry for decades to comes.

See also: Insurtech Is an Epic Climb: Can You Do It?  

To provide feedback, ask for additional information or learn how to apply these concepts, contact Guy Fraker, guy@insurancethoughtleadership.com.

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Beginning of the End for Car Insurance?

Volvo’s statement last week that it would accept all liability when its cars are in autonomous mode takes the threat to traditional auto insurance to a whole new level. Google and Mercedes have already made similar promises, so we now have three major companies saying they will treat certain car accidents as product liability issues and will take on risk that has historically been the responsibility of individual drivers and auto insurers.

For good measure, Tesla just offered a software download that will let real drivers in real Model S cars operate autonomously on real roads.

The future is upon us.

Obviously, this is just the start. In Churchillian terms, we aren’t at the beginning of the end for car insurance, and we aren’t even at the end of the beginning; we’re at the beginning of the beginning.

For the immediate future, there will be zero effect on auto insurers. Only a small number of drivers will be operating their cars autonomously and only for a portion of their time on the road. Tesla isn’t even accepting liability at this point, and auto insurers won’t initially even be asked to adjust their rates to reflect the risk that providers of autonomous technology are taking out of the auto policy equation.

A thoughtful column by Craig Beattie argues that two significant steps still have to happen before much risk for car accidents moves to the product liability side of the ledger. First, courts must sort out the many issues that will be raised when the first unlucky person dies in an accident where an autonomous vehicle is at fault. Second, he says, autonomous cars must be in operation long enough that lack of maintenance, rather than product design, becomes the issue that has an autonomous car cause an accident. Courts will then have to sort through who bears the responsibility for that lack of maintenance.

Although I agree with the first point, about settling key issues in court, I’m not so sure the second is a huge deal. I think vanishingly few people will own autonomous cars once we get through the hybrid phase that Volvo, Mercedes and Tesla are taking us into now, where people can switch into and out of driverless mode in what are otherwise traditional cars. Today, cars sit idle more than 95% of the time, so it’s far more efficient to share cars operated as part of a fleet, rather than pay to have what is usually someone’s most expensive asset, or second-most (after a house), just sit there. A study that Chunka Mui and I cited in our book Driverless Cars: Trillions Are Up for Grabs found that a fleet owner could provide cars to people for 90% less than we pay for car transportation now and still make gobs of money. So I believe that fleets, not individuals, will be responsible for maintenance, removing that as an issue that would be in the province of traditional auto insurance.

I also expect the federal government to get involved at some point. If driverless cars can really reduce the number of traffic deaths on U.S. highways (currently roughly 35,000 a year) by tens of thousands and reduce the number injured in accidents (currently about 2.5 million a year) by many hundreds of thousands, then driverless cars create a clear societal good, and their use should be encouraged. Even if the government decided to be revenue-neutral, it could take the money it currently spends through Social Security, Medicare, Medicaid, etc. because of auto accidents and could perhaps cover all the liability for accidents caused by autonomous vehicles — and have a lot left over, besides.

Politics will rear its ugly head when it comes to deciding what government should do and how quickly it can act, but it’s hard to run a campaign in favor of injury and death.

So the issue about traditional auto insurance is much less about if it goes away and much more about when.

“When” is a legitimate question. It takes 15 years or more for the full complement of cars on U.S. roads to be replaced, so you could decide that autonomous-car technology won’t really be mature for a few years, then start a clock and count out 15 years to a time when roads will be fully autonomous. That approach takes many people’s calculations to 2030 and beyond — by which time today’s C-suite members will be safely retired.

But many autonomous technologies, such as forward collision avoidance systems and automated braking, can be installed as a retrofit — Autonomoustuff, advised by our friend Guy Fraker, is a notable supplier. And the dynamics of auto accidents and insurance change long before every car becomes autonomous. Many studies say 20% to 25% penetration is plenty to cause major changes.

While I won’t venture a precise guess about the fate of car insurance, I’ll offer an observation: When Chunka and I wrote about driverless cars 2 1/2 years ago, we staked out what was then an extremely aggressive position about how quickly the transition to autonomous vehicles would happen and about how far the ripples would reach, including for auto insurance — and we may be turning out to have been too cautious.