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How to Insure the Sharing Economy

During the snowstorm that hit the East Coast in January, I took some time to clean up my office and read reasonably current newspapers and trade magazines. I quickly identified many opportunities for new insurance products, mostly around shared assets. For example, an article on Millennials and the sharing economy explained that (primarily young) people make money by sending selfies of what they are wearing every day to a website called CovetMe; they get paid based on the brands and looks they are sporting.

They Uber their way to work, school or social events (when did Uber become a verb?) as a driver or passenger; they use their subscription to a shared car service such as Zipcar to take occasional trips; or they get paid for allowing advertising on their own car by subscribing to companies such as Carvertise. FlightCar gives you free parking at big airports if you let other travelers use your parked car when you are traveling. Similar sharing activities take place with homes, clothing and accessories, occasionally used tools and equipment and even medical equipment.

All these shared assets need to be covered in different ways than the traditional, personal lines homeowner’s or car insurance policies. Occasionally renting out assets to third parties or shared ownership of one asset between non-family members creates a different risk profile than self-use only, both for property coverages and especially for liability.

Think about deductible coverage between multiple owners in case of a claim, good driver discounts or multiple non-familial owners getting involved in the same accident, as liable parties and as claimants. The insurance market has been pondering insurance solutions for the shared economy for a while now and found ways to cover Uber drivers or Airbnb landlords or offer non-owner car insurance. As an industry, however, we defaulted to our classical model of insurance and put a commercial coverage, bought by the shared economy company for their members,  on top of individual personal insurances where needed.

It works, but, as one can imagine, it is a bit clunky. Especially on larger claims, I expect delays and issues to occur concerning liability, wear and tear, acceptable use of assets and confusion around which policy should pay followed by subrogation. Now, most shared-economy companies have stated that they will reimburse their members for losses and will figure out later what is covered by which insurance. This is a good thing for their members, of course, but it doesn’t necessarily help insurers very much.

We should be able to do better and create truly new insurance coverages for the shared economy. For example, why wouldn’t an insurer work with one of the new tech companies that provides people with a cloud solution to document all of their assets with pictures, videos, sales receipts or warranty documents? Why wouldn’t an insurer create a comprehensive coverage for property and liability for all these clients’ assets, under the assumption that they will be shared? Tag the key assets with a sensor and learn from usage data. Use telematics data on the car use. Limit home rentals to one or two partner companies and learn from usage analytics.

Why wouldn’t a carrier try a pilot with a segment of young people with limited assets, in a single location?

I know that this is not a simple proposition and that, in creating these kind of coverages, many hurdles will be encountered. I do think, however, that the market is ready, and that the sharing economy will become a force to be reckoned with soon. So, we might as well figure out how to insure and service that force.

As my colleague Mark Breading stated in his recent research brief, Insurance in the Connected World: Observations on Opportunities and Threats, “Actively participating in the rapidly growing sharing economy will be critical for personal lines insurers. Asset ownership is shifting and requiring a different approach for managing and protecting the assets.”

It is not going to be easy, but customers will count on our industry to develop solutions to protect their shared assets. We have successfully been supporting changing economies and technologies for centuries now – I am sure we’ll also find a solution for the new sharing economy in a connected world.

Moving Closer to the ‘Smart City’

Judging by the reported 11,000 attendees at the Smart City Expo World Congress in Barcelona, representing companies and cities from around the world, there is great interest in governance, mobility, society, sustainability and technology. The trade show was very crowded even with sunny Barcelona beckoning with a perfect 71 degress Fahrenheit. The event gave me the opportunity to see many interesting technologies.

Many innovations focused on smart traffic routing and parking supported by sensors. Solutions in this category address the need to decrease traffic congestion or enable drivers to find available parking spots – problems afflicting many cities. Car-sharing initiatives by city communities were shown and explained. Autonomous vehicles were on display and got a lot of attention while raising questions about financing and insuring some of these new developments.

With the tragic events in Paris fresh in people’s minds, city officials were very interested in any offerings dealing with crisis or incident management. One example was IOmniscient’s 3D high-accuracy cameras that count people present in a specific location in real-time (very handy for crowd management). Other solutions include facial recognition capabilities to locate lost children or people of interest to law enforcement. These, and other applications, can assist local governments and citizens in preventing, managing and mitigating incidents.

“Gamification” got significant interest. Virtual reality environments supporting driving education or enabling urban planning were in high demand. There were also long lines for learning how to drive a real tram in a virtual city (not as easy as it looks). And Microsoft partner Geodan NEXT demonstrated how children were educated in smart-city development and how kids assisted in real-life design of schools and playgrounds by use of a Minecraft-based solution. In a more adult world, this same tool is being used for collaboration between professionals and citizens working together around a big touch table to address urban planning issues.

It is not often that I get to attend conferences outside of the insurance or technology space. It was refreshing to see the enthusiasm of professionals for innovation in a different industry. And many of the technologies that we frequently discuss, such as driverless cars, resource sharing, gamification, drones or Internet of Things, are equally relevant for smart cities.

I was also pleased with the balanced approach the people I spoke with took regarding opportunities for innovation and risk mitigation. Assisted by big data and technical developments, historically more disconnected industries such as technology, insurance, government, health or energy will quickly become more connected to each other, and the people of the world will collaborate in smart communities to capitalize on innovations.

The show in Barcelona was an uplifting experience, even with the sun beckoning.

Telematics: Because Accidents Happen

As I researched recent developments in the telematics space, I thought of the wise words of an unknown car driver: “The worst fault of a car driver is his belief that he has none.” Whenever I speak to a group on telematics, I ask the audience, “Who considers themselves to be a better than average driver?” Every time, at least 80-90% of the hands go up.

Even if we are all close to perfect drivers, accidents will still happen. And telematics data can be used to help identify who is at fault.

Claims handling might be the new frontier for telematics, in general; beyond the early adopters of telematics-based pricing, many insurers have run pilots and proofs of concept with telematics in areas such as product development, underwriting, new business and market segmentation. They have gathered insights and developed telematics-based solutions for the broader market, often with the support of increasingly sophisticated telematics solution providers in technology or data and analytics. In fact, the SMA 2015 report, “The Changing Auto Insurance Landscape: Influencers Driving Disruption and Change,” revealed that, since its introduction to the market in 2010, telematics has come to be recognized as a maturing rather than emerging technology and often gets incorporated into connected car initiatives. The study also discussed how the industry is starting to investigate even newer technologies that might affect the auto insurance market, such as shared transportation and the autonomous vehicle.

However, it would be a mistake to move on to newer technologies and initiatives without further considering investments in telematics, especially when the full business value of telematics offerings may not have been reached yet.

Right now, particularly in personal lines, telematics is used primarily for market segmentation, product and underwriting purposes. There is a growing appreciation, though, of the value of telematics in claims handling beyond accident avoidance and driver education. For example, at a recent LexisNexis/Wunelli insurance event, it was demonstrated that telematics can play a key role in claims investigations by helping to determine which party is at fault – not always a clear-cut matter. In the specific accident discussed, two cars hit each other in the parking lot of a supermarket. The physical damage did not give a clear picture of who was at fault, and the drivers disagreed in their statements about what actually happened. One of the cars involved, however, was equipped with a telematics device. At the request of the driver of this car, the insurance carrier was able to analyze the data on the location and speed of her car immediately preceding this accident. This analysis made it abundantly clear that the driver of the telematics-equipped car could not have been at fault, which provided the insurer with proof to settle the claim accordingly.

I found it even more shocking that it was the insured driver who actually had to point out to her insurer that telematics data was available and that access to that data could be of great help in handling this claim. It was obviously not standard procedure for this specific carrier to look at telematics data in the claims handling process – and in this case, without the driver’s suggestion, the opportunity would have been missed.

Unfortunately, I don’t believe that this carrier is unique. I would urge personal lines carriers, in particular, to consider the uses and applicability of telematics data outside of the market segmentation, product and underwriting functions. We can all learn from examples like this one, as well as from the commercial lines telematics applications for risk management and claims handling.

Because we all know that, even though we drive better than the average driver, accidents still do happen.

Maturing Use of Mobile in Insurance

“Can you hear me now?” The use of mobile technology is indeed maturing in the insurance industry!

Recent SMA research shows that, over the last year, insurers have increasingly invested in developing digital strategies. Most intend to migrate, over time, to a comprehensive digital insurer approach. Some others pick a specific area to work on, such as mobile agent/broker support or self-servicing capabilities for policyholders. Although both approaches are perfectly justifiable, we strongly recommend to tie all digital and mobile initiatives together under a “digital insurer” strategy. This approach will ensure consistency between business functions, market segments and customer experiences – and it is the approach that will help prioritize investments.

A big part of a digital strategy is a plan for implementing mobile technology. Most phones are not being used primarily to make calls anymore. (When I was overseas last week, and my phone didn’t work, I experienced first-handed how much we all rely on our smart phones for information and transactions, restaurant and hotel bookings, travel info, weather, banking and shopping.) Today, people expect to be able to transact on their mobile device as if it is a desktop or laptop. So how is our industry responding to these expectations?

Especially in the direct writing, personal lines space, mobile has become a mature and widely implemented technology. Direct writers support pretty much all informational and transactional interactions with their policyholders via mobile devices. In the last year or two, we have also seen carriers with agent/broker distribution channels invest heavily in mobile services. This investment tends to be triggered by one or more of three drivers: cost savings because of self-servicing; distribution channel experience (ease of doing business) and expectations; or competitive pressure. Almost all of these carriers start their mobile implementations with purely informational capabilities, followed by enabling transactions. In addition, some of the multi-channel carriers are now starting to expand their mobile capabilities beyond the distribution channels into the policyholder relations, carefully balancing what to communicate directly to policyholders and how to continue to fully engage the agent/broker.

On the commercial side of the business, we have seen a slightly different approach to mobile enablement. Carriers first built mobile capabilities around loss or risk management functions, including information on replacements materials and costs, uploading pictures of damaged assets, providing tools for risk assessments or location-specific information. In most cases, these capabilities were first rolled out to distributors; now we see some carriers that also offer them to their policyholders. Especially in the commercial segment, however, insurers are very cautious about reaching out directly to policyholders, and almost all communication is a three-way process among carrier, agent/broker and policyholder.

As both our research and our interactions with specific insurers have shown, mobile strategy and implementation have matured rapidly. Our industry is definitely past the “can you hear me now” days. The next focus area will be how to integrate mobile into a true digital strategy and how to capitalize on the information we are starting to gather on our policyholders and partners. That is the point where all investments made will truly start paying off.

Is Price Optimization Really an Evil Idea?

There seems to be a lot of misperception about what price optimization really is, largely driven by publicized assumptions that it will only serve the best interests of the company and hurt the consumer.

Basically, price optimization boils down to applying analytics to available information to develop more quantitative and targeted pricing policies and processes. Price optimization is currently used extensively in many industries. The benefits and rewards to both the companies and the customers are plenty, with the customer rewards being highly visible.

Through the use of price optimization, retailers are able to present highly personalized and appealing offers to their customers based on past shopping and buying patterns coupled with predictions of customer wants and needs. Retailers are able to keep their best customers informed of sales and special offers that are of real value to them. The travel industry uses price optimization to manage profitability and, equipped with insights that give them the ability to fine-tune the metrics, are able to offer very attractive options to travelers. Capacity that would otherwise have gone unused attracts happy customers and often brings them back.

For the insurance industry, it is important to understand that price optimization does not replace risk-based pricing; rather, optimization is the next level of sophistication for risk-based pricing. With price optimization, insurers are able to explore product options and then find an optimal balance point among all options and constraints within complicated rating orders and large sets of data. This makes it possible to construct and present more appealing, more targeted product and service offerings. Personalized offerings can be shaped to meet personalized needs. The laws of large numbers can be optimized for the individual situation.

Today, price optimization is being used most often by insurers in personal lines — in many cases, those that are trying to innovate and capitalize on the next wave of analytics. The goal is to improve the bottom line and increase market share by using newly available types of analytics, models, tools and methods. These insurers don’t see price optimization as an independent exercise; they view it as a key part of the business’s journey to the next level of maturity. Recognizing that rate changes and the resulting customer reactions have an immediate and very significant tie to new business and renewals, and understanding that informed consumers expect offers that meet their personalized requirements, insurers see optimization as a journey that is essential for profitable growth in personal lines.

It is only a matter of time before the principles involved are applied to commercial risk pricing, especially for smaller and middle markets. As the comfort level increases and experience with the insights and tools matures, price optimization will likely become a significant aspect of the collaboration and negotiation process for mid-market and even large, complex cases.

The business benefits of price optimization are undeniable. Improved insights give insurers greater ability to achieve specific financial objectives for growth and profit. Fortified with intelligence, including a better understanding of customer demand and buying behaviors by segment, insurers can make business decisions and tradeoffs based on agreed-upon metrics rather than emotion and historical understandings that sometimes morph over the years.

While the benefits are clear, the reality is that price optimization is a complex endeavor. It involves deep analytics, advanced business intelligence and ready access to complete and accurate data. Many companies are spending lots of time and resources building sophisticated models of loss cost, expenses and customer demand, incorporating competitive position and market data. Price optimization brings them all together, aligning to specific business goals and the regulatory framework, enabling companies to clearly understand the trade-offs between various pricing strategies.

The extent of the use of price optimization in the insurance industry is small in terms of the number of companies that have implemented optimization or are conducting pilots. It is, however, important to note that price optimization is being adopted by the largest insurance companies — those that have the most market share — so the portion of the industry that being affected is significant. It won’t be long before a very large percentage of the premiums being written will be based on rates developed by using advanced analytics capabilities that involve price optimization.

In many insurance companies, there are both real and perceived hurdles that impede progress in price optimization. Project capacity is limited, and price optimization does not always make the list of top-priority efforts. For some insurers, there is an inherent cultural resistance to change, particularly when today’s models have been delivering growth. Price optimization is complex; it requires special skills — deep experience in predictive modeling and advanced analytics. Price optimization involves a transformation of the entire pricing process.

But the insurers that are embracing and implementing price optimization are finding ways to overcome these challenges. Obviously, most national insurers have the volume of data that is necessary to get pricing optimization right, but they can also be burdened with an overwhelming amount of data that originates from multiple sources and isn’t always clean and consistent. In contrast, it is not unusual for regional insurers to think they don’t have enough data. The reality is that most insurers do have more than enough data to build and use customer demand models.

Price optimization will work for more insurers than one might expect. Now is the time to lay the ground work for competing effectively in the long run.