Earlier this month, my colleague Monique Hesseling wrote about the power of asking the right questions in product development. That is just as important with new technologies.
As we have seen with social media and smartphones, what were once “emerging” technologies can become widely available and widely used in a very short time. Insurers have developed ways to use both of these technologies in new products and services, although plenty of untapped opportunity remains in both areas. But as new technologies continue to emerge, how do we, as an industry, continue to incorporate them into products and services?
The conversations about using new technology in insurance have typically centered on two questions: Why? and Why not? The Whys, as we shall call them, are reluctant to adopt new technologies because the status quo works (or works well enough). The Why Nots, on the other hand, jump at the opportunity to use new technologies because of their novelty and the desire to be among the early adopters, even when the benefits are not necessarily clear.
The problem with framing the conversation around adopting new technologies as a question of “why” or “why not” is that it focuses on personal beliefs and opinions. The best questions to ask about new technologies start with “how.”
How can insurers take the technologies around us, whether they be established, maturing or emerging, and use them for competitive advantage? How can we get the most out of their use, and how can we use them to improve the customer (and employee) experience? How can new technologies be applied to products to make them better and to differentiate our company?
This year’s SMA Innovation in Action Award winners gave us some good examples. For instance, John Hancock’s Vitality Program is using mobile technology, “gamification” and wearable devices (a free Fitbit) to create a highly interactive relationship between life insurer and policyholder. Wallflower Labs is using the Internet of Things to provide brand new preventative services to a specific population of homeowners policyholders: those with aging relatives or young or special needs children, who face increased risk of house fires from the unsupervised use of ranges and cooktops.
Both of these initiatives gather data on policyholder behavior (fitness activities and cooking patterns) that insurers can use to offer premium discounts and leverage to create increasingly personalized life and homeowners products. Haven Life Insurance Agency has taken this thinking a step further by designing a term life product that uses big data and analytics to offer policies online with a 20-minute application process.
These award winners demonstrate just how much can be done toward creating products and modifying existing ones through the creative use of maturing and emerging technologies. John Hancock, for example, models effective decision-making with regard to incorporating new technologies into existing products by offering program members a free wearable device. Wearables can provide behavioral and physiological data that can be used to inform the calculation of life insurance premiums. The same wearables can provide policyholders with valuable feedback and the possibility of earning premium discounts. It’s a win-win for the customer and the insurer.
All insurers looking to incorporate new technologies into their product development should invest in idea-generating processes that are focused on how a given technology can be deployed before deciding whether to pursue that technology. Insurers excel at calculating risks and benefits, after all. Once the potential uses of a specific technology have been determined, insurers can apply that expertise to performing sophisticated cost-benefit analysis on those options.
The Whys and the Why Nots will never agree on everything, but they can unite behind the question of How. That shifts the discussions around new technologies to evaluation and problem-solving rather than opinion and persuasion. Ask “How?” and reap the benefits.
“The boat is safer anchored at the port; but that’s not the aim of boats.” — Paulo Coelho
The scenes are now all too familiar. Waters rising, dams breached, cars drifting away, homes and properties inundated with water. As of this writing, 13 people have died in the Carolinas as the “one in a 1,000 years” flood continues to ravage the area. Losses should easily exceed $1 billion.
If all of that was not bad enough, what’s worse is that you and I will be paying for this.
Unfortunately, the song remains the same after all these years:
Property owners either believe they have coverage or choose not to purchase it
The biblical rains arrive, causing damage, and property owners seek help from the largest wallet available and willing to help…the U.S. government
(Alternatively, and unfortunately, property owners may buy flood coverage, but, because the coverage was mispriced, the National Flood Program will not have the funds to pay the claims and will need to borrow from us taxpayers).
The system is a mess, and my criticism lies directly with the insurance industry. We can solve this problem. These floods are insurable events. We are flush with capital, and each week it seems another technology firm is releasing a flood model to help us manage this risk.
But that sound you hear is crickets. We are not making much progress at all.
The solution cannot be separate, private, flood coverage. That is a nice start but is not the solution, because it’s more of the same, just with a different wallet writing the check.
What we need is to “loosen the exclusion.” Flood needs to become a standard component in the homeowners policy. Just as fire, wind, lightning, theft, vandalism and liability are all standard components of a homeowners insurance package, flood needs to be included as that form of standard coverage.
The advantage to homeowners is true peace of mind.
Every homeowner has some ground water risk, and we can eliminate this coverage concern once and for all.
We can eliminate policy juggling, with one single policy.
A single claims adjuster can determine any losses without needing superhuman insights to know whether water or wind caused the damage.
The enterprising insurer gets to differentiate its personal lines business with a non-correlated premium source. The insurer eliminates the headache of defending flood exclusions and the bad publicity and court judgments around those issues.
There’s a thundering herd running through Iowa this year — and not just the herd of presidential candidates. There also is a herd of technological innovators driving considerable change in insurance.
Many people find it intriguing that technology innovators are coming through Iowa, but Iowa is an insurance state and home to some of the largest insurance companies in the U.S. Iowa also is home to niche companies that price out very specific risks to targeted markets.
In my role as Iowa’s insurance commissioner, I’ve met with many entrepreneurs whose ideas will improve, enhance and create value for insurance companies and consumers. In these meetings, I hear a fairly consistent and constant theme: State insurance regulators are a major burden for entrepreneurs and, in turn, for their ideas for innovation.
However, when I walk them through what regulators do and provide them a copy of the Iowa insurance statutes and regulations that empower my office, I’ve found that most haven’t read even one word of insurance law before working on an idea or creating a product or service.
To be clear, I don’t believe I stand in the way of innovation. On the contrary, I am very supportive of innovation.
But my fellow regulators and I do have an important job — consumer protection. Insurance is one of the most regulated industries in the nation because, for the insurance system to work, when things go wrong and a consumer needs to make an insurance claim the funds to pay the claim must be available.
The days on which people file insurance claims may be the worst days in their lives, and they may be very vulnerable. Perhaps a loved one passed away; a home is destroyed; an emergency room visit or major surgery is needed; someone may be entering a long-term care facility; a car is totaled; or injuries are preventing a return to work. Insurance is a product we buy but really hope we never use. However, when we need to use it, we want the company to have the financial resources to pay the claim. It’s our job as regulators to make sure the companies in our states are financially strong enough to pay claims in a timely fashion.
Insurance is regulated at the state and territorial level by 56 commissioners, superintendents or directors. The state-based regulatory system has served consumers well for more than 150 years and demonstrated extreme resilience in the last financial crisis. My fellow commissioners and I are public officials either elected or appointed to our respective posts. We are responsible and accessible to the citizens of our states or territories.
However, I do understand that complying with the laws of all the states, District of Columbia and territories poses challenges to entrepreneurs. In recognition of this, state regulators have worked together to help minimize differences between states through the National Association of Insurance Commissioners, thereby creating a more nationally uniform framework of insurance regulation while recognizing local markets and maintaining power in the hands of the states.
The job of an insurance regulator sounds easy. We exist to enforce the state’s laws, to make sure that companies and agents follow that law and to ensure that companies domiciled in our state are in financial position to pay claims when required. As with many things, the duties of regulators are more difficult than they appear. Regulators need to have great knowledge of multiple lines of insurance, technological advances, financial matters and marketing practices. In reality, the execution of our job duties in enforcing our state’s laws may at times cause friction with some innovative ideas.
As I stated, I don’t believe that I or my fellow regulators stand in the way of innovation. I believe that a robust and competitive market that delivers value to the consumer is one of the best forms of consumer protection. However, our insurance laws are also designed to make sure that insurance companies stay in the market and keep the promises that they have made to their customers when the products were originally sold.
In executing my duties as commissioner, I pay a great deal of attention to innovation and developments. I personally spend time with entrepreneurs, investors and others to learn about new trends and ideas. My commitment to enforcing state laws, combined with the laser focus on protecting consumers, requires keeping abreast of innovation.
My office addresses more than 6,000 consumers’ inquiries and complaints every year. People on my staff address issues quickly and care deeply about their roles in helping Iowans. I’ve learned in my nearly three years as commissioner that many consumers don’t understand the insurance they own. They may have relied on an agent, or purchased insurance coverage on their own, hoping it will suit their needs. However, when life happens and an insurance claim needs to be made, consumers may discover the coverage they purchased did not suit their needs. For instance, some people may discover their health plan network doesn’t have healthcare providers near their home. Others may discover too late that certain items lost in a fire were not covered under their homeowners’ policy. Some consumers may discover that the very complex product that they bought simply did not measure up to their expectations.
Having consumers be comfortable with making a purchase and not understanding what they purchased is a culture we need to change. Some consumers desire to simply establish a relationship with an insurance agent or securities agent they feel they can trust, schedule automatic withdrawals from their bank account to be invested or submit their premiums for their insurance products as required so they can ultimately focus their attention on all the other activities that occupy our busy lives. In essence, they forget that they purchased the coverage, and, while it may have been the right purchase at that time, it may not fully suit their needs now or when they need to file a claim.
Insurance regulators and the insurance industry need to encourage consumers to learn more about their coverage needs and the insurance they actually purchase. Innovation that leads to personalizing insurance and better consumer understanding is a good thing. Innovation that increases speed-to-market, enables better policyholder relations through in-force management and provides more value to the consumer is a good thing. However, all that innovation must comply with our state’s laws.
To that end, I’ve met with several entrepreneurs to highlight issues that would arise with certain proposed business models. I enjoy discussing ideas about our industry and sharing Iowa’s perspective. Innovation can help consumers, and it’s my hope that entrepreneurs continue to work with regulators to develop new products and services. This collaboration helps both the regulators and the entrepreneurs and has led to some very positive and healthy dialogue in Iowa.
With our past few posts on ITL, we have been exploring how insurers can continue to bring more private capacity to U.S. flood (Note: Everything we talk about for U.S. flood is also relevant for Canada flood). We have explored here how technology, data and analytics exist to handle flood in an adequately sophisticated manner, and we have described here the market opportunity that exists. Now, it’s worth a look to explore how a flood program could be introduced, starting from scratch through cherry-picking mischaracterized risks and then to a full, mass-market solution.
What’s a FIRM? It’s not what you think
First, let’s take a quick look at how National Flood Insurance Program (NFIP) rates are determined: the Flood Insurance Rate Maps, or FIRMs. For the NFIP, FIRMs solve two core problems – identifying which properties must have flood insurance and how much to charge for it. The first function is for banks, giving them an easy answer for whether a property to be lent against requires flood insurance – this is what the Special Flood Hazard Area (SFHA) is for. Anything within the SFHA is deemed to be in a 100-year flood zone (basically, A and V zones), and requires flood insurance for a mortgage. The second function sets the pricing and conditions for the NFIP to sell the actual policies. The complexity of solving these two problems should not be underestimated for a country of this size. But it must be remembered that a FIRM is a marketing device and not a risk model.
Considering that FIRMs are a marketing device built on a huge scale, it makes perfect sense that some generalizations needed to be made on the delineation of the various flood zones. The banks needed a general guideline to know when flood insurance was needed, and the NFIP needed rates to be distributed in a way that could result in a broad enough risk pool to generate enough premium to be solvent. While the SFHA has served the banks well enough over the years, the rating of properties has not been so successful. There are plenty of reasons the NFIP is deep in debt (see page 6 of this report); suffice it to say that the rates set by FIRMs do not result in a solvent NFIP.
The fact that the FIRMs are a flawed rating device based on geographical generalizations means there are cherries to be picked. By applying location-based flood risk analytics to properties in the SFHA, a carrier can begin to find where the NFIP has overrated the risk. Using risk assessments based on geospatial analysis (such as measurements to water) and their own data (such as NFIP claims history), a carrier can undercut the NFIP on specific properties where the risk fits their own appetite. Note to cherry-pickers: Ensure you account for the height above ground of the building, because you won’t need elevation certificates for this type of underwriting. So far, cherry-picking has been focused on the SFHA for a couple reasons – homeowners need to have coverage, and the NFIP rates are the highest. There is no reason, though, that cherry picking can’t be done effectively in X zones and beyond.
The same data and analytics used for cherry-picking can be used more broadly to create a mass-market solution. By adjusting the dials on the flood risk analytics – and flood risk analytics really should be configurable – you can calibrate to calculate the flood risk at low-risk locations. In other words, flood risk can be parsed into however many bins are needed to underwrite flood risk on any property in the country. With the risk segmented, rates can be defined that can (and should) be applied as a standard peril on all homeowner policies. Flood risk can be underwritten like fire risk.
Insurers have traditionally been confident underwriting fire risk. But consider this: While fire is based on construction type, distance to fire hydrants and distance to fire station, flood risk can be assessed with parameters that can be measured with similar confidence but with greater correlation to a potential loss.
Flood will be the new fire
Insurers have been satisfied to leave flood risk to the Feds, and that was prudent for generations. But technology has evolved, and enterprising carriers can now craft an underwriting strategy to put flood risk on their books. Fire was once considered too high-risk to underwrite consistently, but as confidence grew on how to manage the risk it became a staple product of property insurers. Now, insurers are dipping their toes into flood risk. As others follow, confidence will grow, and flood will become the new fire.
Munich Re is known as a conservative giant of international reinsurance, so it might seem odd that it is joining the National Flood Insurance Program (NFIP) in covering U.S. flood. A quick look at the opportunity shows why the plan makes sense.
U.S. inland flood insurance is an untapped source of non-correlated premium unlike any other in the world. The market is dominated by an incumbent market maker that is in trouble because it offers an inferior product that cannot price risk correctly (this paper nicely summarizes the problems at NFIP). So, here is what the new entrants are seeing:
Contrary to industry beliefs, flood is insurable. The tools are present to accurately segment risk.
Carriers offering flood capacity will differentiate themselves from competitors. This will give them a leg up on the competition in a market that is highly homogeneous. Carriers not offering flood will likely disappear.
The market is massive, with potentially 130 million homes and tens of billions of dollars at stake.
Let’s go into details.
Capital Into a Ripe Market
The U.S. Flood Market
As most readers of Insurance Thought Leadership already know, many carriers have flood on the drawing board right now. The Munich Re announcement was not really a surprise. We all know there will be more announcements coming soon.
Let’s summarize the market reasons for the groundswell of private insurance in U.S. flood.
The most obvious characteristic of the market is the size. For the sake of this post, we’ll just consider homes and homeowner policies. Whether one considers the number of NFIP policies in force as the market size (about 5.4 million policies in 2014), the number of insurable buildings (133 million homes) or something in between, there is clearly a big market. And the NFIP presents itself as the ideal competitor – big, with a mandate not necessarily compatible with business results.
So, there is no doubt that a market exists. Can it be served? Yes, because the risk can be rated and segmented.
Low-Risk Flood Hazard
To be clear: A low-risk-flood property has a profile with losses estimated to be low-frequency and low-severity. In other words: Expected flood events would rarely happen, and not cause much damage if they do. For many readers, joining the words “low-risk” and “flood” together is an oxymoron. We strongly disagree. Common sense and technology can both illustrate how flood risk can be segmented efficiently and effectively into risk categories that include “low.”
Let’s start with common sense. Flood loss occurs because of three possible types of flood: coastal surge, fluvial/river or rain-induced/pluvial (here is more information on the three types of flood). The vast majority of U.S. homeowners are not close enough to coastal or river flooding to have a loss exposure (here is a blog post that explores the distribution of NFIP policies). Thus, the majority of American homeowners are only exposed to excess surface water getting into the home. We’d be willing to wager that most of the ITL readership does not purchase flood insurance, simply because they don’t need it. That is the common-sense way of thinking of low-risk flood exposure.
How does the technology handle this?
There is software available now that can be used to identify low-risk flood locations (as defined by each carrier), supported by the necessary geospatial data and analytics. Historically, this was not the case, but advances in remote sensing and computing capacity (as we explored here) make it entirely reasonable now, with location-based flood risk assessment the norm in several European countries. Distance to water, elevations, localized topographical analyses and flood models can all be used to assess flood risk with a high degree of confidence. In fact, claims are now best used as a handy ingredient in a flood score rather than as a prime indicator of flood risk.
How to Deliver Flood Insurance in the U.S.
Deliver Flood Insurance to What Kind of Market?
Readers must be wondering at the size of market, because we offered two distinctly different possibilities above – is it about 5 million to 10 million possible policies, or 130 million policies? The difference is huge – the difference is between a niche market and a mass market.
The approach taken by flood insurers thus far is for a niche market. The current approach probably has long-term viability in high-risk flood, and the early movers that are now underwriting there are establishing solid market shares, cherry-picking from the NFIP portfolio.
On a large scale, though, the insurance industry’s approach needs to be for a mass market.
Here is a case study describing the mass market opportunity:
Using InsitePro (see image below), you can see that the property is miles and miles away from any coastal areas, rivers or streams. More importantly, the home is elevated against its surroundings, so water flows away from the property, which is deemed low-risk.
The area has no history of flooding, and this particular community has one of the most modern drainage systems in the state.
Screenshot of InsitePro, courtesy of Intermap Technologies. FEMA zones in red and orange
Using Google Maps street view, we can estimate that the property is two to three feet above street level, which adds another layer of safety. Also, this view confirms that the area is essentially flat, so the property is not at the bottom of a bathtub.
And, as with most homes in California, this property has no basement, so if water were to get into the house it would need to keep rising to cause further damage.
To an underwriter, it should be clear that this home has minimal risk from flooding. As a sanity check, she could compare losses from flood for this property (and properties like it in the community) to other hazards such as fire, earthquake, wind, lightning, theft, vandalism or internal water damage. How do they compare? What are the patterns?
For this specific home, the NFIP premium for flood coverage is $430, which provides $250,000 in building limit and $100,000 in contents protection. The price includes the $25 NFIP surcharge.
This is a mind-boggling amount of premium for the risk imposed. Consider that for roughly the same price you can get a full homeowners policy that covers all of these perils: fire, earthquake, wind, lightning, theft AND MORE! It is crazy to equate the risk of flood to the risk of all those standard homeowner perils, combined! We provided this example to show that even without all the mapping and software tools available for pricing, what we can quickly conclude is that the NFIP pricing for these low-risk policies is absurdly high. Whatever the price “should” be for these types of risks, can you see that it MUST be a fraction of the price of a traditional homeowner’s policy? Don’t believe that either? Consider that the Lloyd’s is marketing its low-risk flood policies as “inexpensive,” and brokers tell us privately that many base-level policies will be 50% to 75% less expensive than NFIP equivalents.
The news gets even better. There are tens of millions of houses like this case example, with technology now available to quickly find them. These risks aren’t the exception; these risks can be a market in their own right. Let the mental arithmetic commence!
Summary: Differentiate or Die!
The Unwanted Commodity
Most consumers of personal lines products don’t have the time or the ability to evaluate an insurance policy to determine whether it provides good value. Regrettably, most agents and brokers don’t have the time to help them either. So, when shopping for a product that they hope they will never use and that they are incapable of truly understanding, consumers will focus on the one thing they do understand: price.
Competing on price becomes a race to the bottom (yay! – another soft market) and to death. But there is an opportunity here – carriers that compete on personal lines/homeowner insurance with benefits that are immediately apparent (like value, flexibility, service, conditions and, inevitably, price) have a rare chance to stake out significant new business, or to solidify their own share.
The flood insurance market is real, and it’s big enough for carriers to establish a healthy and competitive environment where service and quality will stand out, along with price. Carriers that would like to avoid dinosaur status can remain relevant and competitive, with no departure from insurance fundamentals – rate a risk, price it and sell it. It’s obvious, right?
Which carriers will be decisive and bold and begin to differentiate by offering flood capacity? Which carriers will evolve to keep pace or even lead the pack into the next generation of homeowner products? More importantly, which of you will lose market share and cease to exist in 10 years because you didn’t know what innovation looks like?