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Global Trend Map No. 20: N. America (Part 2)

Today, we continue our journey through our dedicated regional profiles, in which we explore key insurance/insurtech trends continent by continent. In Part I of our profile for North America, we reviewed our general statistics for the region, which we gathered in the course of our Global Trend Map (download the full thing here), and identified several qualitative themes (of which we explored the first two):

  1. Insurers’ renewed focus on their primary underwriting business in the face of low interest rates and impending insurtech disruption
  2. The rise of the “new consumer” and how this is changing the insurer-customer relationship
  3. Customer-centricity as the prime mover of distribution and product
  4. The impact of legacy systems and regulation on (re)insurers’ innovation and transformation efforts
  5. How insurers are to unlock new sources of growth in a mature market

Here we explore themes 3 and 4 in discussion with our two in-region influencers:

  • Chicago-based Stephen Applebaum, managing partner at Insurance Solutions Group
  • Boston-based Matthew Josefowicz, CEO at Novarica

3. A ‘New Insurance’ for the ‘New Consumer’

In Part 1,  we identified the rise of the new consumer, who expects and seeks out on-demand digital interactions, as representing both a challenge and an opportunity for incumbent insurers.

It is not enough just to focus on customer-centricity in a broad sense. If, as we have suggested across this content series, distribution disruption is the root of customer disruption, it is on this ground that insurers must stand and fight. This makes distribution into a key axis of insurer response as carriers seek to prevail over their new-age competitors.

It unsurprising, then, that we discern a fresh strategic focus on distribution from our North American correspondents:

“Every major, every top-tier P&C carrier is actively developing multi-channel communication capabilities and multi-channel distribution capabilities,” states Stephen Applebaum, managing partner at Insurance Solutions Group.

This is far easier said than done, given the legacy constraints that insurers find themselves under, which we explore in the next chapter.

“Insurers’ infrastructure, which has been built over literally hundreds of years, never anticipated having multiple channels of communication to support, so insurers are scrambling to learn how to do that,” Applebaum continues.

‘In the past, it was a paper-based business, and the postal service was the method of communication, or the agent was the method of communication. The role of the agent is dwindling, as is that of the post office in P&C insurance.”

There is a risk that insurers attempt to become all things to all people from a distribution perspective, dissipating their energies, and the task of transforming distribution will certainly be a much more manageable one if they can focus their efforts on what really works for their specific customers and products.

“Different segments of the market and different products imply different distribution methodologies – so it’s a matter of dealing with increasing complexity,” summarizes Novarica’s Matthew Josefowicz.

While distribution is arguably the centerpiece, the heightened demands of 21st-century consumers in fact apply to the entire customer journey from start to finish. It is not enough to give customers the option of researching, buying and accessing their products via digital channels in addition to physical ones – the entire interaction must be as frictionless as possible, and all of this irrespective of access device. Applebaum gives us some context around what this means for insurers:

“Whether it’s filing a claim through an app on their phone or receiving a claim payment electronically to an app or to their bank account, or even just exchanging information like adding another vehicle to the policy, today’s consumers don’t want to have to make phone calls, and they don’t want to send emails. They basically just want to exchange digital information as quickly and efficiently as possible.”

Encouragingly, most North American respondents indicated that they had digital, mobile and cross-platform strategies in place (see our earlier post on digital innovation).

“Insurers must focus on removing the friction points customers encounter in their interactions if they wish to meet the needs and expectations of their customers. Processes and customer interactions need to be redesigned from the customer’s point of view.” — Cindy Forbes, EVP and chief analytics officer, Manulife Financial

Friendly interfaces with high usability go some way toward eliminating friction from customer experience, but the greatest improvement is to be wrought at the back end, by achieving transparency and straight-through processing. The analogy of the retail industry (as it moves toward e-commerce) is once again instructive: What matters to retail customers is not always the absolute speed of their order but often their ability to track its progress. Offering this level of immediate insight to customers – as well as satisfaction – generally requires some level of automation.

See also: Global Trend Map No. 9: Distribution  

If we take claims as an example, we see that automation does not imply that the whole process is automated across the board, rather that enough is automated to provide clarity on the status of a given claim.

Some simple claims will be dealt with automatically, while, for more complex claims, customers can be provided with a working estimate for the resolution time – the key point in each case is the clarity and feeling of control that customers are left with. In our post on claims, we registered a moderate degree of automation among North American respondents, in line with our other regions.

In addition to a seamless, zero-friction experience, customers are also demanding personalization, and in the context of insurance this applies first and foremost to range of coverage and premium price. Usage-based insurance (UBI), which we went into in greater depth in our profile on Europe, is a fundamentally new insurance for the new consumer. Formal UBI strategies are only acknowledged by a minority of North American respondents, but this is consistent with our other key regions (for more on UBI, see our earlier posts on Internet of Things and product development).

The premise of UBI is that insurers can leverage real data on individuals’ actual usage (for example of a car) to tailor prices and ultimately reward better risk behaviors. The two key ingredients here are data and analytics.

Analytics was in fact one of the priority areas that North America led on in our insurer priorities section. A majority of North American insurers also reported increasing their investment in this area, and the salience of the chief analytics officer role in the region has already been noted.

“The whole business understands the value of what analytics can help deliver. In traditional businesses, this seems to mean reports, hundreds of them every month that are mostly rearview mirror. Getting intelligence out of that is what many companies should be focusing on and then making use of it.” — Michael Shostak, SVP and chief marketing officer at Economical Insurance

As for data, this is available from a variety of sources. In North America, we find well-established the use of third-party aggregators as a supplement to first-party data, although this data is often neither personal nor in real-time (two key criteria for UBI).

The pre-eminent ingress for UBI data must remain IoT, which appears not to be quite as well-established in North America as in our other regions. Although IoT was not ranked highly as a priority in any of our global regions, it came out lowest in North America with a rank of 13th (compared with 10th in Europe and Asia-Pacific). We also suggested in our Internet of Things section that Europe has the lead in terms of platform implementation.

“With connected devices becoming more and more ubiquitous, the availability of data is increasingly a nonissue. The next hurdle for insurance carriers in North America is finding ways to incentivize customers to adopt IoT solutions and part with their personal data – and this requires careful investment in building customer engagement.” — Emma Sheard, head of strategy at Insurance Nexus

These measures aside, Applebaum is quick to point out that all the familiar consumer devices that enable IoT in insurance have a presence in the North American market, from in-car telematics to smart-home security and connected-health devices, and he even points out a couple of areas that are well ahead of the curve:

“I think IoT is catching up, but there are a couple of specific areas, like water leaks, where it is quickly gaining traction in the U.S. market, both in personal-line and in commercial-line policies,” Josefowicz explains. “IoT devices that control water leakage are becoming very popular.”

Josefowicz points to the strong IoT opportunity for the U.S. market in commercial property and commercial inventory. Applebaum also acknowledges the property opportunity and hints at some of the innovative uses of drones in this area:

“Drones, which are also IoT devices, are being used by property and casualty companies to examine property damage after catastrophes and storms, saving them a lot of time and money, so people don’t have to climb up on the roofs, which is dangerous and time-consuming. So drones, water-leak management and of course telematics are prime examples of IoT where there is adoption.”

Given the strong growth indicators for the next two to three years, it would be foolish to read too much into our depiction of North America as an IoT laggard. Indeed, our stats on IoT platform implementation suggested that our key global markets could be aligned in as little as a year.

One extension of IoT that Applebaum flags as a space that insurers are watching closely is autonomous driving.

“We will have a situation where people don’t drive cars, where software drives cars and cars don’t have many accidents – but when they do, they are going to be extremely serious and will involve large liabilities,” he explains.

“There is a lot of IoT left where there is no adoption as of yet, it’s just being developed, it’s emerging, and that would cover all the other 50 billion sensors that are going to be broadcasting data by 2020,” Applebaum concludes.

Insurers looking to usher in the “new insurance” must, concurrently with expanding their sources of real-time data through IoT, build out their back end so that it can, first, cope with and, second, capitalize on the influx of sensor data; to have the unprecedented volume of data that IoT promises but deficient systems for accommodating it would be like striking oil in a world without refineries.

Fundamentally, front end and back end must be developed in synchrony, given the dependencies that each one has on the other, although we believe that organizations may place a different emphasis on them depending on the point they have reached in their transformation. One hypothesis would be that focus on the back end – which is the foundation of the whole transformation effort – is higher at the outset and that, with the passing of time and the steady expansion of capabilities, the C-suite’s strategic focus shifts toward harvesting the rewards at the front end.

As we pointed out in the table in our priorities post, North America has a substantial lead over Europe in underwriting (by 19 points), risk management (13 points) and product development (5 points); Europe on the other hand leads North America on Internet of Things (by 11 points), pricing (9 points), digital innovation (5 points), customer-centricity (5 points) and claims (3 points).

We feel intuitively that, in the context of emerging UBI models, the priority areas on which Europe leads have more of a front-end flavor, and those on which North America leads more of a back-end flavor.

We suggested in our profile on Europe that the North American market might be marginally behind Europe in terms of customer-led disruption, and it is possible that Europe’s front-end overtone reflects this market having progressed marginally further down that path.

Whatever the blend, every insurer must juggle early-stage and late-stage initiatives all at once, managing their investments across these tranches like they’d manage any other investment portfolio.

“We think it’s very important for insurers to exist in three timelines at the same time,” Josefowicz emphasizes. “They have to mitigate the limitations of their legacy systems, they have to address current business needs – short-term, tactical business needs – and then they have to keep an eye on the future in terms of how technology is going to change their business tomorrow.”

4. How Insurance Must Set its (Digital) House in Order

Standing at the start of the road of digital transformation, incumbent insurers find themselves in an awkward position. In one sense, operating a pre-existing business should represent a headstart over new players. However, their established systems and processes quickly reveal themselves to be less a blessing than a curse, when we consider the rampant dependencies that exist between them. Josefowicz briefly sketches how this becomes problematic for insurers:

“The majority of insurers in the U.S. are working with 20th-century systems that didn’t anticipate 21th-century challenges,” he explains.

“Most of the systems of record or policy-management systems that most insurers have are from the ’90s or before, and they didn’t anticipate this level of digital and this level of analytics, so they aren’t necessarily as flexible as they need to be to bring new products to market quickly.”

It is to the drag of these legacy systems and processes that Applebaum attributes the relative tardiness of the U.S. market, with much of the previous generation of technologies being more entrenched in the U.S. than elsewhere in the world (a good analogy would be with telecoms, whereby cell phones have achieved their highest penetration in precisely those areas where legacy fixed-line infrastructure is missing).

“The CTO or CIO is driving both the ‘cleanup’ of redundant systems and systems that don’t communicate well, but additionally he or she would typically have the responsibility for driving the vision of the future. They need to be finding efficiencies where possible and pinpointing the best investment areas for the future. The CTO must understand the needs of customers, business partners (third parties) and also internal stakeholders such as sales, marketing, actuarial and finance.” — Damon Levine, CFA, CRCMP, ERM practitioner, writer and industry speaker

The ideal solution to legacy would be wholesale system replacement but, given that budgets are limited, (re)insurers are more often than not forced into an uneasy coexistence with systems old and new. The overwhelming challenge North American insurers face today – starting with their back office – is to orchestrate the myriad pieces of the transformation jigsaw, keeping cost, time and adverse business impacts to a minimum, and we will see that there are various approaches that they can take.

“The last decade has really been insurers struggling to make their 20th-century systems meet 21st century business challenges, and replacing them when they can,” Josefowicz says.

“The key considerations for choosing a technology platform include compatibility with existing customer information storage and analysis platforms at your company. Of course, cost and adaptability to a changing data landscape are also of interest. The regulatory landscape, including penalties for data loss, will evolve.” — Damon Levine, CFA, CRCMP, ERM Practitioner, Writer & Industry Speaker

See also: Solving Insurtech’s People Challenge  

Applebaum observes that digital transformation is overwhelming the resources of most insurers, who simply cannot provide all the pieces of the puzzle in-house, and that this is forcing them to look further afield.

“Insurers want to be all things to all people, they want to be available by all channels,” he comments. “If they can’t do it internally, for whatever reason – like they’re not fast enough or the skills don’t exist – then they will partner. And if they can’t partner, they’ll buy. But basically, it’s by any means possible.”

In the longer term, Applebaum believes, many components of the stack, like the management of IoT data streams, will end up as the preserve of large third-party software vendors, which can not only specialize but also operate at a scale far beyond that of even the largest insurance carrier.

This will also work out positively in other ways, like from a cybersecurity perspective, because it will shift the liability from the insurer to a third party that can bring to bear a much wider experience with cyber threats. Incidentally, cybersecurity was one of the priority areas on which North America led our other global regions.

Alongside legacy, we should draw attention to the regulatory environment – at least in the U.S. – as another hurdle that insurers have to get over in their efforts to innovate:

“The regulatory environment in the U.S. is extremely complex, with the insurance industry regulated at the state level, so essentially that’s like operating 50 different insurance companies when you are just one insurance company, because you have to adhere to this never-ending, changing regulatory environment, state by state by state,” Applebaum elaborates.

“That’s not the case of course in the European markets or in the Asian markets, where country markets are regulated by a single national authority. So that’s a real issue for carriers, and they’re trying to deal with it. It’s expensive, it’s complex and it’s a reality.”

Josefowicz agrees that regulation will remain a key factor for North American (re)insurers, though he notes that this applies less to the Canadian market, which does not have the 50 separate regulatory regimes on a state level that the U.S. does. While this framework is indeed onerous, requiring insurers to file for the same product in multiple jurisdictions and potentially structure it differently in each one, insurers at least operate on a level playing field with insurtechs in this respect.

Indeed, Josefowicz believes that incumbent insurers’ established regulatory competence and compliance may be one area where they can convincingly trump new market entrants:

“Most insurance companies that exist are already pretty good at managing the state regulatory process, and in fact they see that as a defensible capability because it’s something that they have a lot of experience in that new entrants struggle with,” he says.

“And you can see what happened with Zenefits, where they ran afoul of the licensing requirements, as either inexperience or a willingness to disregard regulatory challenges a la Uber, which is much more painful in the financial-services world than it is in the taxi world.”

Global Trend Map No. 1: Industry Challenges

Welcome to the first post in our new insurance/insurtech content series! Here, we examine the top internal and external challenges facing the insurance industry, as revealed by our Trend Map, for which we gathered more than 1,000 survey responses from insurance players around the world and consulted more than 50 industry thought leaders. You can find a breakdown of our survey respondents, details of our methodology and bios of our contributors by downloading the full Trend Map here.

It’s a tough time for the insurance industry right now, with a complex raft of issues to deal with over the coming years, from regulatory and climatic change through to adverse market factors, legacy systems and the rise of insurtech. Indeed, one of the problems we had surveying the industry was the sheer variety of potential challenges that respondents might name.

For this reason, we drew up a short list based on our periodic research within the insurance community. And, as not all challenges are directly comparable, we split them out into external and internal challenges, creating two separate hierarchies:

  1. External challenges: issues in the wider world that necessitate a response from the industry if the industry is to survive and thrive
  2. Internal challenges: whatever stands in the way of that response’s successful implementation

For example, increased regulation might require changes from insurers and other industry participants (external challenge); however, lack of company-wide dedication to core priorities might prevent these necessary changes from actually happening (internal challenge).

We then asked all our survey respondents – encompassing carriers, intermediaries, solution providers, associations and regulatory bodies – to rank these external and internal challenges in order of importance, giving us an idea of what the industry regards as the biggest hurdles ahead.

External Challenges

Our external challenges table points to technological advancement as by far the greatest external challenge, followed by changing customer expectations and digital channel capabilities.

A quick note on our methodology: Respondents were asked to rank their top three challenges, with three points being awarded for 1st place, two points for 2nd and one point for 3rd. This allowed us to create not just a ranking but a cumulative score for each challenge.

New emerging risks, changing economic conditions, increased regulation and increased competition make up the middle tier. Further down we have new entrants to the market, catastrophe risk, absence of a clear strategy and climate change. Then, comfortably in last position, we find lack of company investment.

“Technology has always been a key enabler within the insurance sector. In today’s highly customer-centric world, organizations that want to thrive will do so through digital excellence; meaning by combining unique customer experiences and omni-channel distribution mechanisms, as well as by reinventing interactions across the insurance value chain, despite legacy constraints.” — Sabine VanderLinden, managing director at Startupbootcamp

So what then is the picture, if any, that we see emerging? The top three challenges, notably, form a clear constellation: Changing consumer behavior patterns, especially the desire for digital channels, certainly underlie insurers’ preoccupation with technological advancement to a considerable extent.

See also: Prospects for Insurers as a Global Industry  

We would therefore say tentatively that the interface between customer and insurer is going to be one of the key battlegrounds going forward, not just in the trivial sense of online portals and chatbots but rather as the ability of insurers and other industry participants to make every part of their operation work for the customer. The mid-tier challenges – essentially market factors – are certainly significant but represent the pointy end of “business as usual” rather than the digital, customer-centric paradigm shift we see coming into focus at the top of the challenges table.

This shift falls broadly under the remit of digital transformation, which we have seen at work in many recent initiatives at major insurers, both internal and external to their organizations. Many insurers have, for instance, like Allianz in November 2015, founded some form of digital transformation unit. Likewise, a number of major players have set up venture-capital arms to foster digital innovation outside of their four walls – like AXA Strategic Ventures.

While insurance was for a time considered the sleepy corner of financial services in terms of digitization, tech and innovation, we now see a host of transformation and innovation projects underway, and the money is flowing. This is borne out by the fact that lack of company investment was, by some way, the lowest-ranked challenge in the industry. Insurers and other industry participants may or may not be successful in their digital transformation – but this will likely be decided by factors other than their willingness to invest in it.

Download your complimentary copy of the full Trend Map here.

Internal Challenges

The results for internal challenges show lack of innovation capabilities and legacy systems neck and neck and leading the pack. Finding and hiring talent and siloed operations make up the middle tier, with lack of company-wide dedication to core priorities and mergers and acquisitions activity a long way behind at the bottom of the table.

The methodology used here was the same as that used in gathering the external challenges – giving us both a ranking and a score.

These results are consistent with the picture we saw emerging with the external challenges; that lack of innovation capabilities should be the leading internal challenge indicates first and foremost the industry’s strong will to innovate, which is part and parcel of many insurers’ and other industry participants’ current digital transformation projects.

In keeping with this is the low position attained by lack of company-wide dedication to core priorities – it’s clear that what is missing is neither the intention nor the investment to change (lack of investment was rated the industry’s lowest external challenge), rather it is the capabilities to make it happen. And these capabilities fall short in three perennial areas that turn up once again in our internal challenges table: systems, staffing and silos.

“These challenge tables perfectly illustrate and explain the fundamental conundrum of the global insurance industry; the acceleration of technological advances coupled with expanding sense of consumer entitlement and their rapidly evolving tech-driven behavior is causing older and slower-to-change insurers to struggle mightily in playing catch-up and has made them vulnerable to newcomers and disruptors.” — Stephen Applebaum, managing partner at Insurance Solutions Group

Find out more about how these internal and external challenges vary by geography – for Europe, North America, Asia-Pacific and LatAm – in our regional profiles, by downloading the full Trend Map here.

Additional Challenges

Our survey respondents had the opportunity to provide any additional challenges they felt we had missed. Responses were colorful and varied, but some that stood out were:

  • Prevailing low interest rates
  • Insurtech/disruptors
  • Cyber-risk
  • Loss of agents/disintermediation
  • Change management
  • Lack of strong leadership

Conspicuous on this list is insurtech; while this was not explicit in our short list of challenges above, it nonetheless cuts across them (in particular, technological advancement and lack of innovation capabilities, our two leading external and internal challenges respectively). There is indeed plenty of talk on the air about an impending shakeup of traditional insurance models…