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Helping Insurers Get a Handle on Wildfire

“California is the lab for managing exposure to wildfire risk,” according to Lynn McChristian, a professor of risk management at Florida State University. If carriers and reinsurers can make it there, they can make it anywhere.

The past several years have seen a steep increase in the severity of wildfires, with the 2017 and 2018 seasons causing $24 billion in insured losses in California alone. Rates are climbing there, and coverage is dropping—there is clearly insufficient wildfire coverage to meet market demand, especially in high-risk, wildland-urbane interface (WUI) communities. 

These historic losses, combined with insufficient solutions for managing wildfire risk, mean insurers are trying to get a handle on their wildfire portfolio accumulations and gather perspective on relative risk. Simply put, the old way of doing things has been proven not to work—and insurers are demanding better. 

The flaw with historical wildfire risk management: Fires don’t burn in a circle

The California wildfires illuminated that many companies do not have clear best practices around managing wildfire risk, primarily because it has often been considered part of wider policy terms.

One solution is to limit accumulations between highly correlated areas of wildfire risk. Historically, insurers have looked at their concentrations of wildfire risk at the county level, along with using ring accumulations as a tool to assess risk. But fires don’t burn in a circle, and they don’t know postal code boundaries. Now, RedZone, a wildfire modeling company, has used millions of wildfire simulations to identify burn patterns across the landscape to create areas called “correlated risk zones.”

See also: Parametric Solution for Wildfire Risk

These zones are essentially regions that look completely separate but, statistically, burn together. They provide a logical and credible alternative by which to manage portfolio risk accumulations, alongside traditional loss modeling techniques. A more consistent approach to managing capacity can also improve risk-based pricing.

Solving a portfolio-scale problem requires changing the way we think

“Models have focused on risk at specific locations, but this is a portfolio-scale problem,” RedZone CEO and founder Clark Woodward says. 

The above screenshots show RedZone’s models for use in portfolio-level analysis. On the left is RedZone’s burn probability layer. When combined with the image on the right, which is RedZone’s hazard control zones, you can develop a firmer understanding of portfolio composition when it comes to accumulations and likeliness to burn. 

Accumulation analysis involves defining zones of correlated risk—where properties are likely to be damaged by the same event in the same year—and estimating the probable maximum loss (PML) within each zone. By evaluating accumulated wildfire risk, insurers can assess where additional properties may be insured with minimal increase in exposure to extreme losses. 

Reinsurance broker Willis Re has also brought to market a new methodology for wildfire underwriting and customer-specific portfolios. By helping carriers understand not only individual risk selection but geographic areas that are driving up their PMLs, Willis Re can, in turn, help them diversify their portfolios and drive down reinsurance costs.

Practical innovation that can be deployed now  

It’s taken a beat—and a harsh reality check—but better wildfire risk management strategies are now coming to fruition. Providers like RedZone, Willis Re and Insurity are working collaboratively to create solutions, like the correlated areas of risk discussed here, that provide better, more logical ways of managing wildfire accumulations.

This technology can be quickly deployed and implemented alongside traditional risk management strategies. This allows insurers to avoid disruption while employing a consistent approach to managing capacity across both underwriting and portfolio management and, ultimately, better serve and protect insureds against wildfire risk.

Principles for a Digital-First Mindset

Digitalization has become the new standard for business success and is fundamentally changing how insurers run their organizations. Just four years ago, less than 40% of insurers identified as a digital insurer; today, more than 90% see themselves as one, according to SMA research. While some are only in the nascent stages of digital transformation, others like Chubb are paving the way by functioning as a fully integrated digital enterprise.

No line of business is exempt from digital transformation, but workers’ compensation has the largest initial impact, with concerted efforts from many carriers to improve their underwriting through predictive analytics and redefine the claims experiences for injured workers. Leading insurers are increasingly using digital tools, emerging technologies as well as external and internal data, to enhance sales and service experience for agencies and policyholders while minimizing losses and improving ease-of-use. Liberty Mutual, for example, has employed personalized, interactive videos to enhance communications and drive engagement with injured workers. Similarly, insurers such as QBE are leveraging AI and machine learning to improve patient care, reduce litigation potential and manage fraud.

However, becoming truly digital is not just about overhauling agency portals or using technology to improve operations. It’s changing the entire mindset of an organization and can touch every aspect of the business including the people, processes and technology. Here are some of the guiding principles to establishing a successful digital mindset.

A Comprehensive Digital Strategy

An ideal digital strategy blends emerging and existing technologies to redefine a company’s value proposition to create and support all means of engagement and automation across the company. It’s about finding the right balance between effectiveness and efficiency.

There are several stages of building a successful digital strategy. The first is a baseline capability of taking a paper asset and making it digitally available. The second is the ability to apply new methods to enhance digital experiences across the board, whether through automation of internal processes or through customer-facing portals. Finally, it involves smooth transition for handling fundamental changes in an insurers’ business model, which includes looping in all parties who will be affected by the change, deploying changes in phases and using the process of changes and upgrades as learning opportunities.

See also: 5 Digital Predictions for Agents in 2019  

Speed-to-Market Principles

As insurers continue to integrate technology into their organizations, competition is escalating, and getting a product to market as quickly as possible is essential to the success or failure of a project. The value that digital tools and platforms provide to an insurers’ stakeholders is of prime importance, but it’s vital that these changes and updates are introduced in a timely manner. Given that, on an infrastructure level, most companies aren’t built to support digital businesses, the best approach is to integrate the new digital capabilities across the organization in increments. Insurers should begin by introducing a minimum viable product (MVP) to the marketplace and then adapt as needed. Using an iterative testing and learning approach will save time and help make the products better-suited to user needs.

Simplified Customer Experience

The way customers perceive their interactions with insurers defines the customer relationship. Today, people want insurance providers that offer simple, time-saving products and services and have many options beyond incumbent insurers, with new entrants vying for their business.

Most insurers begin digital transformation by overhauling their internal processes to support automation, but true digital transformation should also extend to the customer touchpoint. Insurance buyers have a long list of “asks” in the modern economy. They expect broad coverage, state-of-the-art technology and apps to make the processes simpler. They also demand bespoke risk management solutions and faster claims management.

What makes catering to this ever-growing demand a challenge is the number of players competing for the same piece of business. On one hand, we have insurtechs and traditional insurance companies looking to offer efficient digital platforms, and on the other, pay-as-you-go insurance models and producers looking to own buyer relationships with innovative customer solutions and product offerings.

As a result, insurers should create ways for customers to reap significant rewards by improving time-to-quote, expedite policy binding and create more flexible billing options. An example of how to achieve these goals is to offer seamless customer services using application programming interfaces (APIs), email, telephone and customer portals. Currently, more than 40% of the applications are submitted via agent portals on average, which share policy documents and commission information. Insurers have a complex and deep sales funnel that can be streamlined if internal systems work together to reduce operational friction.

Data and Customer Insights Drive Decision Making

Insurance companies have access to a wealth of data, whether from customers or third-party data acquired from IoT, sensors and drones. Over the years, insurers have proven themselves adept at collecting data but struggle to analyze, process and organize the information in a way that helps with real-time decision making.

The idea is to leverage data-driven insights to model products and solutions while making updates and enhancements to them. An example of a company successfully doing this is Pie Insurance, which uses predictive analytics to expedite and improve the direct-to-consumer quote experience. Routing data across an insurer’s systems is incredibly challenging, which is why more are moving away from disparate core systems and migrating to a unified platform that supports data flow across the entire organization.

Evolve With the Market While Inspiring Change Adoption Across the Board

Any cultural or organizational change requires educating the affected parties about the value that technology will bring to their day-to-day workflow. Employing new tools to better the business means nothing if it won’t be used appropriately by stakeholders that interact with the solution every day. This promotes actual mindset change and organizational alignment that prepares companies to continue to build on their digital foundation. For example, an insurer might have stringent underwriting guidelines for how a team should use a predictive model to make policy decisions, but, if the underwriters themselves do not understand the tool or how it benefits them, they risk breaking protocol or providing misguided feedback that makes the model less effective.

See also: 3 Ways to an Easier Digital Transformation  

True digital transformation not only requires an understanding of what’s needed to replace legacy systems, but also depends on a detailed strategy and plan to see the organization through transformation. Building on top of existing technology is just as important for the future and, without organizational alignment, insurers won’t receive critical feedback and suggestions that can help optimize the technology.

IoT: Collaboration Is Now Mandatory

The definition of collaboration is the action of working with someone to produce or create something. That seems far too simplistic a way to describe the many types of collaboration already at work in the insurance industry and moreover does not begin to convey the looming and enormous demand for working together that will be required for success in implementing the Insurance Internet of Things (IoT).

Historically, the insurance industry has had to use a wide variety of collaboration tools to succeed as data, information, consumer behavior, products and regulations changed with increasing velocity. These tools included e-mail, texting, instant messaging, content management systems, enterprise social platforms and formal enterprise collaboration software. Insurers have even begun to leverage the use of digital technology and web-based collaboration tools such as Slack to empower employees, enhance user experiences, improve internal communication and strengthen agent and broker relationships.

See also: Insurance and the Internet of Things  

Looking beyond insurance companies themselves, we note the emergence of insurtech accelerators and incubators, both independent and captive. What is becoming apparent is that there is a convergence taking place between these entrepreneurial startups and the traditional carriers, sparking collaboration between the new, small and fast market entrants with the old, big and slow incumbents. Much more of this kind of collaboration will be required for the insurance industry to survive and thrive in tomorrow’s world.

New forms of collaboration are emerging in the insurance ecosystem, some more formal than others. Strategic alliances and partnerships are being announced daily, as are vendor-vendor and carrier-carrier arrangements. Recent examples are plentiful; CoreLogic joined the Guidewire PartnerConnect program to deliver more accurate property risk pricing and residential estimating more efficiently to Guidewire’s property insurance customer base, and Insurity collaborated with Allstate Business Insurance to quickly deliver a new self-service quoting app with convenient data pre-fill.

Co-opetition is a more innovative form of collaboration that has been gaining traction. Former competitors work together to leverage a common, defined opportunity that yields better results for each company than either could have achieved on its own. In the world of insurance IoT, of which the connected car is a major subset, we increasingly see original equipment manufacturers (OEMs) participating in programs with auto insurers with telematics data exchanges and with each other in developing vehicle-to-vehicle (V2V) communication standards.

In other areas of insurance IoT, we are seeing a rapidly increasing number of health and property insurtech partnership announcements with insurers delivering innovative new risk-management products and services to consumers (e.g. Vitality-John Hancock, Roost-Liberty Mutual, True Motion-Progressive, etc.).

As the number of connected things expands exponentially, so, too, will the frequency and velocity of data generated by these sensors and devices. The ability to receive, normalize, manage and use all of this digital data will quickly exceed the capacity and expertise of even the largest insurers, so collaboration with a new generation of information management and data science providers will be mandatory.

See also: 12 Issues Inhibiting the Internet of Things  

For insurers and others to successfully navigate this burgeoning ecosystem, access to relevant knowledge and competitive information will also be mandatory, and one effective way to gain these insights is participation in subject-specific industry conferences where expert speakers and industry thought leaders share their experiences and insights. One such event is the Insurance IoT USA Summit taking place in Chicago on Nov. 30 and Dec. 1.

So critical will be effective collaboration in the future that it is conceivable that formal courses, certifications and degrees in collaboration will be offered by business schools in response to the exploding demand for this set of business skills and expertise driven by IoT proliferation and adoption. In any event, participants in the insurance ecosystem that best master the art of collaboration are sure to be the market leaders of the IoT future.

How Acquisitions Are Reshaping Landscape

With the announcement that Insurity has acquired Valen Analytics, the core and analytics landscape has changed again. We have been tracking M&A activity and outside investments in the core systems space for some time, and the past year has seen a marked trend toward the acquisition of data and analytics firms by core systems providers.

Insurity and Valen are only its latest manifestation. Duck Creek acquired Yodil. In March 2016, Guidewire acquired EagleEye Analytics, and prior to that Millbrook. The momentum of these acquisitions and core providers’ other investments in expanded capability is morphing the core provider landscape significantly.

The insurance industry is awash in data, and more and more data presents itself every day. Historically, insurers had three choices for how to extend data and analytics capabilities across the enterprise. Many contracted with outside providers, for example, SAS, SAP and IBM. Others chose to build their own data and analytics capabilities. Both of these options had expense and skill set considerations that put these paths beyond the reach of most small and mid-tier insurers. They most frequently turned to the third option: spreadsheets. The big players had the best options – and smaller insurers having to make do struggled to join their ranks.

See also: Applied Analytics Are Key for Progress  

When SMA surveyed insurers on their plans for becoming Next-Gen Insurers, we found out just how important data and analytics are. We measured insurers’ progress along seven “bridges” – initiatives that provide defined pathways upon which insurers can build transformation strategies critical to becoming a Next-Gen Insurer. The results were published in the recent report, Insurance in Transformation: Building 7 Bridges to the Future. The number one bridge was “majoring in data and analytics.” 95% of insurers are making progress in this area. It is imperative, therefore, that insurers look for ways to further their data and analytics capabilities.

Based on insurers’ three options for data and analytics, smaller insurers have been at a disadvantage. Although they are well aware of the importance of data management and analytics, they are limited by resources and skill sets.

While core systems have advanced in many areas the past 10 years, their data and analytics capabilities have typically focused on business intelligence functions, like operational reporting and data standardization. Predictive analytics and link analysis have not been within the scope.

The analytics firms that we are seeing acquired by core solution providers, however, have the deep expertise in these areas that many insurers have never been able to access. Smaller insurers and others who depend heavily on the built-in capabilities of their core systems stand to gain the most from this trend of core providers acquiring data and analytics expertise. The benefits are significant. Insurers that previously were not able to gain necessary insights from their data will now be able to obtain them. New insights that will allow insurers to innovate will go a long way toward leveling the playing field.

See also: Why Data Analytics Are Like Interest  

Integrating the new acquisitions is a work in progress for the core providers. The major upside for insurers is that pre-integrating analytics into the core environment supports the trend of bringing analytics closer to real-time transactional processes. This is an important goal for all insurers to attain.