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Why L&A Insurers Are Now the Smartest

In many quarters, the above title could be fighting words! Because I can’t even watch an Olympic boxing match, much less an all-out fight, let me explain.

For as long as I have been in the insurance industry, life and annuity insurers have been thought of as being significantly behind P&C insurers in terms of technology adoption and innovation. L&A insurers hung on to “build, not buy” strategies long after P&C insurers were advancing “buy” strategies. Technology providers with potentially cross-segment capabilities frequently did not even have a road map for selling to L&A insurers because, in their view, the front door was nailed shut! When STP (straight-through processing) started to become table stakes in personal lines operations, many life insurers seemed to feel that STP was simply a good motor oil. Every application for life insurance needed manual review.

Let me enthusiastically state that those days are gone. L&A has most certainly caught up – and sometimes surpassed P&C – on many fronts. One of the measures of being “smart” is learning from prior mistakes. L&A insurers have had opportunities to learn, and not necessarily from their own mistakes. They have learned from P&C insurer mistakes, as well.

See also: How to Insure the Gig Economy  

SMA recently issued two research documents based on L&A insurer surveys:

Many exciting insights are revealed through the survey data. Not the least of which is that, in 2018, 43% of L&A insurers indicate they are transforming. Eight short years ago, only 13% indicated this to be the case.

While this blog cannot hope to recap all the findings contained in the two SMA research papers, what did jump out quickly was the differences between how L&A has approached some things versus P&C – lessons learned:

  • Digital isn’t all about fancy front ends and apps. When it became apparent that insurers needed to respond to the reality of a digital world, many P&C insurers ran headlong into introducing apps – most usually first notice of loss (FNOL) apps. Click to pay with a credit card on websites was another common feature. More examples could be cited. But to cut to the chase, the problem was that these digital capabilities stopped right at corporate walls, dropping into legacy technology and manual processes. They ceased to be digital. P&C insurers learned the hard way – through disconnected customer experience – that core modernization was necessary! L&A insurers have seemingly learned that lesson, with 55% having policy admin projects in 2018 – the No. 1 project overall.
  • Love the hand that feeds you. The mantra across most all insurer segments, and strongly for P&C insurers, is customer experience. “We Love Our Customers” T-shirts are on every desk. This is absolutely critical, but for many P&C insurers this focus went to the exclusion of distributors. Agent and broker technology fell to the bottom of the top priority lists at many insurers. Given that agents and brokers have not disappeared, and, in fact, are critical as advisers for many consumers, this created a gap. L&A insurers do want to show some “love” to the distributors who play a critical role in customer acquisition and service. 55% of L&A insurers are executing distributor portal projects for both sales/submissions and service.
  • It’s not all about BI. SMA research shows a historical trend among P&C insurers to invest in BI technology. In fact, in relation to other components of data and analytics such as dashboards, data and text mining and predictive analytics, 71% of P&C insurers indicate they are advanced users of BI tools. This is certainly good, but for many years P&C insurers have invested in BI and have not invested to the same degree – or at all – in other capabilities, which stalls advanced execution in this area. L&A insurers are investing in BI, as well, but, in 2018, 22% are investing in behavioral analytics, big data and AI. Getting into the game in these advanced areas is imperative, and L&A insurers understand that.

And there is one lesson that L&A insurers have learned from themselves:

  • Building it yourself is a long and painful road. Over time, L&A insurers have attempted to tweak internally developed technology to step up to new market requirements. Given the rapidly shifting technology landscape, most insurers are not positioned to keep up, both from an IT capacity perspective and in terms of general skills levels. When it comes to emerging technology, 43% of L&A insurers are partnering with others that have emerging technology solutions. Only 29% continue to leverage their own capabilities.

See also: 3 Ways to Keep Training Fresh  

Many exciting things are happening at L&A insurers in 2018. Both of the SMA research reports, which can be found here and here, provide insight into strategic initiatives and projects. Clearly, there are opportunity areas that are challenges, but there is little evidence that L&A insurers are content to support the status quo. Smart L&A insurers are looking over the fence to see what they can learn from P&C insurers. Over time, the opposite may be the trend!

Life/Annuity M&A Is Heating Up

As life insurance and annuity carriers pursue greater market share and growth, a potential solution sits before them: M&A activity. This transactional path, leading to deep consolidation in the life insurance and annuity (L&A) sector in the U.S., is stoking much debate and discussion in company boardrooms.

The hunt for elusive growth and profitability for carriers in the U.S. has many players, creating a crowded marketplace for possible consolidation. The multi-headed acquirers come in three dominant forms: large insurance companies, private equity (PE) investors and foreign acquirers, driven largely by the Chinese and Japanese.

Insurance carriers intimately know about their competition and what companies in the sector would mesh well within their operations. Executives have the greatest amount of specific industry expertise and therefore can understand the pros and cons in a specific combination.

See also: How Life Insurance Agents Can Be Ready

Private equity investors have been turning to the life insurance and annuity field for several years to provide consistent returns, as these companies have predictable cash flows. Through these investments, investors can strengthen their returns for assets under management with steady growth. One caveat to this investment approach is the concern of the increasing regulatory state and federal pressures, as navigating through 50 individual state regulatory guidelines can be burdensome and difficult if a company moves out of a state and into a new one.

Foreign countries like China and Japan continue exploring opportunities to increase their presence in the U.S., the world’s largest insurance market. Reasons abound: Japanese insurance companies have found U.S. acquisition targets appealing to offset the aging of Japan’s population and to provide a more attractive interest rate environment. Chinese companies have been snapping up foreign companies, including in the U.S., searching for yield on their capital and economic growth.

Several reasons exist for this trend of M&A activity.

  1. Buyers are motivated by the current low-interest-rate environment and the opportunity to expand their assets and book of business. This has always been an essential piece of the M&A discussion as market conditions must be favorable to make any transaction worth its while.
  2. Sellers are suffering from the low return on their capital. By exiting less profitable lines of business, they can reallocate their capital for use in other capacities. As contemplation of one’s business clarifies, many carriers may conclude that selling, rather than buying, assets is the chosen path. Selling could stabilize or enhance a company’s bottom line as the capital obtained in a sale can be reinvested in its existing operations or be put to use for another potential acquisition.
  3. Increasing regulations are restricting the ability of companies to productively run their businesses; thus, they are looking for exits. Companies are often stymied by the sheer weight of complying with and managing regulations. Exiting businesses can become appealing.

Regardless of which direction is undertaken, one aspect paramount to success is the importance of ensuring that business continues to operate smoothly. In today’s environment, the role of technology, specifically at a time when companies are implementing and managing digital transformations, can be a beacon of light. And as acquirers delve deeper into possible transactions, increasingly they are employing an outsourcing model to extract more value.

See also: This Is Not Your Father’s Life Insurance  

Safeguarding a company’s operations and maintaining its continuity through powerful technology and servicing solutions, or what we call “future proofing,” has additional benefits besides the desired functionality. Companies must first build their vision and plans and then bolster them with end-to-end operational services. This step will then enable rapid expansion into new market segments, faster product launches and seamless servicing of open and closed blocks of business. By future-proofing through technology, carriers can drive greater efficiencies, lower costs and produce higher levels of customer satisfaction.

2017: A Year of Transition

The insurance industry is in transition — there’s no doubt about it. So much is happening regarding digital strategies, insurtech, customer expectations, analytics and other areas that are positioning the industry for the future. Despite all the activity, IT budgets for P&C and L&A insurers in North America this year appear to be subdued, with average increases of only 2.7%, following larger increases over the past few years.

There are a couple explanations for this seeming contradiction. For one, business conditions in the industry are less favorable than they have been in recent years, prompting predictions of slower growth for key lines. This results in budgets for the existing tech infrastructure that hold the line. It should also be noted that the percentage of insurers planning decreases has jumped to 15%, which factors into the average and reinforces the notion that there is an industry bifurcation occurring, with a widening gap between the winners and losers.

A key trend identified in our recent research report, “2017 Insurance Technology Spending Priorities and Plans,” is that many projects are shifting from new or replacement initiatives to enhancing systems already in place. There are still plenty of new deals out there and big modernization or replacement projects underway in specific areas (such as commercial lines policy systems). But the big picture seems to be that the gains from many projects in prior years are being optimized and extended as insurers look to solidify their tech infrastructure and prepare for new initiatives.

See also: Innovation — or Just Innovative Thinking?  

But there is another side to the story.

Many of the newer tech initiatives are being driven and funded by business units or at the corporate level. This is not a brand-new trend, but the more that tech strategy becomes intertwined with business strategy, the more often that business executives are the catalysts and sponsors. Chief marketing officers are driving change in digital and customer experience. Newly established chief digital officers are key players at many companies now. Strategists and business unit heads are seeking advantages from analytics, emerging technologies and insurtech. Senior corporate leaders are creating ventures and are asking how the digital connected world changes their customers and the insurance industry.

Insurers expect IT budgets to pick up again starting in 2018. In the meantime, the strategy work that is underway below the surface at many companies is likely to result in increases for tech-based initiatives related to new areas. Major investments and plans for distribution channels, underwriting, core systems and other areas are not going away. In fact, they are vital to maintaining modern systems in these mission-critical areas.

Overall, 2017 will be a pivotal year for the industry — a year of transition. Expect to see investments increase in initiatives aimed at innovation and transformation as the pace picks up and the industry carves out new roles in the digital, connected world.

Why CIOs’ Heads Are on a Swivel

In the face of growing commoditization, carriers increasingly focus on innovation as they describe their development plans and go-to-market strategies.

Recently, we spoke to 10 carriers from the Novarica Research Council spanning both the P&C and L&A segments. The insights and perspectives we gained provide a fascinating view of an industry facing significant changes in its markets, customer demographics and persistently low interest rates, which make outside-the-box thinking a necessity.

Innovation is the father of disruption in the insurance industry, and that disruption is now coming from multiple directions simultaneously, so CIOs have their heads on a swivel. CIOS view the most significant source of innovation and disruption as coming from outside the industry—specifically, banking and financial services firms, which tend to require more rapid adoption of advancing technology. Within the industry, insurtech startups are the main sources of innovation, bringing ideas, technologies and processes from other verticals into insurance.

See also: How to Master the ABCs of Innovation  

When it comes to leveraging these perspectives for innovation, the P&C industry is further along than L&A. Many P&C CIOs have put together a combination of insurtech startups, customer experience designers from outside the industry and traditional management consultants to build capabilities. L&A CIOs are still largely looking for that sweet spot of combining outside and inside industry expertise to start getting their arms around what innovation means to them and their companies.

Once a carrier has decided to incorporate innovation, CIOs have to make the move from conceptual to concrete by sponsoring formal activities that encourage creative thinking. While P&C carriers are, by and large, further along the innovation curve, L&A carriers appear to be making greater use of tools like hackathons and ideathons to foster a culture of innovation. Appointing an internal “innovation champion,” whether a person or a team, has become commonplace in L&A carriers. Innovation champions serve notice that innovation is a priority and that resources will be allocated accordingly.

CIOs also have to consider a range of new technologies to support, and even to drive, their innovation efforts. Right now, AI-themed solutions like robo-advice apps are top of mind for CIOs. Wearable devices are more important for life insurers, while semi-autonomous vehicles and telematics are more important to P&C insurers. Drone-based technologies and data collection will continue to be important to both P&C and L&A insurers.

Supporting innovation efforts can also mean recognizing the need to reach outside their own spheres of experience for help. A common approach is to create a venture capital entity separate from the core insurance business. Another approach is pursuing strategic alliances directly with insurtech startups or others, who might have the intellectual know-how, but not the resources and structure, to move ideas from concept to reality. Finally, some insurers are using “flanker” brands, which serve as alternatives to the traditional parent brand, as an entry into the innovation world. These can do things that the parent brand may not allow for.

Like any other initiative, those focused on innovation need funding. L&A insurers favor the traditional budgeting route, and some have levied a corporate “tax” on other business units as a way to aggregate budge monies for innovation. The short-term risk here is that such an approach could cause political or cultural issues inside an insurer. P&C insurers, perhaps due to their having had more time in the innovation space, have found other ways to fund innovation initiatives. Some have gone so far as to carve out a whole separate innovation budget and create “innovation centers,” responsible for coming up with as many ideas as possible and turning the most promising ones around into prototypes quickly, without bureaucratic interference. In terms of investing in innovation, both P&C and L&A CIOs have discovered the power of investing in cultural change and adaptation, looking both inside and outside their organizations for inspiration and new ideas. Many have created innovation centers or loosely coupled investment funds to engage with startups, universities and think tanks. That trend is likely to accelerate as more insurers get serious about innovation.

Understandably, insurers want to see that innovation is leading to new products, more effective and efficient processes, better customer service and, of course, higher profits. Along with that comes a desire to measure and quantify the effectiveness of innovation initiatives (measuring is simply what insurers do, after all). The industry, though, has yet to land on a quantitative and qualitative set of metrics to accurately gauge how successful an innovation project has been. Both P&C and L&A CIOs are for the most part still coming around to the idea that some innovation efforts can pay dividends without those dividends being directly measurable.

See also: Where Will Real Innovation Start?  

Innovation is becoming increasingly important to insurers in 2017, and it requires support from senior leadership to succeed. Insurance is an industry that is generally very conservative, and innovation is all too often looked at with skepticism, or even hostility. Innovation can be hard work that requires a dedication of resources and a willingness to take new risks. It can also require new organizational structures and an acceptance that an asset (e.g., a traditional brand) can also be a liability. Carriers simply cannot double down on the strategies from the past. Innovation is frequently about breaking things and a willingness to walk away from traditional approaches to products, distribution models and operations.

Blockchain: What Role in Insurance?

Blockchain is a revolutionary technology that could fundamentally change the way business is conducted and result in the restructuring of major industries. At least, that is the view of some prognosticators. Others believe that there are important implications for the technology, but that it will not be truly disruptive. What about insurance? Will blockchain be a major force in the industry, and, if so, when?

New research by SMA sheds some light on these questions. The short answer is that blockchain is likely to play a major role in the reshaping of insurance – but the big implications are two to three years out.

Blockchain has burst onto the scene. Many in insurance are still just becoming aware of its importance and are in learning mode. At this stage, slightly more than half of property/casualty insurers are aware of blockchain and are beginning to understand its implications, while only about 20% of life/annuity insurers surveyed know about the technology. What makes blockchain so powerful is the wide range of potential use cases. As a foundational technology, it becomes an enabler for peer-to-peer insurance, micro-insurance, digital currencies/payments, smart contracts and the exchange of all manner of sensitive documents. None of these require blockchain, but, in every case, blockchain makes the transactions more secure, improves efficiencies and makes new business models more feasible. L&A insurers see the exchange of sensitive documents with prospects and customers as the top potential use case for blockchain in the next few years. P&C insurers are looking to a wider range of use cases with high potential, such as micro-insurance, peer-to-peer insurance and digital payments.

See also: How Will Blockchain Affect Insurance?  

All sectors of the insurance industry increasingly see blockchain as important and potentially transformative. However, the level of investment and projects are still relatively low. About one in eight P&C insurers are developing strategies with blockchain in mind and moving to pilot projects. Only 3% of L&A insurers claim to have any activity regarding blockchain. Several of the global insurance players are participating in blockchain consortiums, investing in startups or implementing live projects with blockchain. Another important consideration is the emergence of more than 20 insurtech firms anchored by blockchain.

Blockchain does show great promise for the insurance industry. There are likely to be more projects, investments, consortiums and production implementations based on blockchain over the next two to three years as the industry gains experience with the new technology. Then it will not be surprising to see a wave of many blockchain-based initiatives ripple across the industry and become a contributing force to industry transformation.

For more information on the insurtech startups, business use cases and insurer blockchain projects, see the new research report Blockchain in Insurance: Insurer Progress and Plans, which is available at this link.