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Directive Communication Systems’ Lee Poskanzer

Lee Poskanzer, CEO and Founder of Directive Communication Systems, talks with ITL CEO Wayne Allen about the growth of digital assets and why access to these are at risk of being lost in estate planning without specific legally compliant steps to protect them for heirs. DCS, he says, aims to make this process easier for individuals to decide which assets—from social media, cloud storage, bank accounts and more—should be passed on and to whom..before it’s too late.

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In 2006, years before Lemonade started to disrupt the insurance industry and the terms “fintech” and “insurtech” became known at large, Daisuke Iwase co-founded the first digital life insurance company Lifenet in Japan. Lifenet has been disrupting the Japanese life insurance sector right from the start by providing direct distribution of life insurance products via the internet – something that many still say is impossible to do. We’re therefore excited that Daisuke Iwase, a real pioneer in digital innovation, sat down with us to share his secrets on how he uses his experience in his current role as group chief digital officer at AIA Group.

AIA Group is 100% focused on the Asia-Pacific with a presence in 18 markets, and headquarters in Hong Kong. The portfolio includes over 33 million individual policies and over 16 million group scheme members. AIA has an outstanding track record of growth. It is the largest life insurer in the world in terms of market capitalization. There is a major commitment to digital innovation, especially in transformative business models.

Summer 2006, many years before people even thought fintech and insurtech could disrupt the digital landscape and the overall industry, you decided to start a digital life insurance company. Can you share how this came about?

Daisuke: “Let me start by describing the industry landscape at that point. Many complex products, lack of transparency, mistrust, distrust in life insurers, consumers looking for more simple, transparent and convenient solutions. At the time, we had most industry colleagues telling us it was impossible; no one would buy life insurance digitally. Regulators wouldn’t give a license to two random individuals. But then, May 2008, we launched Lifenet with a capital of more than $120 million and with a license awarded to a new independent company. This was the first license awarded since 1936!”

Impressive! Basically, you were insurtech 1.0, operating in a time before unicorns or the rise of fintech and insurtech …

Daisuke: “In hindsight, we were a little bit ahead of time, yes. Fast forward three, four years to March 2012, we were still small but growing rapidly. We basically tried to build something that made total sense, but faced many challenges. We went public on the Tokyo Stock Exchange, raising additional capital. We also persuaded Swiss Re to come on board to become our lead investor. And a little later, in 2015, KDDI, Japan’s second largest telco, became the largest shareholder of Lifenet. So it has been a journey, but a very interesting journey.”

See also: New Efficiencies in Life Insurance  

Lifenet celebrated its 10th anniversary summer of 2018. Many say the company not only stands out because of its business model, but also because of its corporate culture. About 65% of the staff comes from other industries. Can you share a bit about this exciting period at Lifenet and being the first challenger in a huge, matured market?

Daisuke: “At that time, Japan was the second-largest life insurance market in the world with over $400 billion in premium written every year. We came with a very simple solution: term and supplemental health insurance that was sold online with transparency, empowering the consumers, saving cost and giving the cost back to the consumers. We had successes, challenges and setbacks. I must say I am really proud of what we have achieved at Lifenet. I think we inspired many other challengers that shared the belief that incumbents could change the way they engage with their customers, the way they design their products, the way they engage with the millennials. But we did not yet disrupt the market.”

Nevertheless, you had
a significant impact on the Japanese life insurance industry and probably also beyond Japan. What lessons did you learn?

Daisuke: “Let me share three lessons. First, consumers do not necessarily behave in an economically rational manner. Makes sense if you think about it. When was the last time you made a purchase solely based on economics? So, there is a lot more than just delivering value to the customers. Second, having the best products does not necessarily make you the one with the largest market share. History has shown that many times the companies with the best products do not necessarily win, but companies with the strongest distribution do prevail.

Third, my humble experience reminds me of a case I read during my time at business school. It was on channel distribution strategy in marketing, and it said, ‘You can eliminate the intermediaries, but you cannot totally eliminate the functions they are serving.’ So, while we believe that by going direct to customers we can create significant value, there are many reasons that insurance agents have existed for a long, long time in history, and there are multiple functions that they serve that cannot be totally eliminated; they have to be replicated in different forms. That’s why technology is a tool to either help you sell life insurance in a more productive manner or help consumers buy life insurance more efficiently. But, during this time, from 2008 to 2018, most consumers did not wake up in the morning yearning to buy life insurance more efficiently.”

Technology, at the end of the day, is a means to an end. So, then in late 2017, Keng Hooi, CEO of AIA Group, approached you and offered you another challenge.

Daisuke: “Yes, and I shared these views with my current CEO now at AIA. AIA, given its strong distribution presence, should focus on enabling and empowering the distribution force through the power of technology. Not much later, as Lifenet celebrated its 10th anniversary in the summer of 2018, I made my transition from an entrepreneur to lead the digital and innovation initiative for the largest Pan Asian life insurer.”

In Europe, most people know AIA through the Tottenham Hotspur sponsorship. Can you tell a bit more about the company?

Daisuke: “AIA is the largest independent publicly listed pan-Asian life insurance group – with a presence in 18 markets around the Asia-Pacific region. We were rooted in Shanghai a century ago in 1919.  We completed the reorganization driven by AIG’s liquidity crisis in 2008, leading to the positioning of the company for a public listing.  As of June 2019, AIA was valued at $120 billion, becoming the largest life insurer in terms of market capitalization.”

So, here you are, making the transition from a start-up to this huge company. What drove you to make this transition?

Daisuke: “The reason is exactly the size and the potential impact that I can have through the AIA platform. Through AIA, I can touch the lives of our 30 million customers across 18 markets. Needless to say, I am very excited about the opportunity. I truly believe that we are at a very interesting time, when the fundamental nature of a life insurer is significantly changing from a payer to a lifetime partner, supporting the health and the life of our policyholders. But I also believe that the life insurance industry will not be disrupted in the foreseeable future because of one reason; it is the low purchase frequency of the product. The power of digital is at its best when it involves something that is of very frequent purchase like an Amazon product or travel, etc. With the way life products are designed to date, this is not the case.”

What should be the way forward then, in your view?

Daisuke: “We can add much value by going digitally but with somehow limited impact. What we can do is change the nature of the engagement. The engagement takes place when we pay you when you’re sick or you are diseased and thus becoming a more engaging partner of your healthy life. The opportunity for digital to have more impact will be larger. Just looking at the fundamentals, Asia’s middle class will continue to grow. This middle class will make up the majority of the new rising middle class who, as they increase their fluency, would seek protection coverage for their loved ones. AIA’s competitive advantage lies in our extremely robust and competitive distribution force through highly disciplined management of agency and through the new partnerships that we are pursuing with our bank or telco partners and other non-traditional partners as well as our focus on health and wellness.”

Can you share a bit about the strategy to make this happen? 

Daisuke: We’ve identified four strategic areas that we would like to focus on as part of this innovation initiative. First is distribution digitalization. Second is customer engagement and ecosystem. Third is proposition enhancement, primarily around health tech. And fourth is artificial intelligence and data analytics. We’re looking for companies that are willing to build a base in Asia to properly support us, offer robust technology and solutions and partner with other countries in our 18 markets to realize the vision that I’ve shared with you right now.”

Scaling insurtech innovations with the incumbentsorganization seems difficult. Having been at the other side of the table, I’d say your experience as an entrepreneur means that you probably approach things differently compared with a traditional large insurance company …

Daisuke: “I’m not interested in doing innovation for the sake of innovation. I only want to focus on things that have real impact, and by impact we mean something that moves the needle for our $120 billion market capitalization. I’ve noticed that innovation cannot happen in an isolated lab or isolated group office.  It has to be embedded into the strategic priorities, it has to be driven by the markets, the countries that are running their businesses day to day. We need to have a clear budget to support that. We need to have close alignment with our internal technology team to assess and build real businesses, and of course there needs to be a change in the culture and the mindset, which so often hinders innovation and challenging new initiatives.”

See also: What Is Really Disrupting Insurance?  

How do you tackle this from your current role as the executive who is responsible for digital, data and innovation?

Daisuke: “As I mentioned earlier, I think there’s a lot that we can do to make our distribution partners, our agents, our banks, our telco partners sell life insurance more productively to enrich our customer experience and to enable our employees, our colleagues to operate much more efficiently. Previous to my arrival, AIA had already embarked on many digital initiatives. For instance, last year we led a strategic investment of $500 million, as an investor group collectively, in WeDoctor, an online healthcare solutions platform, providing seamless online and offline healthcare services as well as integration of general practitioner and specialist doctors in China. WeDoctor has 27 million monthly active users on its platform, and through this strategic alliance we believe that we can deliver a new value proposition for our customers and access the broad customer base that WeDoctor has and many more digital initiatives we have pursued.”

How do you think the future of life insurance will look?

Daisuke: “I think of many things that may change in the future, but then my 10 of years experience running Lifenet made me humble about how slow or how little consumer behavior actually changes. What will not change is the fundamental nature of the life insurance product, a financial solution to offer protection for families in the future. But we are listening to many changes that are happening around us, that affect the way consumers behave, the expectations consumer have, and the role that life and non-life insurers may play. I hope that you can feel the energy from Asia. The opportunities ahead are serious commitments to driving our growth further through technology and innovation.”

A Scary Future for Life Insurance?

Web users, especially business owners, already have plenty of good reasons to be careful with what they put online. Shifts in public perception, the increasing threat of data leaks and continual attempts to steal your identity might be enough. However, new state rules for New York’s insurance companies could highlight another worrying trend. What you post could affect your premiums.

It’s already legal for insurance companies, including life insurance and business protection insurance providers, to use public data to decide what you pay. From credit scores to court records and now including your Twitter feed, they can effectively use nearly anything they want to set insurance prices.

Now, however, New York is taking a bold step forward as the first step to codify the practice. Discrimination by race, sexual orientation, faith and other protected classes is still illegal, but the use of personal data to inform insurance decisions is a trend that many are worried other states will follow.

See also: New Efficiencies in Life Insurance  

Your data is just another way for insurance companies to measure your risk and make more efficient decisions. Regulations are designed to keep the needs of the companies and their customers both satisfied, but many are concerned that it’s just giving the providers license to be more invasive when deciding premium rates. Your rates aren’t only decided by what information you fill out; examinations are reaching further and deeper into our data than ever.

The automation of the industry is making it easier to collect and collate data from many sources, but there’s always a human involved in the judgment, and many are concerned that business protection and life insurance providers expose too much.

Social media use in setting insurance premiums isn’t commonplace, yet. Only one of 160 insurers in New York use it, but “big data” is spreading across industries, showing the power of using data from diverse sources. At the moment, social media is used to determine falsehoods in applications, but there’s no reason it can’t be used in ways that customers might consider more invasive. And while discrimination is prohibited, some fear there’s nothing to stop providers from doing deeper dives. In many cases, the deeper you look into anyone, the more likely you are to uncover something that could be used to raise their premiums.

Algorithms may seem impartial, but they are designed by humans with all of their own biases. One textbook example is COMPAS, which predicted where crime would occur based on criminal justice data from the U.S. The tool vastly overestimated rates of recidivism for black defendants while underestimating the same risk for white defendants.

This trend of using social media data might not be widespread just yet, but there are justified fears that social media surveillance and investigation will become more common as reliance on the technology spreads. As such, it may be even harder for customers to see what affects their premiums, as much of it could be determined by big data gathering information from dozens of sources and obscure algorithms used to highlight risk factors.

This risk of surveillance, even if it has no application in reality, affects how we use the internet. A trend toward “deleting Facebook” arose shortly after its sizable data breach last year. Data-sharing from sites and businesses of all kinds has seen use of virtual private networks (VPNs) skyrocketing. This might seem prudent, at first, but if our social media use is being so closely monitored, then we’re less likely to use those platforms to talk and associate freely.

The issue isn’t just in the data we share, but also the data we consume. If a business protection insurance provider looks at who you follow on Instagram, what’s to stop it from deciding premiums based on whether you follow high-risk individuals, even if you are not a high-risk individual yourself? The same goes for health and life insurance companies, which could raise premiums because someone is seen as a higher risk because they are part of suicide prevention groups on Facebook.

Business are already under great scrutiny for their social media, mostly by customers, which is justifiable. However, when it comes to business protection insurance and key man insurance, the premiums for protecting the people and assets most important to your business’s growth could be rising for reasons that are more obscure than most will be able to work out. We don’t know how far into your posting history insurance providers can go in their search for data, so it’s best to create a strong social media policy as soon as possible.

The law is always slow to catch up on technology. While many fear that the wheels may not turn in time for smart, context-driven regulation, other solutions are being looked for. Some want broad restrictions on the ability of insurance providers to use public information, while others are fighting for great transparency. Some consider it of utmost important that insurance companies be clear with what data drives their premium setting, as well as when new algorithms and data sources are used to adjust them.

See also: How to Resuscitate Life Insurance 

However, insurance companies have a vested interest in protecting their algorithms and how, exactly, they find their premiums. Protection of trade secrets and other intellectual property is part of what keeps them competitive. Furthermore, if the widespread ignoring of terms and conditions on the internet shows anything, it’s that notices of new algorithms may not register with the majority of customers. Most people simply don’t understand the technology that could be used against them.

More detailed regulations, such as a need for algorithmic impact assessment, are looked at as another potential solution. In answering questions that find out the data that insurance providers use, why they use it, what they test and whether they have tested the system for bias, discrimination could be halted in its tracks. The insurance industry and its customers rely on the ability to use the data available to set premiums based on risk level. However, the threat of discrimination is driving concerns.

Pricing Right in Life Insurance

Life insurance might be the slowest vertical to adopt new technology, but it is not immune to changes that are affecting the industry. The market is changing, demanding insurance that’s easier to purchase, more personalized and tailored in a way it never has been before. A 2018 study by MarketWatch showed over 40% of Americans own no form of life insurance, making competition for this uninsured population fierce.

The life insurers that find a way to evolve in meaningful ways will have an edge over the competition when it comes to customer acquisition and retention. Life insurers might consider adjusting how they engage the customer, such as through digital servicing and customer engagement that goes beyond a simple yearly bill. What’s clear to forward-thinking insurers is how pricing transformation presents a massive opportunity to stimulate growth in this regard.

How the pricing process affects the sales process and customer experience

Typically, pricing is only considered when a life insurer’s actuarial team is due to run a pricing exercise. The exercise generates a price that suits the insurer’s goals, it goes out to market and pricing is forgotten until the next exercise. However, the consequences to this approach can lead to carriers going to market with sub-optimal rates.

See also: How to Resuscitate Life Insurance  

Price’s significance doesn’t diminish between pricing exercises. The market changes constantly, but the average life insurer’s pricing processes aren’t designed to keep up.

How the pricing process exists today, and why it’s not working

The problem with the life insurance pricing process boils down to how intensely manual it is.

The standard pricing process used by most life insurers consists of an actuarial system and good old Excel. The actuarial system works as a projection system, modeling calculations and assumptions to deliver a price that incorporates strategic objectives. Excel works as a Swiss Army knife, incorporating policyholder and competitive data, as well as analyzing the results of the actuarial system.

Life insurers’ actuarial teams run these two systems separately in a manual process, taking one set of goals/constraints set by the insurer and deriving the best price based on that specific setting. This is where the problem occurs.

While this current system does work and has done so for a long time, it is sub-optimal, especially in a market as competitive as today’s.

Remember that one set of goals/constraints that helps determine the sweet spot, the ideal price, for the market today? A life insurer can see exactly what price it needs at that specific moment, but no further. The system pinpoints one spot on a graph but can’t draw the trajectory it’s on.

This trajectory has a name: the efficient frontier. Whenever an insurer creates a price with the traditional process, it’s typically landing below the efficient frontier right off the bat, although the insurer might not necessarily realize this. The inability to see beyond the specific price this process creates also means an insurer’s ability to adjust based on strategic objectives may be limited.

With the right pricing tool, a life insurer has the opportunity to see its entire range of possible prices based on the company’s financial goals, each slightly different depending on the constraints/goals. It’s the great “what if” scenario, except it’s every “what if” scenario all at once, clearly laid out for an insurer to analyze. The efficient frontier is the optimal pricing range depending on an insurer’s objectives; without it, it’s impossible to see the forest for the trees.

How pricing transformation benefits a life insurer

There isn’t a real downside. While some transformations or implementations can take years and millions to achieve, investing in the right pricing software, philosophy and process generates a significant ROI for insurers and quickly affects market position.

See also: Selling Insurance in a Commoditized World  

A flexible system that shows a variety of pricing strategies an insurer can take to maximize sales, margin or competitive position constantly enables experimentation to ensure pricing reflects the market, competitor pricing and consumer attitudes. Such a system even allows for the evaluation of an insurer’s strategic goals, and whether those are optimized for success in the market.

All this can be achieved with minimal resources with the right pricing tool. Not only does it automate an intensely manual process, but it delivers more insights and flexibility and frees your actuarial team to focus on adding further value, with complex product pricing or long-term pricing strategy.

The efficient frontier is the difference between having the perfect price 70% of the time and 100% of the time. Why not hit the bull’s eye every time your product goes to market?

New Efficiencies in Life Insurance

A tiger never changes its stripes. But is this true of life insurance companies? They’re good at selling through distribution, but there is a large pool of younger generations that must not be overlooked. This is where digital distribution comes in — digitizing the whole process end-to-end, from improving the sales process through to identifying new target audiences. But how can this actually work in practice? And what are the barriers for life insurance firms?

Digital distribution is often conceived of too narrowly – something akin to “we’ll market via social media,” with little additional thought. In reality, the use of digital has multiple applications right through the whole sales process.

First, there is the question of funneling new customers into the sales process – getting people aware, interested and to the door. The insurance industry has a real opportunity here to supplement its traditional reliance on agents and intermediaries with direct-to-customer marketing through all manner of online engagement. But rather a one-off initiative, long-term success depends on creating a virtuous cycle. Any company that moves into digital sales and marketing will find itself with an influx of new data. This needs to be stored, analyzed and used in a sophisticated way to inform future marketing, in terms of whom to target, how and when. It needs to be a continuing process.

Second, there’s the sales process itself, which is still fairly archaic and often involves reams of paperwork with incomprehensible or irrelevant detail (from the customer’s point of view). Embracing digital distribution means giving new customers the ability to sign up to a policy in around five minutes maximum, via a simple, slick and intuitive mobile app that doesn’t overload the user with information.

Third – and most often overlooked – is the role digital can play in engaging, retaining and upselling to existing customers, those who are already through the door. One example of this is what we call reciprocal intelligence, whereby, instead of the data flow being entirely one way (from customer to company), the insurer gives something back. For instance, if a consumer is using wearable apps to monitor fitness levels for a policy, the insurer should provide information back — if the average resting heart rate has improved, or about the level of subsequent health risk that comes with certain lifestyles.

See also: Digital Innovation in Life Insurance  

The main misconception with digital distribution is that it’s all about replacing traditional marketing. In reality, it’s an opportunity to supplement the more traditional approaches and start to tap into an entirely new set of customers. The more traditional, agency-based model does still works well at engaging and selling to the type of customer it has always favored – asset-rich households. However, this pool of revenue is shrinking, and younger, less financially secure generations are far less inclined to purchase insurance through traditional channels. It is in tapping this relatively untapped pool of customers – and thus growing the overall pool of potential revenue – that digital distribution will come into its own.

Another misconception is that digital distribution brings channel conflict. A few years ago, this was a dominating fear, and the main reason behind a lot of companies’ reluctance to adopt direct, digital models. But the fear was largely based on the misconception that both strategies would be targeting the same audience. This isn’t the case. On the contrary, embracing the digital side can make the traditional component more efficient and effective. The data and insights generated on the digital side can be used to inform and improve marketing and outreach on the traditional side in a way that was too expensive before. There’s more synergy than conflict.

Of course, there are challenges for life insurance carriers looking to digitize. First is the question of technology and infrastructure, of making the investment required to ensure the company has the means to execute these quite unfamiliar, data-heavy digital strategies – whether that be through replacing or upgrading in-house systems, or through partnering with technology firms.

There is also the question of talent and company culture. Fully embracing digital means processing large amounts of data, then knowing how to use it to maximum effect. This will require hiring people who are tech-savvy and know how to navigate, for instance, social media or data analytics. The skills and aptitudes involved are quite alien to many insurance firms and will involve hiring new types of employees at all levels. Any insurance firm that wants to do the work entirely in-house will have to, to some extent, become a tech firm – and that’s a big cultural leap. There’s also the inconvenient fact that insurance is not exactly the first sector that younger tech wizards think of when deciding on a career – firms will need to think about how to make themselves appealing to this kind of talent and bridge the gap.

There is also the matter of digital distribution affecting the carriers’ risk profile. The main hazard from a risk perspective is the loss of human judgment when bringing customers onboard. The digital approach is about automation and volume – what comes through the door is a set of data points. There isn’t an agent talking to customers, getting to know them in a more rounded way.

This is far from an insurmountable problem, but it does introduce the potential for new risks coming on board to not be screened as well as they would be via the traditional approach. It means learning new ways to screen for risks. The main things an insurer needs to understand about new customers are their financial status, their health and whether they truly need the product in question. This evaluation has to be done differently, rather than relying on the expert judgment of agents – any digital onboarding process needs to incorporate a way of both capturing and assessing information in a reliable fashion.

This further underlines the point that digital and traditional should be seen as complementary rather than mutually exclusive – ultimately a human element will always be needed to address this type of risk. The key is finding a way to integrate the two, to ensure there’s an aspect of human intelligence built in.

Life insurers are starting to embrace the shifting sands and are looking to digitize. Some firms want to build their own digital capabilities but recognize they don’t know where to start, and so they bring in a tech firm to advise. Other firms are partnering with tech firms to outsource the function. In these cases, the insurtech firm gets ‘bolted on’ to the insurance company, bringing its own talent and essentially acting as that company’s digital department.

See also: A Game Changer for Digital Innovation

The relationship between traditional insurers and smaller insurtech outfits has changed considerably over the last couple of years. Whereas many insurers initially thought they’d be competing directly against a new generation of disruptive fintech startups, a far more collaborative dynamic has now emerged. This makes a lot of sense – the two sectors bring very different yet complementary capabilities to the table, and have advantages with different markets and consumer audiences.

Life insurers’ traditional revenue pool does have some life in it yet. But firms that are not just looking to survive but to thrive, at the very least, need to understand their customers better, and be more up to speed with modern consumer behavior.

This doesn’t necessarily mean they have to go down the direct-to-customer route, but adaption is needed to unlock the efficiencies that digital can enable and to bring approaches in line with expectations consumers now have. Relying on traditional messages and systems limits the potential market, and will eventually be obsolete. Digital distribution is just one aspect of the modernization of the insurance industry that is, in the long run, inevitable. Those that don’t adapt will be left behind.