Tag Archives: mike fitzgerald

A New Way to Develop Products

The long-term sustainable value from insurtech lies in its ability to change how insurance products are created. The economic model behind how startups bring their products to market is bending — no, breaking — the traditional development cost curve. Insurers that recognize this dynamic and adjust their innovation activities accordingly will create more value from insurtech than their competitors.

Insurtech has already gone through at least two iterations in its short lifespan. A little more than a year ago, the market was abuzz about widespread disruption. Now that it is recognized that there is value in integrating insurtech, partnership is the rage. The next phase will see an increase in greenfield operations. Over the next 12 months, the economics of insurtech development will result in a significant increase in spin-offs and stand-alone propositions.

See also: 10 Trends at Heart of Insurtech Revolution  

The reasoning is this – economics will motivate different behavior. Traditional insurance product development is typically characterized by these approaches/tools/techniques:

  • Product or process-centered design
  • Waterfall development (although agile techniques are catching on)
  • Centralized, on-premise infrastructure
  • Package or custom-built software
  • Periodic release and control procedures
  • Service-oriented architecture (SOA) integration

Contrast that with insurtech operations. They are typically characterized by these approaches/tools/techniques:

  • Customer-centered design focused on delivering a minimal viable product as quickly as possible to the market
  • Agile development using small teams
  • Cloud infrastructure
  • Microservices architecture
  • Use of DevOps to control updates
  • Use of open source software
  • API integration

Here is where the economics comes in. Without reading ahead, answer the following question:

If you spend $1 delivering a specific set of functionality in the traditional approach, what amount would be needed to deliver exactly the same functionality using the new development approach?

I have been asking this question for the last two months. It is a tricky one, because the best input comes from the limited number of people who have delivered insurance products in both the traditional AND the new development approach. These few professionals have “lived” both environments. My sample size is small so far, but I have polled about 30 people.

The answer ranges between 20 and 30 cents on the dollar. So, call it a quarter. That means that a $4 million project delivered with the traditional approach is only $1 million using the new tools/techniques. Or, better yet, entire propositions, which include changes to both the insurance product and a new automation platform, can be delivered for less than $4 million. (For more on this, see the @Celent_Research report Slice Labs: A Case Study of Insurance Disruption.)

With this cost profile, a greenfield startup approach becomes much more attractive. Investing in a new product/market approach is much less risky given the smaller level of investment. If we marry this with the innovation fatigue expected as incremental efforts fail to deliver sufficient value to the core business, the environment is ripe for spin-offs.

This is not to say that the current “partner with a promising insurtech firm” or the “we want to make innovation part of our culture” approaches will go away. However, expect to see significantly more stand-alone efforts than we have seen in the past.

Immediate adjustments to this opportunity include:

  • Insurers should include multiple startups in their innovation portfolios
  • Insurance software/IT services providers and venture groups should help both insurers and insurtech firms to set up greenfield propositions
  • Insurtechs should look beyond incremental solutions and apply their talent and techniques to entire insurance propositions

See also: How Technology Breaks Down Silos  

As some of the spin-offs succeed (and most of them fail), insurers will learn how to develop in the new environment and will transfer these techniques to their core business. As a result, the true value of insurtech will not be an either/or choice, but change through absorption of new approaches and techniques.

Insurtech = new way to develop insurance products.

In Search of a New ‘Dominant Design’

There is little in the world of insurtech happening today that insurers couldn’t arguably choose to do for themselves if they were motivated to do it. They have the capital to invest. They have resources and could hire to fill gaps in any new capabilities required. They understand the market and know how to move with the trends. And yet insurers readily engage with the startup community to do the things that arguably they could do for themselves.  Why is that?

In Making the Most of the Innovation Ecosystem, Mike Fitzgerald observes the main cultural differences between insurers and the startups they court. These differences give us a strong clue as to why insurers engage with startups, even though on paper they do not and should not need them.

Alongside these deep cultural differences, I believe that there is another angle worth exploring to help answer the question. That’s the market’s maturity stage and, with it, the strategies required to succeed.

One model that helps explain this relates to the work of Abernathy and Utterback on dynamic innovation and the concept of the “dominant design.” To accept the argument, you first need to believe that we’re on the cusp of a shift from an old world view of the industry based on a well-understood and stable design toward one where substantial parts of the insurance proposition and value network are up for grabs. You also need to believe that, for a period at least, these two (or more) worlds will co-exist.

See also: Insurtech Has Found Right Question to Ask  

So, here’s a quick overview of the model (in case you’re not familiar with it)…

Settling on a ‘dominant design’

First introduced way back in the mid-1970s and based on empirical research (famously using conformance toward the QWERTY keyboard as an example), Abernathy and Utterback observed that when a market (or specifically a technology within a market) is new, there first exists a period of fluidity where creativity and product innovation flourishes. During this period, huge variation in approaches and product designs can co-exist as different players in the market experiment with what works and what does not.

In this early, “fluid” stage, a market is typically small, and dominated by enthusiasts and early adopters. Over time, a dominant design begins to emerge as concepts become better understood and demand for a certain style of product proves to be more successful than others. Here, within an insurance context, you’d expect to see high levels of change and a preference for self-built IT systems to control and lower the cost of experimentation.

Once the dominant design has been established, competition increases and market activity switches from product innovation to process innovation – as each firm scrambles to find higher-quality and more efficient ways to scale to capture a greater market share. This is the “transitionary” stage.

Finally, in the “specific” stage, competitive rivalry intensifies, spurred on by new entrants emulating the dominant design; incremental innovation takes hold; and a successful growth (or survival) strategy switches to one that either follows a niche or low-cost commodity path. Within an insurance context, outsourcing and standardization on enterprise systems are likely to dominate discussions.

Applying the ‘dominant design’ concept to the world of insurance and insurtech

Building on the co-existence assumption made earlier, within the world of insurtech today there are broadly (and crudely) two types of firms: (1) those focused on a complete proposition rethink (such as TrovSlice and Lemonade); and (2) those focused on B2B enablement (such as Everledger, Quantemplate and RightIndem). The former reside in the “fluid” stage (where the new dominant design for the industry has not yet been set and still may fail) and the latter in the “transitionary” stage (where the dominant design is known, but there are just better ways to do it).

Figure: Innovation, Insurance and the ‘Dominant Design’

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(Source: Celent – Adapted from Abernathy and Utterback (1975))

Outside of insurtech, within the “specific” stage, there is the traditional world of insurance (where nearly all of the world’s insurance premiums still sit, by the way), which is dominated by incumbent insurers, incumbent distribution firms, incumbent technology vendors and incumbent service providers.

So what? 

What I like about this model is that it starts to make better sense of what I believe we’re seeing in the world around us. It also helps us to better classify different initiatives and partnership opportunities, and encourages us to identify specific tactics for each stage – the key lesson being “not to apply a ‘one size fits all’ strategy.”

See also: 8 Exemplars of Insurtech Innovation  

Finally, and more importantly, it moves the debate from being one about engaging insurtech startups purely to catalyze cultural change (i.e., to address the things that the incumbent firms cannot easily do for themselves) toward one begging for more strategic and structural questions to be asked, such as: Will a new dominant design for the industry really emerge? What will be its timeframe to scale? A what specific actions are required to respond (i.e. to lead or to observe and then fast-follow)?

Going back to my original question: What does insurtech have to offer? Insurers can do nearly all of what is taking place within insurtech as it exists today by themselves…but, as stated at the start of this article, if, and only if, they are motivated to do so.

And there’s the rub. Many incumbents have been operating very successfully for so long in the “specific” stage, optimizing their solutions, that making the shift required to emulate a “fluid” stage is a major undertaking – why take the risk?

This is not the only issue that is holding them back. For me, the bigger question remains one of whether there is enough evidence to show the existence of an emerging new dominant design for the industry in the “fluid” stage that will scale to a size that threatens the status quo. Consequently, in the meantime, partnering and placing strategic investments with insurtech firms capable of working in a more fluid way may offer a smarter, more efficient bet.

In a way, what we’re seeing today happening between insurers and insurtech firms  is the equivalent of checking out the race horses in the paddock prior to a race.  Let the race begin!

How to Develop an Innovation Perspective

There once was an immutable law in business: to increase quality, you must increase cost. In other words, to make something better, you must spend more. The principle seems quaint now given the generally held expectation that we should get more and pay less at the same time.

One reason for this change in mindset is a collection of business disciplines often referred to as total quality management. Throughout the 1980s, ’90s, and into the 2000s, businesses across the world introduced techniques such as statistical process control, kaizen, quality circles, employee involvement, the Toyota Way and the teachings of W. Edwards Deming into multiple areas of their business.

What does this have to do with today and with financial services? Businesses everywhere are now challenged with delivering consistent, meaningful innovation to meet customers’ growing expectations. New technologies offer the promise of different business models that simultaneously deliver higher value to both companies and consumers.

Companies making progress with innovation adjust their traditional business processes to include an “innovation perspective.” This is particularly true in the annual planning process used to select which strategic projects will be funded and which will not.

One approach is similar to portfolio management, where a set of choices are profiled according to different factors. The result is then reviewed to determine which factors are overweight, which are under and which are not addressed at all.

The first step is to select 20 to 25 projects considered to be the most important strategic business initiatives in the organization for the coming planning horizon. There is no magic to this number, but there is a practical limit within which choices can be made efficiently.

Second, each project should be reviewed to identify its strategic intent. This is defined as the principal reason that an initiative is undertaken. Many high-profile projects are pursued for a multiple of reasons; however, it is important that one central, driving motivation be chosen for each item.

Next, identify which type of change each project seeks to make. To label these, the company must have agreed-upon definitions for different types of changes. Again, it is important to limit the number of labels. What has proven successful is a three-tiered model of improvement, innovation and disruption.

Once these two dimensions are identified for each project, plot the results on a 2×2 matrix or on a graph showing the intersection of different strategic levers and types of projects. The visual will clearly show where there are clusters of initiatives and where there is no representation at all.

Teams of senior leaders can then challenge their results and ask a number of questions, including:

  • Given our strategic intent, are our “bets” the right ones?
  • Are our resources aligned against the right initiatives?
  • Are we being bold enough regarding innovation?
  • Are there disruptive technologies that should be tested?
  • Where are we at risk of losing ground against competitors?
  • What trade-offs in the portfolio need to be made?
  • Is the organization ready for the changes required?

Research in insurance has shown a predictable concentration of initiatives that are improvement projects related to the strategic lever of efficiency and expense reduction. Disruptive efforts are not prevalent, but where they are present are usually related to product and market strategies.

This model is not intended to replace current budgeting tools or planning methods used by project management offices or finance teams but is meant to introduce the concept of innovation into the control process. The desired outcome is a plan that considers the impact of more, or less, innovation in an approved project portfolio. As the annual budgeting cycle begins for firms on a calendar-year reporting schedule, companies are encouraged to include an innovation perspective in their deliberations.

My Risk Manager Is an Avatar

In the world of commercial insurance, there exists the very curious role of risk manager. I mean curious in the sense that successful risk managers appear to have superpowers. They are charged with taking the actions necessary to avoid or reduce the consequence of risk across an entire enterprise. Their knowledge must extend deeply into a variety of subjects such as engineering, safety, the subtleties of the business of their employer, insurance (of course), physics, employee motivation and corporate politics and leadership. Their impact can be wide-ranging, from financial (e.g., dollar savings from risk avoidance/mitigation) to personal (the priceless value of the avoidance of employee death or injury).

Sadly, the tyranny of economics restricts the access that businesses have to continuous, high-quality risk management. Full-time risk managers are prevalent in huge, complex, global companies. These firms often self-insure, or purchase loss-sensitive accounts, and the financial value of a risk management position (or department) is clear. The larger mid-market firms can afford to selectively purchase safety consultant services; their insurance broker might perform some of these tasks (especially at renewal), and their insurers may have loss control professionals working some of these accounts. However, for the majority of small businesses, risk management at the professional level is not affordable.

I have toyed with different ideas about how to automate this function to bring the value of a risk manager to the small commercial business segment. My attempts were always unsatisfying. However at a Front End of Innovation conference in Boston, a presentation by Dr. Rafael J. Grossmann (@ZGJR) crystallized the vision. I can now clearly see how existing technology can be combined to create a risk manager avatar.

Dr. Grossmann is a trauma surgeon who practices in Maine. In addition to the normal challenges of his profession, he is one of only four trauma surgeons servicing a very wide area. Although the area is sparsely populated, the challenge of distance and time complicates the delivery of medical services. Dr. Grossmann presented his vision of a medical avatar, a combination of technologies that will perform 80% or more of the routine medical cases in a consistent, timely and cost-effective manner. Combining the technologies of mobile, voice recognition, virtual reality, artificial intelligence, machine learning and augmented reality forms a new silicon entity – a medical doctor avatar. He also introduced a company, sense.ly, that is working to deliver similar services (video here: http://www.sense.ly/index.php/applications/).

If such systems can deliver medical services, then why not risk management? For example, given permission, a system would monitor the purchases of a small company and identify when the historical pattern changes, e.g., when the company begins to buy new types of materials. Using predictive algorithms, the pattern can be compared against others to evaluate if there is likelihood that the company is now performing new business operations. The avatar could then contact the small business, or could signal human intervention by an underwriter to evaluate the necessity for an endorsement to a policy to cover the new business operation. Eventually, some of these interventions would also be handled through machine-to-machine communication and would allow the endorsement to take place automatically.

Someone will build a risk management avatar. The question is, who will do it first?

Moving to Real-Time Risk Management

In insurance, sales are usually periodic, but risks are continuous. In personal lines, for example, annual or semiannual automobile renewals are automated, and a customer may not speak with an agent or a representative of an insurer for an extended period. Insureds do not receive continual rick consultation, because it is high-touch and high-cost, and can unintentionally retain risks. This is especially true during times of change. New activities, conditions or locations often increase exposure.

This post explores how technology can be combined with a customized service proposition to deliver continuous, real-time risk management. In the process, digital technology can reshape patterns of engagement between insurers and their customers that have existed for decades (or centuries).

Look at what happens every day as teenagers become drivers. As learners, their skill level is low. As drivers, they make poor decisions and crash more often. Parents try to supplement the teaching of driving schools but with mixed results. High loss frequency and severity for the 16- to 20-year-old age group, particularly males, drives insurance premiums to unaffordable levels. More significantly, many people are injured or are killed in accidents involving youthful drivers.

Now look at the approach taken by Ingenie, an insurance broker founded in the UK in 2010. The founders observed the safety and affordability issues in the UK motor market and set out to design a proposition to address both issues. At that time, telematics solutions were just beginning to take shape. However, Ingenie intended to go beyond a simple black-box-in-a-car approach. It partnered with the Williams Formula 1 team and used its racing experience and data to build sophisticated algorithms that analyzed driving patterns and predicted the behaviors that were most likely to result in an accident. Ingenie also engaged psychologists at Cranfield University to understand the specific emotional and physical characteristics of youths. With insights from these sources, Ingenie built an engagement approach focused on this age group.

Ingenie’s founders were veterans of the insurance software industry and had the technological skills to build a platform that blended social media, call center technology and an online app. The objective was to provide real-time feedback to influence driving behavior by communicating at appropriate intervals and in the most effective manner. As the telematics device in the vehicle reported the driving details, if the data showed that a young driver was performing better (safer) than her peers, she received a discount on her insurance. If the driving was not as safe as it could be, the driver received a text outlining what driving behavior could be improved, with a link to training videos and other multimedia sources. If the actions were severe, the driver was contacted directly by a call center employee of Ingenie. The company employs psychology majors from local universities, usually young men and women in their early 20s, in the service centers to counsel the youths and to speak to them on their own terms.

The model is proving successful. Between 2012 and 2013, behaviors improved such that average premiums dropped 23% for 17-year-olds and 10% for those who were 18. The broker has earned rapid growth in the UK market — 2013 premiums were more than $80 million. In 2014, Ingenie expanded into Canada.

By going beyond pure telematics, Ingenie delivers continuing risk control that previously had not been possible or affordable. Going forward, digital technologies will continue to provide similar opportunities across other lines of business – increasing both the efficiency and effectiveness of risk management.