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Innovation Executive Video – Octo Telematics’ Nino Tarantino

Nino Tarantino, North American CEO of Octo Telematics, talks with Innovator’s Edge CEO Wayne Allen on how his company’s leadership in telematics is enabling insurance innovation, and what next steps are for innovation at Octo.


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Insurtech: How to Keep Insurance Relevant

In the age of the fourth industrial revolution, risks are changing. The advent of technology has made digital assets more valuable than physical ones.

In this scenario, the insurance sector has been increasingly left to deal with technological change and disruption and is having to reconsider the way it defines itself. Having had the opportunity to discuss this transformation in more than 15 countries, I have seen that insurtech is helping to redefine the way the insurance industry is perceived.

Insurance is about providing protection for people in life and in employment. It is about providing a contract where someone promises to indemnify another against loss or damage from an uncertain event, as long as a premium is paid to obtain this coverage – the concept has been around since 1347.

It’s unthinkable for an insurer today not to ask how to evolve its business architecture by thinking which modules within the value chain should be transformed or reinvented via technology and data usage. I believe all the players in the insurance arena will be insurtech – that is, organizations where technology will prevail as the key enabler for the achievement of the strategic goals.

See also: Core Systems and Insurtech (Part 1)  

Insurtech startups have received more than $18 billion in funding to date, according to Venture Scanner data. Fantastic teams and interesting new insurance cases have been grabbing the attention of analysts.

Full-stack insurtech startups are generating a lot of excitement in the investor community and attracting relevant funds, and some have achieved stellar valuations, with Oscar, Lemonade, Sonnet, Alan, Element, Zhong An some of the most fascinating players. It looks like the aim of disrupting the status quo, combined with a skepticism about the incumbents’ ability to innovate, is focusing the attention on players to create new insurance products.

A business model adopted by more and more players is the MGA/MGU approach (Managing General Agents/Managing General Underwriter), a way to satisfy investor appetite for players covering a large part of the activities in the insurance value chain and partnering only with an incumbent for receiving underwriting capacity. Trov, Slice, so-sure, Insure the Box, Root, Bought By Many and Prima are some examples of this approach.

I am positive about the ability of the incumbents to innovate, and about the potential for incumbents and insurtech startups to collaborate. This view is based, for example, on the impressive international success of players such as Guidewire and Octo Telematics. I believe service providers for the insurance sector will be more successful in scaling at an international level than the other models described above. This kind of collaboration is leveraging on the incumbents’ technical knowledge and their customers’ trust, which has frequently been underestimated by insurtech enthusiasts. The most relevant opportunity is the collaboration between incumbents and specialized tech players capable of enabling the incumbents’ innovation in the different steps of the business model.

Denim for the awareness, Digital Fineprint for the choice, Neosurance for the purchase, MotionCloud for the claims, Pypestream for the policy management – these are a few players innovating on each step of the customer journey, based on my map to classify the insurtech initiatives.

For insurtech startups to outperform traditional insurance companies, they need to have their business models concentrated in what I call the four axes (4 Ps): productivity, profitability, proximity and persistency.

An excellent example is Discovery Holding, with its Vitality wellbeing program. This has been replicated in different business lines and countries with different business models – they are carriers in some countries, operate joint ventures with local insurers in other regions and are a service provider in other nations. They are using state-of-the-art technologies such as wearables and telematics to create a model based on value creation outperforming on all the four Ps, enabling them to share value with their customers through incentives and discounts.

See also: What’s Your Game Plan for Insurtech?  

Insurtech adoption will make the insurance sector stronger and in that way more able to achieve its strategic goal: to protect the way people’s lives and organizations work.

8 Exemplars of Insurtech Innovation

The winners of the SMA Innovation in Action Awards are Figo Pet Insurance, Meteo Protect, Motorists Insurance Group and Texas Mutual Insurance, among insurers, and Baseline Telematics, Life.io, Octo Telematics and Pristine, among service providers.

SMA launched this awards program five years ago to recognize projects and solutions that have reshaped one or more of the foundational areas for the Next-Gen Insurer: business model, customer, innovative culture and technology and data.

See also: Innovation — or Just Innovative Thinking?  

The insurer winners of 2016 SMA Innovation in Action Awards, in alphabetical order, are:

  • Figo Pet Insurance, for its unique approach to the pet insurance business model through the innovative use of emerging technologies. The proprietary Pet Cloud platform offers policyholders real-time pet GPS tracking, cloud storage for medical records, mobile claims filing, social pet profiles, a pet-friendly business locator, texts and alerts for coming shots and appointments. Figo’s reimagination of the pet insurance value proposition is focused on making life easier for people and their pets. Figo’s holistic approach offers a meaningful example of how the insurance industry can reinvent its business models and customer engagement strategies for the digital world.
  • Meteo Protect, for offering customized, data-driven agricultural insurance for weather-related risks. Customers can choose each parameter of their weather policies, including crop, period of coverage, specific weather event and intensity and payment amount. Meteo Protect’s Vivaldi platform aggregates huge volumes of weather-related data from 40 years of climate history; current readings from satellites, sensors, gauges and other global weather data sources; and commodity prices and crop yields. Meteo Protect’s focus on the changing nature of weather risks and emphasis on the uncertain future expands the possibilities for the personalization of insurance products and services.
  • Motorists Insurance Group, for creating an innovation space as part of the cultural shift necessary for its 10-year vision of organizational transformation. This vision hinges on Motorists’ reinvention as an “85-year-old startup” designed for innovation and collaboration. The Intersection, the company’s new collaboration space, represents a complete redesign of a 1940s space to prioritize natural light, bright colors and transparency. It facilitates global collaboration through the use of cutting-edge technology, enabling work to shift seamlessly across time zones and continents. Motorists demonstrates that no company is ever too established to change, and that vast and intangible changes like developing an innovative culture can start small and still have a big impact.
  • Texas Mutual Insurance, for “Safety in a Box,” a groundbreaking virtual-reality app designed to teach construction workers the value of following safety procedures. The app is available for download to a user’s phone, which can be inserted into a Google Cardboard virtual-reality viewer for an interactive, 360-degree viewing experience in English or Spanish. The user can experience the four most dangerous construction site accidents, including a collapsing trench, and see how safety choices determine the outcome of each scenario. Texas Mutual is distributing the boxes for free at construction industry events to promote workplace safety and reinvent the company’s role as a workers’ comp insurer.

A compendium of case studies detailing the success stories of the four winners and the 16 other insurers that participated in the SMA Innovation in Action Awards program is available here.

The solution provider winners of 2016 SMA Innovation in Action Awards, in alphabetical order, are:

  • Baseline Telematics, for its BaseDrive telematics solution, which leverages a mobile app and in-car Bluetooth dongle to give insurers everything they need to create their own usage-based insurance (UBI) programs.
  • Life.io, for its policyholder engagement platform for physical, emotional and financial health, which uses behavioral economics, predictive analytics and personalized content to drive high levels of sustained policyholder engagement and the achievement of personal goals.
  • Octo Telematics, for its telematics offerings that deliver behavioral, contextual and driving analytics, enabling insurers to provide value-added services for policyholders such as UBI pricing, loyalty programs, vehicle diagnostics, location-based services, mobile connections and more.
  • Pristine, for Pristine Eyesight, a video communication platform for smart glasses (e.g., Google Glass) and mobile devices that enables long-distance collaboration between field professionals via real-time audio and video connection.

A collection of case studies profiling the four solution provider winners, with details on the rest of the 27 solution provider awards submissions, will be released in early October.

See also: Insurance Innovation: No Longer Oxymoron  

A Word With Shefi: Carbone at Bain

This is part of a series of interviews by Shefi Ben Hutta with insurance practitioners who bring an interesting perspective to their work and to the industry as a whole. Here, she speaks with Matteo Carbone, with Bain Financial Services in Italy, who says the Internet of Things “has introduced more changes than the sector has seen in the last 100 years.”

To see more of the “A Word With Shefi” series, visit her thought leader profile. To subscribe to her free newsletter, Insurance Entertainment, click here.

Describe what you do in 50 words or less:

I advise financial services groups mainly on innovation within their business models. My field is insurance, and I’ve spent the last couple of years handling digitalization of traditional channels: inventing technology-based value propositions, generating customer experience strategies and bringing the omni-channel approach into the insurance business.

Name an emerging technology you are most excited about:

Internet of Things – it’s a game changer! From connected cars to “domotics,” to wearables to connected machines; all the things that are creating tremendous opportunities to price risk, handle claims differently and deliver new services. In the last couple of years, this technology has introduced more changes than the sector has seen in the last 100 years.

Name one similarity and one difference between American and Italian insurance shoppers:

The customer preference for human interaction at the purchase stage within the customer journey is the same in both countries, and so is the digitalization wave, which is obliging insurers to create an omni-channel customer journey around their traditional, physical point of sale.

One important difference is the role of banks in insurance distribution. In Italy, bancassurance accounts not only for more than 80% of the life market but also for 16% of the P&C personal lines market, excluding auto. Currently, banks are looking to play a more relevant role in the auto insurance distribution.

Name a challenge you have faced working in insurance:

You have to really know the intimacy of this strange industry to be able to innovate it. It’s a technical business, so you cannot advise an insurer without knowing the deep aspects of the industry.

A memorable consulting gig:

Without a doubt, it was two years ago advising Renova Group on the acquisition of Octo Telematics, a global leader in insurance telematics solutions. It was amazing to help Renova discover the value of telematics for the insurance business.

Your favorite news source:

As for me, LinkedIn is the primary source. Each day, I check five to 10 insurance news websites yet the best insights come from my LinkedIn network of insurance professionals around the world. I consider the daily sharing of ideas with them an incredible asset.

When you are not working for Bain & Company you are most likely…

My work is my hobby. I enjoy my work, and it is normal for me to think about work even when I am doing other things. However, if I have to identify my main hobby, it is fitness. I am definitely addicted to the gym.

If you weren’t working in insurance consulting, what profession would you be in?

I would probably be managing my family’s historical winery.

Prosecco or Champagne?

Champagne! I’m in love with Krug Clos Du Mesnil; their first vintage was produced the year I was born.

Favorite quote:

“Work hard, play harder.”

Which term best describes you…

  • Driverless or in control? In control
  • Elon Musk (dreamer) or Warren Buffett (doer)? Warren Buffett
  • Risk-averse or risk-taker? Risk-taker

Usage-Based Pricing: Reality or Fantasy?

In the world of usage-based insurance (UBI), Progressive is an exception: Its massive amount of driving data – 110 terabytes covering some two million vehicles, 1.5 billion separate trips and more than 10 billion miles driven – allows it to quickly test new rating factors and to do so with a great degree of accuracy.

“We continue to test new ideas all the time,” says David Pratt, Progressive’s general manager of usage-based insurance. “Our research team will come up with a theory for what would predict safe driving. With our big data set, we can test those quickly.”

Few other UBI providers are as fortunate. Octo Telematics, which launched its first UBI product in 2002, also has tons of data: 194 billion kilometers of driving performance from two million drivers globally. But most other companies are making educated guesses based on more limited data combined with more traditional ratings factors.

As Nino Tarantino, CEO of Octo Telematics North America, says, “Today, there is no data standard and no clear understanding of which data and how much is required.”

For example, Octo works with seven insurers in the U.S. and Canada, and each one asks for a different data set to be collected – everything from hard braking and acceleration to how many trips a driver takes and how long the trips are, as well as when and where they occur.

Actuarial guidelines often cite 100,000 earned car years as the threshold for credibility for a model, says Dwight Hakim, vice president of telematics, Verisk Insurance Solutions, a provider of underwriting data and tools for UBI. An earned car year is equivalent to one car insured for one year.

In traditional motor vehicle insurance, the number of earned car years is used to show state regulators that an insurer’s pricing decision is based on plenty of evidence. This helps reassure regulators, and helps agents selling the insurance.

“Credibility is particularly important when insurers are constructing a rate plan that might increase premiums,” Hakim says. “Regulators need to see a model with high credibility if that model might result in rate increases. Assuming the insurer has a good financial position overall, modest rate decreases are easier to justify.”

While using earned car years – or the equivalent in telematics driving data – may be critical when an insurer asks regulators to approve a price increase, it may not be strictly necessary to see how different UBI rating characteristics perform, Hakim says.

Trial first, price later

That is what many insurers in need of beginning to test or launch UBI programs are betting on, to avoid the need for a large data set.

For starters, insurers can assume that good drivers self-select for UBI programs. “Chances are [that] the people who try it are more likely to be safe drivers,” says Thomas Hallauer, research and marketing director for telematics consultancy Ptolemus Consulting Group. “So you know you can offer some kind of discount anyway. You also know they will probably stick longer to your contract.”

Another strategy, Hallauer says, is for UBI insurers to collect an initial data set through trials, and to then revise their ratings as more data comes in. Coming up on one full year of offering UBI in the U.S., American Family Insurance used just this approach.

“We feel like we got enough to launch, but as we see the data we know we need to refine it,” says Pete Frey, personal lines UBI program and product manager, American Family Insurance.

Combining telematics data with traditional rating factors, such as age and location of residence, is yet another strategy. The Hartford is one of many U.S. insurance companies to do just that, saying it makes for finer segmentation for its consumers.

“Almost all programs in the U.S. augment telematics data with other carrier-specific rating factors,” Hakim says. “Assessing the degree of overlap among rating factors to avoid double-counting takes a significant amount of work, but carriers are implementing telematics because they know doing so will help them stay competitive and win market share.”

But the benefit of adding more data must equal the cost, Progressive’s Pratt warns. While he agrees that UBI rating will continue to evolve and become more sophisticated, “if it costs a lot to get the information, it’s maybe not worth it,” he says.

Consumer acceptance is another sticking point. “Everything we use has to be something the customer thinks is fine,” Pratt says. “We have to be able to explain to people why it makes sense, why it’s actually fair that we do it that way.”

Pooled data

Finally, insurers can get larger data sets from third-party telematics data providers, such as Verisk Insurance Solutions, Towers Watson and Octo Telematics.

Verisk offers what it calls “Driving Behavior Database for Modelers,” which makes available to statistical modeling applications: data from telematics devices; exposure, premium and loss information on insured drivers; and third-party data, including weather conditions, road type and traffic flow.

Towers Watson has a pooled data offering that collects telematics data and claims, policy, vehicle and driver information. And it uses this pooled data to score drivers and to provide those scores to insurers. Also available from Towers Watson are models that take into consideration third-party information like maps and weather, road type, population density, weather and angle of the sun.

Octo’s Insight Centre collects global, real-time data from its installed base of Clearbox telematics devices, which customers can then interrogate to inform their UBI offerings.

However, there are caveats when it comes to using pooled data.

Hakim, for example, warns that while amassing large quantities of data is critical, not all data is equally valuable. Its utility depends on its accuracy and completeness; how frequently it’s sampled; and the source – whether OBD2 outputs, GPS or accelerometers in cell phones.

“Knowing how each device works and the manner in which the different technologies interact is key,” he says. “The complexities of reading the car’s diagnostic information, appending accelerometer data and then transmitting [it] wirelessly require a deep bench of experience.”

American Family Insurance’s Frey makes a similar point. The availability of aggregated, third-party data is not the issue, he says. While there are plenty of companies offering data to insurers, “carriers are just trying to figure out how to use it,” he says. “The data is almost overwhelming.”

The profit question

One of the big, unanswered questions about usage-based insurance is whether insurance carriers will ultimately be more profitable than – or even as profitable as – providers of traditional motor vehicle insurance.

“It’s an accepted thing that putting in a UBI program for starters is a cost,” according to Frey, of American Family Insurance. “It is about a longer-term strategy. Ideally, companies hope to achieve more growth.”

Among those costs that must be taken into account are the cost of telematics hardware – if an insurer is going the route of using its own devices – and the cost of the back-end infrastructure. Adding UBI on top of an already-existing infrastructure, as major insurers must do, is extremely costly, according to Hallauer, at Ptolemus. In this respect, UBI upstarts that rely on scalable cloud solutions have an advantage, Hallauer adds.

Still, the hope is UBI will ultimately pay off.

Enabling more sophisticated pricing is one benefit. “You want to make sure you have the right rates for the right drivers,” Frey says. “One of the biggest goals is trying to create fair rates eventually.”

And insurance discounts are only part of the equation, Hallauer adds. “The pricing decision is not a discount decision; it’s how do you change the offering to make it enticing?” he says.

According to Hallauer, discount-based UBI incentives will eventually evolve into a more service-oriented approach that may range from life-saving services, such as calling an ambulance after a crash, to more prosaic ones, such as allowing drivers to get a driving score.

Ultimately, he says, UBI can make the customer feel comfortable in having a stronger link with the insurer.

Value beyond discounts

Frey says American Family Insurance is looking in this direction. While it hasn’t pinpointed what services it might offer, it’s considering safety services, making drivers aware of their driving habits and stolen vehicle recovery.

Octo’s Nino Tarantino notes that the value-added services approach is more common in Europe, where some insurance companies offer personal safety and security services, instead of discounts.

The environment is different in North America, he says, because of Progressive. The early mover’s decision to base its UBI offering on a good-driver discount established the tone for consumer expectations and shaped the market.

According to Pratt, at Progressive, the company tries to set its prices so the profit margin is the same for people who sign up for Snapshot, its UBI product, as it is for people who opt for traditional insurance.

Progressive’s theory is that UBI customers will stay with the company longer – and so far that’s been the case. Therefore, the lifetime revenue per customer should be higher, even though the margin is the same as for traditional insurance customers.

Progressive may also save some money through helping people drive better. The company noticed that the driving of UBI customers improved when, a couple of years ago, it added the option of turning on audio feedback in the device so that, for example, it beeps when someone brakes hard.

“We see this training effect within the first few weeks people have the device plugged in,” Pratt says. “They learn to avoid hard braking, and we have evidence it helps people avoid accidents. That could be a big change in the industry, trying to actually reduce your risk.”

But the big win is likely in the life of the customer relationship. Pratt adds. “We are not trying to make ourselves more profitable with this. We are trying to attract and keep good customers for a long time.”

In fact, Tarantino thinks that most usage-based insurance programs cannot succeed if they’re based only on discounts because of all the additional costs associated with them. He says Octo’s experience with 2.4 million insured drivers in Europe shows that “when the benefits of pricing and determining risk are combined with the benefits of the understanding the moment of loss for the insurance company – when there is a crash, that is – it will be successful.”

There is never enough data

So is there any such thing as enough data?

Pratt doesn’t think so. Progressive’s Snapshot considers mileage, time of day and hard braking. The company recently began a pilot using GPS-enabled devices to examine whether highway versus city street driving can contribute to predicting future losses.

Progressive has found that the measurement of how someone drives is indeed a better predictor of risk than driving record, age, gender or any of the traditional rating factors. Still, “the models can still get a lot better,” Pratt says.

Say Progressive wants to find out if people who are low-mileage drivers are safer drivers. The company can segment out those drivers from its customer base and see which ultimately did have accidents and which didn’t. It could go further and segment the low-mileage drivers by age to determine whether low mileage is a good predictor for all age groups.

Even with 10 billion miles driven, there may not always be enough drivers in the database to provide a meaningful segment to test a theory, Pratt says.

 

This article has been produced in the lead-up to the Insurance Telematics USA conference and exhibition, which will take place in Chicago on Sept. 3-4. This conference will tackle the steps needed to take UBI programs to the mass market. Find out more here.