P&C insurers are staying the course when it comes to their original digital and technology plans and investments for 2020. Many insurers report no changes to their plans, with some reshaping and a few accelerating, but very few pausing or retrenching. These are the big themes in SMA’s new research report, P&C Tech Plans in the COVID-19 Era: SMA Market Pulse Insights. 2021 plans may paint an entirely different picture, but, for now, P&C insurers are moving full speed ahead.
As might be expected, the plans vary significantly by line of business. Commercial lines insurers are much more cautious than their personal lines counterparts, chiefly due to the larger negative impact of the pandemic. Still, our SMA market pulse survey of insurance executives confirmed what we have been hearing from our clients:
95% of personal lines insurers are moving forward with their overall technology plans and investments, with only 5% retrenching.
75% of commercial lines insurers are moving forward with their overall technology plans and investments, with 25% retrenching or pausing.
Our survey also showed that many of the insurers that are moving forward are reshaping and reprioritizing projects while keeping investment levels steady and striving to maintain momentum. Digital payments appear to be one of the hottest areas, as insurers have been obligated to send employees into physical offices to print and mail paper checks. Core systems also continue to move forward, although interestingly nuanced by line of business and with differences between policy, billing and claims plans.
Digital transformation plans are quite different for personal and commercial lines insurers. On the personal lines side, there is a trend toward accelerating plans, while commercial lines insurer plans are mixed. Only about one-third of commercial lines companies are continuing with digital transformation plans unchanged, while another third pause or retrench and the final third reshape or accelerate.
Overall, the response to the pandemic from P&C insurers has been remarkable as companies continue to support their distribution partners and policyholders. Plans are likely to morph even more as the pandemic continues. SMA intends to conduct the market pulse research on a regular basis throughout the remainder of 2020 and report on changes to insurer plans along the way.
In the midst of all the chaos, insurers are being put to test in real time. For all, it becomes the moment of truth for our industry and every individual company.
The strength of our industry is shining through. Insurers have quickly adapted to the new norm. Insurance executives are mindful of how this pandemic could hurt revenues and the bottom line, all financial ratios, even investment returns and stock prices and possibly coverage/claims.
At the same time, we continue to serve as a safety net for society, mitigating risks for all types of disasters – man-made or natural. This is who we are and what we do – as an industry and as each company in the ecosystem. As always, we will assess our strengths and our gaps and adjust our strategies and plans accordingly.
As a vehicle for insurers to understand and monitor the pulse of our industry in the middle of this pandemic, SMA just published a research brief that outlines the “The 10 Moments of Truth and Watch Points for the Future: How Insurers are Responding to COVID-19” highlighting the “whats” and “hows” of insurer response to this new norm. Each Moment of Truth reflects our reality as of April 1; insurers will continue to adapt to our changing environment every day. This brief also highlights the watch points to track and monitor for each Moment of Truth, as insurance evolves over the next several months.
Below is the list of SMA’s 10 Moments of Truth:
Demonstrating Insurance Strong
Stressing Every Risk and Continuity Plan
Working Remotely Effectively and Efficiently
Sustaining Current Levels of Service
Keeping Momentum Going Across Initiatives and Plans
Changing the Rules of Engagement
Innovating in Real Time
Keeping Everyone in the Loop
Demonstrating the Value of Digital Investments
Identifying the Gaps in Digital Strategies
One thing that this pandemic has already taught us is that we have never needed a digitally connected world more than we do now. Couple this with the reality that a crisis often brings about needed change. The needs, possibilities and opportunities that become clear during this crisis will stand out even more in our environment of fear and uncertainty.
Just remember, we are all part of this amazing insurance industry, and we are all standing strong. We will continue to stay present in this Moment of Truth.
P&C insurance is becoming less important financially because the insured world is becoming safer. The safer the world, the less insurance people need to buy to protect them against losses. The less important any good or service is, the less valuable it becomes, and people will not pay as much for it. It is just simple economics.
Before jumping to conclusions like most people do when I present these facts, it is important to understand the difference between the insured world becoming safer and the part of the economy that is not insured by private companies. In the U.S. (unlike some other developed economies), the government provides most flood insurance. A material portion of the population does not buy insurance, so they become part of the non-insured world. Many of the disasters you see on the news are not insured because people did not buy insurance for those catastrophes. Lots and lots of people may lose their homes to an earthquake or forest fires, but many of those people will not have insurance coverage for those types of events. In many cases, insurance coverage is not readily available so events become uninsured. The insurance companies have made the decision to only insure people and property they are confident they can insure for a profit. Many insureds have decided to forgo purchasing coverage for many kinds of risks because they are either too expensive to cover or, in consumers’ minds, the risk is too small. What does get insured because of carriers’ conservative approach and the insureds’ cautious approach is the part of the economy that is becoming ever safer. If we’re not careful as an industry, we will eventually have nothing left to insure.
Here is the proof the insured world is becoming safer (all data is based on A.M. Best’s latest Aggregates and Averages). The following two charts are for frequency, which is a better metric relative to whether more or fewer adverse insured events are occurring. For many reasons, severity may take a different path primarily because large losses tend to make up a larger portion of the remaining claims when frequency decreases.
These charts exclude physical damage to autos because that one single line defies other trends. In other words, hail and flood auto claims are not becoming less frequent. The charts above do consider non-auto property hail claims, however, and, even with those claims, which include damage to hundreds of thousands of properties over the last few years (primarily in four states), the absolute number of claims is less. Considering that there are hundreds of thousands more businesses, people, homes and drivers, claims have decreased from around 54 million per year to, even in a cat year like 2017 (2018 numbers have not fully developed), only 50 million. The insured world is safer.
The chart below clearly shows that claims relative to GDP are in a steady decline. Even if auto physical damage claims are added to these charts, the overall trend does not change. The difference is that the steepness of the decline moderates.
If it was not for severity increasing in pure dollar terms, which should be expected, the decrease would be even more pronounced. I do not have the definitive data, but my guess is the severity increase over the last three years is due to the hail storms and the horrible California fires. I can personally testify to hail claims totaling cars — if you don’t live in a severe hail state, it is difficult to appreciate the damage a hail stone the size of a golf ball, much less a tennis ball, can do.
The increasing safety of the insured world is a threat to carriers’ and agents’ existence because the problem is likely to grow. The safety improvements in vehicles, blue collar work environments and, perhaps especially, water shut-off devices, along with technology that will reduce exposures, means insurance will become even less valuable soon.
The above charts show obvious points. Improved regulations involving better zoning distances, airbags and even OSHA have all made our world safer. I am glad many of the tort reforms seem to have minimized or at least in some states reduced some of the ludicrous litigation that seems to benefit no one but a few plaintiff attorneys and the defense attorneys hired to defend against those nebulous suits. The fewer the losses, the less important insurance is. The less important insurance is, the less people will pay for it. Add record surplus, and talk of a true hard market becomes obvious wishful thinking unless some key carriers have managed to underestimate their reserves by large amounts.
The increasing safety of the world is out of the industry’s control. We must adjust. Two other factors affecting the results shown in these charts are within our control. The first is how carriers adjust claims and underwrite. Based on real world experience with agents every day and some interesting published articles, some of which are more direct in their accusations, it is thought that some carriers have taken approaches that make getting a payout for a legitimate claim so difficult that frequency and severity are depressed. Similarly, some of the public has become aware, and agents definitely are aware and often educate their customers, that filing small claims should be avoided. These claims should be avoided because the pricing penalties assessed for minor claims are far too high.
This situation presents an opportunity in my mind for carriers that don’t suppress claims or make processing claims inordinately difficult to let the world know they are easier to deal with in a claim situation. It is also an opportunity for agents to educate clients on the differences in claims-paying behaviors. Every agent knows different companies’ tendencies with regard to claims, but many agents are reluctant to discuss those tendencies. Just as with any situation where full disclosure is limited, those with more dubious practices get the benefit, and those with the best practices fail to get full credit. Maybe use one of the publicly published claims satisfaction surveys or create your own.
The second way in which the industry almost certainly needs to change to offset the safer insured world is to change its current focus on insuring 1950s America. 1950 was about manufacturing. 2020 is about services and data. It seems every insurance company is telling every agency that their target market is manufacturers, which is proof of 1950s thinking. The industry needs to insure today’s economy.
Ever try to buy a full data policy for self-created data (which obviously is the most valuable data for a huge proportion of businesses)? Ever try to buy a policy providing coverage for intangible assets? How about intellectual property? Today’s economy is built on intangible assets, data and intellectual property. Most machines and buildings are almost unimportant because most are fairly easily replaced, or substitutes can often be easily identified (excluding highly specialized firms). Companies and governments run on data, not lathes. Few companies go out of business because they can’t find a temporary building following a fire. Businesses do go out of business after cyber-attacks, reputational damage, theft of data and theft of intellectual property. In fact, think of it this way: What is the bigger danger even to a manufacturer — the building burning down or someone in another country stealing the company’s design and then undercutting the price by 50%? There is only one answer to that question.
The Hartford did a study in 2015 showing reputational harm was the most severe small business claim (40% more than the average fire claim). I can only imagine that the spread has increased. In 2017, Deloitte published a study that reputation was more important than getting the strategy wrong for 87% of executives. A CNBC article from Oct. 13, 2019, reported on a study by Hiscox stating that 60% of small businesses go out of business within six months of a cyber-attack. Many other studies support the same statistics but carriers and agents continue to focus on $x liability limits, $x property and workers’ comp.
Some readers may be thinking that policies exist for cyber, reputational harm, etc. (notwithstanding the fact that many cyber policies are arguably worse than no policy at all because at least not having a policy is free). Those readers are missing the point. A BOP or package policy provides coverage if a machine or building burns or is stolen or is blown away. Where is the same property coverage for a destroyed reputation or the theft of self-created data? I know Lloyd’s has some coverages available, but 99% of carriers are focused on what was important in 1950. Customers are concerned with what is important today. Carriers and agents that continue trying to insure the needs of 1950 will have a short life.
Another reason today’s exposures are not covered is that many agents do not understand business income coverage, so they either don’t sell it or they don’t sell it correctly. Next to cyber, business income is arguably the most difficult coverage to understand. Furthermore, the simplified solution that many agents choose to follow is offering the same business income solution to every client, as if all insureds were identical (and if you are thinking ALS is a universal solution, you are wrong). This is just bad thinking. Business income coverage in and of itself is far more important for many insureds, especially if one includes true contingent business income that goes beyond standard forms.
Whether you are working for a carrier or an agency, you need to insure the economy of today and tomorrow. You have complete control over this aspect of the insurance industry’s diminishing in economic importance. If you focus on what is important in today’s economy, you become a hero with a much more secure future by using the tools that are already invented such as business income coverages, much less creating tools to insure data and intangible assets. Let’s finally let go of 1950s thinking.
Although crime data can be spatially expressed just like flood, hurricane, hail and other perils, it is commonly an overlooked piece of the property risk puzzle, and therefore not often supported by underwriting guidelines. One of the factors contributing to the underuse of crime data is that it has generally lagged behind other hazard data in research and development. Now, however, leading data companies are creating models that account for the location where the crime actually occurred, allowing crime risk to be geographically represented.
Traditionally, crime data has not been detailed or accurate enough for underwriters to gain a comprehensive understanding of the true risk related to a property or portfolio. That’s because there is a lack of crimes reported at the geographic level versus the law enforcement agency level. Data from Location Inc. and Pitney Bowes, however, can be applied at the point of underwriting or portfolio management to help insurers assess the likelihood of violent crime, theft, vandalism and even behavior-based fire risk at the street level.
Here are a few examples of how P&C insurers can apply crime risk data within a solution like SpatialKey for more informed underwriting and property risk assessment:
Use Case 1: Violent Crime & Property Crime
The below image shows a top tier college campus with a moderate crime score according to Location, Inc.’s SecurityGauge crime data. A moderate score is the national average for crime; however, the area around this college’s location has an above-average crime rating.
As you can see, there is a clear delineation between the school’s campus (near average risk relative to the nation, shown in yellow) and the surrounding city (in orange/red), which has an elevated crime score. So while the school itself is at or below the national average for crime risk, knowing that there is some high crime nearby could raise a flag to ensure proper coverages and adequate premiums are in place when underwriting this risk.
Use Case 2: Arson
When underwriting property risk outside the U.S. and Canada, for example in the U.K., Pitney Bowes crime data, for England, Wales, Scotland, and Northern Ireland, can be used within SpatialKey to understand factors driving overall risk, as shown below.
The location has a very high score (borderline extreme, in fact) for arson. When looking at this map, you can see that there is a bus depot across the street from the location in question. This information should factor into your risk assessment due to the flammable nature of the bus depot.
These use cases demonstrate how using expert crime risk data wcan help insurers:
Gain a more comprehensive view and reduce adverse selection by determining the overall crime rate for an area at the street level.
Adequately or more accurately price for the associated risk — For example, setting a higher theft deductible if the crime data shows increased crime in the area, or lower premium if the property has security measures on-premise such as cameras, lobby security, etc.
Determine which coverages to limit or even exclude based on the characteristics of a particular neighborhood/community (e.g. for an apartment complex, review the crime data to determine the level of property and violent crime in the area and limit/exclude coverages accordingly).
Evaluate concentrations of exposure in particular for a schedule of risks, as crime codes can vary greatly within the boundaries of a single city.
Digital transformation initiatives have become an imperative for businesses in the modern age, but many organizations struggle to reach their objectives. Based on a survey of 200 respondents (the majority in the financial services field) conducted by IDG Research Services, more than half of organizations have been forced to pause or completely abandon digital transformation projects.
Where the insurance industry is concerned, the struggle is real. Friss, a risk assessment and detection services provider, discovered that only 69% of insurers offer some form of online distribution.
On the surface, it appears that the industry is moving in the right direction, with more than half of insurers on the digital track. However, this number has risen only 4% since 2016, even though as many as 80% of consumers use digital channels during the purchasing process, according to some research.
Survey findings indicate a strong disconnect between insurer expectations and objectives. In 2016, 25% of insurers that had not introduced online distribution expected to do so within a year. Had they been successful, the current number of online insurers would now be around 75%. Currently, only 69% of insurers report offering some form of digital distribution.
Through its research, IDG discovered that organizations stall or fall short because they have failed to lay the groundwork for successful transitions. Sixty-two percent have not documented or communicated their plans across the organization, and 64% have no plan for dealing with outdated or legacy technology.
To put the insurance industry on a contemporary path toward digital prominence, insurers need to plan for the obstacles they face and implement a strategy that ties legacy systems into future-proof distribution designed to reduce internal costs and meet the needs of consumers.
Understanding Digital Transformation Opportunities and Challenges
According to Forrester, implementing digital technology “dramatically alters the balance of power between customers and companies.” Customers gain the upper hand with better information and choice, but insurers succeed by lowering the cost of doing business.
Digital leaders find it a factor of 10 cheaper and faster to engage customers and provide them with an experience that meets their rising expectations than those relying on traditional practices. Considering the benefits, digital transformation tops the agendas of many executives, but businesses across the board find it difficult and costly to modernize their operations.
In IDG’s research, 64% of companies cited legacy technology as a top transformational impediment, followed closely by technology silos (59%) and cost (50%). At least half don’t know where to start.
It’s interesting to note that businesses in general experience many of the same top challenges as insurers when it comes to digital transformations.
Often, policy administration is handled in silos operating on outdated technology stacks. With so much data at stake, it’s difficult to create a plan of attack for uniting back-end systems. However, it’s a situation where the effort is worth the price.
Bain prioritized 30 fundamental values that, when in place, can elevate the customer experience and push insurance products above the commodity status.
Values were divided into four categories: social impact, life-changing, emotional and functional. Each category is defined by consumer needs, such as “saves time,” “reduces anxiety” and “avoids hassles.” Insurers that rank high in more elements of value achieve higher Net Promoter scores and realize above-average growth, according to Bain.
To excel in these categories, however, insurers need to establish relationships with customers. According to Bain, staying in frequent contact, digitizing purchasing and servicing and offering ancillary services are the primary components of an insurer’s relationship-building strategy.
However, legacy technology and product silos impede insurers’ ability to swiftly react to customer inquiries and issues. Accessing the necessary information is often limited or time-consuming, and, when it comes to offering additional products or services, insurers are unable to extract the necessary insights quickly enough to make real-time product recommendations a reality.
Beyond technology considerations, 62% of organizations have failed to lay a solid foundation for transformation by establishing a plan and effectively communicating it to relevant stakeholders.
Planning and communication become necessary in light of the impact digitization has on the organization, particularly where resource management is concerned.
As insurers engage in digital transformations, processes within the organization change, affecting job functions and the people who perform them. McKinsey says that up to 25% of current business processes could be automated, resulting in the consolidation or elimination of up to 25% of full-time positions.
Technology and automation also open doors to new roles and occupations. McKinsey points out that 25 years ago jobs in areas such as IT development, hardware manufacturing and app creation did not exist. Just as new employment opportunities arose out of the technology revolution, automation will generate demands for new skills, creating job roles in insurance that we can’t imagine today.
Part of a successful transition is understanding what processes will change and how those changes will affect existing roles across the organization. Envisioning new roles at the beginning allows insurers to identify existing talent that can be upskilled or reskilled to fill new vacancies.
Making for Successful Digital Transformations
At the heart of successful digital transformations is a focus on the customer. Digital leaders understand this, with 92% reporting that customer experience is central to their strategy.
Digital leaders, such as Amazon, become industry giants because they can tie revenue outcomes to specific measures of customer satisfaction and tweak or completely revolutionize their business approach accordingly.
According to Forrester, digital leaders succeed by adhering to four basic principles:
A customer focus during digital transformations ensures that outcomes meet the intended objectives. Insurers can plan from the outset to build the necessary speed and efficiency into digital channels while ensuring cross-functional capabilities.
A recent consumer study conducted by Facebook and comScore revealed that the typical insurance-buying journey is short. Thirty percent of consumers made a decision within a day, while the same number took less than a week to select their insurer.
That gives insurers a short window of opportunity to engage with consumers and secure their business.
According to J.D. Power, a preference for digital interactions is on the rise. In their surveys, over 60% of consumers use online channels when researching insurers, but only 42% use these channels to purchase.
Pitted against consumer expectations shaped by the Amazon experience, too many insurers fail in speed, efficiency and convenience, J.D. Power says, forcing consumers to seek out more digitally proficient insurers or to switch to other channels when purchasing coverage.
Filling the Gap with Digital Transformations
When it comes to improving the customer experience, insurers are filling the gap between expectations and reality by ramping up their digital capabilities. In a recent survey of industry executives conducted by SAP, 85% were prioritizing the development of digital and mobile channels.
Findings like these indicate that insurers understand the need for digital engagement. However, there is no indication that insurers have conquered the impediments to creating an efficient omni-channel environment. To do so, they need to unite back-end systems to obtain a complete view of the customer, including every policy on record, as well as consumer data and related insights.
With legacy technology and siloed systems at the top of executive concerns, it’s no wonder that business leaders are partnering when it comes to gaining digital capabilities. Respondents to the IDG study expect more than 1/3 of their transformation initiatives to be handled by a third party. This approach is particularly applicable to the insurance industry where overhauling systems is risky and problematic.
“In a time of disruption, the smartest insurers recognize they can’t do everything on their own. They’re teaming up with insurtechs and other companies to modernize their operations, from distribution to claims processing,” said Dr. Henrik Naujoks, head of Bain & Co.’s financial services practice in Europe, the Middle East and Africa.
Integrating third-party solutions with existing technology puts insurers on the digital fast track without the worry of disrupting data held in traditional systems. According to Rick Huckstep, chairman, Digital Insurer, the insurer’s existing system becomes the system of record, while digital distribution platforms supply the digital front end.
In the process, back-end systems are connected through a single point of access, providing clear visibility across policies to all channels. This capability is necessary to ensure an efficient omni-channel experience for the customer.
By connecting all policy silos, agents and customers are able to quote, issue and bind multiple policies from a single application. Through automation, the process is completed in minutes, ensuring that insurers capture customer purchasing intentions at the moment they are ready to buy.
Digital distribution platforms also simplify the approach to ecosystem environments, providing insurers with a ready platform for connecting with ancillary service providers or other insurers.
Bain’s in-depth consumer research reveals that digital leaders are excelling with three main capabilities. These core components of a leading digital strategy are all easily addressed with the application of a digital distribution platform:
High-quality products are delivered at competitive prices. Customer experiences are simple and digital.
How a Digital Distribution Platform Helps: Automating much of the quote-to-issue lifecycle reduces insurer costs and provides an ecosystem environment where insurers can connect with other insurance companies. By using products from other insurers to meet price points or when there is no appetite for the risk, insurers can always fulfill the needs of their customers.
Going Beyond Insurance
Insurers foster engagement and a sense of affiliation by offering ecosystem services from third-party providers.
How a Digital Distribution Platform Helps: Outside vendors can be connected to digital distribution platforms, allowing customers to move freely from the insurer’s website to third-party applications. Customers can simply and easily take advantage of ancillary services right from the insurer’s website.
Insurers understand the urgency behind digital initiatives and push for speedy digital transformations.
How a Digital Distribution Platform Helps: Digital distribution platforms provide insurers with a complete digital environment, from online storefront through back-end integration, in a matter of weeks.
Connecting with digital distribution platforms drastically improves the odds of transformation success. Aside from implementation simplicity, insurers gain the benefit of expertise.
Platform providers are well-versed in the impacts that transforming to digital distribution have across the organization and are equipped to lead insurers through the process. They advise on staff changes and have resources on hand to fill talent gaps, thereby increasing the odds of success.