The personal lines segment of the property and casualty (P&C) industry has been the golden child of late, having exhibited a willingness and apparent propensity for the adoption of new tech. While personal lines may be the first that place new technology has gained a foothold in the insurance industry, it is hardly where the real potential is hiding.
In contrast to personal lines, which has historically been the industry’s “volume game,” commercial lines remains a segment where high degrees of expertise and specialization allow insurers and brokers to carve out very specific and profitable niches in the market, making the definition of the best risks necessarily relative. The specificity of commercial lines business is precisely why these insurers are poised to become the beneficiaries of new tech driving efficiency gains up and down the value chain.
Right now, insurance companies are entertaining new ideas about what to cover, how to cover it and how to most effectively bring commercial insurance products to policyholders. In an era inundated by new tech, the bests ways for commercial lines insurers to identify, compete for and win the right to write the best risks include investing in solutions and partners that enable better communication, better products and significantly better distribution.
Within commercial lines, there’s a high degree of variation between how things get done depending on the characteristics of the risk (e.g., exposures, premium size, geography, etc.). The universal truth, however, is that there is a big market opportunity for technology to improve communication and collaboration between underwriters, brokers and policyholders. Insurance policies in general, and complex commercial policies in particular, take too long to write, require too much back-and-forth between brokers and underwriters and let too many premium dollars fall through the cracks due to inability to quickly close a customer.
What is perhaps saddest about the current state of affairs is that the breakdown in communication begins at the start of the sales process. A recent survey from Channel Harvest Research revealed that brokers wish insurers would put greater emphasis on what the company is willing to write. Commercial lines agents often invest significant data entry time on applications or key information into an insurer portal only to be declined due to underwriting ineligibility. One could easily equate such a situation to Amazon asking customers to submit an onerous, multi-page order form for something before revealing whether the product is even available.
Despite this kind of situation having been normalized in the insurance industry, it is also an area where new technology is already making a positive impact in typical insurance processes. The essential first step for any commercial insurer to get a look at the best or most desired risks is to clearly articulate the company-specific definition of the best risks. While this may seem almost oxymoronic, commercial insurers must be able to clearly define and communicate niches and specialties, so that business partners and channels know instantly what is within the company’s wheelhouse without wasting underwriting time with ineligible or undesirable risks.
It seems safe to assume that no one responsible for the regulatory aspects of insurance product approval or filing has ever been heard saying “Boy, that was easy!” Regulatory complexities, to make matters worse, can be compounded when an insurer attempts to design and bring to market a non-standard product.
New insurtech entrants are doing everything from automating and managing the filing process with the multiplicity of state insurance divisions to providing artificial intelligence (AI) to identify like contract clauses that can be brought to bear when designing product. Because insurance is responsible for producing an astounding amount of legalese, taking collective advantage of it just makes good sense, doesn’t it? Thanks to insurtech, it’s increasingly possible to automate the development of contract language and manage getting it filed with insurance departments with almost Turbo Tax-like efficiency, helping insurers laser-focus on emerging market opportunities instead of on creating more legalese.
In the age of the internet, too often there’s a rush to judgment that improving distribution means taking a product online or cutting out brokers and going direct. The truth is that better distribution is smarter, more targeted distribution that puts the buying decision in front of the potential policyholder at exactly the moment insurance is needed for something (and often this requires a broker, especially as you move up market).
Some commercial insurers are finally starting to realize the thinking that every match must be a “home game,” and that distribution and underwriting (the sales process) must happen on a company website or portal, is hopelessly outmoded. Insurers today are delivering APIs to distribution partners, thereby empowering partners to create a native rate/quote/bind experience specific to the channel. Why can’t workers’ comp be sold directly in a payroll app? Why can’t a liability policy be issued directly from drone controller software? Why can’t a policy be endorsed at the time new equipment is procured? Why can’t a cyber policy be issued commensurate with the sign-up for AWS or GCP or Azure? There’s easily as much opportunity, if not more, to sell insurance at the point-of-sale (PoS) in commercial lines as the personal segment. By identifying the right buying trigger, insurers can tap into a supply line of the best risks.
At the end of the day, the definition of the “best” risks varies from one commercial lines insurance company to another, but ultimately, the best risks are those each company individually determines are a good fit for the company strategically. Figure out what best means to your company, clearly articulate your definition of best to the world, tailor product to cover the niche and sell the heck out of it.
At times, it seems like insurtech is around every corner, with new startups materializing every day, conferences emerging out of nowhere and accelerators doing their job of accelerating. Until recently, most of the activity and visibility in property/casualty has been related to personal lines. Sure, there have been commercial lines startups and partnerships in the distribution space for quite some time, but there has appeared to be much less activity than around personal lines. This has begun to change in the last six months.
SMA’s recently released research report, InsurTech and Commercial Lines: A Surge of Activity and New Implications, analyzes the current state of the insurtech world, and there are approximately 400 startups that SMA has identified as relevant for commercial lines insurers. At this stage, the biggest areas of interest are small commercial (distribution) and workers’ comp (loss control and claims). This follows the natural path of technology adoption in the insurance industry. Insurtechs and emerging technologies will likely advance along this path. There are certainly some insurtechs that are applicable beyond small commercial today, but the complexity and uniqueness of other commercial lines have limited insurtech’s penetration thus far.
Among the insurtechs with capabilities for commercial lines, almost half are either in the connected world or the distribution spaces. Distribution plays include digital agents/brokers, startup MGAs and tech companies with platforms or solutions for agents and brokers. Those with connected-world solutions have great potential for risk reduction and mitigation for fleets, properties, worksites and other areas that commercial lines insurers cover.
It is likely that insurtechs will continue to emerge with use cases for commercial lines. In the meantime, the existing body of insurtechs are maturing as they refine their solutions, pilot/partner with insurers and begin to roll out live implementations with customers.
For many people, the arrival of the New Year heralds the promise of achieving bigger and better things, reaching new heights and perhaps accomplishing things that weren’t done in the prior year. 2017 is going to mark a pivotal year for agents and brokers as insurtech distributors really hit the marketplace with new ways of fulfilling customer sales and service expectations. Agency-carrier connections are a critical issue. Depending on which path a distributor chooses, it can either be a Happy New Year – or it can be a very un-Happy Year.
Unfortunately, SMA survey results show that many distributors have a long, arduous path ahead. Sixty-three percent of responders indicated they were mainstream investors in connectivity technology, not investing for differentiation or not investing at all. This lack of investment needs to be reversed, or those distributors will likely face a very sad New Year’s Day in 2018.
Small agents with less than $1 million in premiums are in the most defensive position, with 67% believing the No. 1 business driver for investing in connectivity technology was customer retention; 58% of agents with more than $1 million in premium said retention was their main motivation.
Being the owner or principal of an insurance agency is not an easy job. There are many factors that contribute to success, but there are also many barriers. Agency survey responders indicated the top barrier to improving connectivity is workflow challenges. It is very important for agency owners and principals to assess why this is the case. If the challenge is internal culture, it is imperative that agency management work to change attitudes as quickly as possible. The other potential cause of workflow challenges is how insurers execute connectivity. Agency management needs to work with insurers on how they connect with the agency. If an insurer cannot change how they deal with connectivity issues, agency owners and principals should assess just how much value that insurer brings to the agency, and if the inefficiencies are worth it.
SMA has looked at the connectivity issue from the perspective of commercial lines insurers and personal lines insurers, and now from the agent and broker point of view. There were similar responses to many of the questions asked. For example, conflicting priorities were the No. 1 inhibitor to investment for all groups. There were also some clear differences: For instance, the majority of agents and brokers indicated they weren’t satisfied with their connections with insurers, while more than 50% of personal lines insurers believed that needs are being met. Clearly, there is work to be done.
While some consumers want a completely automated insurance and sales process, a good number of others want the help of a knowledgeable insurance professional, and they want a personalized experience. There is much opportunity for agents and brokers to deliver on those expectations, but change is needed.
On New Year’s Day 2017, agents and brokers should make a resolution to adopt technology that will facilitate seamless, straight-through processing to support customer requirements. This is not a resolution that can be broken. Customers are demanding service transparency and real-time execution. There are some emerging insurtech distributors who will be very happy to fulfill the needs of customers with all the bells and whistles customers have come to expect. New Year’s Day 2018 could be a sad day for the agents left behind with a deteriorating customer base.
If you have gone three days without seeing the term “insurtech,” well, you are probably on a remote Caribbean island with no means of connecting to the outside insurance world. Putting your head in the sand on some nice island might sound tempting, but there is an issue that any insurer with a vested interest in an agent and broker distribution model for personal lines can no longer afford to ignore the situation.
SMA research indicates that 30% of the approximately 600 insurtech startups being tracked are focused on disrupting and displacing conventional distribution channels – the largest of all insurtech categories. What does this mean? With great urgency, personal lines insurers need to work with agents and brokers to ramp up connectivity capabilities so that traditional distributors can execute sales and service transactions at the same speed and efficiency as the newly minted distributors emanating from the insurtech world.
Most personal lines insurers are not asleep at the wheel relative to the overall situation. 64% of survey respondents indicate the top business driver for investing in agency connectivity is improved customer experience for the agent. The No. 2 reason for investment, agent/customer retention, follows close behind with a 56% response rate. Even though these two reasons correlate from a strategic and tactical perspective, 37% of respondents indicate they are mainstream investors in agency connectivity, not investing for differentiation, and a further 11% indicate they are not investing at all. This leaves a fairly large hole for insurtech-enabled distributors to drive straight through, gathering up customers … customers who used to be with traditional agents and brokers.
I am a big fan of remote Caribbean islands, so any reader who has been on holiday and without the insurtech ref is forgiven. However, creating seamless and transparent personal lines sales and service transactions between agents and brokers and insurers is critical. This is the personal lines consumer mandate!
There are competitors in the market who have figured out the technology piece of the equation. And no one can assume that tradition and familiar corporate logos are going to protect market share.
Our recent SMA report, Agent-Carrier Connectivity: Personal Lines Insurers, provides survey results and looks at the subject of personal lines agent connectivity. Last month, the commercial lines view of this topic was published. There are some interesting differences. In the next few weeks, we will close the loop with the agent and broker view of connectivity, so please stay tuned.
The way people and companies interact with each another is tremendously different from the way they conducted business just 10 years ago. Technology is pushing the boundaries of how and when business is conducted between businesses and their customers. That being said, the insurance industry’s customer journey over the last 100 years has not evolved or diverted from its basic business model: Brokers and agents are still the primary means for insurance companies to market and sell their products. This broker-dependent model served the industry well and remained the same while other industries have evolved their delivery channels. While there are some exceptions—such as Progressive and Geico, which use direct channels quite successfully—the industry’s most prevalent delivery channel remains with agents and brokers.
Given the insurance industry’s stability and profitability over time, the notion of a distribution chain realignment or agent disintermediation seems quite unlikely. This is bolstered by the fact that many large and successful companies played by the old business model quite profitably. Accordingly, there had been little incentive in the past to alter this business model. Today, however, insurance distribution is ripe for technological disruption, and carriers that ignore this trend are doing so at their own peril. We are on the verge of the perfect storm; the magnitude of technological availability and shifting demographics in the U.S. has the potential to disrupt and reorganize almost all aspects of the insurance customer journey.
Technology’s Adoption and Diffusion: Its effects on the general population
During earlier periods of technological growth, technology created more efficiency within the brick-and-mortar framework. Businesses were able to cut costs, automate design and streamline processes. The ultimate consumer did not necessarily enjoy lower prices or a better buying experience as a direct function of improving economies of scale. Moreover, consumers did not have additional access to pricing information, product research, reviews or product promotion pieces in real time. Instead, the average consumer bought through the retail channel that businesses sold through without any alternative.
Today, access to information is widely available in real time. If you want a product review on something you are interested in at your local store, you Google it. Then, if the review is satisfactory to you, you can go to a brick-and-mortar location and purchase it, or you can log on to an online store and purchase it from your sofa. The average consumer has more information and power at his disposal than ever before. He can search for prices at no cost to him and then make purchases. According to the U.S. Census in 2013, 84% of U.S. households reported computer ownership, with 79% of all households having a desktop or laptop computer and 64% having a handheld computer. 74% of all households reported Internet use, with 73% reporting a high-speed connection.
Complementing this growth in computer home ownership is the increasing popularity of tablets. In just three short years (between 2010 and 2013), tablet ownership increased from 3% to 34%. With this advance in personal technology there comes access to information.
All these statistics raise the question, “Why is technology growth at the individual level important to the insurance industry?” Because many products offer information on the web just by clicking, there is a fundamental shift in buying behavior because of the speed of information. There is a certain convenience factor individuals currently enjoy by using digital channels for research. Convenience is a key factor along the customer journey. As an example, when buying an airline ticket, do you call the airline or simply log on to a travel site to research options and make a purchase?
Many in the insurance industry state that insurance products’ complex nature will require that consumers use agents and specialty advisers to assist with product selection. Many would agree with that statement, with some qualification. For large commercial and other extremely complicated risks, the agent and broker channel will exist, but for small commercial and personal lines the delivery channels will blur.
Some consumers will always pick up the phone or meet with someone to get a better understanding of risk products. That preference, however, may be a generational one. People born in the 1960s and 1970s did not have computers and tablets from a young age. The millennial generation is used to the convenience and the speed that digital technology affords.
As an example, a 24-year-old told the story of his first experience purchasing automobile insurance. He called a national firm’s local office to inquire about a policy. The agent was friendly but was not available to meet with him for several days. Thinking that was ridiculous, he declined the appointment and used a website to research, evaluate and price a policy. Following that, he spoke to a customer service representative who explained coverages and what they were. At the conclusion of the phone call, he paid for the policy and was done. His primary goal was to 1) get information quickly, 2) evaluate the coverages, 3) determine that the price was fair and 4) purchase his policy. This was also accomplished after business hours when it was convenient for him, not the agent. All told, using digital channels first and later interacting with a call center was the optimal delivery channel path for him.
Technology and New Channel Formation
With the widespread growth of personal computing devices in the U.S. increasing each year, insurance companies have begun to take notice. It’s not uncommon to see websites that outline the company’s products. As a general rule, however, when it comes to pricing policies, insureds are still referred to agents. Consumers of insurance products demand information on multiple channels. Many want the ability to research and evaluate products on their own, without an agent (this is an evolutionary change), but this does not mean they might not want to BUY insurance from the agent. The agent will be there to answer any final questions and to fit the product into the overall financial situation of the consumer. The real challenge for most agents is remaining relevant and finding a way to create value within the digital customer journey. To that end, agents must find a way to help expedite how information is distributed and consumed. If agents relegate themselves to becoming just order-takers, they will quickly become irrelevant and will add very little value to the process. In other words, the agent’s role must evolve to avoid obsolescence. The agency distribution channel is not dead.
While there will always be agents representing insurance companies, their roles and their interactions with the industry and insureds will change over time as new distribution channels manifest themselves. The questions of “where” and “how much value” are what is changing. Some customers will use channels differently, but it is up to agencies and brokers to understand their target market’s preferences for channel selection. Agencies who do not use an omni-channel strategy will lose business to other agencies that do. Also, agencies need to create value through content, creating a clearly defined holistic- and flexible-guidance value that resonates with customers. Those who are able to evolve will continue to thrive, but those who do not will either continue to lose business or will close their doors. If you look at the travel agent industry, the number of travel agents has declined markedly, but there are still agencies in business that provide value to their customers. These agencies simply evolved and realigned their value proposition and targeted their customer segments quite successfully. The result is that there are far fewer agencies than there were 10 years ago. The same will occur with the agency channel.
The Rise of Omni-Channel Delivery
Under the old insurance distribution model, consumers were expected to shop for insurance with their agent, who would also be there for their subsequent questions or for submission of claims. Today, consumers increasingly expect to interact with their insurance provider on the consumer’s schedule through omni-channels. Subsequently, the agency delivery channel’s role is changing.
Perhaps, spoiled by a streamlined customer experience in other industries, consumers now want to research their purchases online and then decide whether to buy online or through brick-and-mortar stores. Blogs and consumer reviews are also important to today’s consumer. The way people shop is evolving at a rapid rate, and insurance companies need to recognize that. Carriers like Plymouth Rock, for example, are experimenting with an “option direct” delivery strategy. It allows prospective insureds to quote policies and, at their option, bind the business directly with the company. If the prospective insured does not purchase the policy online, it is released to an “agent exchange” where an agent purchases the lead and then follows up to cross-sell, up-sell or quote other companies. Using this approach, Plymouth Rock allows for a direct distribution channel with an option to work with an agent for coverage advice.
Time will tell if Plymouth’s model is successful, but, given the demands for omni-channel availability, it certainly makes sense that the company tests the model’s efficacy. This test presents an interesting business practice. Testing new distribution channels is a must. No one person—or expert—truly knows how distribution channels will evolve over the next few years. What is widely known, however, is that these channels exist and that they are viable alternatives with lower cost structures to insurance carriers. Also, what doesn’t work this year may work quite well five years from now. These new channels may just be a step in the customer journey, or they may turn out to be the point in the customer journey where purchases are made: i.e. the moment of truth. Either way, understanding target customer preferences is critical in an omni-channel world. Successful insurance companies will constantly test their channels to determine what the most effective strategy is for sales conversions.
Omni-Channel and Commoditization
With the proliferation of multiple distribution options, insurance companies are increasingly forced to compete on price instead of features. The growth of price comparison sites and aggregators makes buying insurance based on price even easier for the consumer. These channels provide a list of insurance policies ranked in ascending price order. On the surface, this presents challenges. From the carriers’ perspective, this is not the optimal solution because price alone does not explain the value of a policy or a company’s ability to pay claims. From the consumers’ perspective, buying solely on price potentially subjects them to improper or incomplete coverage. Yet, despite these challenges, over the last decade insurance product commoditization has occurred (e.g. personal auto).
To counter commoditization, insurance companies need to position themselves effectively to differentiate their product offerings. Evaluating the demographic preferences and buying habits allows insurance companies to more effectively target their customer base and not rely on price alone as the distinguishing factor. Deciding on a differentiation framework is even more important today given the changes in the market. Companies can compete on service (e.g. fast, no hassle claims), 24/7 accessibility, customer experience, unique product offerings, speed to market, leadership in the industry, etc., but they must fight to make sure these differentiators are made known in the midst of increasingly commoditized interfaces, distribution and thinking. To counter commoditization in the digital era, it might behoove insurers to select strategies other than price to compete and stand out from the competition and, secondly, to make sure these strategies are obvious and well understood by the consumers who might tend to look first at price.
The Importance of Millennials and their Preferences
The demand for omni-channel customer journeys is in its infancy. Consequently, there are fundamental differences in Internet use and shopping behavior by millennials, as compared with other generations. As baby boomers and Generation X age out, millennials and the subsequent generations who have experienced technology from an early age are going to drive market behavior on a larger scale. They are comfortable with an omni-channel approach and expect to find information available on the Internet so they can research their purchases. These consumers have skills, beliefs and requirements that previous generations did not have. (How many children help their parents and grandparents with their online challenges?) If one were to summarize some of the millennials’ characteristics and their digital preferences, a number of the following points deserve mention:
Based on their familiarity with technology, they are open to using digital channels as an option for purchases;
Millennials currently make up 25% of the population but will make up 75% of the population in 2025. Some of them are going to rise to the management level;
Convenience and ability to purchase goods and services 24/7 is important to them;
Online reviews and blogs are widely used in their decision making;
Millennials interact with brands on Facebook and other social media sites;
Opinions of others—particularly friends and family—influence buying decisions.
The power of insurance customers to voice their opinion is particularly strong with digital channels. A dissatisfied customer has the ability to vent his negative experiences to a massive audience. Online reviews and blogs are a powerful information source for current and potential customers, and these
sources can—and do—influence customer behavior. This shift in power drives home the importance of customer experience. With today’s social media, a negative experience could go viral and give a company a public relations nightmare. Conversely, publishing success stories that prove alignment with customer needs is an excellent way to demonstrate a company’s core values and reinforce its positioning as an insurer that fosters an excellent customer experience.
As stated earlier, over time, millennials’ buying preferences will become more and more important to numerous industries, including insurance. Because the millennials’ demographic will make up 75% of the workforce in 2025, many insurers will need to evolve their distribution channels and their customer interaction strategy to better serve this demographic. As far as personal lines are concerned, this demographic group will influence distribution channels more immediately because millennials are now at the age where they need to purchase insurance products. What is not clear today is which omni-distribution channel is the most effective for insurance distribution. Recognizing that, providing omni-channel delivery ensures that all options are covered and that marketing opportunities for customer touch are available.
It is the prevailing wisdom that the more an insurance company interacts with its customers, the more likely it is that customers will renew their coverage. In the old agency model, the only touch points for an insurance company are the claims and billing processes. To accomplish additional touch points, publishing content works quite well. Today, content- and information-sharing is one of the main avenues for adding value to customers. As an example, some homeowners insurance companies send out text warnings to areas in the path of a hurricane or tornado to guard against loss of life and property. Others use content quite differently. Topics that are relevant to a customer base (that are not insurance-related) work equally well. As another example, one insurance company sends out gardening suggestions based on demographic data.
Because insurance is a low-interest category to most consumers, insurers that publish content that interests their customers will create engagement and, consequently, develop a connection with their insureds. Only a small percentage of consumers actually file claims, and most insureds have little or no contact with their carrier. As a result, a content strategy allows insurers to interact with the majority of their customers other than just in claims or billing situations. This greatly increases customer touch and provides the opportunity to improve the customer experience. In the near future, however, content will become commonplace and expected, while user experience will determine the winners and losers in the marketplace.
Additional Demographic Shifts
The U.S. of 2050 will look very differently from that of today: Caucasians will no longer be the majority. The U.S. minority population, currently 30%, is expected to exceed 50% before 2050. No other advanced country will see such diversity. In fact, most of the U.S.’s net population growth will be among its minorities, as well as in a growing mixed-race population. Latino and Asian populations are expected to grow threefold, and the children of immigrants will become more prominent. Today in the U.S., 25% of children under five years old are Hispanic; by 2050, that percentage will be almost 40%. As a direct consequence, insurance companies need to start their long-term planning for these demographic shifts and must have strategies to serve these segments. In addition, the number of women in the workplace is increasing. As women grow in the management ranks, their influence on buying decisions will increase accordingly. Currently, women are responsible for 85% of all consumer purchases, including everything from autos to healthcare. Farnaz Wallace—the founder of Farnaz Global, a strategic consulting firm—said, “In the New World Marketplace, women, youth and multiculturalism are shaping our future economically and culturally, and companies must find ways to stay relevant in a world different than the one taught in textbooks.” He also said, “Millennials are the most racially and ethnically diverse generation in American history—gender-neutral and colorblind—transforming business norms.”
Throughout business history, products have fulfilled human needs. Think about how the automobile, air travel and the microwave oven changed the way we live. All these innovations took place on the company side of the value chain. In the past, these products disrupted other products. What makes disruption more likely in the insurance industry today? The major shift in the customer journey. Today, information is available to consumers on a massive scale and is virtually free. The agent is no longer the sole channel for information and product delivery. This disruptive cycle is substantially different because it empowers customers to use different channels during the purchase journey, channels that never existed before. Additionally, a generation of insurance purchasers are coming online with a major predisposition for utilizing omni-channel approaches. Companies that ignore these shifts are taking a major risk with their future viability because these shifts have already occurred and will continue with tremendous momentum.