How far along are commercial lines carriers in delivering digital solutions to their agents and other distribution partners? Answering that question depends on whether you are a glass half-empty or glass half-full type of person. The pessimist might say: Despite huge investments in technology over the past few decades, there is still a great deal of manual processing; the time for the rate-quote-bind process is too long; and the goal of truly making it easy for the agent to do business with the carrier is still elusive. The optimist would cite enormous industry progress, as many companies have increased straight-through processing (STP) to a significant percentage of the business; digital self-service capabilities for both sale and service are widespread; and agent-carrier connectivity, in general, enables astounding volumes of electronic business flow.
SMA recently surveyed carriers focused on the small commercial market to assess the state of digital capabilities offered to distribution partners, the barriers to implementation and adoption and the plans for enhancing or delivering new digital capabilities. We discovered that rather. than taking a glass half empty or half full approach, the better analogy is a road trip, with the kid in the back seat regularly asking, “Are we there yet?” It turns out that the question is not easy to answer. Once you get by the lofty goals of STP and ease of doing business (EODB), there are a variety of specific functional capabilities that are important. By the way, STP and EODB are still the top two reasons that carriers invest in tech solutions for distribution, and they do provide a north star for plans in this space.
SMA’s research tracked 14 different digital sales-oriented capabilities and 17 servicing capabilities, starting with a carrier’s satisfaction with the state of the offerings to their distribution partners. Suffice it to say that, while some are satisfied with their offerings, many are not. For example, only about a third are satisfied with their quoting capabilities. Satisfaction levels on the servicing side are higher, but there are still many companies that are dissatisfied or do not offer the digital capability. In terms of plans and projects, there is lots of investment and activity in addressing the areas where companies believe they are weak. For example, data pre-fill is the top project area for sales capabilities as it is a critical starting point for achieving STP.
There are both business and technology roadblocks to success in distribution technology. For example, few will be surprised to learn that limited IT resources are the #1 barrier on the technology side. In short, this is a very critical but complex area of the insurance business, and the industry as a whole is moving to enhance the digital capability provided to distribution partners. It is a journey, but, like that proverbial kid in the back seat, many executives will continue to ask, “Are we there yet?”
For more information on commercial lines distribution expansion strategies, see our recent research report, “Distribution Technologies for Small Commercial: Carrier Progress and Plans.” SMA is also introducing a research series with perspectives from the distributor viewpoint. A regular series of research reports will be published based on surveys and interviews of agencies, brokers, MGAs and others in the distribution channel, including insights from ReSource Pro’s large footprint of distribution clients.
Analytics can be a great equalizer in every industry. It’s why 90% of respondents to a McKinsey survey call their analytics investment “medium to high” and another 30% referred to the investment as “very significant” proof that the surveyed understand the value that analytics possesses.
Those investors—especially the commercial insurers—understand the value of analytics and get their money’s worth. In addition to improving sales targets and reducing churn, analytics can increase profitability when it comes to underwriting and selecting risk.
Still, the full potential of analytics goes beyond the insights it provides insurers. When merged with modern technology, data and analytics can fuel efficiency, accuracy and productivity. When used within the decision engine to drive automation, for example, data and analytics can help insurers expedite processes and improve customer experiences, even without human intervention.
Automated reports and actions provide insurers new ways to optimize their day-to-day operations. However, the marriage of automation and analytics is especially vital for the small commercial market as they contend with higher volumes of policy quoting and writing. Using predictive models, automation can reduce the amount of human effort it takes to sell and service policies for small businesses.
Analytics and automation present opportunities to optimize every facet of growing market share for small commercial insurers if properly applied. The sooner that insurers embrace the two, the better off they—and their customers—will be.
Analytics and Automation Can Deliver
When it comes to risk assessment for small businesses, insurers are usually hampered with limited or even misleading information. Unfortunately, this can result in a gap between a risk-appropriate rate and the quoted premium. Thanks to automation and analytics, however, that sort of disparity can be a thing of the past.
While there are many ways analytics and automation can be used to improve the small commercial insurance industry, there are three particular areas where major improvements have been demonstrated. For insurers that are on the fence about committing to analytics and automation, here’s where their influences will likely be most visible:
1. Simplified Applications
By automating customer quoting and underwriting, insurers can phase out the process of collecting troves of information on an application. With reliable third-party data sources, automation can fill in many of the blanks present on typical applications. Insurers will then only need to ask for what’s relevant for the predictive model to assess the risk and provide direction on pricing.
In the same vein, the automation of processes and decisions empowers insurers to use straight-through processing for new applications—quoting and binding policies entirely through an e-commerce experience, without involving staff or consuming staff time. Typically, this is a far more streamlined process for both the insured and insurer, and delivers improved customer experiences.
2. Expedited Claims Processing
Small businesses are acutely sensitive to how long it takes insurers to pay claims and how good (or bad) their experiences are. Analytics helps insurers triage claims while suggesting different processing options.
According to a LexisNexis study, the availability of this data helps shorten processing cycle times by up to 15%. For example, through IoT (internet of things) devices, an insurer can detect water heater leaks and other high-risk problems in real time, enabling the insurer to anticipate potential claims and possibly even prevent them.
Of course, being fast is only part of the equation—the process must also be accurate. Thankfully, automation and analytics improve processes by catching overlooked data points. When sophisticated analytics are applied against a large sample of detailed claims data, the resulting insights can, for example, highlight the best way to get an injured employee back on his or her feet and offer a customized plan to do so.
By using reliable third-party data, such as information available through a data consortium, insurers can more quickly and accurately identify risk—even if it’s in a sector where they have little or no experience—and ensure that risk-appropriate pricing is quoted. Analytics thus becomes a valuable growth engine for insurers to confidently expand into different business lines and regions. In an environment where 40% of the smallest organizations have no business insurance whatsoever, insurers that embrace modern technology could reap significant rewards. By combining analytics with automation, the small business insurance market could be transformed—which would be welcome news for both insurers and their customers.
In our hyper-connected society, it was estimated a few years ago that on a normal day another 127 devices are connected to the internet each second. Moreover, the Internet of Things (IoT) trend is accelerating. Insurers cannot stop this; they can only leverage the data that comes from connected devices, or ignore this data.
As of today, the insurance sector has exploited the data more in personal lines than in commercial lines. Insurance telematics on personal auto has been out there for more than 15 years. The Italian market has achieved more than 22% of telematics penetration on the auto insurance business; in the U.S. the penetration is still low, but in the last two years the market has evolved significantly. French insurers have built a success story on smart home insurance (télésurveillance services) over the same period; even in the U.S., experiments are progressing as players such as American Family lead the pack.
We are starting to see the emergence of commercial line applications, especially in the U.S. We have some products on auto commercial lines, such as Progressive Smart Haul, that are gaining traction, and the interest for the application on other business lines is growing.
However, on the insurance commercial lines — outside of commercial auto — we are still talking about theoretical ideas and proofs of concept (POCs), and there are only a few already commercialized products. At the IoT Insurance Observatory – a think tank that in North America has aggregated almost 30 members, including six of the top 15 P&C insurance carriers, as well as the main reinsurers – I’ve directly seen this growth of the appetite of the traditional insurers for IoT applications.
The insurance sector has four different opportunities to leverage the IoT data on commercial lines:
There is the opportunity to insure new risks that are emerging due to IoT technology, but also to insure the outcomes of IoT solutions adopted by a business owner.
Another area of opportunity is to develop new ways to insure existing risks. Let’s think about real-time measurement of the key drivers for the exposure of an insurance coverage, such as the presence of people in an area for general liability or the inventory for theft insurance.
IoT data (and processes based on this data) allows improvements in the performances of the core insurance activities (underwriting, pricing, risk management and claims handling) for current insurance products,
There is the opportunity to sell IoT-based services.
The last two are the key aspects that have worked well in the usage of IoT on personal lines. Indeed, based on the Observatory research over the past few years, the most relevant international insurance IoT success stories have five common characteristics:
A product sold through current distribution channels, frequently as an option on an existing product;
A closed system with devices/app provided by the insurer;
Fees paid by the customer for services, which include the rental of the devices;
Explicit usage – a customer consents at the moment of purchase, giving the insurer access to data that will help it improve risk self-selection, loss control, consumer behaviors and pricing;
The sharing of a material value with customer through discounts, cash back and other incentives.
The marriage of IoT-based services and impacts on the core insurance activities is going to allow insurers to obtain a competitive advantage on small commercial. This is typically a segment that has not jet been penetrated by IoT services – because the first targets for IoT companies have been large and medium enterprises – and the insurance players can succeed in delivering this bundle between IoT services and insurance coverages to this segment. The synergies between those two aspects – services and impacts on the core insurance activities – are possible because the same data used to deliver services allows improvements to the technical profitability of the insurance business. IoT allows the creation of value on the insurance P&L, and this value can be shared with the client, creating a valuable bundle between insurance coverages and IoT solutions. Obviously, the bigger the difference between insurance premium and service cost, the higher the potential of the bundle.
Let’s think about how spending for commercial line coverages – even excluding commercial auto – can easily be several thousand dollars for a small enterprise.
The value creation
The sensors necessary for service delivery – let’s, for example, think about security cameras with AI on the edge – can be fundamental to detecting risky situations. This is precious information for an insurance company. First of all, this allows claim prevention and damage mitigation. This could be achieved through real-time alerts to the on-field supervisor, such as the store manager in retail shops, or to the provider of the necessary emergency services, such as the emergency plumbing service provider. The second use case, which is linked to the detection of risky situations, is reporting. The quick delivery of insights provides objective information to the claim handlers. This way, the insurance company can be ready to address the claim in a more efficient and effective manner, limiting fraud and inflated claims. The reporting of claims and near-miss incidents also allows for providing automated loss control advice to the business owner. This information can also be used to take underwriting decisions at renewal, and even to intervene on pricing.
Value creation is also possible using sensor data to manage behavioral change mechanisms. As found in experiments on personal lines – from life, to health and even to auto insurance – working on awareness creation, behavior suggestions and incentives it is possible to obtain a reduction of the expected losses of an insurance portfolio.
One last aspect to consider is the self-selection effect. The personal line experience has taught us that, at each pricing level, those who accept being monitored are better risks (lower loss ratio) than the peers who don’t accept. So, we can be pretty confident that the business owners who chose the IoT-based insurance coverage are better risks (because they have nothing to hide from their insurers) than their peers who don’t accept to be monitored.
The insurer who succeeds in these use cases will obtain the waterfall represented below, where the sum of the service fees and the effect of risk selection, loss control, risk-based pricing and behavioral change – all the elements that in my previous articles I have defined as “value creation levers” – covers the IoT costs and allows the creation of a relevant amount of extra value. This value can be shared first of all with policyholders through discounts and incentives. However, part of it should be shared also with intermediaries (agents and brokers involved in the insurance policy distribution), through extra commissions, to scale up the IoT-based portfolio.
The main challenge will not be the choice of technological aspects, as many may expect. The trickiest aspects are the design of the insurance IoT strategy, the delivery on the field and the progressive optimization based on the lessons learned.
First of all, it will be key to identify and design the services that the target customers are interested in paying for. The sensors necessary for these services will be the foundation of the insurance IoT approach, and all the additional sensors with a cost lower than the achievable benefits should be added on top. In the design of the insurance use cases, all the different functions related to the value creation levers described above must be involved, as well as all the business lines of the insurance group. The potential in each coverage and each endorsement dedicated to the segment has to be squeezed to maximize the value creation and therefore the return on the IoT investment. In the cost-benefit analysis, it is necessary to adopt a multiyear perspective, thinking toward the amortization of the hardware cost over multiple periods. These are the same challenges that have been successfully addressed by the best practices on personal lines.
Specialization of the solutions by segments will be necessary to deliver effectively. This aspect is an additional challenge that was not present in the personal lines experience, which instead has easily been addressed with a “one size fits all” approach.
Another complexity, which was not present in personal lines, is the presence of multiple actors to be involved in the adoption of the solution, in the prevention/mitigation and in the behavioral change. The business owner (or eventual employees appointed to purchase the insurance coverage), the on-field supervisor (such as a store manager) and operative employees are relevant stakeholders. The IoT insurance approach must take into account all of them to succeed.
Let’s consider the reasons for investing to overcome these barriers facing the IoT-based opportunity. There is an opportunity to win more business and to generate a more profitable commercial line portfolio. The right IoT approach will generate knowledge about clients and their risks (which will lead to opportunities for cross-selling and up-selling) and produce positive externalities for society (by contributing to the modernization of the small and medium enterprises of the country).
Many commercial lines insurers recognize that there are great opportunities for growth in the small commercial segment. There is no question that the segment is hot and that the potential is there for increased business. So, many are rushing into the space or redoubling their efforts and focusing on small commercial. Thus, it is hyper-competitive, and success is not guaranteed. This raises the question, “What does it take to win in the small commercial segment?” A new SMA research report, Ten Guidelines for Success in the Small Commercial Market, answers this question.
Senior leaders intent on small commercial face many questions. Are our existing distribution channel partners adequate to support our growth? Should we establish a new digital brand? Do new insurtech distribution firms present good partnership options? Do we need to modernize our products by adding new coverages? How can we simplify the submission and underwriting processes? The list of questions could go on.
To develop a winning strategy that can be effectively operationalized, insurers should consider the 10 guidelines in the SMA report. These guidelines can serve as a type of filter or way to organize and address the various questions that arise in the development of a new or enhanced strategy for small commercial. Five of the guidelines are aimed at framing the strategy, while the other five are meant to direct the execution elements. Excerpts from each type of guideline are:
Strategic Approach: Take an outside-in approach. Internal insights and agent input are still important, but the outside-in approach considers customers first: their needs, their pain points and their preferences for interaction. The very first task in taking the outside-in approach is to be absolutely clear on who the customer is. Is it the agent? The policyholder? Or, are they both considered customers?
Execution Elements: World-class data and analytics. The strategies and operations for small commercial must be data-driven. This demands a sophisticated platform for business intelligence and advanced analytics. One of the top areas of focus today for small commercial is improved data pre-fill and data augmentation.
Winning in this market is not easy. Big players are devoting huge dollars to capture more market share. New entrants such as insurtechs are bringing innovative, customer-focused approaches that are appealing to small business owners. Leaders are leveraging analytics to understand how to segment more effectively. And all are looking at the vital role of technology to create a competitive advantage. It is a big and growing market. And the right formula and focus can make a winner out of any insurer willing to innovate and stay the course.
The small commercial insurance market is hot – there’s no doubt it. In fact, the entire small business environment is quite active, with around 11 million businesses that employ fewer than 20 people, according to the U.S. census bureau, and another 6 million with between 20 and 500 employees. Around 600,000 business are started every year in the U.S., and almost as many fail each year.
As in every other segment, small business owners’ expectations have risen over the past decade, due in part to their daily experiences with digital and mobile capabilities.
In the insurance sector, the competition for retaining small business customers and acquiring new ones is intense. During this time of active industry transformation, a variety of approaches are being employed by commercial lines insurers, especially when it comes to distribution options. Which of these options are the best? SMA has identified five prevalent distribution strategies that are currently deployed by insurers. A synopsis of these strategies follows, along with recommendations for insurers.
Existing agent channels … enhanced with tech: Many insurers are doubling down on their independent agent distribution channel. Agents, after all, still sell most of the small commercial business. However, in this digital age, insurers must be aggressive in the tech capabilities they provide to agents – with modern portals, mobile capabilities, enhanced agent-carrier connectivity solutions and more.
Direct digital: The direct model, successfully deployed for years in the personal lines space, is moving to small commercial. Small business owners are more tech-savvy, and some want self-service capabilities to identify the coverages they need, get quotes and finalize their policy – all online.
New digital brand: Some insurers are establishing new digital brands for small commercial distribution. In most cases, the underwriting and back-office support remain with the insurer, but the front-end marketing and sales are done via a newly established, visible brand. This allows insurers to distinguish the channel from the agent channel and go after different segments in new ways.
Partnering with insurtech: An appealing option to many insurers is to partner with insurtechs that are capturing attention with their focus on the customer experience. These insurtechs may be digital agents/MGAs or comparative raters. Many insurtechs offer agent-focused solutions or enhance the agent/carrier relationship and support the approach in #1.
Establishing a marketplace: Several very large insurers are establishing their own marketplaces that support either agent or direct submissions. These marketplaces typically provide automated appetite matching, triage and recommendations on coverage. In addition to traditional small commercial players such as Chubb and Hartford, large personal lines companies such as Progressive and Nationwide are also going after small commercial business with this approach.
Which of these approaches will turn out to be the most successful in growing a small commercial book? Of course, there isn’t one definitive answer. The likelihood is that a combination of approaches will yield the best results for each specific carrier. The omni-channel world has come to small commercial, which means that most insurers will utilize at least two of these methods of reaching customers.
Perhaps the most important advice is to understand customer segments at increasingly discrete levels and adopt an outside-in approach. The commercial lines business has continued to move in the direction of more specialization, and small commercial is no exception. The deeper the understanding of the characteristics and risks of each type of business, the better-equipped insurers will be for creating products and programs to serve that segment. The distribution channel then becomes part of the customer expectations discussion. What methods will be most successful for each segment? Will the business owners in a particular segment react most positively to experienced agents whom they know and trust? Or are they more likely to prefer acquiring their insurance via a direct self-service approach (or one of the other options outlined here)?