Blockchain can be used in different domains, such as fintech, healthcare, manufacturing, tourism, real estate and government. It removes intermediaries from many business workflows. This helps organizations optimize costs and gain additional competitive advantages. Let’s go through blockchain use cases beyond bitcoin.
Blockchain-based supply chains
In a traditional seafood supply chain, for example, it is hard to trace illegal practices and product mislabeling. There are too many parties involved, with incomplete transparency about their actions.
Food safety and quality issues lead to parties mistrusting each other, which adds to the industry’s economic instability. Sustainability is also a growing problem, because more customers demand to know where their food comes from.
To solve these problems, blockchain consultants suggest implementing the combination of IoT and blockchain. The IoT part consists in tagging seafood items with sensors that gather and translate their location data in real time. Recorded on a blockchain, this data becomes available to all members of that blockchain, allowing them to track the food origin.
Thanks to blockchain, the supply chain can become transparent and trustworthy. It can also become faster and cheaper because of the automation of product location and status updates.
The same approach can be followed with other highly regulated products (such as pharmaceuticals) or high-value resources (such as gemstones and precious metals).
Everledger, a startup that recently secured $20 million in funding, created a blockchain use case in which each asset is assigned a digital fingerprint and tracked throughout the supply chain. This system provides all stakeholders with an immutable, forgery-proof record of each product’s origin.
Distributed autonomous marketplaces
One of the main advantages of blockchain is its decentralized structure. That’s why in the future some blockchain applications may well underpin autonomous distributed marketplaces regulated by their users rather than corporations.
Let’s consider the possibilities blockchain can bring to marketplace management. In the table below, there are marketplace aspects that a blockchain model would redefine:
An example of a blockchain-based marketplace is Australian startup CanYa. The company tries to differentiate itself from the competition by offering more transparency and trust. CanYa’s founders guarantee that paying clients will be satisfied with the quality of provided services, while service providers will be paid in full and on time. All this is achieved thanks to blockchain.
The startup also launched iOS and Android apps processing both fiat cash and peer-to-peer cryptocurrency payments. Their own cryptocurrency—CanYaCoin—is created to be at the center of the platform. It is designed into the innovative hedged escrow contracts that combat the notorious instability of cryptocurrencies.
Origami Network takes a different approach by offering developers a platform where they can create their own peer-to-peer marketplaces. Origami developed a set of blockchain-based standards and protocols, which businesses can use to create their own online decentralized shopping platforms and enjoy all the perks of the distributed ledger technology.
The emerging smart marketplaces prove that blockchain use cases are not just limited to technological advancements but will also most definitely bring socioeconomic change through decentralized autonomous organizations, much like the internet did.
If we fantasize a bit and extend what startup SimplyVital Health is doing with its ConnectingCare platform for tracking post-discharge patient care, similar advancement can be made in the field of tracking customer care and the quality of after-services using IoT data on blockchain. This way, you don’t have to worry about an employee forgetting about a tweet or a message from a disgruntled client.
Similarly, music and photography publishing is moving to blockchain, with products like Ujo Music that allow users to protect all rights to their creations by simply publishing them, without the notorious intermediaries. It’s safe to say the same is possible for tracking all types of intellectual property and payments to creative professionals to secure their rights.
The triggers that have induced the insurance industry to innovate have dramatically changed in this millennium. Up until the 21st century, little innovation occurred, because insurers were looking to create products for emerging risks or underinsured risks. Innovation occurred most often as a reaction to claims made by policyholders and their lawyers for losses that underwriters never intended to cover. For example, the early cyber policies, which insured against system failure/downtime or loss of data within automated systems, were created when claims were being made against business owners policies (BOPs) and property policies that had never contemplated these perils. Similarly, some exclusions and endorsements were appended to existing policies to delete or add coverage as a result of claims experience. Occasionally, customer demand led to something new. Rarely was innovation sought as a competency.
Fast forward to today, when insurers are aggressively trying to develop innovative products to increase revenue and market share and to stay relevant to customers of all types. Some examples include: supply chain, expanded cyber, transaction and even reputation coverages.
With sluggish economies, new entrants creating heightened competition, emerging socio-economic trends and technological advances, insurers must innovate more rapidly and profoundly than ever. The good news is that there is movement toward that end. Here is a sampling of the likely spheres in which creativity will show itself.
Insurers have already started to respond to the drone phenomenon with endorsements and policies to cover the property and liability issues that arise with their use. But this is only the tip of iceberg in comparison with the response that will be needed as space travel becomes more commonplace. Elon Musk, entrepreneur and founder of SpaceX, has announced his idea for colonization of Mars via his interplanetary transport system (ITS). “If all goes according to plan, the reusable ITS will help humanity establish a permanent, self-sustaining colony on the Red Planet within the next 50 to 100 years” according to an article this September by Mike Wall at Space.com.
Consider the new types of coverages that may be needed to make interplanetary space travel viable. All sorts of novel property perils and liability issues will need to be addressed.
Weather-related covers already exist, but with the likelihood of more extreme climate change there will be demand for many more weather-related products. Customers may need to protect against unprecedented levels of heat, drought, rain/flood and cold that affect the basic course of doing business.
The insurance industry has just taken new steps in involving itself in the flood arena, where until now it has only done so in terms of commercial accounts. Several reinsurers — Swiss Re, Transatlantic Re and Munich Re — have provided reinsurance for the National Flood Insurance Program (NFIP), for example. Insurance trade associations are studying and discussing why primary insurers should do more in terms flood insurance as a result of seeing that such small percentages of homeowners have taken advantage of NFIP’s insurance protection.
As a single definition for the sharing economy begins to take shape, suffice it to say that it exists when individual people offer each other products and services without the use of a middleman, save the internet. Whether the product being offered is a used handbag, a piece of art or a room in a private house or whether the service is website design, resume writing or a ride to and from someplace, there are a host of risk issues for both the buyer and seller that are not typically contemplated by the individual and not covered in most personal insurance policies. This is fertile ground for inventive insurers. How can they invent a coverage that is part personal and part commercial? Smart ones will figure out how to package certain protections based on the likely losses that individuals in the sharing economy are facing.
So much has already been written about the future of driverless cars, but so many of the answers are still outstanding. How will insurance function during the transition; who will be liable when a driverless car has an accident; who will the customer be; what should the industry be doing to set standards and regulations about these cars and driving of them; how will subrogation be handled; how expensive will repairs be; how will rates be set? A full list of unanswered questions would be pages long. The point for this article is – how innovative will insurers be in finding answers that not only respond to these basic questions but also provide value-added service that customers will be willing to pay for?
The value added is where real innovation comes into play. Something along the lines of Metromile’s offerings for today’s cars is needed, such as helping drivers to find parking or locate their parked cars. Such added value is what might stem the tide of the dramatic premium outflows that are being predicted for insurers once driverless cars are fully phased in.
Corporate Culture and Reputation
Recent events indicate that corporations need some risk transfer when it comes to the effects of major corporate scandals that become public knowledge. The impact from the size and scope of situations such as the Wells Fargo, Chrysler, Volkswagen and other such scandals is huge. Some of the cost involves internal process changes, public relations activities, lost management time, loss of revenue, fines and settlements. Reputation insurance is in its infancy and warrants further development. And though insurance typically does not cover loss from deliberate acts, especially those that are illegal, there is enough gray area in many scandals that some type of insurance product may be practical despite the moral hazard and without condoning illegal behavior.
And the Risk
All innovation poses risk. Risk is uncertainty, and innovation leads to uncertain outcomes. Just as insurers must create solutions, they must be willing to acknowledge risk, assess risk, mitigate risk and prepare for some level of risk to materialize. So, as insurers are now actively trying to innovate, they must make sure that their enterprise risk management practices are up to addressing the risks they are taking.
For each new product, some of these risk areas must be explored:
Is there a risk that projections for profitability will be wrong?
If wrong, by how much, and how will this shortfall affect strategic goals?
What is the risk appetite for this product initiative?
What is the risk the new product will not attract customers, making all development costs wasted expense?
What is the risk that price per exposure will be incorrectly estimated, hurting profitability?
What is the risk for catastrophic or shock losses relative to the product?
How will aggregation risk be handled?
What is the risk that litigation concerning the policy coverages will result in unintended exposures being covered?
Regardless of whether or not they have been dragged into innovation by disruptive forces, insurers are finally ready to do more than tweak products around the edges. The risk of not innovating appears to be greater than the risk associated with innovating.
As a professional loss accountant with more than 20 years of experience with business interruption (BI) valuation, I can understand why policyholders struggle with finding a repeatable, efficient system that produces an accurate measurement of their BI exposure. Over the years, some of my clients recognized the issues with the traditional BI values approach, and decided to make a change. Unfortunately, too many companies continue doing what they have always done, even when there is a better way available.
Consider for a moment, just how important BI information is to your underwriter. The numbers you report give the underwriter the basis for writing coverage and calculating premium. Each renewal provides policyholders the opportunity to present their unique BI exposure. Unfortunately, this opportunity is often squandered because of a misunderstanding of business interruption values and the exposures they represent. The point of this article is to share a proven, alternative approach.
Understanding BI Values
First, there’s the ratable value. It is the “big number” that is calculated for the business as a whole, assuming a 12-month, total shutdown of all revenue-generating operations. This worst-case and often unrealistic scenario is the information requested by the insurance company, usually in the form of a one-page worksheet. Without additional information, the underwriter will use this information to set limits and charge premium.
The ratable value calculated is somewhat meaningless, except that it establishes the base assumption that is used as the BI value in all other scenarios, such as unincurred cost categories. The ratable value is seldom a reflection of your exposures. Better ways to assess your exposures are to examine your maximum foreseeable loss (MFL) and probable maximum loss (PML) scenarios.
What Is Maximum Foreseeable Loss?
The MFL, as the name indicates, is the worst-case scenario. This is not as extreme as the ratable value scenario, but pretty close. The assumptions used here include a complete breakdown of protection and loss mitigating factors while you are hit where it hurts at the worst possible time. An example would be the loss of a unique distribution center to a retailer during the holiday shopping season — say the distribution center that handles online orders goes up in smoke on Cyber Monday.
The factors used to measure the ratable value would be used in this scenario to determine the business interruption value. Certain assumptions may change depending on the duration of the loss scenario. For example, labor expense may be considered completely saved in the ratable value scenario because of the assumption that there is nothing left, but only partly saved in an MFL scenario.
What About the Probable Maximum Loss?
The PML is the same as the MFL, except that loss mitigation efforts and protections work properly. The PML also takes into account pure extra expenses used to retain customers. The PML can help with decision making on purchasing extra expense coverage.
What Happens in Underwriting?
Although I’m not an underwriter, I’ve typically seen insurance companies take an engineer’s approach to MFL and PML scenarios that vary only in duration. This singular perspective does not account for the rest of the pieces of the puzzle. The other pieces are the finer details that actually occur during a claim. In a real claim, topics like seasonality, make-up and outsourcing would surely come up, but you won’t see them on any BI worksheet.
The MFL and PML should be based on realistic loss scenarios and measured as if they were a claim. Simply applying the ratable value to loss-period assumptions produces misleading and inflated numbers. This is precisely why it is in your best interest to develop your own valuation method based on real scenarios.
Why Create Exposure Scenarios?
If BI values are based on assumptions, and you are using the worksheet, then the assumption is a 12-month loss scenario. Can you imagine a scenario in which your operations would only be affected for six months? The worksheet makes a blanket assumption of 12 months whether realistic or not. Coming up with various loss scenarios by location would flesh out a more realistic representation of the impact of each particular loss. The scenarios would also highlight high-risk locations along your supply chain, which could improve your business continuity planning.
An exposure analysis project is not only an accounting project; it’s an integrated business exercise offering multiple benefits to an organization. The goal is to identify and examine loss scenarios and the resulting ripple effects.
It isn’t necessary, nor is it practical, to anticipate every possible loss scenario. It’s better to prioritize by perceived risk and probability. Then, develop a good sampling of loss scenarios from which you can determine the impact to operations and the mitigating actions that would be taken. Depending on the exposure, involve the appropriate internal personnel, e.g., operations, sales, business continuity, IT and accounting. The external experts you may involve are your broker, legal counsel and, of course, a forensic accounting firm that specializes in insurance work. Additionally, your company’s business continuity plan (BCP) and incident response plan should be factored in. However your scenarios play out, the loss accountants can calculate the business interruption as though it were an actual claim.
As you can see, this approach would produce a more accurate BI value by location and overall. It’s the right way to look at business interruption, so make it a part of your approach with underwriters.
DISRUPTION IN THE AUTOMOTIVE ECOSYSTEM: What to Expect, and How to Survive and Win
For the purposes of this paper, and to explain the codependencies and inter-industry impacts, we’ve chosen to define the auto ecosystem as including all business segments affected by the automobile, including: auto manufacturing, auto buyers and drivers; collision repairers; aftermarket suppliers, including parts providers; auto insurance companies and their policyholders; and the deep and extensive claims and services supply chain that supports them, such as the technology and information provider segments. Given the broad scope and complexity of the component topics, we have identified and provided a degree of depth on each one, but by no means should this information be considered exhaustive.
The entire auto ecosystem is in the midst of significant disruption, and the dizzying pace of change will only continue to accelerate. This disruption is the result of the convergence of upstream upheaval in these sub-segments of the auto ecosystem:
• “new consumer” behavior and expectations
• technology evolution, including mobility and the Internet of Things
• the digital data gold rush and the adoption of advanced analytics
• globalization integration, collaboration and supply chain consolidation in the automotive ecosystem
• collision repair industry consolidation
Over the last 30 years, the auto repair and automotive aftermarket segments were part of a steady and inevitable evolution. During this long-term progression, the auto physical damage industry adapted to a myriad of business innovations, technology enablers, program and process changes and product and service introductions. Some resisted these innovations as either real or perceived business disruptions or dis-intermediation while others embraced them as opportunities to be leveraged for business, market and strategic transformation.
The 2007/2008 “Black Swan” event, the U.S. recession, affected our entire economy and loomed large and ominous for a number of years. This became the foundation for today’s unmatched auto physical damage industry transformation. It triggered the start of unprecedented structural change within the U.S. and Canadian auto repair and aftermarket segments. This changing landscape became part of four distinct, yet connected, marketplace phases: contraction, consolidation, convergence and constructive transformation, which continue today.
Additionally, these four phases are being affected by a confluence of numerous, dynamic and impinging forces, which have both disruptive and transformational influences on today’s stakeholders. Some of the more influential external impact factors include:
• private equity investment
• accident safety and avoidance technology
• predictive analytics
• telematics and integrated claims process models
• insurer multiple-shop operator, strategic performance-based, direct repair program (DRP) contracts
• new and hybrid direct repair program models
• OEM- certified networks’ influence in the repair process
• complex vehicle technology and proliferation of advanced materials
• increased complexity in insurance company DRP participation requirements
Consequently, the traditional process of linear thinking, with its straightforward cause-and-effect structure, is giving way to a more realistic and more complex multi-dimensional thinking pattern that heightens the understanding of the frequency, acceleration and degree of change. It is important, in light of this, to build and leverage a strategic alliance ecosystem with customers, suppliers, competitors, investors and business partners to maintain and grow a collaborative brain trust. This shared commitment will help to co-create and foster constructive change within an organization in an attempt to influence its uncertain environment for the mutual benefit of all strategic partners.
Evidence of disruption in the auto insurance industry and its extensive supply chain is plentiful and portends even greater change. Long-standing leaders in the U.S. auto insurance industry have lost significant market share to more innovative consumer-centric carriers. Advanced analytics and telematics technologies have combined to enable new forms of insurance products, including usage-based insurance. The Internet of Things, including the connected car, will amplify this trend going forward and literally change the fundamental nature of insurance and risk management products, solutions and servicing. For example, consumers are now shopping for and purchasing auto insurance, and submitting and receiving claim payments, on their smartphones. Fueled by the entry of large and growing pools of private equity capital, rapid industry consolidation is occurring across several supply chain segments including the once highly fragmented collision repair industry and alternative parts supplier markets.
In this dynamic environment, we believe that the ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute on the development of compelling personal mobility solutions; transform product development and distribution around the new consumer; leverage data and analytics across the enterprise; think, plan and execute globally; and aggressively collaborate, partner and affiliate as effectively as possible.
The new consumer, mobility and the internet of things
Today’s consumer is totally unlike that of the past, and they have created new challenges and opportunities for all participants in the automotive ecosystem, in particular for auto insurers. This new consumer, epitomized by Millennials, has embraced mobile technologies and the social media they support. This phenomenon has fundamentally changed how insurance is branded, marketed and sold. Moving forward, this same mobility will enable insurers to design completely new types of insurance products and manage risks much more effectively for policyholders and themselves.
The most disruptive group of mobility technologies is the rapidly emerging Internet of Things, much of which is controlled today by industry outsiders. The potential impact on numerous aspects and multiple lines of insurance, as well as on the rest of the auto ecosystem, is enormous.
Of related concern to the insurance industry should be the potential for these outsiders to leverage this valuable information to enter the business and become competitors. Some recent acquisitions include Facebook’s purchase of the fitness and location app Moves, Monsanto’s acquisition of crop insurance and data company Climate Corp. (which was started by former Google executives) and Google’s acquisitions of the connected home devices and security company Nest and the Israeli location-mapping service Waze. Verizon acquired Hughes Telematics in 2012.
The data generated by all of these businesses, which was never before so digitally available, can be combined with advanced analytics to accurately establish and manage individual and property risks. The ability to successfully acquire, control and effectively translate and use all of this data will determine the insurance industry’s digital gold rush winners and losers of the future.
Impact of OEM globalization
The impact of automotive industry globalization is pervasive within the automotive and aftermarket industries. It is one of the more significant continuing influential macro factors within the larger constellation and confluence of simultaneous conditions affecting the auto physical damage landscape. For example, the change caused by how vehicle manufacturers are aggressively re-engineering and consolidating their light vehicle platforms is evident in the worldwide auto manufacturing transformation underway; General Motors is planning to reduce in 10 years its current 26 global production platforms to just four by 2025. This globalization of cars and its many OEM implications will continue to drive significant change throughout the entire property and casualty auto insurance and auto physical damage aftermarket supply chain.
One of the key drivers of this manufacturing transformation is the National Highway Traffic Safety Administration’s CAFE standards, which require average manufacturer fleet fuel consumption to drastically improve from today’s 30.2 miles per gallon to 54.5 miles per gallon by 2025. By the 2016 model year alone, there will be approximately 250 new and different vehicle debuts and redesigns from both U.S. and foreign manufacturers. Ultimately, achieving strategic goals and objectives such as reducing fuel consumption and gas emissions by improving fuel economy and reducing the environment’s carbon footprint reflect the current megatrends end game.
As the OEMs drive to innovate globally, there will be intended and unintended outcomes involving the use of many new materials, engine downsizing, alternative powertrains, advanced integrated electronics, telematics and new repair technologies and processes, and producing light-weight vehicles. These innovations will be seen as a disruption by some, while being embraced by others who seek to leverage these global influences for future growth and competitive advantage.
Other ecosystem and supply chain industry consolidation
Another globalization perspective is being driven by increasing international trade and investment by private equity and strategic buyers involving an explosion in mergers and acquisitions within the property and casualty insurance and auto physical damage industries in the U.S. and throughout the world.
The following is a partial list of some of the more relevant recent M&A activity by U.S. and international companies in this ecosystem:
• CCC Information Services acquires telematics and UBI solutions provider DriveFactor
• Desjardins Insurance, Canada, acquires State Farm Canada, U.S.
• Boyd Group, Canada, acquirers Gerber Collision and Glass, U.S.
• OMERS, Canada, acquires Caliber Collision Centers, U.S.
• UniSelect, Canada, acquires Finish-Master, U.S.
• Solera, U.S., acquires Velexa Technologies, UK
• Solera, U.S., acquires CAP Automotive, UK
• Belron, South Africa, acquires Safelite Glass, U.S.
• LKQ, U.S., acquires EuroParts, UK
• UBM, UK, acquires Advanstar-Motor Age and Auto Body Repair News ABRN, U.S.
• The Carlyle Group (owners of Axalta and investors in Service King) acquires Nationwide Accident Repair Services of the UK
These acquisitions reflect the growing trend of an increasingly integrated global insurance and automotive economy resulting in an extension of business and market international strategies, introduction of new, innovative and disruptive technologies and processes, and brand expansion while also managing resource and risk diversification.
The digital data gold rush/ advanced analytics
We have entered a “digital Gold Rush” era – a modern version of the California Gold Rush of 1849 – with the gold being digital data, which is beginning to flow in torrents. This has huge implications for the insurance industry, and not least for property and casualty claims. Digitization is already having an impact across the claims technology and services supply chain, forcing supplier consolidation and compressing customer service cycle and response times to near real time. These forces will affect property and casualty claims technology, as well as information and services provider segments, which have historically been highly fragmented and privately owned and operated. National consolidation, volume aggregation and the infusion of sizable technology investments led by professional management teams offer significant medium-term rewards to the participants.
The most potentially disruptive group of digital technologies of all is the rapidly emerging “Internet of Things” or “M2M” (machine-to-machine) technology, with its potential impact across multiple lines of insurance. Of related concern to the industry should be the potential for non-traditional competitors to leverage M2M data and enter their business. An example is Google’s acquisition of the connected home devices and security company Nest Labs. The data acquired in all of these businesses, never before so digitally available, will be combined with advanced analytics to accurately establish and manage individual and property risks.
These powerful forces are all converging to drive mergers and acquisitions activity to unprecedented levels in the property and casualty insurance claims technology ecosystem, attracting increasing numbers of private equity and strategic investors, and providing attractive exit opportunities and strategic alternatives for participants, all while creating exciting new and innovative technology-enabled capabilities for insurers, agents, brokers and consumers.
Private equity and collision repair industry consolidation
The first two phases of the current collision repair industry structural transformation, contraction and consolidation, are part of a four-phase model consisting of contraction, consolidation, convergence and constructive transformation. These first two phases began to emerge and quickly expand after the start of the recession in December 2007. Simultaneously, private equity groups turned their attention to the collision repair industry; they looked under the hood and liked what they saw.
Private equity firms were on the hunt to find alternative investments that could yield comparative or better returns than were currently available during the trough and slow recession recovery between 2007 and today. Additionally, their interest is backed and driven by unprecedented amounts of strategic buyer, private equity and pension fund dry powder/cash-seeking investments that can drive higher valuations and returns on their capital invested. The current private equity investor groups competing in the consolidation of the auto repair industry are identified in the chart below.
There are a number of factors affecting the continued attractiveness of investing in the collision repair industry.
• the collision repair industry’s structural transformation is still early to mid-stage
• the stigma from consolidation’s failed first attempt during the early 2000s is now fully erased
• excess strategic and private equity capital continues to seek high-return, quick-turn investments, which are characterized by recurring revenue, free cash flow and attractive returns on invested capital
• aggressive MSO consolidator and private equity competition
• debt financing is inexpensive and available
• collision repair management teams realize the benefit of strategically partnering with investors to more quickly grow and develop market share
• $32 billion addressable collision repair industry size
• high barriers to new entrants associated with the MSO consolidator model
• rising operational excellence with lean-based process environment
• replicable acquisition and integration models
• leveraging and expanding technology enablers
• insurance industry strategy aligned with MSO consolidator strategy
As consolidation continues to drive collision repair industry contraction, four MSO consolidators, ABRA, Boyd/ Gerber, Caliber and Service King stand out as the primary buyers or disruptors vying for multi-location and multi-region platform acquisitions. More nascent strategies are focused on market density and coverage through “build outs or tuck-ins,” acquisition of individual shops, constructing “green fields” and “brown fields” and utilizing franchise models in smaller tier markets.
The growth of MSO consolidators associated with these transactions has in all cases had private equity backing. When viewed in the context of an approximate $32 billion auto repair marketplace, there is room for further consolidation in what is still an oversupply of repairers within the approximately 33,000 U.S. auto repair locations.
The transfer of just more than $1.5 billion in multiple-location operator (MLO) platform transaction repair revenue from 2012-2014 excludes three large recapitalizations that included Caliber in 2013 and ABRA and Service King in 2014. If these recapitalizations were included, the total transfer of MSO consolidator revenue would have been slightly more than $3 billion, or approximately 10% of the industry’s annual revenue. Additionally, the MSO segment representing at least $20 million in annual revenue included 80 MSO organizations processing $6.3 billion in annual revenue at year-end 2014. How long private equity continues its aggressive funding of MSO consolidators is uncertain.
Supply chain consolidation in the auto insurance ecosystem
Beyond the collision repair segment, an unprecedented and powerful number of forces are converging to drive mergers and acquisitions activity in the North American property and casualty insurance claims and technology “ecosystem” to historically high levels, including:
• claims supply chain rationalization and consolidation
• rising adoption and deployment of big data and analytics solutions
• insurance product commoditization and the resulting business transformation
• an influx of private equity capital (already raised and seeking to be deployed in the sector)
• expectations of a continuation of a steadily improving economy with the prospect of lingering low interest rates
We expect these forces to amplify competition among well-capitalized strategic players and private equity participants who seek to create scalable and defensible positions in the industry. The implications for smaller, less capitalized, regional or technology- challenged competitors are meaningful.
Claims supply chain consolidation
The area in which we expect the greatest potential for increased activity in 2015 and beyond is within the claims supply chain. The property and casualty insurance claims ecosystem is composed of thousands of small local and independent firms as well as larger regional, national, and global vendors and business partners that provide mission-critical products and services to the claims operations of the property and casualty insurance industry, including:
• insurance technology and IT services, system integrators, core system and claims management software solutions and database and information providers, including communication, repair estimating and body shop management systems
• third-party administrators and claims business process outsourcing firms
• claim services, including independent auto and property adjusters and appraisers and catastrophe services
• insurance defense attorneys
• auto and casualty claims management solution providers
• salvage vehicle auctioneers and towing services
• insurance staffing firms
• insurance claims investigation firms
One of the subsectors most affected by these factors is the highly fragmented and inefficient collision repair and parts business. Many of these are local, privately owned businesses with limited technology capabilities and management talent. National consolidation, often driven by private equity, can lead to expense rationalization, upgraded information technology systems, improved management and the ability to better respond to upstream customer pressure and improved pricing. By way of example, since its founding in 1998, LKQ (NASDAQ: LKQ) has consolidated the automotive repair alternative parts market in North America and elsewhere to become the largest provider of alternative collision replacement parts and a leading provider of recycled engines and transmissions, with annual revenue approaching $7 billion. In 2014, LKQ acquired Keystone Automotive, a leading distributor of aftermarket parts and equipment.
Additionally, one of the other important trends is the development of an electronic parts procurement and e-commerce solution for the large $15 billion, and still highly fragmented and inefficient, North American auto repair parts supply chain.
For smaller providers in the claims supply chain, now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies. A “going it alone” strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations.
Claims information provider expansion and consolidation
North American insurance industry auto and property claims operations, including their auto collision repair and property partners, primarily use the products and services of three claims information providers, each of which has expanded its offerings into automotive claims-related markets.
CCC Information Services: Private equity-backed CCC Information Services (Leonard Green & Partners plus TPG Capital), a database, software, analytics and solutions provider to the auto insurance claims and collision repair markets, recently acquired Auto Injury Solutions, a provider of auto injury medical review solutions. This follows the earlier acquisition of Injury Sciences, which provides insurance carriers with scientifically based analytic tools to help identify fraudulent and exaggerated injury claims associated with automobile accidents. In December 2014, CCC acquired the assets of Actual Systems of America, including its interest in Pinnacle Software, an automotive recycler and yard management system provider, which will enhance its fast-growing TRUE Parts alternative collision repair parts procurement platform. In May 2015, the company further extended its insurance claims solution capabilities by acquiring telematics driving data and analytics provider DriveFactor.
Mitchell International: In 2014, Mitchell International, a provider of technology, connectivity and information solutions to the property and casualty claims and collision repair industries, acquired pharmacy claims management software vendor Cogent Works as well as Fairpay Solutions. Fairpay’s service offering includes workers’ compensation, liability and auto cost containment and payment integrity services. These assets will expand Mitchell’s solution suite of property and casualty insurance-focused bill review and out-of-network negotiation services as it complements its 2012 acquisition of National Health Quest. Mitchell was acquired in 2013 by KKR & Co. (NYSE:KKR).
Solera, Inc.: The breathtaking series of recent U.S. and foreign automotive service industry and data acquisitions in 2014 by Solera (NYSE:SLH) includes the Czech and Slovakian vehicle valuation provider IBS Automotive, the UK vehicle valuation firm CAP Automotive, the insurance and services division of PGW (including LYNX, GTS and Glaxis), the claims-related business of UK-based Sherwood Group (Valexa Technolgies), AutoPoint (U.S.) and AutoSoft (Italy). HyperQuest (U.S.) was acquired in 2013 along with Distribution Services Technologies and Services Repair Solutions (U.S.), Serinfo (Chile), Pusula Otomotiv (Turkey), Ezi- Works/CarQuote (Australia) and APU Solutions in 2012. Since its initial public offering in 2007 (originally backed by private equity firm GTCR), Solera has completed 30 acquisitions globally and grown its revenue to more than $1 billion.
Over the next 12 months, we expect these information providers to expand in several directions through internal product development supplemented by strategic acquisitions. This expansion will likely include:
• deeper integration with claims management core systems
• introduction of new tools and services utilizing advanced analytics for use cases across the entire auto and property claims process
• deeper and wider integration with third-party companies in the auto and property claims supply chain, specifically including collision repair parts procurement
• further development of auto casualty and workers’ compensation medical management networks and services and cost containment solutions.
Predictions for 2015 and beyond
• The macro influencers of contraction, consolidation and convergence, combined with the intensity and high velocity of change among the confluence of simultaneous events, will continue to overlay and affect the structural change and the continuing constructive transformation currently happening within the entire automotive ecosystem.
• Property and casualty insurance carriers will develop new forms of highly customized and contextual insurance coverage tied to policyholders’ real-time needs.
• Property and casualty insurance carriers will sell micro-insurance and risk management services to customers based on digital connections to their bodies, automobiles, homes and other personal property; collectively composing the Internet of Things,
• Insurance carrier supply chain partners will increasingly assume claims servicing and resolution responsibilities and may well assume some or all of the associated risks in exchange for guaranteed transaction volume.
• Direct repair assignments through customer choice among the top 10 property and casualty auto insurers continue to grow, and many now have an assignment conversion rate of more than 50% to their DRP providers
• Analytics will evolve to change every aspect of insurance, including marketing, distribution, underwriting, pricing, claims and billing
• The pace and scope of supply chain consolidation within the auto insurance ecosystem will accelerate sharply in 2015 as existing players move to protect and grow their market shares. New, well-capitalized and more consumer-savvy players will enter the market with an array of powerful digital assets. Investors will continue to gravitate to the space, betting on attractive short-term upsides and adding fuel to the fire.
• MSO consolidators will continue to execute on their platform acquisition growth and development strategies. They will supplement their multi-regional and national growth with a combination of single repair center acquisitions, Brown field and green field build outs and franchise expansion to improve coverage and density in existing major and smaller markets.
• The traditional insurer-repairer business model, which is focused on an estimate exchange process, is likely to be transformed within three years and supplanted by a process driven by mobile technologies coupled with predictive analytics. This will reduce and eventually eliminate the need for repairer-carrier estimate exchanges for an increasingly higher percentage of claims.
• The ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute upon the new realities identified in this report. They will also leverage a strategic alliance ecosystem in which they team up for success. They will accomplish this with customers, suppliers, competitors, investors and business partners as part of a collaborative brain trust where all are committed to co-create and change their organizations and their uncertain environments to their individual and mutual benefit.
• In this dynamic environment, we believe that the ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute on the development of compelling personal mobility solutions and transform product development and distribution around the new consumer. They will leverage data and analytics across the enterprise, think, plan and execute globally and aggressively collaborate, partner and affiliate as effectively as possible.
• The auto parts supply chain, one of the most fragmented of all segments in the ecosystem, and until now characterized by numerous competing parts search and procurement platforms, will finally begin to consolidate in the hands of just a few well-capitalized, highly experienced and strategically positioned information and software providers.
• The ability to successfully acquire, control and effectively translate and leverage all of these new streams of data into actionable information and insights will determine the insurance industry’s digital gold rush winners and losers of the future.
• The area in which we expect the greatest potential for increased disruption in 2015 and beyond is within the claims supply chain.
• For smaller providers in the claims supply chain, now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies. A “going it alone” strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations.
• Many of the trends associated with the beginning of a slow, long-term, downward slope of future accident frequency such as the proliferation of accident avoidance technology, urbanization, car sharing, Uber, connected vehicles and telematics are already cooked into the expanding equation and future auto insurance and repair model reflecting reduced auto accidents and fewer repairable vehicles with new and hybrid insurance coverage offered by fewer surviving insurers.
This was originally published in the U.S. in ABRN in the July 2015 edition and in Canada in Collision Repair Magazine in the August 2015 edition.
As a claims advisor, I specialize in helping to optimize property casualty claims management operations, so I spend a lot of time thinking about claims business processes, activities, dependencies and the value chains that are commonly used to structure and refine them. Lately, I have been focusing on the claims management supply chain — the vendors who provide products and perform services that are critical inputs into the claims management and fulfillment process.
In a traditional manufacturing model, the supply chain and the value chain are typically separate and — the supply chain provides raw materials, and the value chain connects activities that transform the raw materials into something valuable to customers. In a claims service delivery model, the value chain and the supply chain are increasingly overlapping, to the point where it is becoming hard to argue that any component of the claims value chain couldn’t be handled directly by the supply chain network.
Which creates an intriguing possibility for an insurance company — an alternative to bricks and mortar and company cars and salaries, a virtual claims operation! Of course, there are third-party administrators (TPAs) that are large and well-developed enough to offer complete, end-to-end claims management and fulfillment services to an insurance company through an outsourced arrangement. That would be the one-stop shopping solution: hiring a TPA to replace your claims operation. But try to envision an end-to-end process in which you invite vendors/partners/service providers to compete to handle each component in your claims value chain (including processing handoffs to each other.) You select the best, negotiate attractive rates, lock in service guarantees and manage the whole process simply by monitoring a performance dashboard that displays real time data on effectiveness, efficiency, data quality, regulatory compliance and customer satisfaction.
You would need a system to integrate the inputs from the different suppliers to feed the dashboard, and you would also need to make certain the suppliers all worked together well enough to provide the ultimate customer with a seamless, pain free experience, but you are probably already doing some of that if you use vendors. You would still want to do quality and compliance and leakage audits, of course, but you could always hire a different vendor to do that for you or keep a small team to do it yourself.
Your unallocated loss adjustment expenses (ULAE) would become variable, tied directly to claim volume, and your main operating challenge would be to manage your supply/value chain to produce the most desirable cost and experience outcomes. Improved cycle time, efficiency, effectiveness, data accuracy and the quality of the customer experience would be your value propositions. You could even monitor the dashboard from your beach house or boat — no more staff meetings, performance reviews, training sessions — and intervene only when needed in response to pre-defined operational exceptions.
Sounds like a no-brainer. Insurance companies have been outsourcing portions of their value chain to vendors for years, so why haven’t they made their claims operations virtual?
If you are running an insurance company claims operation, you probably know why. Many (probably most) claims executives are proud of and comfortable with their claims operations just the way they are. They believe they are performing their value chain processes more effectively than anyone else could, or that their processes are “core” (so critical or so closely related to their value proposition they cannot be performed by anyone else) and thus sacrosanct, or that they have already achieved an optimal balance between in-house and outsourced services so they don’t need to push it any further. Others don’t like the loss of control associated with outsourcing, or they don’t want to consider disruptive change. Still others think it might be worth exploring, but they don’t believe they can make a successful business case for the investment in systems and change costs. Unfortunately, this may help explain why claims executives are often accused of being stubbornly change averse and overly comfortable with the status quo, but I think it is a bit more complicated than that — it all begins with the figurative “goggles” we use to self-evaluate claims operations.
If you are running a claims operation, you have an entire collection of evaluation goggles — the more claims experience you have, the larger your collection. When you have your “experience” goggles on, you compare your operation to others you have read about, or seen in prior jobs, or at competitors, to make sure your activities and results benchmark well and that you are staying up to date with best practices. At least once a year, someone outside of claims probably demands that you put your “budget” goggles on o look for opportunities to reduce ULAE costs. or legal costs, or fines and penalties, or whatever. You probably look through your “customer satisfaction” goggles quite a bit, particularly when complaints are up, or you are getting bad press because of your CAT response, or a satisfaction survey has come out and you don’t look good. Your “stakeholder” goggles help you assess how successful you have been at identifying those who have a vested interest in how well you perform, determining what it is they need from you to succeed, and delivering it. You use your “legal and regulatory compliance” goggles to identify problems before they turn into fines, bad publicity or litigation, much as you use your “no surprises” goggles to continually scan for operational breakdowns that might cause reputational or financial pain, finger pointing and second guessing. Then there are the goggles for “management” — litigation, disability, medical, vendor — and for “fraud mitigation” and “recovery” and “employee engagement.” Let’s not forget the “efficiency” goggles, which help you assess unit costs and productivity, and the “effectiveness” and “quality control” goggles, which permit you to see whether your processes are producing intended and expected results. And of course your “loss cost management” goggles give you a good read on how well you are managing all three components of your loss cost triangle, i.e., whether you are deploying and incurring the most effective combination of allocated and unallocated expenses to produce the most appropriate level of loss payments.
Are all those goggles necessary? You bet. Claims management involves complex processes and inputs and a convoluted web of variables and dependencies and contingencies. Most claims executives would probably agree it makes sense to regularly evaluate a claims operation from many different angles to get a good read on what’s working well , what isn’t and where there is opportunity for improvement. The multiple perspectives provided by your goggles help you triangulate causes, understand dependencies and impacts and intelligently balance operations to produce the best outcomes. So even if you do have a strong bias that your organization design is world-class, your people are the best and all processes and outcomes are optimal, the evaluation should give you plenty of evidence-based information with which to test that bias and identify enhancement opportunities — as long as you keep an open mind.
No matter what you do, however, there will always be others in your organization who enjoy evaluating your claims operation, and they usually aren’t encumbered by such an extensive collection of goggles. They may have only one set that is tuned to budget, or customer experience, or compliance, or they may be under the influence of consultants whose expensive goggles are tuned to detect opportunities for large-scale disruptive/destructive process innovation or transformation in your operation. On the basis of that narrow view, they just might conclude that things need to change, that new operating models need to be explored. Whether you agree or disagree, your evidence-based information should be of some value in framing and joining the debate.
Will we ever see virtual claims operations? Sure. There are many specialized claims service providers operating in the marketplace right now that can perform claims value chain processes faster, cheaper and better than many insurance companies can perform them. The technology exists to integrate multiple provider data inputs and create a performance dashboard. And there are a few large insurance company claims organizations pursuing this angle vigorously right now. I fully expect the companies that rethink and retool their claims value chains to take full advantage of integration of supply chain capabilities and begin to generate improved performance metrics and claim outcomes, ultimately creating competitive advantage for themselves. Does that mean it is time for you to rethink your claims value chain? I think the best way to find out is to put on your “innovation” goggles and take a look!