Tag Archives: tech

No, Insurance Will Not Be Disrupted

I recently had the pleasure of attending the Insurance Disrupted conference in Palo Alto (put on by the Silicon Valley Innovation Center in partnership with Insurance Thought Leadership). This was the single best insurance conference I have ever attended. I was surrounded by hundreds of hopeful, smart, problem-solving professionals from disparate backgrounds and industries all trying to make a difference in insurance without money being the prime motivator.

I was so encouraged by what transpired at the conference, the connections that I made and what I believe would be the promise of a new future that I began to pen this article on my flight home. But something just did not sit right with me as I wrote. Three weeks have gone by, and I am beginning to understand why I felt the way I did; at the end of the day, insurance will NOT be disrupted.

For all the promise of big data, the Internet of Things, autonomous vehicles and peer-to-peer insurance, there was nothing presented at this conference that struck me as disruptive in the way the tech industry is generally thinking of the term today. When technologists think of disruption, they immediately point to Uber and Airbnb, which disrupted the taxi/livery and travel accommodations industries. The taxi industry is literally fighting for its survival. No, that will not be the fate of insurance. Insurance will be a lot more difficult to shake up or disrupt.

Here’s why:

  1. At the core, insurance customers are leasing the potential to access capital. That capital is sitting in predominantly liquid assets. Not real estate, not taxi medallions. How do you make a big pile of money irrelevant?
  2. The modern form of the industry is 300 years old, and the math is pretty solid (that’s why they call it actuarial science). We sell a product whose costs are unknown at the time of purchase. That means scale and immense capital is required to cover worst-case scenarios, which rules out any new business model not having that potential. Peer-to-peer providers just won’t be able to get sufficient scale to efficiently use capital to cover risk. And if they aggressively get scale, then they just become another insurance company, so what’s the point?
  3. Getting a better glimpse into those unknown expenses can create massive competitive advantages. This is where big data and the IoT creators are looking to disrupt, as big data and IoT will generate incredibly large data sets to be used to accurately predict, avoid and mitigate future losses. I have no doubt that these new technologies will make an impact on the industry, but I am less convinced of their disruptive nature. Insurers have already established non-actuarial, big data departments where fraud detections and credit scoring are just a couple of many predictive models being created. IoT devices will slowly be adopted by most insurers as they look to get competitive edges, but the follow-the-leader paradigm of the industry will mean that any edge will disappear quickly, and we will all be running hard just to stay in place. These technologies are impressive. I would classify them as a solid innovations to the industry, but not disruptive. (Disclaimer: I bought a smart battery from Roost.)
  4. Autonomous vehicles represent the one area where some chaos can occur. But notice I use the word “chaos” and not “disruption.” If autonomous vehicles can live up to expectations, then they will be a great service to society, reducing deaths and increasing efficiency. Risk will transfer from a personal lines business to commercial lines, and that could be chaotic for heavy personal lines auto writers such as State Farm and Progressive. But will this be disruptive? Will State Farm or Progressive be fighting for their survival the way that medallion owners in the New York City taxi system are? Again, I doubt it. State Farm is sitting on about $70 billion in surplus capital, and it generally writes at a 100 combined ratio, working the float and cash flow model. I think State Farm and large auto insurers like them will be just fine, and technologies such as autonomous vehicles will be more of an annoyance than an existential threat. And like others, I don’t think autonomous cars are nearly as ready to take over our roads as many seem to think.
  5. For better or worse, state-by-state regulation of insurance is intense and nebulous. Ask Zenefits. The battlefield is already uncertain, and scrutiny by a regulator with political ambitions can kill your disruptive product quickly. Any technology that you think you can create that could potentially benefit the majority of buyers while subsequently raising the price for some other group, alone, would be grounds for a regulator to squash you, as that vocal minority raises their collective voices. In Florida, the state may even create a company to compete against you, writing business at a loss. Insurance regulation might be the ultimate disruption killer.
  6. There was not one presentation on natural catastrophes, which happen to be my area of expertise. How we underwrite, manage and think about natural catastrophe risk has changed quite a bit over the past 20 years. In fact, CAT models have been and may continue to be the most disruptive force in insurance, and yet there is little technology can do to disrupt that area of the industry. I would have been very excited if we had discussions about new business models to help customers with the problems the industry is currently facing with getting adequate flood or earthquake cover to homeowners. If someone had proposed a new product that removed the exclusions of flood and earthquake from the homeowners policy, now, THAT would be disruptive! Alas, nothing on NatCat, and so we will continue to have thousands of homeless families following big storms and earthquakes.

I don’t think insurance will be disrupted, not in the way folks from Silicon Valley are used to doing it. But the future of insurance will look very different than today. Very digital. Streamlined. Less clunky, more efficient. If “disruption” comes to insurance, it is likely going to require the replacement of the current set of leaders with new ones cultured in this digital age and influenced by the successes of technology to make change happen to their business models.

Paul Vandermarck from RMS (a CAT modeling vendor) perhaps summed it up best when he said that no matter how all of this change to the industry plays out, we know of one sure winner: the customer. And that’s how it should be.

Atlanta: The Ripening Silicon Peach

When evaluating the beginnings of established tech markets in the U.S., there are several similarities about their regional characteristics that can serve as indicators for their tech trajectory. Consider Palo Alto, New York and Seattle, also known as the centers of Silicon Valley, Silicon Alley and Silicon Forest, respectively. Each has unique advantages with its geographies, easy access to Millennial tech talent, attractive quality-of-life benefits and specialized technology roots.

The same pattern is beginning to emerge in Atlanta. Atlanta’s combination of low cost of doing business, educational institutions and growing population of Fortune 1,000 companies is making it one of the fastest-growing tech hubs in the country. This year, Atlanta was ranked among the top 10 tech talent markets with a 21% growth in tech jobs since 2010, according to the latest CBRE report.

One driver in Atlanta’s recent economic and tech growth is the infiltration of insurance. The insurance industry is undergoing a tech transformation of its own, and of late several of the industry’s leading insurance companies have set up shop in the region.

Let’s take a look at how we got here.

Tech Market Drivers

In addition to a prominent business ecosystem – Georgia is home to 20 Fortune 500 headquarters and 33 Fortune 1,000 companies – Atlanta’s tech surge is largely fueled by its world-class universities, which emphasize technology specialization and diversity, and its reputation as an attractive work-life destination.

Like Silicon Valley’s beginnings with tech recruits from local Stanford University, Atlanta’s midtown is walking distance from two respected universities, Georgia Institute of Technology and Georgia State. Georgia Tech is currently ranked seventh in the nation among public universities, and its college of engineering is consistently ranked in the nation’s top five. Georgia State is ranked fifth in the nation for its risk management and insurance program. The vast pool of graduate talent each year is a huge attraction for start-ups and Fortune 1,000 companies alike.

Atlanta’s universities are also known for their emphasis on diversity. Georgia Tech is consistently rated among the top universities with high graduation rates of underrepresented minorities in engineering, computer science and mathematics. This has transcended the universities into the region’s broader tech community — Atlanta is ranked as one of the top five states for women-owned businesses, with a 132% growth rate from 1997 to 2015, according to the U.S. Census Bureau.

As far as work-life attractiveness, Atlanta has been named the “top city people are moving to” by Penske for the last five years, because of the range of job opportunities, low cost of living and appealingly warm weather. Similarly, according to the job website Glassdoor, Atlanta was named one of the top 10 cities for someone to be a software engineer.

Insurance Intersect

The insurance industry is one of the key drivers of economic growth in the country — and it is establishing major roots in the Atlanta region. Just in the last few years, Atlanta has seen a number of insurance companies relocate their head offices to the south. Recently, State Farm announced the addition of 3,000 jobs over the next 10 years, and MetLife just announced a significant investment in Midtown, choosing this area for its proximity to rapid transport and the international airport. Where Atlanta is situated, travelers can reach 90% of the U.S. in fewer than three hours.

Insurance growth in the region is also likely linked to the density and size of insurance claims on the East Coast, with the largest insurance providers located along the corridor from Boston down to Miami. The 10 most costly hurricanes in the U.S. history have hit the East Coast, and four have greatly affected Georgia.

2015 and Beyond

Looking ahead, I expect the majority of insurance companies to increase their visibility in Atlanta, as they’ll find a wider pool of insurance experts and other advantages that cater to the industry’s growth. Similar to the tech hubs ahead of it, Atlanta will continue taking advantage of its geography, access to talent and cultural ideals to not only build its tech community but to also push the insurance industry forward. The U.S. will soon have another major tech hub to be proud of.

Global Insurance IT Spending Set to Top $100 Billion

As conditions in insurance markets worldwide slowly improve, CIOs are beginning to re-assess their strategies to drive a new set of IT priorities and are increasing their IT budgets.

The new reality of only modest premium growth in most mature markets is driving focus on simultaneously improving operational efficiency and organizational flexibility. As a result, Ovum is seeing the re-emergence of IT projects focused on legacy system consolidation/transformation and replacement.

Within emerging insurance markets, expanding core platforms and infrastructure to support growth in these regions remains the priority.

Consumers' demands for “anywhere, anytime” interaction continue to drive significant IT investment in digital channels across all regional markets.

These findings come from the latest Ovum Insurance Technology Spend Forecasts, available on the Ovum Knowledge Center. These interactive models provide a highly detailed breakdown of IT spending through 2017, segmented by geography, insurance type, insurance business function, and IT category.

The sharp decline in new business growth across all life insurance markets following the global slowdown led most insurers to rapidly and significantly cut their IT budgets. However, accelerating year-on-year growth in 2013, following some cautious expansion from 2011, confirms that life insurers are now moving from a cost-cutting mindset toward reinvestment in strategic IT projects. Ovum expects this growth in IT budgets to continue at a 7.6% compounded annual growth rate (CAGR) between 2013 and 2017 to reach a global value of just over $49 billion.

IT spending across global non-life insurance markets varies less and has generally lower growth rates. However, Ovum expects IT spending by non-life insurers to grow at a 5.7% CAGR overall to reach $60 billion in 2017. IT spending in the most mature regional markets of North America and Europe will continue to remain significantly greater (at least twice the size) than the faster-growing Asia-Pacific region beyond 2017.

As insurers emerge from short-term cost-cutting, CIOs are beginning to prioritize projects that drive customer acquisition and retention or improve operational effectiveness – ideally both. All insurers should at least be re-assessing their current IT approach to ensure sufficient focus is given to revenue-growth initiatives, to prevent becoming stuck in a “maintenance only” IT strategy.

Within the European markets, intensive competition and prolonged slow premium growth is driving a focus on customer retention, with online portal projects being key IT initiaitives for many life insurers. These initiatives are a critical means of driving process efficiency, reducing operational costs, and responding to the demands of policy-holders for self-service functionality. As the requirements of Solvency II recede and the imperative to deliver sustainable reduction in operational costs becomes increasingly urgent, European life insurers are also refocusing on the issue of legacy system modernization. Legacy systems are not a new concern, but market conditions are now forcing insurers to address the problem. As a result, Ovum expects to see continued expansion of IT budgets in support of consolidation/transformation and core system replacement projects, to reach annual spending of nearly $5 billion by 2017.

A key priority driving IT spending by North American life insurers is the need to comply with emerging regulation such as the National Association of Insurance Commissioners (NAIC) Solvency Modernization Initiative (SMI). The impact of regulatory compliance on IT budgets will continue to be felt up to 2017, driving spending on enterprise risk management (ERM) and enhanced management information systems (MIS) in particular. Ovum forecasts a 9.7% CAGR in this area.

The Asia-Pacific region will see the most significant growth at an 11.6% CAGR to reach annual IT spending nearing $15 billion by 2017, overtaking the European market to become the second-largest regional market. This expansion is being driven by life insurers needing to “build out” core systems and infrastructure to capture the strong growth opportunities in the region.

The goal of increasing new revenue through greater customer interaction is a critical objective for non-life insurers in both the North American and Asia-Pacific markets. Although North American non-life insurers are already well advanced in terms of online channel deployment and functionality, Ovum expects budgets directly related to digital channels to grow at a 9.0% CAGR, with mobile and social media emerging as the key focus of channel-related IT projects. Among Asia-Pacific non-life insurers, Ovum expects advanced functionality (such as policy application, quotation, payments, claim tracking, etc.) served via digital channels to see rapid development in the next 24 months.

European insurers in general are less advanced in the implementation of digital channels than their North American counterparts, although there is significant variation between individual players. However, Ovum expects this gap to rapidly diminish as the deployment of online portals and mobile channels emerges as a key priority from 2013 onward. IT spending in support of digital channels will grow at a 7.4% CAGR to 2017, with much of this growth occurring early on.