Tag Archives: transformation

Technology Cannot Replace Brokers

Amid all the investment activity in the insurance industry, I distinguish two types of startups by using a very straightforward – and I believe a black-and-white, legal – perspective: If a firm must comply with insurance regulations then it is an insurance firm, and not a technology firm, regardless of what technology it uses to get and keep customers.

Why all the activity? Why is the insurance industry a target for transformation or a destination for disruption for investors?

VCs, other investors and the startup entrepreneurs view the trillion-dollar global insurance industry as a group of (very) old companies using (very) old processes to conduct commerce. From their perspective, the industry is an extremely large addressable market of companies that are seriously out of touch with the realities of how commerce is, and should be, conducted in the mobile, digital, connected marketplace in the Internet era. 

For investors, it is an industry ready to be plundered!

Brokers: the sweet spot of many startups

Quite a few of the insurance startups are targeting insurance brokers as a sweet spot to be disrupted. And a sweet spot it is. Estimates from various sources put the number of agents and brokers in the U.S. insurance industry at between 300,000 and 400,000. 

See also: Agents, Brokers Are Dead? Not So Fast!  

[Note: For the purposes of this post, I will use the term “broker” to mean either insurance broker or insurance agent. I agree that I’m taking liberties doing that.]

Brokers: target for transformation

There is an important fact about insurance brokers: Customers can’t legally purchase insurance without using one.  

I believe that investors forget that brokers are legally required in the purchase of insurance, think that fact (i.e. the law) will change to the benefit of the startup they are invested in, are ignorant of the fact or willingly ignore the fact.

(If you’re wondering … Yes, I believe there are VCs or other investors who would willingly and illegally ignore insurance regulatory requirements and related laws.)

The key question is: Can the insurance broker space be disrupted or transformed?

My answer is no.

I believe the broker space can’t be disrupted, as in, broken apart, thrown into disorder or interrupted in their normal course or unity.

Customer-Broker Paths

However, I believe the broker space can be transformed. 

Specifically, the customer-broker paths can be transformed. In reality, through the applications of technology through the decades, these paths have been transformed, are being transformed and, I suggest, will continue to be transformed.

See also: What a Safer World Means for Brokers  

Consider the visual below. The visual captures past, existing and potential future customer-broker paths. But keep in mind two points:

  1. Even through the process of transformation, the broker (whether person or algorithm) remains because the broker is legally required in the insurance purchase.
  2. The transformation is about transforming the path between customer and broker but is not about transforming the role (or the essence of the role) of the broker.

The history of customer-broker paths is founded on face-to-face (F2F) meetings, whether in the customer’s home, in the broker’s office, at car dealerships or in banks. 

Beyond F2F paths, technology has acted as an interface that has eliminated time and distance between the customer and the broker. But whether at the other side of a computer screen, via a mobile app, through an email or using a chatbot on an insurer web portal, there must be a broker present to sell the insurance line of business. Even algorithms used as brokers have to comply with the requisite insurance regulations: no leprechauns, no pixie dust, no magic. 

Technology redefines the existing paths, introduces new paths and makes the activities enabling any of the customer-broker paths both more effective and more efficient. 

The technologies, whatever they are, do not, of course, replace the broker even if they make the broker appear in a virtual reality or in Second Life or “embed” the broker in a hologram.

Commercial Lines: Kicking Into Gear?

“Transformation” is fast becoming the next overused word in insurance, right behind “digital” and “innovation.” But the fact that so many commercial lines insurers are talking about transformation indicates a reality – there is definitely fundamental change underway. It is true that the basics of the business remain the same, and many of the headline-grabbing initiatives are not yet driving big financial gains. But in those headlines and the behind-the-scenes strategies and pilots underway, there is a palpable sense of real transformation. And it is changing the industry for the better.

SMA’s recent research report, 2020 Strategic Initiatives: P&C Commercial Lines, provides more insight into this transformation. It addresses both what insurers are doing and why they are doing it. The why discusses the factors compelling insurers to embark on transformation, while the what covers insurer strategies and plans and their stage of development. Great progress is being made in the overall digital transformation as well as a dozen other initiatives ranging from improving customer engagement to building world-class data/analytics capabilities.

SMA’s observation from working on strategy with insurers is that there are actually two levels of transformation underway. We divide this bi-level transformation of commercial lines into approaches we call incremental and transformational.

Incremental transformation, Level One, is beyond business as usual. It is not just developing next year’s plans to improve the business on a continuing basis, with gradual, minor improvements to the metrics. It is more about harnessing innovation to generate ideas and approaches, take more risks, establish new roles such as customer experience or chief data officers and begin to change the culture. The objective is to accelerate the optimization of the business and achieve top-line and bottom-line results faster and at a higher level. However, at the incremental level, all activity is done in the context of the current business model and builds off of today’s growth and profitability.

See also: Commercial Lines Embracing Change  

At Level Two, the transformational level, revolutionary change takes place. The objective is nothing less than relevance and future survival. In this mode, insurers are looking at how to create value in new ecosystems, engage in new types of partnerships and achieve the next level of optimization. Considering new business models; rethinking the future roles of underwriters, adjusters and other industry professionals; and designing insurance products to address emerging risks are all part of this level of transformation. By definition, this more “earth-shaking” transformation is a greater challenge because it requires a broader understanding of the rapid changes taking place in the world at large and then translating them into likely scenarios for insurance. Bolder bets are required as part of the risk/reward equation.

What is clear is that many insurers that thought they were undergoing major transformation are now realizing that they are at Level One (incremental transformation). Leaders are trying to kick it into high gear as they launch initiatives to drive Level Two transformation. This is not to imply that the incremental transformation ends. On the contrary, it is still vitally important that insurers push forward with the incremental improvements to the business while working in parallel on more transformative activities. It is a difficult balancing act, but those that successfully move down these paths in parallel will be the winners in the next decade.

Good, Bad and Ugly of Going Digital

Having spent seven years helping major insurers with digital transformation, I’ve seen the good, the bad and sometimes the downright ugly in practice.

The bad and the ugly include:

  • Digital “strategies” disconnected from the priorities of the business;
  • Inconsistent approaches across different parts of the insurer, confusing customers;
  • Gaps and overlaps in delivery, wasting both opportunities and resources;
  • Digital approached as a project rather than as a root-and-branch transformation; and
  • Lots of activity but little practical achievement.

All of these issues, and more, can be avoided by implementing a model for sustainable digital transformation.

I offer you my version of such a model, below.

A Model for Sustainable Digital Transformation

1. The Customer

Ultimately, all premiums and other revenues flow from the customer, hence placing the customer at the center of the model. Without strong focus on the customer, the digital transformation won’t be sustainable.

For any digital initiative, the insurer therefore needs to ask what the impact will be on the customer and design or re-design accordingly.

That doesn’t mean that the customer should the only focus. There’s still scope for using digital to reduce costs, increase efficiency and generate new revenue streams – just not at the expense of the customer.

2. Business Strategy

How the insurer seeks to serve the customer will be set out in the business strategy. This should therefore be the starting point for the insurer’s digital transformation.

To be sustainable, any digital strategy has to be rooted in the business strategy. To give but one example, digital claims would look very different in an insurer competing primarily on price than in an insurer competing primarily on personal service.

3. Digital Vision

The digital vision expresses how digital will help deliver the business strategy.

The vision can take many forms, such as narrative statements, depictions of the future state and key re-imagined customer journeys. But much more important than the format is that all key stakeholders must understand, buy into and be able to expound the digital vision.

The digital vision provides the glue for everything that follows.

See also: 3 Phases to Digital Transformation  

4. Digital Design

Once all key stakeholders are aligned behind the vision, the next step is to drill it down to a level of detail that is deliverable. Again, the precise methods and tools for doing so can vary according to the particular needs of the insurer. But in my experience a focus on customer journeys or user stories is almost always a powerful component.

What is critical is to ensure that all key stakeholders, across the insurer, are aligned behind this more detailed digital design as well as the higher-level vision – not least because trade-offs between different functions and business units are likely to be required.

If key stakeholder alignment isn’t achieved at this relatively early stage, the digital transformation is unlikely to be sustainable.

5. Digital Capabilities

Only now should the insurer ask what it needs to put in place to deliver its digital transformation – the digital capabilities required.

These can, and should, be wide-ranging, encompassing culture, people and processes as well as the requirements for new and improved technology.

The digital capabilities provide the bedrock for the digital transformation, and are likely to be fairly stable over time.

6. Road Map

Once the insurer knows What capabilities are required, the next step is to establish the How and the When. How will any required culture changes be made sustainable? Should new people be brought in, or can existing staff be re-trained? For technology capabilities, should the insurer buy on the open market, build unique capabilities in-house or rent from others in the increasingly abundant insurtech ecosystem?

More controversial is likely to be the When. By now, everyone should be excited about the digital transformation and be keen to get on with it. Unfortunately, not everyone can be first – so compromises and trade-offs will again be required. Otherwise, the digital transformation is liable to collapse in acrimony in its early stages – and never deliver in the first place, let alone be sustainable.

This is also the point at which the digital transformation’s relative priority against other strategic initiatives comes into play. Reaching alignment on the trade-offs between digital transformation and other critical programs will be essential to the sustainability of the digital transformation.

7. Delivery

And now the insurer merely(!) needs to deliver to the road map. As with any transformation program, this won’t be simple – but the same sorts of approaches, tools and techniques apply, so I won’t go into that further here.

8. Review

Many digital transformations end with delivery. But that’s a mistake. Because the world moves on, and the digital transformation of an insurer is rarely complete.

To ensure sustainability, it is also critical to implement a process of continuing review – seeking feedback from customers, assessing financial and other outcomes, considering potential improvements and translating what is learned into updated visions, designs, capabilities and road maps as appropriate.

Without this step, both the digital transformation and the insurer itself will stagnate – losing the benefit of all the hard work done to that point.

See also: Culture Side of Digital Transformation  

9. Change Management

Surrounding steps two to eight in the model, you’ll see a ring titled “change management.”

A Model for Sustainable Digital Transformation

Having now read through those steps above, you’ll see why.

Multiple times I’ve used terms such as alignmentunderstanding and buy-in. And no digital transformation program will be sustainable without its key stakeholders acting in harmony to achieve common goals.

Key to sustainability, therefore, is the establishment and use of a high quality change management capability within the digital transformation program.

I won’t go into that more in this article, but you can see some of my thoughts on change management, within the context of digital transformation, here: Digital Change Management and Adapting OCM for an Increasingly Digital World.

10. Governance

Finally, no insurer’s digital transformation program is likely to be sustainable without the underpinnings of good governance.

This includes multiple elements, but experience shows that the most important to get right are:

  • The RACI Matrix for Digital, showing exactly who is responsible and accountable for what, across the insurer’s functions, lines of business and transformation capabilities;
  • An accompanying target operating model; and
  • The processes and cadences for managing the digital transformation, at both the strategic (vision, capabilities, design, road map and review) and tactical (continuing program delivery) levels – including financial management.

* * *

None of the above is rocket science, yet to this day few insurers, globally, have implemented a truly sustainable digital transformation.

I hope that, by publishing this simple model, I am providing some help to those who find themselves struggling.

Most insurers won’t, of course, be starting from a blank sheet of paper, so the model will need refining to meet the particular needs of each insurer.

Is Transformation Losing Steam?

Technology adoption in personal lines has been going on for a long time. Because of the early advent of personal auto data standards, technology adoption has been fairly easy (always a relative term). Many insurers have staked their industry competitive advantage on data and analytics – Progressive comes to mind. Others have been early adopters of advanced payment technologies – USAA is a great example. So, is it time for transformational technology adoption to plateau or even dip in the personal lines segment?

SMA has been conducting a survey on this very topic over the past decade. As one would expect, early results showed a good deal of learning and strategizing, with cautious investment. Over time, investment ramped up, as did implementations. But what about current results? Is the hype wearing down conviction?

Without reservation, we can state that adoption is not losing steam. The recently released SMA report Transformational Technologies in P&C Lines: Insurer Progress, Plans and Projections reveals that transformative technology interest and application is strong. In particular:

  • New user interaction (UI) – Chatbot technology and text messaging technology are keeping this area high on everyone’s list.
  • Artificial intelligence (AI) – Given all the iterations of AI in the marketplace, the possibilities for adoption are almost limitless, and insurers are definitely keeping initiatives in motion.

Now, I don’t think that anyone reading this blog is stunned that UI and AI are still rolling in personal lines. They both will be for a long time due to the opportunities that keep arising and the strong bottom-line impact. However, the survey does show some noteworthy things – and not for their “rolling along” status.

  • There is a good news/bad news scenario developing in the UI/AI results. Many insurers are putting all their investment eggs into these two baskets and ignoring – or at best shortchanging – other transformational technologies. It is very hard not to run toward one or two areas that are delivering early value. However, insurers need to have an even view of all the transformational technologies that affect customers.
  • The SMA survey asks responders to identify the business areas that transformational technologies will affect. One of the choices is claims. Anyone who has read my recent blog Claims – Caught Between a Rock and a Hard Place – No More! will understand that I am a huge fan of claims workers. They have a super-hard job, one that is at the very heart of what insurance companies are all about. The troublesome thing is that survey results show that claims impact was sometimes fairly low in areas where it should not be.

See also: Commercial Lines Embracing Change  

In all, the personal lines transformational technology report covers 11 technologies. It also provides a view of the impact of these technologies on 12 business areas. The trick is keeping the technologies and business impact areas in balance in terms of strategies and investment. Not every insurer will find business value in all 11 technologies; the key to keeping inertia at bay will be making conscious and well-considered decisions.

The Reinsurers Are Coming!

In most instances, when A.M. Best issues its Top 200 U.S Property/Casualty Writers results, there is some jockeying for position – up or down a position or two. However, the 2018 results issued in July 2019 revealed something that literally flew off the page. One insurer moved up 28 positions, another 29 and a third a staggering 121 positions. While the upward movement is interesting in and of itself, it was who the insurers are that really caught my attention – reinsurers! Swiss Re jumped 28 spots, Everest Re 29 and Arch 121. And Munich Re is already at number 18.

See also: More Opportunities for Reinsurers in Health  

Now, it is easy to rationalize these position changes – mergers and acquisitions. However, it’s what lies beneath that is critical for all insurers to recognize – and changes the market’s competitive landscape in four critical areas:

  • Data: Reinsurers have an abundance of data, across numerous categories and geographies. Data is king, and reinsurers have it in spades. This changes the foundation for insights and puts these organizations ahead of the pack because most primary insurers do not have diverse data – at least not yet.
  • Information: Data generates information. Reinsurers have information about products, segments, buyers, distributors, channels, loss outcomes – you name it. This allows their decision making to be immediately more robust.
  • Skills: At a time when every insurance executive sees a lack of skill as a major issue for their organization, reinsurers have had skills, particularly data and analytics skills, embedded in their organizations for a long time. This puts them down the road in terms of leveraging the explosion of data and information – and using cutting-edge technology to do so.
  • Money: Reinsurers have a good deal of money. For a number of years, catastrophe outcomes have not drained coffers, and capital remains abundant. This allows reinsurers to invest in their subsidiaries. And they are doing so, which affects primary insurers directly.

See also: The Dawn of Digital Reinsurance  

So, the message is not to lock the front door, turn off the lights and send everyone home because the reinsurers are coming. The message is – the competitors of yesterday may not be the competitors of tomorrow. There are competitors that are focused on changing business decisions and how those decisions are made. There are competitors whose DNA is innovation and transformation, and no one can run from that. The bottom-line message is urgency.

If your organization believes it has many years before innovation will transform your operating environment and market position, or that innovation and transformation can be a secondary focus for your organization, consider that there may be a reinsurer just around the corner that has another idea.