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Blue Marble: Building a New Business Model

As with many modern businesses, Blue Marble Microinsurance began with a question-the same question entrepreneurs and innovators ask themselves every day: What can we do differently that will eliminate inefficiencies and redirect resources to a more value-accretive cause?

The underlying mission of Blue Marble is tied to the recognition that insurance is important to economic development around the world. Without prefinancing losses, societies are vulnerable. Following disasters, people who show potential for emerging into the middle class frequently fall back to the bottom of the economic pyramid.

With the knowledge that fortifying the economic progression of the poor would add untold benefits to the global economy, to our industry and, of course, to the poor themselves, we asked another simple question: What needs to change in the insurance and reinsurance industry to make it relevant to the poor?

To examine this question further, Blue Marble’s founders needed to be open-minded about doing things differently and having a willingness to learn while leading. Only by researching the facts could Blue Marble articulate the problem that the founders set out to solve and establish a mission backed by a business model.

The problem was clearly identified in research literature. For example, Swiss Re reported that in the last 10 years, cumulative total damage to global property as a result of natural disasters was $1.8 trillion-only 30% of which was insured, resulting in a protection gap of $1.3 trillion. This gap is even wider when general property risk such as fire, water damage and burglary are considered. And the gap is likely to continue to grow as a result of trends such as global warming and urbanization. While this research covers a scope broader than microinsurance, we have identified the significance of the protection gap and its ever increasing trend.

Other research has underscored how uninsured losses eventually become the responsibility of governments and society at large, resulting in a drag on the economic growth of nations. In emerging nations, 80% to 100% of disaster losses are uninsured, according to Swiss Re.

Haiti, the poorest country in the Western Hemisphere, is an example that warrants examination. The United Nations World Food Program reports that 75% of Haitians live on less than $2 a day. In January 2010, the dire situation was worsened by a magnitude 7.0 earthquake. According to the Inter-American Development Bank, about 230,000 people died, and nearly 1.5 million Haitians were displaced. Economic losses were estimated at about $8 billion- approximately 120% of GDP—with insurance penetration at around 0.3% of GDP.

In another example-the recent earthquake disaster in Nepal-we estimate the damages at 35% to 50% of GDP, with little to no aid delivered as of yet. The effect of the protection gap on developing nations and the consequence on the poor is crippling.

The poor, with no safety nets other than informal systems of caring for each other, are disproportionately affected by catastrophes. The safety nets break down in a village or community following a disaster, thrusting complete communities to the bottom of the economic pyramid for years to follow. In Nepal, communities rich with heritage and dependent on tourism are now struggling to survive with a safety net under stress. Without mechanisms for prefinancing risk, smallholder farmers, shop owners and artisans who lack savings fall deeper into poverty.

With an understanding of the problem that Blue Marble planned to address, a business case for the consortium was established. The problem was viewed as significant and the solution relevant to the global economy, our industry and the poor.

A Role for the Insurance Industry

The potential solutions include charity and public-private partnerships, but what role might the insurance industry assume? While some companies have attempted to enter the microinsurance market in hopes of providing risk protection to the poor, few actually succeeded. Some have been able to show profitability, but most lacked evidence of the double bottom line: the ability to deliver protection that also creates incentives and enables the poor to make better economic choices in their lives.

This is a crucial point. Risk protection, in and of itself, will not enable economic progression. Incentives embedded in the risk protection are the key drivers. Policies should be designed to encourage growth and expansion. For example, by creating a more certain outcome, a policy can enable the smallholder farmer to cultivate two hectors of land as opposed to one hector. Another example is enhancing a micro-entrepreneur’s willingness to expand his or her sewing business-to buy another sewing machine and hire an employee-all enabled by a reduction in the fear of theft.

Making It Work

A review of prior experiences-many unsuccessful-suggested that Blue Marble needed a different business model. The business model needed to recognize the vast array of talent required to address the protection needs within the context of poverty entrapment. From within the insurance industry, expertise was needed to support product development, regulatory environment and risk pricing. Other areas of expertise likely found outside of the industry included an understanding of the poverty ecosystem and how to partner with entities in the supply chain of the poor.

At the same time, the business model had to address the many barriers to success in microinsurance:

  • A long-term commitment was needed, yet our traditional business models were anchored on immediacies and benchmarked against such metrics as payback periods.
  • Financial literacy and trust needed to be established.
  • High distribution costs result in prohibitive frictional cost, making the protection unaffordable. The cost of innovation to address this frictional cost was high.
  • Understanding why the poor consistently made suboptimal economic choices even when given access to the means was critical.

Recognition of the barriers to success in microinsurance and the need for a unique talent model led Blue Marble to a collaborative approach: the formation of a legal entity owned by eight significant insurance entities with a dedicated management team supported by employees from the consortium members. Through collaboration, we would share the cost of innovation and be able to “mutualize” talent from within and beyond the industry. By stepping forward and collaborating among the eight, we developed a public-private outreach partnership with a shared goal.

Blue Marble was established as a legal entity owned by the eight but with a long- term focus. A dedicated management team was retained to give focus to the problem at hand and was backed by a governance model involving senior leaders from the consortium members.

The talent model was unique: The eight consortium companies represent 250,000 employees operating in 170 countries. A virtual business unit was established giving Blue Marble access to talent from the consortium members on a secondment basis. The win-win is that Blue Marble has access to both strategic and technical talent on an as-needed basis. For example, if a Spanish-speaking actuary with knowledge of agriculture risk in Peru is needed, we can identify the person and gain access to her expertise for a limited time. Likewise, Blue Marble facilitates reverse benefits in terms of employee engagement and an appreciation for the relevancy of our day-to-day work.

Why the Name Blue Marble?

Employees of all participating companies were informed about the microinsurance consortium initiative, and their ideas for names were solicited. The communication heads for each company coordinated the outreach and then narrowed the submissions. The board ultimately selected “Blue Marble.”

The name was nominated by Denise Addis, an executive assistant from Guy Carpenter. Addis wrote: “Blue Marble is a nickname for our planet…Technology and social media have made the world an even smaller place, and the planet itself has become a community more than ever before. I think this venture will expand that community.”

The Blue Marble name captures our holistic view of our world. Underscoring our mission to extend insurance protection to a broader portion of the population and to advance the role of insurance in society in a socially responsible and sustainable way, it reminds us that we all share the planet. It is up to us to connect with citizens around the world to make life better for us all.

This article first appeared in Carrier Management. Joan Lamm-Tennant spoke to Carrier Management about Blue Marble Microinsurance during a videotaped interview at the IICF Women in Insurance Global Conference in June. Excerpts of the interview are presented below.

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What is microinsurance?

Lamm-Tennant: Microinsurance is risk protection for the poor-artisans, small- scale farmers, shop owners. We address their specific risk protection needs and enable them to have stable consumption, which allows them to invest, improve productivity and grow through the economic pyramid.

What are the greatest benefits for carriers that take part in the microinsurance consortium?

Lamm-Tennant: It’s an opportunity to have an impact, to be relevant, to work in public-private partnerships and solve the protection gap. By solving the protection gap and being a part of the financial inclusion initiatives, we in fact enable a massive emerging middle class…

Today, we have seven billion people in the world. The middle class is only 1.8 billion. We could double that in the next 15 years.

The opportunity is also significant in terms of solving our own problems within the insurance industry. It’s an opportunity to be forced to innovate because being successful in these markets is not about lifting and shifting products that are on our shelves. It’s about being more efficient, being more focused on the value proposition within our products, and it’s about new distribution channels.

Because we’re forced to innovate, we’ll have the opportunity to reverse innovate. Last of all, we have a talent challenge within the insurance industry. The Millennials are not necessarily interested in investing their brilliance, their talent, in our causes. So this is a way in which we join them in their cause for relevancy.

Exactly how does the collaboration work? How do carriers share the costs, premiums and claims? Whose paper are policies written on?

Lamm-Tennant: We’re a service entity. Our objective is to prepare a complete turnkey, cost-efficient package for the carriers so that they can enter the market…

What are the component parts of that package? It could be everything from policy design to distribution mechanisms to social impact metrics. In essence, by delivering this package to the carriers, they then will have to add risk capital, using this enabler to enter the market. Their goal is to create the market.

Yes, one of them will lead, and that’s a part of our governance structure. Collectively, among the eight carriers, we have licenses in many markets. A lead, perhaps, would be somebody who is already present with a license…Within and among the eight of us, to fill the demand, our goal is to engage local carriers and other partners. [What] we’re trying to do is make it cost-efficient, by sharing the development cost, so that they can enter with risk capital at a profitable level.

In what areas do you expect microinsurance carrier participants to innovate and reverse innovate?

Lamm-Tennant: Success will not occur by simply reducing a few zeros off the line and saying, “Here, we’ve made this a smaller product. So won’t you buy it?”…There has to be a clear value statement…

The second part is our distribution mechanisms have to be efficient. I’m not suggesting abandonment of the agency distribution system, [but the question is] how do we enable that system to be very efficient with technology?

The third is how we measure success…If we truly want to be relevant, let’s put some broad measures of social impact in our products and not carve it off into a CSR initiative.

Those are three platforms that are going to be critical to our success and create an opportunity for the carriers to then rethink similar issues in their traditional business.

How are microinsurance products distributed?

Lamm-Tennant: We’ve seen some success in some markets with the distribution through utility companies, mobile phone operators, even seed manufacturers. [But] the embedded distribution costs are quite high…Some of these products distributed on those platforms could have a claims ratio of 10 or 20 and a distribution cost of 50 or 60. So we can’t just roll ourselves into those platforms.

We have to think about how to utilize those platforms yet still do it in an efficient way and not impose such distribution costs. Having said that, we are an arm’s throw away. It is within our reach that the poor will move from mobile phones to smartphones…

How will you measure the success of the venture?

Lamm-Tennant: Success to us is having demonstrated evidence that those who are benefiting from our products are benefiting in a sense that they are moving up the economic pyramid-that we’re seeing behavioral change. We’re seeing them put risk aside and invest in their businesses, grow their land, sustain their consumption if it’s a food sustainability motive that we’re looking at.

The Growing Disruption in Auto Ecosystem

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:

• globalization

• 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

• morphing demographics

• multi-system operators (MSOs), growing market dominance and insurance carrier acceptance

• repair segmentation

• national technician shortage

• complex vehicle technology and proliferation of advanced materials

• urbanization

• 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

• Hartford-based Insurity acquires Montreal-based Oceanwide

• Patriot National’s Technology Solutions unit acquires Vikaran Solutions in Pune, India

• Uber acquires control of Metromile (PAYD) insurance, U.S.

• Google acquires CoverHound, an insurance aggregation website, U.S.

• Google’s Nest unit buys Dropcam

• Fosum buys Meadowland, a first-ever acquisition by a Chinese insurer of a U.S. insurer

• Alliant Insurance Services of the U.S. buys the U.S. agency business of Australia’s QBE

• Majesco acquired Cover-All Technologies and Agile Technologies, U.S.

• Symphony Technology Group acquires Aon e-Solutions from Aon (UK)

• ACE (Bahamas) buys Fireman’s Fund U.S. personal lines business

• Vista Equity acquires TIBCO for $4.3 billion, U.S.

• Onex (Canadian private equity firm) acquires York Risk Services for U.S. $1.325 billion, U.S.

• Element Financial (Canada) acquires U.S.-based PH&H fleet management business for U.S. $1.4 billion

• Mapfre Insurance, Spain, acquires Commerce Insurance and MiddleOak personal lines, U.S.

• QBE Insurance, Australia, acquires Balboa Insurance, U.S.

• Travelers Insurance, U.S., acquires Dominion Insurance, Canada

• 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

• business complexity

• mature management teams

• performance-based insurance DRP contract requirements

• brand recognition

• demonstrated economies of scale

• 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

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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

• claims technology vendors (document management, compliance, data quality, payment systems, etc.)

• collision and auto glass repairers

• collision repair parts suppliers

• insurance replacement rental car providers

• 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

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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.

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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.

Conclusions

• 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.

Insurance at a Tipping Point (Part 2)

This is the second in a series of three articles. The first is here.

With the entire insurance industry at a tipping point, where many of the winners and losers will be determined in the next five to 10 years, it’s important to think through all the key strategic factors that will determine those outcomes. Those factors are what we call STEEP: social, technological, environmental, economic and political.

In this article, we’ll take a look at all five.

Social: The Power of Connections

The shifts in customer expectations present challenges for life insurers, many of which are caught in a product trap in which excessive complexity reduces transparency and increases the need for advisers. This creates higher distribution costs.

A possible solution lies in models that shift the emphasis from life benefits to promoting health, well-being and quality of life. In a foretaste of developments ahead, a large Asian life insurer has shifted its primary mission from insurance to helping people lead healthier lives. This is transforming the way the company engages with its customers. Crucially, it’s also giving a renewed sense of purpose and value to the group’s employees and distributors.

Further developments that could benefit both insurers and customers include knowledge sharing among policyholders. One insurer enables customers to share their health data online to help bring people with similar conditions together and help the company build services for their needs. Similarly, a DNA analysis company provides insights on individual conditions and creates online communities to pool the personal data of consenting contributors to support genetic studies.

A comparable shift in business models can be seen in the development of pay-as-you-drive coverage within the P&C sector. In South Africa, where this model is well advanced, insurers are realizing higher policyholder retention and lower claims costs.

This kind of monitoring is now expanding to home and commercial equipment. These developments are paving the 
way for a move beyond warranty or property insurance to an all-’round
 care, repair and protection service. These offerings move the client engagement from an annual transaction to something that’s embedded in their everyday lives. Agents could play
 an important role in helping to design aggregate protection and servicing.

In banking, we’ve seen rapid growth in peer-to-peer lending; the equivalent in insurance are the affinity groups that are looking to exercise their buying power, pool resources and even self-insure. While most of the schemes cover property, the growth in carpooling could see them play an increasing role within auto insurance.

Technological: Shaping the Organization Around Information Advantage

More than 70% of insurance participants in our 2014 Data and Analytics Survey say that big data or analytics have changed the way they make decisions. But many insurers still lack the vision and organizational integration to make the most of these capabilities. Nearly 40% of the participants in the survey see “limited direct benefit to my kind of role” from this analysis, and more than 30% believe that senior management lacks the necessary skills to make full use of the information.

The latest generation of models is 
able to analyze personal, social and behavioral data to gauge immediate demands, risk preferences, the impact of life changes and longer-term aspirations. If we look at pension planning, these capabilities can be part of an interactive offering for customers that would enable them to better understand and balance the financial trade-offs between how much they want to live off now and their desired standard of living when they retire. In turn, the capabilities could eliminate product boundaries as digital insights, along with possible agent input, provide the basis for customized solutions that draw together mortgages, life coverage, investment management, pensions, equity release, tax and inheritance planning. Once the plan is up and running, there could be automatic adjustments to changes in income, etc.

Reactive to preventative

The increasing use of sensors and connected devices as part of the Internet of Things offers ever more real-time and predictive data, which has the potential to move underwriting from “what has happened” to “what could happen” and hence more effective preemption of risks and losses. This in turn could open up opportunities for insurers to gravitate from reactive claims payer to preventative risk adviser.

As in many other industries, the next frontier for insurers is to move from predictive to prescriptive analytics (see Figure 2). Prescriptive analysis would help insurers to anticipate not only what will happen, but also when and why, so they are in a better position to prevent or mitigate adverse events. Insurers could also use prescriptive analytics to improve the sales conversion ratio in automated insurance underwriting by continually adjusting price and coverage based on predicted take-up and actual deviations from it. Extensions of these techniques can be used to model the interaction between different risks to better understand why adverse events can occur, and hence how to develop more effective safeguards.

figure-2

Environmental: Reshaping Catastrophe Risks and Insured Values

Catastrophe losses have soared since the 1970s. While 2014 had the largest number of events over the course of the past 30 years, losses and fatalities were actually below average. Globally, the use of technology, availability of data and ability to locate and respond to disaster in near real-time is helping to manage losses and save lives, though there are predictions that potential economic losses will be 160% higher in 2030 than they were in 1980.

Shifts in global production and supply are leading to a sharp rise in value at risk (VaR) in under-insured territories; the $12 billion of losses from the Thai floods of 2011 exemplify this. A 2013 report by the UN International Strategy for Disaster Reduction (UNISDR) and PwC concluded that multinationals’ dependencies on unstable international supply chains now pose a systemic risk to “business as usual.”

Environmental measures to mitigate risk

Moves to mitigate catastrophe risks
 and control losses are increasing. Organizations, governments and UN bodies are working more closely to share information on the impact of disaster risk. Examples include R!SE, a joint UN-PwC initiative, which looks at how to embed disaster risk management into corporate strategy and investment decisions.

Governments also are starting to develop plans and policies for addressing climatic instability, though for the most part policy actions remain unpredictable, inconsistent and reactive.

Developments in risk modeling

A new generation of catastrophe models is ushering in a transformational expansion in both geographical 
breadth and underwriting applications. Until recently, cat models primarily concentrated on developed market peak zones (such as Florida windstorm). As the unexpectedly high insurance losses from the 2010 Chilean earthquake and the 2011 Thai floods highlight, this narrow focus has failed to take account of the surge in production and asset values in fast-growth SAAAME markets (South America, Africa, Asia and the Middle East). The new models cover many of these previously non-modeled zones.

The other big difference for insurers is their newfound ability to plug different analytics into a single platform. This offers the advantages of being able to understand where there may be pockets of untapped capacity or, conversely, hazardous concentrations. The result is much more closely targeted risk selection and pricing.

The challenge is how to build these models into the running of the business. Cat modeling has traditionally been the preserve of a small, specialized team. The new capabilities are supposed to be easier to use and hence open to a much wider array of business, IT and analytical teams. It’s important to determine the kind of talent needed
 to make best use of these systems, as well as how they will change the way underwriting decisions are made.

Emerging developments include new monitoring and detection systems, which draw
 on multiple fixed and drone sensors.

Challenges for evaluating and pricing risk

Beyond catastrophe risks are disruptions to asset/insured values resulting from constraints on water, land and other previously under-evaluated risk factors. There are already examples of industrial plants that have had to close because of limited access to water.

Economic: Adapting to a Multipolar World

Struggling to sustain margins

The challenging economic climate has 
held back discretionary spending on life, annuities and pensions, with the impact being compounded by low interest rates and the resulting difficulties in sustaining competitive returns for policyholders. The keys to sustaining margins are likely to be simple, low-cost, digitally distributed products for the mass market and use of the latest risk analytics to help offer guarantees at competitive prices.

The challenges facing P&C insurers center on low investment returns and a softening market. Opportunities to seek out new customers and boost revenues include strategic alliances. Examples could include affinity groups, manufacturers or major retailers. A further possibility is that one of the telecoms or Internet giants will want a tie-up with an insurer to help it move into the market.

More than 30% of insurance CEOs
 now see alliances as an opportunity to strengthen innovation. Examples include the partnership between a leading global reinsurer and software group, which aims to provide more advanced cyber risk protection for corporations.

Surprisingly, only 10% of insurance CEOs are looking to partner with start- ups, even though such alliances could provide valuable access to the new ideas and technologies they need.

SAAAME growth

Growth in SAAAME insurance markets will continue to vary. Slowing growth 
in some major markets, notably Brazil, could hold back expansion. In others, notably India, we are actually seeing a decline in life, annuity and pension take-up as a result of the curbs on commissions for unit-linked insurance plans (ULIP). Further development in capital markets will be necessary to encourage savers to switch their deposits to insurance products.

As the reliance on agency channels adds to costs, there are valuable opportunities to offer cost- effective digital distribution. Successful models of inclusion include an Indian national health insurance program, which is aimed at poorer households and operates through a public/private partnership. More than 30 million households have taken up the smart cards that provide them with access to hospital treatment.

The already strong growth (10% a year) in micro-insurance is also set to increase, drawing on models developed within micro-credit. The challenge for insurers is the need to make products that are sufficiently affordable and comprehensible to consumers who have little or no familiarity with the concept of insurance.

Rather than waiting for a market-wide alignment of data and pricing, some insurers have moved people onto the ground to build up the necessary data sets, often working in partnership with governments, regional and local development authorities and banks and local business groups.

Urbanization

The urban/rural divide may actually be more relevant to growth opportunities ahead than the emerging/developed market divide. In 1800, barely one in 50 people lived in cities. By 2009, urban dwellers had become a majority of the global population for the first time. Now, every week, 1.5 million people are added to the urban population, the bulk of them in SAAAME markets.

Cities are the main engines of the global economy, with 50% of global GDP generated in the world’s 300 largest metropolitan areas. The result is more wealth to protect. Infrastructure development alone will generate an estimated $68 billion in premium income between now and 2030. Urban citizens will be more likely to be exposed to insurance products and have access to them. Urbanization is also likely to increase purchases of life, annuities and pensions’ products, as people migrating into cities have to make individual provision for the future rather than relying on extended family support.

Yet as the size and number of mega-metropolises grow, so does the concentration of risk. Key areas of exposure go beyond property and catastrophe coverage to include the impact of air pollution and poor water quality and sanitation on health.

Tackling under-insurance

A Lloyd’s report comparing the level 
of insurance penetration and natural catastrophe losses in countries around the world found that 17 fast-growth markets had an annualized insurance deficit of $168 billion, creating threats to sustained economic growth and the ability to recover from disasters.

Political: Harmonization, Standardization and Globalization of the Insurance Market

Government in the tent

At a time when all financial services businesses face considerable scrutiny, strengthening the social mandate through closer alignment with government goals could give insurers greater freedom. Insurers also could be in a stronger position to attract quality talent at a time when many of the brightest candidates are looking for more meaning from their chosen careers.

Government and insurers can join forces in the development of effective retirement and healthcare solutions (although there are risks). Further opportunities include a risk partnership approach to managing exposures that neither insurers nor governments have either the depth of data or financial resources to cover on their own, notably cyber, terrorism and catastrophe risks.

Impact of regulation

Insurers have never had to deal with an all-encompassing set of global prudential regulations comparable to the Basel Accords governing banks. But this is what the Financial Stability Board (FSB) and its sponsors in the G20 now want to see as the baseline requirements for not just the global insurers designated as systemically risky, but also a tier of internationally active insurance groups.

The G20’s focus on insurance regulation highlights the heightened politicization of financial services. Governments want to make sure that taxpayers no longer have to bail out failing financial institutions. The result 
is an overhaul of capital requirements 
in many parts of the world and a new basic capital requirement for G-SIIs. The other game-changing development is the emergence of a new breed of cross-state/cross-border regulator, which has been set up to strengthen co-ordination of supervision, crisis management and other key topics. These include the European Insurance and Occupational Pensions Authority (EIOPA) and the Federal Insurance Office (FIO) in the U.S.

Dealing with these developments requires a mechanism capable of looking beyond basic operational compliance at how new regulation will affect the strategy and structure of the organization and using this assessment to develop a clear and coherent company-wide response.

Technology will allow risk to be analyzed in real time, and predictive models would enable supervisors to identify and home in on areas in need
 of intervention. Regulators would also be able to tap into the surge in data and analysis within supervised organizations, creating the foundations for machine-to-machine regulation.

A more unstable world

From the crisis in Ukraine to the rise of ISIS, instability is a fact of life. Pressure on land and water, as well as oil and minerals, is intensifying competition for strategic resources and potentially bringing states into conflict. The ways these disputes are playing out is also impinging on corporations to an ever-greater extent, be this trade sanctions or state-directed cyber-attacks.

Businesses, governments and individuals also need to understand the potential causes of conflict and their ramifications and develop appropriate contingency planning and response. At the very least, insurers should seek to model these threats and bring them into their overall risk evaluations. For some, this will be an important element of their growing role as risk advisers and mitigators. Investment firms are beginning to hire ex-intelligence and military figures as advisers or calling in dedicated political consultancies as part of their strategic planning. More insurers are likely to follow suit.

The final article in this series will look at scenarios that could play out for insurers and will lay out a way to formulate an effective strategy. If you want a copy of the report from which these articles are excerpted, click here.