Never mind the start-ups, here’s the quants

Quants

Matthew Josefowicz

While the insurers have been nervously watching Sand Hill Road and the billions of dollars pouring into the InsurTech start-ups that are taking aim at the industry’s weaknesses in customer experience, a potentially more ominous development is taking place a little closer to home: the Quants are coming, and they’re targeting the industry’s ability to model risk.

Yesterday’s WSJ featured a profile of Two Sigma Investments and their joint venture with Hamilton and AIG to use predictive analytics to streamline both the buying experience and the underwriting of commercial risk.

According to the article:

Small and medium-size business insurance is a “gigantic market” and a “data science” problem, [Mr. Siegel] said.

“It’s not just about taking manual processes and automating them,” Mr. Siegel said. “By using our data science, we think we can do a better job of underwriting.”

The algorithms being used by the Two Sigma group’s venture, called Attune, will draw on detail that Two Sigma has obtained from vendors who collect public records and other sources that can tell AIG and Hamilton what they believe they need to know to understand the risk to be insured.

As our recent report on Understanding Insurance Industry Disrupters noted, there are three axes of disruption for insurers: Distribution, Cost Basis, and Product/Risk Analysis.

Most of the Silicon Valley-funded players are focusing on Distribution. While this creates noise and uncertainty, it does not strike at the heart of the industry’s core capability of underwriting risk.
But initiatives like this have the potential to change radically both the cost basis and effectiveness of underwriting risk. That strikes at the industry’s core value the same way that the capital markets’ moves into cat bonds are undermining reinsurance.

The Future is Already Here.

Back in 2011, we wrote about the Deloitte-Aviva pilot program that indicated that risk could be modeled entirely with third-party data, and advised the industry to plan for the days of zero-question underwriting. As far as we know, this Aviva project stayed in the lab and was never operationalized. But last summer, we highlighted MetLife’s Xcelerate program, which brought a similar approach to group auto insurance.

Now, the Two Sigma/Hamilton/AIG partnership is bringing it to commercial lines.

Meet Your New Competitors

Two Sigma’s founders, David Siegel and John Overdeck, cut their teeth at legendary Wall Street Quant shop D. E. Shaw & Co., the same firm that Jeff Bezos left to found Amazon. You know, the guy who says “Your margin is my opportunity.”

Insurers need to suit up. The future is coming at them fast.

Related Research:

News and Views: Disrupters, Autonomous Vehicles, Blockchain for Claims, Reinsurance

Novarica’s team comments on recent insurance and technology news

Boston is launching an Urban Mobility program to test driverless cars, and the U.S. government is proposing 15 benchmarks that autonomous vehicles must meet.

Tom Benton

Novarica comment by Tom Benton, Senior VP of Research and Consulting: “The future of self-driving cars may be fewer accidents, but the immediate impact will be an unpredictable mix of human-driven and self-operating vehicles taking the road together. Coverages will inevitably become more complicated as the convergence of these two vehicle types pose new risks. Some insurers may be choose to profit from this period, while others may choose to exit the market. Pilot programs and legislation may help to smooth what is likely to be a somewhat volatile period, however they are also a move to normalize self-driving vehicles for more rapid entry to market. No matter the case, the gears are in motion to bring self-driving vehicles to the mainstage, and carriers should prepare for the changing car and driver landscape that will ensue.” More from Novarica on autonomous vehicles.

Synechron debuted a blockchain-based accelerator that offers financial services applications in the cloud .

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting “Synechron’s blockchain offering for claims is part of an ever-growing dialog around various use cases for blockchain. Paying claims automatically based on a trusted source- a disinterested third party- is being discussed for a number of new products. An example we have heard is paying CAT claims for homeowner damage automatically based on weather service data (the trusted third party). There are other possible uses of blockchain for insurance including intercompany charges between entities in large global insurance holding companies, reinsurance negotiations, surety bonds, etc. Blockchain has been the topic of many conversations we have been having with carriers over the last few months. Expect to see more innovation and new product offerings in 2017.” More from Novarica on blockchain.

Both Coverhound and Lemonade launched their websites this week, and MetroMile will begin selling auto insurance.

Steven Kaye

Novarica comment by Steve Kaye, Associate VP of Research and Consulting: “MetroMile, Coverhound, and Lemonade demonstrate three different approaches. MetroMile developed a good front-end and customer service as well as a useful product, and brought underwriting in-house with the purchase of Mosaic. CoverHound also focused on the front-end and customer service and partners with carriers who provide the actual products, the most recent being small commercial insurance. Lemonade has a different business model from other insurers, taking a percentage of premiums as a fee to cover reinsurance and the cost of paying claims, while paying any left-over funds to charities.

All three companies emphasize improved customer service (which includes taking advantage of technology) and making typical insurance processes less painful. With plenty of capital seeking investments, smaller insurers and shell companies to purchase for their licenses, and changes among large established players constantly making experienced industry personnel available, it doesn’t suit the industry to dismiss the potential for genuine innovation.” More from Novarica on insurance industry disrupters.

Customizing coverage to specific risk may be a lifeline for reinsurers

Rob McIsaac

Novarica comment by Rob McIsaac, Senior VP of Research and Consulting: “The reinsurance world, like many other parts of the insurance industry, continues to suffer in the low interest rate environment. Industry projections suggest that combined ratios could increase further in 2017, creating added pressure to find ways to improve operational and underwriting performance. Investment income won’t cover gaps. For big reinsurers an emerging and attractive alternative is to write increasingly customized coverages that use their analytic and technical skills to hone specific prices for more clearly understood risks. In addition to making it harder for smaller, less sophisticated carriers to compete, this can insulate big carriers in other ways. Harder, for example, to take away customized, versus commoditized, business. This trend of customization and tailoring is something we’ve seen in other lines (and for that matter in other industries). We have said before that technology and analytics represent something of an arms race in insurance and this is yet another example. The future is already here, it just is not evenly distributed!” More from Novarica on reinsurance.

News and Views: UBI, On-Demand Insurance, and the DOL

Novarica’s team comments on recent insurance and technology news

The growth of connected cars could make usage-based insurance ubiquitous

Chuck Ruzicka

Novarica comment by Chuck Ruzicka, VP of Research and Consulting: “Adoption of telematics and usage-based insurance has plateaued in recent years, and market penetration has been lower than expected. This partly reflects a lack of consumer excitement around the traditional discount model, but also the reality that UBI schemes require some effort on the part of consumers to implement. As cars become more connected, and smartphone-based telematics apps improve, it will be interesting to see if uptake of UBI increases once it’s as easy as tapping a button on your car’s screen.” More From Novarica on telematics and UBI

Munich Re will underwrite Trov’s on-demand insurance platform

Tom Benton

Novarica comment by Tom Benton, VP of Research and Consulting: “The recent partnership between Munich Re and Trov to provide on-demand insurance is an interesting experiment in providing new kinds of coverage that are more aligned with modern consumer demands. Today’s consumers have come to expect a completely digital purchasing experience, and insurance is no exception. Most customers won’t have the patience to sit through what is often a long and complex process, involving multiple waits and slow correspondence, to obtain specialty insurance, and Trov’s on-demand platform provides a way to for individuals to cover items on their own terms, for less money.”

State farm will start selling impacted annuities in 2017 through their call center as a response to the DOL ruling

Rob McIsaac

Novarica comment by Rob McIsaac, Senior VP of Research and Consulting: For carriers, the timeline remaining for implementing the necessary business process, technology and compensation related changes in order to fully comply with the DOL Fiduciary rules is getting ever shorter. While there remains a hard date for implementing key changes by April of 2017, for many carriers, their distribution partners do not want to run ’17 as a split year. As a result, some important changes need to be made in as little as 15 weeks. What’s notable at this point is that many carriers have really not made public their plans for addressing the compliance requirements for this brave new world. State Farm’s recent move will allow them to provide for a controlled and compliant experience for customers that specifically want to explore their options. This is a notable change in direction for the distribution of these products and it will be very interesting to see if there are similarly significant alternations to the “business as usual” model which emerge as carriers get ready to roll into the New Year.” More from Novarica on the DOL

Case Study Highlight: Transitioning to Agile at Unum

Mitch Wein

As we approach the announcement of the Novarica Impact Awards in the fall, we will be highlighting one Impact Award nominee each week on our blog. The Novarica Impact Awards are voted on by over 300 members of the Novarica Insurance Technology Research Council, making them the only purely peer-reviewed awards program in insurance technology.

Many of the 2016 Impact Awards nominees cited cross-functional teams, with resources familiar with multiple business areas, and the use of Agile methodology as keys to a quick and successful delivery. Common among many projects was a focus on operational transparency, overcoming internal challenges, improving relationships, and cost savings.

This week, we look at an Unum initiative to transition to Agile.

Unum wanted to drive growth and adapt to evolving customer expectations. An Agile operating model would allow Unum the flexibility to quickly respond to market changes and deliver increased value to business partners. The multi-year project began in 2014 and by the end of 2015, Unum had established all Agile teams and trained 85% of members. While adjusting to cultural and organizational change was a challenge, the project team notes that empowering employees to help define and influence areas of change was key to the success of the initiative. Strong leadership, commitment from business partners, and transparent communications were also important to incorporate feedback and course-correct as needed.

For more detail on this project and more than 30 others, including cases from Glatfelter, Prudential, The Hartford, and Homesite, see Novarica’s Best Practices Case Study Compendium 2016.

News and Views: Renters Insurance, Defined Contribution M&A, Reinsurance, Startup Activity

Novarica’s team comments on recent insurance and technology news

Bungalow offers a simplified platform for purchasing renters’ insurance

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “The founders of Bungalow, being Millennials themselves, are well placed to sell insurance to their peers. They have begun by understanding the kind of experience Millennials want, based on simplicity and ease of use, and molding the insurance buying experience to these priorities. This story shows that disruption, especially distribution disruption, can and will emerge from within the insurance industry. Even if tech companies don’t figure out how to handle insurance licensing, there will be people within insurance who understand and respond to the consumer desire for a kind of customer experience traditional carriers are not providing.” For more on Millennials and insurance, check out our new report on the subject.

Ameritas Finalized its deal to acquire Guardian’s 401(k) plans business

Rob McIsaac

Novarica comment by Rob McIsaac, Senior VP of Research and Consulting: “In our upcoming Business & Technology Trends report on the Defined Contribution Retirement Plan business, we highlight the degree of competition carriers face, as well as the significant cost pressure they find themselves under. Last week’s announcement that Ameritas is purchasing Guardian’s 401k business is the most recent example of a carrier choosing to exit this market because they could not attain the required scale. The M&A route allows both companies to achieve something important for their own longer term strategies; we fully expect to see more of this activity in the coming year as carriers look to better position themselves for long term profitability.”

DropIn’s video streaming service has the potential to significantly reduce the cost and labor associated with the claims process.

Chuck Ruzicka

Novarica commentary by Chuck Ruzicka, ,VP of Research and Consulting: “Not all emerging tech poses a disruptive threat to insurers. DropIn, a recently launched startup, could significantly reduce claims processing costs and time. DropIn’s service is just one example of the type of value that startups can provide to the industry. Although this company didn’t incubate in an insurer accelerator or receive funding from a carrier, it offers insurers an innovative solution to a problem that has plagued the insurance industry. Outside entrants aren’t always a threat, and keeping a finger on the pulse of the startup community can work to the advantage of the industry.” More from Novarica on how startups and insurers can work together.

The market continues to be tough for reinsurers.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “AM Best’s report on tough times in the reinsurance market is encapsulated by this simple quote: “low investment yields, and continued pressure from convergence capital.” As I wrote recently on LinkedIn, disruption is not just about distribution. The capital markets are realizing there’s nothing stopping them from pricing and selling risk coverage directly. Like primary insurers, reinsurers will need to think about other ways to monetize their distinctive knowledge of risk, since the loss reimbursement market is under pressure.” More from Novarica on reinsurance.

Tesla has entered the auto insurance business.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “Tesla, a company whose main business is manufacturing electric cars, is launching an auto insurance program business to serve their customers. This program is a response to a perceived gap between the consumer need for an innovative, flexible auto insurance product that will cover an automobile whose properties can be changed almost at will by the owner, and the inflexible coverages offered by traditional auto insurance. In the future, consumer demand will mean more insurance products are bundled with a broader offering and experience. Either insurers will actively partner with third-parties to create these offerings or those third-parties will control the entire customer experience and relegate the insurer to the back-end risk holder.”

Case Study Highlight: Enterprise Operational Analytics at Trustmark

Rob McIsaac

As we approach the announcement of the Novarica Impact Awards in the fall, we will be highlighting one Impact Award nominee each week on our blog. The Novarica Impact Awards are voted on by over 300 members of the Novarica Insurance Technology Research Council, making them the only purely peer-reviewed awards program in insurance technology.

Many of the 2016 Impact Awards nominees cited cross-functional teams, with resources familiar with multiple business areas, and the use of Agile methodology as keys to a quick and successful delivery. Many projects focused on consolidation and speed, combining disparate data silos and core systems to enable centralized access and real-time querying.

This week, we look at a Trustmark initiative to enhance enterprise operational analytics.

The Trustmark Voluntary Benefit Solutions Division needed improved information management and analytical capabilities in order to make better business decisions. The organization created dashboards to track progress against operational KPIs with the goal of aligning analytics with enterprise objectives. The 12-month project utilized Agile methodology and resulted in the creation of a “data-driven culture”, both of which the team cites as critical to project execution. The team also attributes success to business leadership, as well as the use of concrete goals and metrics to improve data architecture and quality. As a result of the initiative, complex payment processes were reduced from 35% to 26%. The project also reduced past-due bills by 18% and reconciled over $1 million in missing payments.

For more detail on this project and more than 30 others, including cases from Amerisure, Tokio Marine HCC, Glatfelter, and Merchants Mutual, see Novarica’s Best Practices Case Study Compendium 2016.

News and Views: the DOL, UBI Adoption, Locating Lost Life Policies, Blockchain Research

Novarica’s team comments on recent insurance and technology news

According to a new DOL ruling, states are now allowed to create retirement plans for the private sector .

Rob McIsaac

Novarica comment by Rob McIsaac, Senior VP of Research and Consulting: “Not all employers can support traditional Defined Contribution retirement plans, and the impact of this is most significant for the employees of small businesses, where the difference in maximum tax advantaged savings rates between ITAs and 401ks can be vast.

The DOL recently enabled states to create plans for private sector employees who work for companies that aren’t able to provide or support plans on their own. This is a potentially significant development which has a positive impact on a broad group of people spanning all demographic cohorts. It can also represent a significant new opportunity for carriers to adapt existing products and capabilities to a new market reality. Exactly how it will play out remains to be seen, but carriers should consider watching this development carefully.” More from Novarica on the DOL.

Findings from a recent study suggest that lack of UBI adoption may be due to lack of opportunity, but targeting parents of teen drivers and the elderly could fix this.

Tom Benton

Novarica comment by Tom Benton, VP of Research and Consulting: “As insurers increasingly compete on customer engagement and innovation, many are offering products that link to device-based information provided by insureds. Since the early days of UBI devices (Usage-Based Insurance), such as Progressive’s Snapshot device, carriers have most commonly offered discounts in exchange for collecting usage data, a trend which continues with newer entrants such as Metromile,. However, the recent results from the 2016 LexisNexis Usage-Based Insurance Study provide interesting insight into what may better motivate consumers to purchase UBI products. The survey seems to indicate that awareness of UBI products is less of an issue than providing incentives other than premium discounts, an argument we made in our report on the current state of UBI from earlier this year. An interesting finding was that potential UBI customers would mostly look for reviews and others they know who’ve enrolled before deciding, which opens the door to using social media to better reach potential UBI customers.” More from Novarica on telematics and UBI.

NAIC launched an app to locate lost life insurance policies.

Chuck Ruzicka

Novarica comment by Chuck Ruzicka, VP of Research and Consulting: “The NAIC’s recent launch of a life insurance policy locator app is a striking comment on the current customer experience provided by the life insurance industry. By building out a system for locating “lost” life insurance policies, they are essentially admitting that life insurers, and the regulatory landscape around life insurance, have made it so challenging for beneficiaries to find the policies that were supposed to protect them that regulatory action is needed to sort out the issue. It’s hard to see consumers today, who have a wide variety of ways of providing for retirement and their survivors, continuing to favor products that are so user-unfriendly that their loved ones might never be able to find and claim what’s rightfully theirs.”

MetLife joined a partnership to research and develop blockchain usage in the financial system .

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “The distributed ledger technology of blockchain will have many applications in insurance because of its unchangeable and encrypted storage capabilities. We have already seen ideas as diverse as use in contracts (recording iterations during negotiation), verification of personal data (confirming authentic documents), confirming policy issuance date and time, and P&C claims. In claims, some use cases discussed include settling claims based on uninterested third party data, not paying duplicate claims, and integration with IoT devices which could send info to an insurer to trigger automatic claims payments. MetLife is the latest of a number of insurance heavyweights to enter this arena, and we only expect interest, and the number of applications, to grow over the next few years.” More from Novarica on blockchain.

Case Study Highlight: Core Systems Replacement at CSAA

Chuck Ruzicka

As we approach the announcement of the Novarica Impact Awards in the fall, we will be highlighting one Impact Award nominee each week on our blog. The Novarica Impact Awards are voted on by over 300 members of the Novarica Insurance Technology Research Council, making them the only purely peer-reviewed awards program in insurance technology.

Many of the 2016 Impact Awards nominees cited cross-functional teams, with resources familiar with multiple business areas, and the use of Agile methodology as keys to a quick and successful delivery. Many projects focused on systems consolidation and speed, combining disparate core systems to improve product development and time to market.

This week, we look at a CSAA core systems replacement initiative.

Multiple acquisitions and expanded partnerships among AAA regional clubs left CSAA with a large, complicated integration architecture that spanned multiple legacy core systems. CSAA needed to replace and consolidate these systems in order to improve infrastructure and policy service, as well as cut costs while laying the groundwork for growth. The project required over fifty internal and external integrations of the organization’s six PAS and three billing systems. While this was a substantial organizational challenge, the company ultimately credits success to its prioritization of the project and use of top project management. Moving program analysts into sustaining operations roles and establishing support and advisory were also key factors. Ultimately, the replacement initiative reduced time-to-market for new products by 50% and decreased underwriting expense ratio by 1%. CSAA also reported a savings of $26 million as a result of retiring two legacy systems, and its DPW increased from $2.6 billion to $3.2 billion.

For more detail on this project and more than 30 others, including cases from MetLife, AIG, Michigan Millers, and Aflac, see Novarica’s Best Practices Case Study Compendium 2016.

News and Views: NAIC Cybersecurity Draft Law, Uber’s Acquisition of Otto, Adaptation to DOL Ruling

Novarica’s team comments on recent insurance and technology news

Insurance groups are looking to define uniformity provisions in the most recent draft of the NAIC Insurance Data Security Model Law.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Uniformity is the key to the new Data Security Model draft law. Once the draft is accepted by NAIC (target end of 2016), each one of the states will start looking at passing a law based on the draft law provided. What this highlights to carriers is compliance to the NIST framework, no matter what form the final draft law takes, will be key to avoiding fines, penalties, and reputational damage in the future. Within 2-3 years all states will have a version of the final NAIC draft law on the books. If you are not evaluating your security practices today through a NIST assessment, you should start right away. Novarica has a security workshop to highlight key areas of concern that can help.” More from Novarica on IT security frameworks.

Uber acquired self-driving truck startup Otto in a move to expand its foothold in commercial logistics.

Steven Kaye

Novarica comment by Steve Kaye, Associate VP of Research: “Uber announced it was purchasing Otto, a company founded by ex-Google employees that seeks to retrofit long-haul trucks for autonomous driving. The long-haul trucking industry is currently faced with a driver shortage, and sleep-deprived drivers are also a problem, one that may grow with recent regulations. The near-term impact may be reduced accidents (as highways are an easier problem to solve than city streets), with drivers on-board to help load and unload, for unanticipated issues, and to prevent hijackings.

From Uber’s perspective, this further expands their presence in logistics. Uber has already been able to evade regulations in some locations by operating as a delivery service rather than a ridesharing firm. Combine this with Uber’s plans to invest in mapping roads worldwide and Uber may wind up making more money from commercial logistics services. After investing in self-driving cars and trucks, perhaps equipment at ports and remote piloted or semi-autonomous ships?” More from Novarica on autonomous vehicles and commercial lines

LPL Financial has decided to adapt to the DOL ruling rather than fight it.

Rob McIsaac

Novarica comment by Rob McIsaac, Senior VP of Research and Consulting: “One of the things which frequently follows introduction of expanded compliance rules is a natural period of grieving for an earlier status quo, as well as some notable scrambling to identify options to deal with a revised operational landscape. However, implementation of the rule changes can actually create a form of competitive advantage. Better customer insight can, for example, create new or improved marketing and sales opportunities. From the news reports, this is exactly the approach being taken by LPL. While this undoubtedly carries some near-term pain, the strategic intent focuses on using compliance with the DOL mandate to improve their use of information and their competitive position concurrently.

Potentially lost in some of the other news is the idea that LPL also plans to make use of “robo-advisor” capabilities. In addition to addressing short-term practical needs in the market, this may have the longer-term benefit of “encouraging” a form of future state omni-channel capabilities that would have otherwise faced a more difficult “row to hoe” for implementation. It will be very interesting to watch this develop for LPL, and to see the responses that come from other BDs and IMOs.” More from Novarica on the DOL ruling.

Case Study Highlight: Enterprise Data at Farm Bureau Financial

Jeff Goldberg

As we approach the announcement of the Novarica Impact Awards in the fall, we will be highlighting one Impact Award nominee each week on our blog. The Novarica Impact Awards are voted on by over 300 members of the Novarica Insurance Technology Research Council, making them the only purely peer-reviewed awards program in insurance technology.

Many of the 2016 Impact Awards nominees cited cross-functional teams, with resources familiar with multiple business areas, and the use of Agile methodology as keys to a quick and successful delivery. Many projects focused on consolidation and speed, combining disparate data silos and core systems to enable centralized access and real-time querying.

This week, we look at an enterprise data initiative at Farm Bureau Financial Services.

Farm Bureau Financial Services needed to improve its data integration capabilities as part of a larger life insurance core systems replacement project. To address this issue, the company built a hub-and-spoke architecture to consolidate more than 30 data integration points between disparate systems. The team executed the project through a series of Agile iterations, and the integration layer was ready for deployment in July 2015. The project reduced report run time from over an hour to three minutes, and time to produce complex data reports decreased from two weeks to an hour. Design time was cut from multiple months to two weeks, and consuming systems are now able to retrieve data in near real-time as opposed to batch feeds. Defining long-term strategy and enterprise architecture and articulation of the goal state were crucial to help the team stay focused. The team also attributes success to support from executive management, as well as education and assistance from its vendor partner.

For more detail on this project and more than 30 others, including cases from MetLife, Amerisure, Merchants Mutual, and Trustmark, see Novarica’s Best Practices Case Study Compendium 2016.