The Problem With Differentiation

Tom Benton

In reading recent articles on innovation, there is a definite focus on differentiation. Various elements to innovation are often mentioned: agility, culture, transformation, customer-focus, data-centered, etc. These are often directed at how a company can develop new innovative products or provide new innovative services or new innovative delivery channels. Carriers are encouraged to use big data to learn more about their customers (policyholders and/or producers), to use the cloud and mobile to provide ease of doing business or to modernize their systems to provide customers with faster better service through internal process efficiency. The focus of these efforts is to be different, faster, better than other providers.

Now, differentiation can be a very good strategy. Apple has become the number one brand and the company of the highest net value (or near it) by following a corporate-wide culture of “Think Different”. Within the insurance world, companies like MetLife, Geico and Progressive have use innovative marketing, branding and technology to their advantage through differentiation. However, there’s a problem with focusing your strategy on differentiation. To be successful at differentiation, a company has to have a corporate culture that supports it – a culture of listening for ideas, design thinking, and tolerance for failures. It has to support its innovation efforts with talented staff, properly funded technology investments and simplified agile processes.

Developing this kind of culture and environment for innovation is relatively easy for start-up companies, but more difficult for the established players in a market, especially if they are risk averse, have a culture of failure being fatal and established technology that is difficult to maintain, upgrade and replace. Creating the proper environment for innovation takes either radical change, or time to evolve the culture and environment. Leaders in established companies often are not willing to make the radical changes necessary, and evolving the culture takes time while other companies get further ahead in the race for innovation and differentiation.

The real problem with differentiation is that unless you are prepared to differentiate now, the innovations will become accepted and you will need to follow a course of imitation. In a recent HBR article, Freek Vermeulen. Associate Professor of Strategy and Entrepreneurship at the London Business School, talks about how customers view differentiation. In some industries, the products and services are fundamentally not that different. He suggests that customers make buying decisions based less on what is different and more on social context – they buy a particular product or service because their social network and relationships suggest it is known and an acceptable choice.

The implication for insurance carriers is that differentiation is a good strategy, but eventually the innovation produced is imitated and becomes a standard offering. A strategy of imitation will eventually be required, and when products look the same to the customer, they will choose based on their social networks and relationships. An alternate focus for innovation by differentiation, then, might be to follow a strategy of imitation and socialization. For example:

  • Instead of using big data to understand customer behavior, shape the behavior through social interaction. While streamlining customer interaction through the cloud and mobile strategies, find ways to build relationships where customers will interact with you and others to build trust and preferences.
  • While modernizing systems to provide internal process efficiencies, put internal social networking into place to build a culture and skills that can be used to leverage external social interactions.
  • Win customers not by being the coolest or latest, but by being the most connected and trusted.

The best part is that a strategy of imitation and socialization can be done while updating technology to do what others are doing, and it builds the kind of culture that can transform into one that is innovative and possibly differentiated in the end. It doesn’t take a radical change or large technology investments that work against the clock of the wave of technical change.

July Market Acquisitions

Catherine Stagg-Macey

In a recent blog on the evolution of core software in London market, I suggested that changes were afoot. (http://blog.novarica.com/?p=2470/) And so they were.

At the beginning of July, Xchanging acquired two insurance software companies within a week of each other –
AgencyPort Europe *(http://www.xchanging.com/news/xchanging-acquires-agencyport-europe/) and Total Objects. (http://www.xchanging.com/news/xchanging-acquires-total-objects) A week later, HG Capital, a private equity firm, announced a co-investment in Sequel Business Systems. (http://www.hgcapital.com/news/hgcapital-announces-investment-sequel-business-solutions)

Whilst the deals are very different in nature, they speak to the buoyant view of both software companies and private equity firms alike. With the consolidation of vendors, it also offers a more distinct choice for insurers.

The Xchanging acquisitions fill out their portfolio of offerings with the addition of a cloud based bordereau management system (TotalObjects), MGA systems (TotalObjects and AgencyPort), a risk aggregation tool (AgencyPort) and a system for Health Insurers (AgencyPort). The deals bring with them some duplication – two broker systems, two reinsurance systems, two MGA systems and two underwriting systems for both syndicate and company’s.

Xchanging has made it clear to all users of all these products that they will continue to support all products for the foreseeable future. That said, we would expect to see some consolidation of the product portfolio in the coming years. At a minimum, this is needed to streamline the market messaging and at an operational level, it would not be surprising to see some reduction in duplication to reduce current operational costs and future product investment.

The co-investment in Sequel Business Systems, a competitor of AgencyPort and Xchanging, will bring with it an injection of cash. No details have been published on where this might lead the company, but in conversations with clients of all these software companies, initial responses were mixed. A spate of deals like this always introduces uncertainty and it takes time for customers and prospects to embrace and understand the impact of these deals on their own technology investments.

One of our critiques of this sector of insurance software over the years has been the underinvestment in the solutions. These deals suggest show this is changing and insurers can be optimistic in the future evolution of London market software.

NOTE: Agencyport Europe has been separated out from Agencyport NorthAmerica in the recent years. This acquisition does not impact AgencyPort NorthAmerica.

Three Questions to Ask about Every Analytics Solution in Order to Get Actionable Insight

Jeff Goldberg

I recently joined Novarica as a Principal after a brief hiatus from the insurance industry during which I founded and eventually sold a SaaS data analysis and business intelligence company in the health & wellness space. For most of my career I’ve been thinking about how to best leverage insurance data, and after spending so much time deep in the weeds of designing and selling a data analysis solution, I have a new perspective on actionable analytics and BI.

The idea of “actionable data” has been a minor buzzword for at least a decade, surrounding all of the many advances and evolutions of data projects and services. We all know intuitively what it means: make sure that we can take action from our data. And we all know examples of projects that failed to heed this advice, where after much time and money spent on bringing different data sources together and building reports against it, nothing in the business changed as a result.

But how do you actually get actionable data and what kind of action do we mean? After having spent so much time at a company that provided online business intelligence reporting to clients, is it perhaps surprising that I often don’t like reports? Or, rather, I frequently feel a report is just a stepping stone to a better business process. Clearly there are users, typically at the strategic or executive level, who need to be looking at big pictures and trends. But for most operational users, poorly designed business intelligence acts as a dead end rather than a call to action.

Now whenever I see a report, often with excellent data and filled with tables and charts and graphs, I ask three questions about it:

  1. What is the key take-away from this data, and if it can be distilled down to one or two important facts then why is the whole report even needed?
  2. Can these one or two important facts be worded in the form of an action or a “to-do” list?
  3. Can I get these “to-do” items directly into the hands of the person who needs to do them, either via e-mail or some other process integration?

As an example, my data company had a very popular report showing a manufacturer’s product distribution across retail stores. It contained a lot of trend and sales information at a macro and micro level. For an industry with a lot of middle-men and where manufacturers often don’t know where their own products are being sold, this was a very important report. But when we asked the above three questions, we got the following answers:

  1. The key take-away is a list of the top five or ten stores where a manufacturer’s full product line is not being sold, ordered by how much potential business is being lost.
  2. The action is to call those stores and sell them on carrying the additional products.
  3. The best way to get these actions done it to split them up by region, and have a list of stores to call (with phone numbers and product information) sitting in each sales person’s inbox on Monday morning.

The head of sales and marketing wants to look at the big picture and be able to analyze the data, and for her the original report is still the correct source. But for most users, by answering those three questions, we’ve just taken a potential confusing dead end and turned it into a driver of their ongoing behavior. (And for a startup that relied on a monthly SaaS subscription, getting data integrated directly into a client’s operating process whether or not their employees ever logs into the website was a great way to become invaluable.)

Every report in your business should be put to the same three questions. For example, any time a data analysis solution helps an underwriter make a risk decision it’s the result of taking what was once large reports with multiple tables and lots of data, boiling that down to the key rating, and then putting that rating in front of the underwriter right within their toolset.

To be clear, I’m not anti-report. Sometimes insurers’ services aren’t integrated or modern enough to support this kind of distribution across tools and systems. But if you can answer those three questions about a report, even if the kind of automated distillation and distribution of the data won’t happen for a long time, then you can better train users on how and when to use that report to take the action that makes your business better.

Business and Technology Trends: Individual Annuities

Rob McIsaac

This week, Novarica released the most recent of our Business and Technology Trends reports, focused on the Individual Annuity market segment. The report is available for immediate download from Novarica’s research library or directly via the link http://www.novarica.com/b_and_t_trends_indv_annuity_2014.

The individual annuity space remains highly competitive for carriers in the United States, with cost pressures remaining high and low interest rates keeping margins compressed. With alternative investment and protection vehicles in the marketplace, demographic shifts underway and consumer preferences for how they engage with financial services providers changing, carriers face important investment prioritization decisions. Novarica’s latest Business & Technology Trends report explores all of these issues in detail. This is particularly timely for organizations that will be starting their 2015 budgeting efforts in the near future.

Consolidation in the industry is both creating more concentration of business among a smaller number of carriers, and forcing acquirers to consider a variety of options for managing multiple blocks of business tied to aging technology platforms. At the same time, carriers are looking for ways to bring product to market faster, which may include implementation of both TPA and BPO alternatives to internal hosting.

This may be a particularly opportune time for Annuity carriers, however, with the key Baby Boomer generation now reaching retirement age at a pace of 10,000 individuals per day, which accelerates a range of changes in their financial needs. For younger Boomers, the key to future financial health is tied to the final push in the accumulation phase of their lives. For the older segment of the generation, the transition is already underway to move from accumulation to preservation and payout. In either case, properly engaged carriers, who have the ability to deliver products and services effectively, can be positioned for success. With end user experiences now well established by both mutual fund complexes and Defined Contribution retirement plan providers, annuity carriers need to be considering how to create compelling and effective engagement models in order to remain competitive.

This report also confirms what has been seen in other Novarica research: in the current business climate, CIO’s and their teams are being asked to do more without much more funding. This report can be used to both confirm existing priorities and refine future investment plans.

London Market Insurer IT Budgets and Projects – New Novarica report

Catherine Stagg-Macey

This spring, we interviewed almost a dozen CIOs within the London market on their plans for 2014. Whilst much of the mainstream P&C market in the UK and US are absorbed in legacy modernization programs, the London market insurers are focused on data.

Developing or enhancing business intelligence capabilities is a priority program in almost all the insurers interviewed. The three largest brokers have all developed strong BI capabilities – AonGrip, Willplace, MarshConnect – and they use this information to negotiate rates with the insurers. The challenge is that the London market insurers do not have the right level of information to ensure this conversation is on a level playing field.

More about plans and projects for this sector of insurance can be found in the new published London Market insurer IT budgets and projects report, available now. This report presents the results of a survey conducted during May 2014 among 10 insurers and syndicates in the London market. These insurers placed either all their business or a significant portion of their business through Lloyds.

The full version of the report is available here.

Small commercial insurance moves online…because it’s too low margin to do offline?

Matthew Josefowicz

There was an interesting article today on PC360 about the state of small business online. The article echoed many of the themes and issues we raised in our report last summer, Direct Online Small Commercial Insurance.

The article had some interesting quotes from direct players like Insureon and Hiscox, both of which were featured in our report. But it also contained this quote, which raises an issue we didn’t mention last summer:

“The Hartford is committed to a multichannel distribution model in its small commercial business and independent agents are at the center of the distribution strategy,” says Ray Sprague, senior vice president of small commercial insurance at The Hartford, but adds that the vast majority of small businesses operating in the U.S. today are often too small for many independent agents to profitably acquire and serve (emphasis added).

This resonates with several comments that small commercial CIOs made at a meeting I attended last week. There’s a big SOHO small commercial market that’s too small for most agents to care about. I believe insurers will increasingly look to the direct channel to be able to meet this market demand.

Related research and blog posts:

Accelerating Pace of Change Requires New IT Planning Paradigms

Rob McIsaac

One of the realities of IT in any industry is that “truth” related to technology is a fleeting thing. The best system or technology to deploy can evolve with surprising speed, making it important for CIO’s and their organizations to determine with some precision what a roadmap toward a future state should look like. Increasingly, CIO’s and their team should carefully consider just how long they think they will be in that future state too. This has implications for both the technologies to be deployed and the financial mechanics used to pay for them. Missing either of these key points can create the IT equivalent of “The Hangover”. Unfortunately, aspirin alone won’t cure this one!

There are parallels in other parts of our personal and professional lives. As a frugal minded sort, my typical approach to cars was to buy them and drive them long after the warranty and that new-car smell were gone. While the shapes and sizes until recently changed like fashion statements, the essential technology remained pretty stable.  Parts evolving slowly over time and had surprisingly long useful lives. As a result, parts and skills remained in a pretty consistent supply. A few years ago I finished restoring a 30 year old BMW (ok, so being frugal has its limits) and the only limiting factors were time and money. Parts and skills could be bought, because essentially the same vehicle had been in production for nearly 15 years.

Try that trick with a new car. They are better in every way. Faster, quicker, safer, better fuel economy, less maintenance. The list is long. But the challenge is that the technology used is fleeting. A two or three year old vehicle may have technology embedded that looks nothing like what is in production now. When the parts run out, there may be no clear path forward. As a friend of mine said, “I don’t think I could afford the risk of owning a new one when the warranty runs out!”.  Relatively small parts failures could lead to catastrophic financial events.  Leasing starts to sound like a pretty decent idea; about the time problems begin to set in, give the keys back and start over again.  It is an appliance, not an investment.

That’s hardly unique to cars. Is anyone paying real money to fix an iPhone 4?  Of course not. They were the height of cool a few years ago and helped to change the world we live in. Now they are disposable.

Large flat screen TV’s are the same way.  When a circa 2008 model expired recently, it was cheaper to get a new one (that was far better) than it was to fix the old one.  Turn them and burn them when they’re done.

There’s a good chance my next car will be disposable too. I will lease it, use it for a specific period of time, then replace it on or around a known date. I won’t depreciate it, won’t fix it, won’t treasure it like a friend. I will consume it and move on.

The same should be true of future core systems at insurance carriers. The systems and their vendors will evolve quickly using the “best” available technology at a moment in time. Then they will move on. Rinse and repeat will be their model.

And while carriers have built, bought, modified and embraced systems from the 1960′s to the 2000′s (a surprising number of 40-50 year old systems run major workloads every night), that’s a model that has a foreseeable end. Anyone pining for that “state of the art 2009 platform” now?  Of course not; we would have had a challenging time describing some of the things that would be key drivers for business success five years later.  That will be even more true as we think about 2019 or 2024.

Rather than acquiring and depreciation systems for a protracted lifespan, implementing with an eye toward “replacing the replacement” appears to be a more viable and effective model. This impacts skill sets, depreciation schedules and even the future state IT discussions. It may no longer be a “buy versus build” dialogue. For the future it may be “buy versus rent”.

A variety of factors have now come together to make this a viable option. If email for large / complex / highly regulated companies can live in the cloud, a host of other things like policy administration, claims, distribution management and financials can too. Pun intended.

I never thought I’d lease a car either, but we’ve crossed a risk / return tipping point that makes that a pretty attractive option. Of course I will keep my ’84 Bimmer for fun and pleasure. Sure wish the A/C worked better, however …

 

“Permission Space” and Transformation Initiatives

Catherine Stagg-Macey

It was news to me but it turns that the world’s largest wi-fi installation is underground in London. Literally under my feet. Transport for London (TFL) has installed free wi-fi in all 137 stations on the London underground. No small feat given most of the infrastructure was built in the Victorian times.

In a recent presentation I saw by Matt Griffin, Head of Biz relationship and IT strategy at TFL, he made the point that this project was the first IT project that had a direct impact on customers. IT had been kept away from the end-customer. TFL is an engineering organization that prioritises anything engineering related over IT.

Triggered by requirements of the Olympics for station staff to better manage station access to a large number of tourists, TFL had to tackle the challenge of better intra-station communication for staff.

IT had little credibility in the business community at TFL. As Griffin put it, they had limited permission space. Clever contracting meant the burden of the financial outlay resided with the mobile network carrier. Even with this reality, TFL IT was reminded rather strongly that they would not get any money should they overrun.

The project went in on time and budget. Wi-fi capability provided much needed information to effectively manage the huge increase in passengers during the Olympics. Customer feedback to TFL was that underground journey’s were more pleasant than usual during the Olympics. That was certainly my experience too.

Learning from this experience, TFL is now working to leverage this digital capability to create extra capacity in the network without new rail or train investments. Needless to say, the business is rather charmed by this all and IT now has rather a lot of permission space to propose new investments that can support TFL.

This is a great story of permission space. As CIO, it’s important to get a good measure of the IT credibility in the business community. Large change initiatives should only be undertaken in the golden end of the permission space continuum. If you aren’t there, work on the small projects that will have visibility to the end-users and build up the reputation of a department that knows what it’s doing.

Click here for more on Novarica’s CIO Best Practices research.

Systems of Engagement, Core, and Analytics are Major Topics at IASA

Our team is just back from the annual IASA conference, which provided the opportunity to meet with dozens of CIOs and solution providers over a couple of days.

In general, insurers and vendors appear to have been investing heavily in technology over the last year or so, with carriers launching major initiatives in core systems and analytics and vendors improving their products both in core engineering and in UI.

In contrast to prior years where technology investments appeared to be focused primarily on cost reduction or mitigation of technology risk, there was one overwhelming theme in the private discussions and panels our team participated in: meeting rapidly changing customer demands.

While we continue to see very strong interest and activity levels in core systems among insurers of all sizes and sectors, there was a notable focus this year on systems of engagement as well. Agent portals, customer portals, responsive technology, and mobile were frequent topics of conversation among the carriers our team met with. Some insurers feel overwhelmed by the problem and lack the expertise to develop a strategic roadmap in an effective way, and there’s a high level of interest in vendor partners that can help them get there.

We found many of the same themes in discussions at the Research Council Meeting. Our report from that meeting is available online and is free to clients and council members.

Document Management and ECM – New Novarica Market Navigator Report

Tom Benton

Insurers are showing increasing interest in improving workflow and customer experience.  This often includes providing multiple communication channels, such as mobile texting, social media and video, along with traditional paper and e-mail.  The growing amount of unstructured data from these communications brings challenges for management, storage, workflow and distribution along with leveraging the data for analytics and reporting.

Insurers are finding that legacy document management systems are not able to meet demands for customer experience and workflow initiatives.  Many find that replacement is necessary, and that current document management / ECM (Enterprise Content Management) systems have capabilities that are difficult to add to legacy systems. Updating can also provide opportunities for improved process flow along with new deployment options such as SaaS or hosted ECM solutions.

Novarica has published an updated Market Navigator on Document Management and ECM Systems, available now.  This report presents an overview of the current solution provider marketplace to assist insurers in drawing up their shortlists of potential providers based on vendor market position and offering details.