Program Business Growth Outstrips Overall Commercial Market Growth

Matthew Josefowicz

Interesting article in PropertyCasualty360 today about how Program Business has now grown to $30B and is experiencing faster growth than the overall commercial lines market.

Hmmm…maybe there’s something to this idea of aligning products, market segments, and distribution strategies after all.

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 Acquisitions in the London Market

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.

For more of our recent research on the London Market see our CIO Survey and our Business and Technology Trends report.

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.

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:

Business and Technology Trends: Individual Life

Rob McIsaac

This week, Novarica released the most recent of our Business and Technology Trends reports, focused on the Individual Life Insurance 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_individual_life_2014/

Five years after the official end of the Great Recession, this is a segment of the insurance industry that continues to face significant challenges. Low interest rates and heightened levels of competition continue to cause economic pressure for companies involved in the sector. Slowing sales in 2013 exacerbated that pressure even as demographic changes in the market highlight future trends which carriers can ill afford to ignore.

There are, however, opportunities for the future, as carriers consider concurrent preparations for both the maturing of the Baby Boomer cohort and the rise of Millennials. Baby Boomers are now reaching retirement age at a pace of 10,000 individuals per day, which accelerates a range of changes in their financial needs. The latter group represents a larger, more diverse and technically more astute generation that has seen relatively low penetration by traditional life carriers. This is a discerning demographic group that has had expectations for services and information transparency heavily influenced by experiences with entities like Google, Apple, Facebook and Amazon. In order to take advantage of these opportunities, carriers should be carefully rethinking operational processes and the underlying technology investments that enable them.

This report explores the range of business trends, including changes in the regulatory environment, which are framing the market for Individual Life products. It also highlights the technology trends, and illustrative examples, for the investments decisions that carriers are now making in preparation for the future.

This report 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.

Commercial/Specialty Underwriting Automation: Cui Bono?

Matthew Josefowicz

Good article recently in I&T on Commercial Insurers and Underwriting Automation., covering some recent studies by various industry analysts. Here’s a quote:

Complex risks are still much more hand underwriting and will be for the foreseeable future,” says Matt Josefowicz, managing director at Novarica. “It’s all about empowering those underwriters with more communications tools and more data. A lot of the tech investment for underwriting in the specialty and large commercial side involves bringing all the information needed to make decisions to the underwriter’s fingertips as quickly as possible.

Complex-risk underwriters present a challenge when implementing new technologies, Josefowicz explains. “The individual underwriting desks have a lot of political power,” he says. When dealing with high-value cases, these experts have a great deal of specialized knowledge and tend to call the shots for which technologies they want to use.

One of the main questions in automating commercial and specialty is in answering the question Cui Bono? – “to whose benefit?” As we discussed in our report on Centralized and Federated IT Models, it’s hard to drive IT strategy centrally when the political power in an organization is federated. Commercial and Specialty CIOs need to work closely with their business leaders to make sure they are addressing their key data and technology issues. If the P&L heads can’t be convinced of the local value of an IT initiative, appeals to a weak central power are rarely successful.

For more on business and technology trends in Specialty Lines, see our recent report.

Crowdsourcing Predictive Models: Who Wins?

Martina Conlon

Analysis of data, creation of predictive models, and the ability to take action based on the outcome of those models have always been at the core of the insurance industry. However, there seems to be a peak in interest in the predictive modeling space right now from our research council and clients. Carriers are realizing how effective these scoring models can be across the insurance lifecycle and want in.

From our research (http://www.novarica.com/analytics_big_data_2013/) we know that predictive models can help marketing departments in lead development, cross selling and campaign targeting. R&D departments can use custom or standard predictive models as part of rate making and distribution can use predictive models to better target prospective agents and geographies. Predictive risk models can improve underwriting consistency, transparency, automate segments of the underwriting process, and ensure that the right underwriter sees the right submissions, all the while driving profitability. Using predictive models for claims triage and expert adjuster assignment can have a big impact on claims severity. Insurers use scoring models to gain insight into which claims are candidate for fraud investigation, subrogation, litigation, and settlement as well as more accurate and automated loss reserving.

Although the opportunities abound with predictive models, obstacles slow down adoption, especially for small and mid-size insurers. Potential high cost combined with uncertain return, priority given to other projects, limited internal data volume, the lack of data scientists, and the lack of business sponsorship are among the biggest challenges. Luckily, the vendor community servicing the space is active and expanding, and they are here to help insurers overcome these obstacles. A variety of insurance specific data warehouses, analytics tools, third party data and predictive models can be purchased. Actuarial and specialized consulting firms offer data scientists with insurance domain experience to provide you with the expertise that you lack in house. These vendors are also communicating their successes to business stakeholders and they are paying attention.

And today – a colleague asked me, “Have you heard of Kaggle?” Kaggle is predictive analytics solution provider for the energy industry, but Kaggle also hosts a marketplace for data science competitions for all industries, data science forums and job posting boards. Allstate has an open competition with them for development of a predictive model to predict which quote/coverages will be purchased when a prospect is presented with several options. Data scientists from across the world are working on this right now, competing for $50,000 in prize money. Allstate conducted a similar competition last year around claims with a much smaller prize where they gained substantial benefits and insights from the submitted models, feedback and concepts. And many other Kaggle competitions have no cash prize, just recognition within the community or a job offer.

So one may think – here’s an option to make predictive modeling more accessible to smaller and mid-size insurers. But to date, crowd sourcing of predictive models has been most successful with companies that have a strong analytics practices already. According to industry press, Allstate’s predictive modeling team felt that the infusion of new ideas and approaches was extremely valuable and enabled them to significantly improve their models. Unfortunately, Kaggle won’t likely be a silver bullet for smaller insurers. Kaggle doesn’t offer solution to many of the obstacles mentioned above. However, it does offer one more way for small companies to gain access to a predictive modeling community and skilled data science resources – which may level the playing field just a little bit.

Goodbye, Old Friend

Rob McIsaac

Well, we are at the end of a mighty 13 year run. Microsoft will be pulling the plug on Windows XP life support early next month. All indications are that this is no April Fool’s joke.

All indications also are that someone would have to be fooling themselves to think that continuing to use it now would be a good idea. I have a solitary machine running the venerable OS. It refuses to run Win-7 and so the end has come. In a few weeks the network interface will be disabled and it will revert to being a glorified, isolated, word processor. The sneaker network lives on via a hacker proof thumb drive.

Of course I’m fortunate. I only have one machine to worry about and no dedicated apps that are tied to antique software stack components. The Windows 8.1 machine I’m now running is great and wasn’t much more expensive than 2 year’s worth of extended support from Redmond. Most insurance carriers don’t have such an easy set of choices.

The migration from Windows NT to XP was slow and painful, carrying with it some notable challenges and costs. The journey wasn’t engineered in the shadow of a financial crisis that has had a long, lingering, hangover; it simply faced normal cost headwinds and technical challenges on non-portable code. The contrast between old and new was also stark, with improvement galore, which generally excited users.

This time around, the improvements are significant but harder to see from the UI. In fact the UI is polarizing, so it alone does not create a big push to bring it into use. Perhaps worse, given the long and successful run of XP, is the sheer number of applications that run on it natively and won’t transition smoothly or cheaply. Reliance on old browser version, old software, old databases and other incompatibilities make it daunting to explain why migration is a good idea. It also makes the transition expensive to execute.

Good luck making all those old Access databases, for example, work in a new environment.

Of course, hand wringing won’t be helpful. Developing and delivering on a migration plan, in concert with key vendors, is really the only possible path forward. A range of solutions are possible, including isolating equipment and virtualizing some “legacy” applications. There won’t be a silver bullet on this, however. Looking at this, and a range of other security related concerns, was highlighted in a recent executive brief (IT Security Issues Update) published by my colleague Tom Benton.

One thing for CIOs and their teams to consider, if they haven’t done it already, is building an educational program around this issue. Making remediation part of a broader effort to improve functionality, reduce risk and reduce support cost over time, can also help win critical organizational and executive support. Mixing in some sugar may make it easier to swallow some strong medicine. This one is worth it since failing to address it now could lead to a much bigger problem in the not so distant future.

New Report: Insurer IT Services Providers

Thuy Osman

Rob McIsaac and I recently published a Novarica Market Navigator report on Insurer IT Services Providers. The report gives an overview of some of the major IT services providers to North American insurers and contains a brief profile of each provider, including information about the company’s experience with different types of clients in different functional areas. Providers profiled in the report are: Accenture, Agile Technologies, Capgemini, CastleBay Consulting, CGI, Cognizant, CSC, Dell Services, Deloitte, Edgewater, EY, HCL, HP, HTC, IBM, iGATE Patni, Infosys, L&T Infotech, MajescoMastek, MphasiS, msg global solutions, NIIT Technologies, NTT Data, PwC, Return on Intelligence, Slalom Consulting, Syntel, TCS, ValueMomentum, Vertex, Virtusa, Wipro and Zensar.

With the market becoming more competitive, having a technology partner that can provide the right level of resources to support business initiatives is a crucial tool for CIOs. Novarica’s recent report Insurance IT Outsourcing Update (January 2014), based on a survey of 95 insurer CIOs, found that outsourcing is a part of nearly every insurer CIO’s toolset. 85% of respondents report at least some IT outsourcing. Instead of simply outsourcing for cost reduction, which was the trend in the past, insurers are now outsourcing to meet peaks in demand, get specialized skills and enable new capabilities.

This makes it even more important for CIOs to evaluate service providers not only on the number of resources available, but the type of skills and level of experience the provider has in a particular functional area. Careful evaluation will ensure that CIOs find the right partner to support the organization’s strategy for growth going forward.

Please note that this report is focused on North America, and presents only North American (US/Canada) resources and client experience numbers from these vendors, most of which are global. Each profile gives a summary of the provider’s capabilities and experience to help insurers sort through their many potential partner options, and Novarica’s team can help insurers assess potential partners in more detail through our retained advisory service.