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.

 

Here’s the Problem… A Process Is Only As Good As Its Weakest Link!

Rob McIsaac

Recently, I decided that I needed to update my life insurance portfolio. With a range of life events taking place, and a 10 year term policy purchased in 2004 coming to a natural end, I was poised to take quick action. Suffering from mild OCD, I actually started the process a full 8 weeks before the anniversary date. Little did I know that I was dancing on a razor’s edge in terms of timing. This sort of “secret shopper” experience has been frustrating, humorous and thought provoking all at the same time. Does it really need to be this hard? If a process is only as good as its weakest link, this one sets a new standard on the low side of the scale.

In an era of instant access, and nearly instantaneous gratification, I went online to start shopping at an aggregator site. To my surprise, this was less functional than the site I recalled from 10 years ago but it did earn me a call back from a call center agent. After going through the medical questions, we landed on the need to “draw fluids”, a process that could take 2-3 weeks to complete. Given the green light, this process started. It took 3-4 weeks to actually schedule the blood draw.

Thinking the process had run amuck, I went to a second carrier directly. After completing their app online, I was called back in minutes for the medical questions. Because of how I answered one question, I was cautioned that I wouldn’t qualify for the super preferred rate and that the agent had no idea what the premium might be. The thrust of the conversation was that it would likely be around 50% more, but that this was just a SWAG. Clearly surprised that I wanted to proceed anyway (not a great trait in sales) we again marched into the need to draw fluids. A process that could take, I was assured, 2-3 weeks.

The third carrier was a traditional Agency company that I decided to test to see if the web site channel worked. Although it took several business days for someone to respond, when they did, the agent was effective and knowledgeable. She was able to share different premium scenarios and suggest which products might best fit the need. While the low end price was higher than the direct company super-preferred rate, the “likely” rate based on the medical questions was lower. And, of course, drawing blood would take several weeks.

Several interesting points in the process:

  • For all practical purposes, the questions the carriers asked were exactly the same. The only variations seemed to be in looking at my driving record (3 years or 5) and my parents issues with illness (before 60 or 65). Other than that, it was cookie cutter.
  • All three companies declined the opportunity to get medical records (fluids, EKG, chest x- ray) directly from my doctor, despite the fact that they were available as part of an annual physical done two weeks earlier. All wanted to have their own chance to stick me with needles.
  • All three carriers used the exact same service to do the fluid draw and on site visit. Some effect envy for me there, since I got a “three for one” deal on the fluids and the list time. Each carrier wanted their own EKG original so I had to sit through that multiple times, but only partially disrobe once.
  • The direct carriers are decidedly poor at staying in touch with process updates. With them it feels like I’ve fallen into an abyss. The agency carrier seems to be far more engaged through my touch point.
  • Across the board, the process seems broken … or at least archaic. I became a little worried about coverage gaps with the ’04 policy exporting, but I shouldn’t have been concerned. The old carrier indicated that it takes a calendar quarter to actually lapse the contract … whose premium would triple on the next anniversary barring action on my part.

    At a time when the balance of consumer’s financial lives is so readily available through self service and guided experience, this seems like a trip back in time to a different world. Actions are measured in weeks and quarters rather than minutes and hours. Rather than full transparency on information and pricing, the process feels both secretive and ill-informed.

    The process also seems to be intentionally inefficient. When my doctor did his version of the fluid analysis, we had results in 2-3 days. The paramedic firm used by all three carriers said it took 2-3 weeks. How could that possibly be?

    Left to a natural course, this process could run (in total) 6-10 weeks, by my estimation. At that point, I will be presented with “take it or leave it” offers from all the carriers involved. I will, of course, have a personal choice to make at that point, armed with full disclosure and valid pricing as inputs. In the end, it will have a happy outcome for some.

    This got me thinking about my own children and their Gen Y peers. They would be highly unlikely to participate in an exercise as slow and as painful as this one. Baby Boomers like me may now be closing in on purchasing their last life insurance contracts as other life events loom.

    For carriers, the time to think about the required paradigm shifts is coming quickly. Those footsteps you hear are future generations of prospects but they may be running away, rather than toward, you!

    Big data, mobile capabilities, access to a form of Telematics and other devices may all prove to be game changers sooner than we think. Remember what life was like before SmartPhone? I don’t either…

    Evolution in London Market Vendor Landscape

    Catherine Stagg-Macey

    The 325-year-old Lloyd’s market makes changes slowly. The complexity of the risk, the uniqueness of the market place and the importance of relationships are all factors in the speed of change.

    However, one area of noticeable change in the last three years is the core solution offerings to Lloyds. Traditionally, a small number vendors serving the local insurers, syndicates and managing agents developed software for each client. These vendors were small in size with management and development staff drawn from the Square mile.

    There was significant re-use of the software across clients but the software offered was some way off from being productized. As a result, the clients (insurer, syndicate, managing agent) would be faced with on-going services bill to maintain what is essentially a bespoke core systems implementation. This had the advantage of being significantly fine-tuned to each client’s requirements but at a cost.

    The Lloyds vendor market was known for mostly over-promising and under-delivering. CIOs would make comments like “our vendor is the best of a bad lot”. The sector is notorious for difficult and painful implementations. With only one or two new deals a year for vendors, it was a hard market to ensure continued investment in the solutions.

    For years, the idiosyncrasies of the Lloyds market (messaging into the Bureau, peculiarities of business process, and complexity of the risk) were significant barriers to entry for other vendors.

    Then two trends converged to create a more interesting target sector for the non-traditional London market vendors looking for continued growth:

    1. Mainstream software market matured significantly and insurers were able to partner with vendors with sophisticated partner programs, and strong delivery records to take on some serious legacy system challenges.
    2. Lloyds/London market insurers started to expand globally and were open to looking at more mainstream solutions for their non-Lloyds business. Several made investments in Europe or the US for their regional businesses and successfully implemented new underwriting and claims solutions.

    The result is several of the big names in the core P&C systems market now have the global Lloyds or London market insurers as their clients, albeit for their non-Lloyds books of business for underwriting. Implementations are mostly in the US or in Europe.

    The Claims area is a different picture. Several vendors have made the necessary investment (with thanks to their charter client) to be London market compliant and support Claims in the Lloyds market. This mostly involves modifications to messaging to be compliant to the London market message standard of ECF.

    So the next uncharted territory is for a mainstream vendor to partner with a London market insurer and invest in the localization requirements. Our view is that is probably 18-24 months away.

    It’s a good time for the insurer in the London market. There is increasingly more choice from established, well-funded vendors with better implementation track records and experience in product management. It’s a challenging time for the incumbent traditional London market software players as the competition is going to really hot up with these new market entrants. Time to buy ring-side tickets.

    New Reports: Policy Administration System Project Averages and Metrics

    Tom Benton

    This week, Novarica published reports on PAS project metrics and averages for L/H/A insurers and for P&C insurers, based on a recent survey of 33 P&C insurers and 11 L/H/A insurers who have completed projects in the last ten years or are currently implementing. The survey included questions on project scope, timelines, resources, costs and impacts – the key areas that carriers focus on when considering a PAS implementation.

    Among the findings, the survey showed that a significant number of midsize P&C insurers and midsize L/H/A insurers are opting for SaaS or hosted PAS solutions. Also, compared with our 2012 study, large P&C insurer deployments are taking somewhat longer to complete and midsize deployments are taking less. For L/H/A carriers, most deployments were completed in less than three years.

    Core systems replacement is high priority for insurers, and the majority of insurers have either just completed a replacement, are in the midst of one, or are evaluating one. These reports should help those in the latter two categories set expectations for levels of effort and cost for these key projects.

    See the reports for more information:

     

    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.

    Turning Insurance Outside-In

    Matthew Josefowicz

    Across the great formal presentations, panel discussions, and roundtables at our 7th Annual Council Meeting this week, one theme kept jumping out for me: the need for insurance to become more demand-led in market, operational, and technology strategies.

    As an industry, we have a tendency to view the world from the inside out. We need to reverse that perspective and look at the our industry and our operations from the outside in. We need to start from market and operational needs as we plan product, service, and technology strategies, rather than starting from our own understanding of capacities.

    Our keynote speaker, data and analytics expert Adam Braff, hit on this theme in his opening presentation on “Cooking with Big Data,” with the first of his 5 guidelines: “Figure out what people want to eat before you go shopping.” Too many analytics efforts start with gathering data rather than thinking about how insights might be operationalized to drive better business results. The supply of data and analytical capability is leading in too many cases, rather than the demand for insight.

    My presentation on Trends in Information Technology and Insurance focused on how changes in the ability to access, communicate, and analyze information means that buyer and distributor expectations about speed, flexibility, and even value propositions, are diverging from insurers’ own understandings of the world. The supply of risk analysis and distribution is leading in too many cases, rather than the demand for coverage.

    In our CIO panel, a common theme of the panelists from AFLAC, The Hartford, Great American, and New York Life Investment Management was re-orienting IT organizations to be more focused on the creation of business value. This involves educating IT staff about business needs and goals as well as educating business leaders about the implications of their requests. The supply (and cost) of technology is leading in too many cases, rather than the demand for capabilities.

    This will be a massive shift for the insurance industry, but one that is necessary to undertake. Access to information, communications technology, and analytical capability is democratizing the ability to price and sell risk. Insurers (and insurer operational and IT executives) that focus on the demand for coverage and capabilities will be better positioned to meet that demand. Those that don’t may soon find themselves with much less demand for what they have to offer.

    The 7th annual Novarica Insurance Technology Research Council Meeting was held in Providence RI on April 30-May 1, and was attended by more than 70 insurer CIOs and senior IT executives. A report based on the discussions at the meeting will be published shortly.

    Other recent Novarica reports on this theme include: