Yahoo News reports that Aon is in talks to sell its employee benefits outsourcing group. Aon bought Hewitt for $4.9 billion in mid-2010, when large brokers were under pressure to diversify into non-commission businesses after the financial crisis. Some interpret this as a signal that Aon wants to focus more on insurance and risk management businesses. With the large commercial insurance world being transformed by new entrants from the capital markets and new technology, and with the employee benefits market under pressure from the growing percentage of the labor force operating as freelancers, Aon may benefit from a tighter focus on its core market where disruption may create opportunity (as well as threats).
Lemonade got some great press this week with their instant claims payment for a small property loss on a renters policy.
While Lemonade is spinning this a miracle of AI, it’s really more a miracle of intelligently-designed processes. Many insurers do rules-based, auto-adjudication for small property losses, but few have the ability to translate those automated decisions into real time payments.
The other thing that Lemonade has done successfully here is focus on the desired customer experience, and exploit the industry’s lack of willingness to do so.
Now if Lemonade can do the same thing with a $25,000 liability claim on a small renters policy, that’s a different story…
The recent action by the Fed to raise interest rates may have been pre-discounted by the equity markets, but the Open Market Committee’s change of posture signaling more aggressive raises in 2017 got the markets excited this week. But while this movement may be directionally encouraging for insurers, it’s a long climb back to the yields of before the financial crisis. With a historically high spread between US and leading European bonds, it’s hard to see the Fed being able to act too precipitously. For insurers for 2017, investment yields are likely to remain underwhelming, continuing the pressure on underwriting profitability to drive positive results.
Sometimes, the received wisdom is just wrong. Even if there is a ton of data to work with, the key assumptions that drive the analysis are not valid.
Sometimes, senior practitioners can be blinded by their own historical experience, and can miss the importance of signals emanating from a rapidly changing market.
Of course, electoral politics moves faster and more erratically than the insurance industry does. But last week’s election provided a stark reminder that the unimaginable can become real very quickly when a major market participant stops playing by the rules that everyone “knows” are true, and when an underserved market segment suddenly has a new option that they never had before.
Well, a few things certainly look different this morning. Here’s some quick thoughts for insurance technology strategists in light of the coming Republican administration and congressional majority.
1. Stop worrying about the DOL. A Republican administration is likely to reverse the pending DOL regs requiring investment product salespeople to act as customer fiduciaries. While this may still happen long-term, it’s unlikely to be implemented in the next two years.
2. Start worrying about healthcare again. However flawed the ACA may have been in the industry’s eyes, at least it was a known quantity. With the incoming administration’s plans to “repeal and replace” facing no opposition, everything may be up for grabs again.
3. Start worrying more about the states. With Federal regulations likely to be eased over the next few years, powerful regulators in democratic-leaning states are likely to get more aggressive. New York’s proposed cyber-security regulations may be just the beginning.
4. Keep worrying about interest rates. While the incoming administration has said they favor higher interest rates, market uncertainty, a global low interest environment, a rhetorical focus on jobs creation, and a Fed chair whose term lasts until 2018 may indicate that the current ultra-low interest rates will continue for the next few years at least. Insurers will remain in the double-bind of being resource strapped while badly needing to invest in new capabilities.
Lemonade shared its first 48 hours’ results earlier this month (15% visitor-to-buyer rate for renters insurance in NYC), and Business Insider offered a nice profile of the company, founders, and its fundraising process. Whether or not it is successful in grabbing significant marketshare, it is remarkable for two things that insurers should carefully consider:
1. The online quoting process is not only simple, but explains the product, coverages, and exclusions simply. Lemonade’s quoting process heavily leverages third-party data to avoid asking unnecessary questions, and it communicates quotes and offered coverages in simple language that non-professionals can understand. While insurers have long maintained that their products are too complex to communicate effectively without an intermediary, companies like Lemonade are proving that either the products were too complex, or the communications skills were too poor. This is a solvable problem for incumbent insurers as well.
2. It’s not holding risk, it’s managing customer relationships and service. While a lot of digital ink has been spilled on Lemonade’s P2P, social-engineering business model, a much more interesting part of the business model is that Lemonade is ceding 100% of risk to reinsurers, while taking a 20% fee to cover operating costs and profits. This means that its operating results are dependent only on its marketing and operating abilities, and not on the unpredictable nature of claims. What Lemonade wants to be good at is customer intimacy.
For incumbent insurers, this may point the way to a bifurcated future where there are customer relationship companies and risk management companies. One might object that that’s the traditional agent/company structure of the industry, but I’d argue that it’s a mistake to see a sales channel as a customer relationship company.
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.
Another day, another suite vendor buys another small independent component vendor. This time, Guidewire bought FirstBest Systems. The Age of Suites is certainly upon us, and the suite vendors are taking their cue from Pokemon Go. Gotta catch’em all!
As we wrote in June, there are three major trends driving M&A in insurance enterprise software these days: verticalization, suites, and portfolios.
For insurers who rely on systems from independent software vendors, it’s time to think about the inevitable. What would it mean for your favorite vendor to get rolled in to a suite or a portfolio?
Back in 2008, we wrote an executive brief on this topic called What to Expect when You’re Expecting Your Core Systems Vendor to Be Acquired. We’ve updated it and republished it today.
Interesting article in today’s WSJ about the impact of Catastrophe Bonds on the insurance industry. According to the article, cat bonds and similar investments now account for $72 billion in risk transfer, equivalent to 12% of the $562 billion in the overall reinsurance market. This is triple the level projected for 2016 by Guy Carpenter in a 2012 report.
As information technology makes it more possible to understand and price risk, insurers are losing their monopoly on this kind of risk transfer. At its core, insurance is a very simple industry. There are some entities with more risk than ability to bear it, and there are pools of capital that will take that risk on for a fee.
All of the entities that facilitate that transfer — whether they are distributors, resellers of risk, carriers of risk, or others — are vulnerable to disintermediation and disruption if they’re not adding sufficient value to justify their existence.
Related: Novarica’s 2014 Webinar on Technology in Insurance: Change, Legacy, and Disparity
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 this year’s impact award nominees share some common characteristics – the use of Agile methodology, a focus on communication, strong executive support, and planning for substantial user training as a key part of unlocking value creation.
This week, we look at an Aflac project to enable one-day health claims payments.
The One Day PaySM initiative was a response to a direct challenge from Aflac’s CEO to create a unique claims payment process. Aflac’s goal was to reduce average claims processing time from four days to one. Over the course of the 12 month project, Aflac used Agile methodology to ensure delivery and quality, which they credited with enabling their speedy delivery and enhancing collaboration between IT and business teams, especially when supported by co-location of IT and other business units. The lessons learned have since been applied to a full restructuring of the IT organization. The project has resulted in 87% of online claims meeting One Day Pay requirements—a year-over-year increase of 43%. Customers submitting claims online reported a satisfaction rate of 91%. The direct deposit capability also reduced the company’s carbon footprint, saving an estimated 16,000lb of paper.
For more detail on this project and more than 30 others, including cases from MetLife, Prudential, The Hartford, and Trustmark, see Novarica’s Best Practices Case Study Compendium 2016.