Never mind the start-ups, here’s the 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: 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.

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.

News and Views: Vendor M&A, FAA’s Revised Drone Rules, the DOL, Wearables in WC, Cat Bonds, Telematics, and the Life Industry

Novarica’s team comments on recent insurance and technology news

Consolidation of software vendors continues, most recently in benefits management with the acquisition of benefitsCONNECT by benefitexpress.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “By inserting themselves between employers and carriers/brokers, benefits providers have provided employers with a one stop shopping approach for benefits. Many employers like this approach since it is much simpler than maintaining separate relationships with multiple carriers. Consolidation of the sort represented by this merger, is likely to accelerate in the future. A product that is not only an enrollment platform but an engagement solution integrating products from several carriers is not just an employer portal but also a new distribution channel for carriers. For many carriers, the group and voluntary benefits markets are key to their financial success. They will want to remain vigilant to how the competitive space is changing and aware of what they need to do in order to effectively adapt.” More from Novarica on M&A in the insurance software market here.

Low interest rates and Brexit continue to force organizational changes at MetLife, and pressure to lower costs will mean job cuts.

Don Metz

Novarica comment by Don Metz, VP of Research and Consulting: “Recent earnings results continue to emphasize the difficult headwinds facing the life insurance industry. Persistent low interests, foreign exchange rate volatility and continuing turbulence in the domestic equity markets continue to drive thin profit margins, while sluggish sales growth compounded by regulatory challenges, such as the recent DOL ruling, may further impact short term sales. Many insurers recognize the need to innovate and transform to drive growth and open new opportunities. But, the dual pressures of needing to invest in innovation and technology modernization while also maintaining aging legacy systems and processes will continue to challenge insurers, and carriers without a holistic approach to IT modernization will find themselves without the tools to cope as the competitive environment gets tougher.” More from Novarica on IT modernization and program management here.

Cat bonds are upsetting profits for reinsurers, showing that the insurance industry doesn’t have a monopoly on risk transfer.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “Catastrophe bonds now account for 12% of the overall reinsurance market, a number that is triple the level projected for 2016 in by a Guy Carpenter report from 2012. Advancements in information technology makes it possible to better understand and price risk, meaning that insurers no longer own this type of risk transfer. The insurance entities that facilitate risk transfer- distributors, resellers and carriers of risk, and others- are vulnerable to disruption and disintermediation if they can’t justify their existence by adding value to this process. More from Novarica on risk transfer in the insurance industry.

Six IMOs have filed for exemption to be defined as “financial institutions” to comply with the DOL’s Best Interest Contract Exemption (BICE).

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “One of the great questions facing annuity manufacturers now, particularly for those involved with Indexed products, is exactly how they and their distribution partners will comply with the Fiduciary Responsibility component of the DOL ruling which is slated to go into effect next year. In reality, many are facing the prospect that the real go-live date could be 1/1/2017 for many changes, since distribution partners are unlikely to want to run 2017 on a “split basis”.

In any case, for variable annuity products, part of the compliance model has relied on the governance controls provided by retail Broker Dealers. This does not currently exist for the Indexed product set. As a result, evaluating different options becomes critical for the entire value chain. Some interesting developments highlighted this week, including the potential direction of an increased number of IMO’s moving to become Broker Dealers.” More from Novarica on the DOL ruling here.

The FAA’s revised drone rules will allow insurers to take full advantage of the technology for inspections and data capture.

Chuck Ruzicka

Novarica comment by Chuck Ruzicka, VP of Research and Consulting: “Insurers sitting on the sidelines wondering about FAA drone regulation have had one major obstacle removed. Now that the FAA has removed most of the regulatory burden of simple drone operations, we expect most P/C carriers to be keen to exploit the numerous operational advantages it can bring. However, to fully leverage drones and the data they can supply, insurers also need to have prepared the necessary technical resources, the data absorption and data analysis capabilities, and prepared their claims departments for the potential impact of new data sources on adjusting and litigation. Permission to take off is only one part of getting off the ground.” More from Novarica on drones and IoT here.

Wearables to manage workplace injuries are poised to reduce risk and cost in workers’ comp.

Tom Benton

Novarica comment by Tom Benton, VP of Research and Consulting: “Wearable devices have the potential to quantify many variables for personal health: movement, heartrate and even more specific items like blood sugar levels for medical monitoring. Consumer adoption has been rapid with fitness bands and smartwatches in the last few years, but insurers have struggled with how to leverage the massive amounts of data that are becoming available. Specific use cases are hard to find, but as the article points out, wearables can make an impact on workers compensation (WC) claims. Injured employees can be better monitored to track recovery to decrease the time away from work, and possibly increase the likelihood of returning to their job. As Novarica pointed out in a report earlier this year, wearables and other IoT devices face significant long-term challenges for insurers such as regulation, adoption, standards and other issues. However, application to workers comp could provide a use case that has near-term impact and measurable benefits to WC insurers.” More from Novarica on wearables and IoT here.

The spinoff of Allstate’s telematics company, Arity, signals intent to sell data and analytics knowledge to competitors and other industries.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “This announcement shows that leading P&C insurers are not going to be content to have their fortunes completely hostage to a low margin, commodifying business like mass market personal auto. They are going to look for new services that they can offer based on their extensive knowledge of risk. Whether insurers will buy services from a company owned by a competitor is another question.”

Insurance Industry Doesn’t Own Risk Transfer

Matthew Josefowicz

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.

Novarica Presentation for PCI Tech 2014

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

News and Views: Predictive Analytics, Mobile for Claims, Blockchain, Distribution Startup

Novarica’s team comments on recent insurance and technology news

Predictive analytics reduces risk in Workers’ comp.

Jeff Goldberg

Novarica Comment by Jeff Goldberg, VP of Research and Consulting: “Workers’ comp carriers are prone to high claims associated with complex injuries and medical handling, and also frequent claims fraud. So any technology that reduces the risk and uncertainty associated with claims is going to be enthusiastically embraced by carriers in this line. Predictive analytics solutions are being used to predict claims severity, to increase reserving accuracy, and identify fraudulent activity. While most insurers have not fully adopted predictive modelling, it has the potential to become a centerpiece of data strategy.” Novarica will be publishing a Novarica Market Navigator™ report on predictive analytics solutions in the coming week. For more Novarica vendor analysis, see

Two insurers have started to use IBM MobileFirst for claims handling – Amica in the US, and RIMAC in Peru.

Chuck Ruzicka

Novarica Comment by Chuck Ruzicka, VP of Research and Consulting: “Amica’s adoption of IBM’s MobileFirst claims app is a timely reminder that it’s not just policyholders who are affected by a carrier’s technology choices, but staff as well. Creating a richer mobile workflow for claims adjusters isn’t just going to improve adjuster productivity or the customer experience for policyholders, important though these are. Amica is explicitly doing this in part to match the way the millenials entering the workforce are used to interacting with technology, and ensure they are able to recruit and retain a younger generation of claims adjusters.”The “Novarica New Normal for P/C Insurers” benchmarking study found that 20% of large PC insurers have some mobile field adjuster app deployed today, and another 30% have current or planned pilots.

SAP will start integrating with Blockchain.

Mitch Wein

Novarica Comment by Mitch Wein, VP of Research and Consulting: “We have previously suggested that blockchain distributed ledgers could allow for claims settlement where an uninterested third party provides key data that can be used to trigger a claims payout. SAP, as part of its new blockchain strategy, is doing just that, designing a system for farmers’ weather insurance that would pull rainfall data from sensors in the field (or perhaps the weather service), then automatically inform insurers if there’s a drought that would trigger a payout. If SAP successfully integrates blockchain with HANA, insurers could start storing key transaction and GL activity in this format, potentially creating an unprecedented level of straight-through processing. This is a clear signal that use of blockchains in insurance is only going to become more widespread.” More from Novarica on Blockchain.

The CEO of Principal Financial estimates the price of the DOL Fiduciary Rule Change to be $1 Million per month, and some analysts believe the ruling could set indexed annuity growth back by a year.

Rob McIsaac

Novarica Comment by Rob McIsaac, SVP of Research and Consulting: “Carriers and distributors alike continue to prepare for the significant changes that the DOL Fiduciary ruling will bring to the annuity business in 2017. For carriers, as reflected by Principal Financial’s comments, there may be significant business process and technical changes that will be required to meet the needs of their broker dealer and other distribution partners. One of the key issues facing many companies now is getting clear business requirements from distributors, a particularly daunting challenge since many distributors want to have any changes impacting compensation and recognition programs in place by the end of 2016.

One might suspect that the adverse impact of the rule changes could actually be more significant on the indexed products than it will be on their variable annuity counterparts. For registered products, the broker dealer infrastructure and compliance capabilities provide a framework for managing rule changes as defined by the DOL. For many producers who are not securities licensed and therefore not affiliated with a retail BD, the implications of the rule could be far more significant. Some manufacturers are beginning to contemplate how they could step in to take on the Fiduciary responsibilities associated with the rule changes, but it is too early to know at this date how, or even if, that would be implemented. This could have a further dampening issue on sales for these products in the new year.” More from Novarica on the DOL ruling.

A former executive at a disruptive insurance distribution startup has founded a slightly less disruptive insurance distribution startup, with MassMutual among the investors.

Steven Kaye

Novarica Comment by Steven Kaye, Associate VP of Research: “Through its funding of Apliant, MassMutual not only gets to shape the future of distribution, but has the potential to make itself more attractive to independent agents by offering a distinctive technology platform. Novarica has said there will continue to be a place for agents in insurance distribution, and the more promising distribution startups empower agents to provide better service. As we keep saying, ‘cyborgs beat robots.’”More from Novarica on VC funds and accelerators.

News and Views: On-Demand Insurance, the DOL, Agent Licensing, Big Data

Novarica’s team comments on recent insurance and technology news

On-demand insurance startups are gaining traction.
One company, Slice Labs, has announced a partnership with Munich Re, and
the Chicago Tribune profiles four other startups in the space.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Pay per use insurance represents the coming together of big data, which supplies large amounts of data for underwriting in real time with the needs that an on-demand economy requires. For example, a Uber driver may need commercial auto insurance while acting as an Uber driver and personal auto insurance when driving the car otherwise, and another consumer might want coverage only while riding their bicycle or driving their car. The larger trend here is the digitization of the overall experience, enabled by smart phones and telematics, which we are seeing across all lines of insurance.” For more on startups and on-demand insurance, see our reports on telematics and VC funds and accelerators.

A new Florida law will allow college grads to waive the personal lines agent licensing exam if they complete the requisite insurance courses at an approved state college.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “The recent change to licensing regulations in Florida is the latest attempt to address the aging insurance labor force, particularly among agents. Beyond creating a short term bump in new entrant agents, however, this regulatory change does little to respond to fundamental changes taking place in the industry in terms of how products will be purchased by Millennials (and others) in the future. Personal lines P&C has seen a significant and growing shift toward a more direct to consumer model recently, and other lines will follow. To truly prepare a distribution force for the future, training programs will need to impart an ever-increasing degree of technical sophistication as well as an appreciation of the importance of Omni-channel capabilities that allow consumer to adjust channels of communication at their own discretion.”, a startup with the potential to disrupt big data, raised 14 M in Series A funding.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “The future of the insurance industry (and most industries) will revolve around getting access to and getting better insight from data. But this means something other than just an insurer doing more with what they have; it will require a combination of private and public data across many different sources. There will eventually be a race by insurers to find new predictive factors from a widening body of available data, even sources that seem tangential to the industry. The investment news about shows that the marketplace values this and is excited not just about data technology but the growth and handling of the data itself. To appeal to the corporate world, solutions and data hubs will evolve to allow businesses to blend their proprietary data with more public sources, and as long as they can maintain both security and ease-of-use it will have a transformational impact on private enterprise.” More from Novarica on data usage here.

The DOL posts technical fixes to the recent Fiduciary Rule.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “While some carriers continue to hold out hope that action in the courts will delay or modify the ruling, most presume the new regulations will go into force as they are currently written, and that changes will need to be in place by January 1st, 2017, notwithstanding the actual effective date for some elements being in April. This week’s technical correction represents a refinement that was already fully expected by the carriers involved and so has no meaningful impact on the trajectory for implementation. Furthermore, it does not clear up the uncertainty over how indexed annuities will be handled, since they are frequently sold by independent agents or other producers that are not necessarily subject to SEC / FINRA oversight. In these instances, it is unclear where fiduciary responsibility lies, and most manufactures appear unable or unwilling to assume it. The path forward for indexed products will be very interesting to watch.” More from Novarica on the DOL ruling here.

News and Views: Customer Experience, Digital, Drone Adoption, Reinsurance, and Insurer M&A

Novarica’s team comments on recent insurance and technology news

A new company in Brooklyn is offering “5-Minute Renters Insurance” and another one in Boston is selling Renters and Life via mobile.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “These are great examples of starting from customer need and re-engineering the process around that. Renters is one of the most undersold, most profitable businesses in P&C – we expect to see more players take this route. With a slick interface optimized for a specific set of buyers, these plays are great examples of how the New Entrants we discussed in the Novarica Nine for 2016 and Beyond are approaching markets differently, and the fact that All Business is Program Business.”

AIG has hired Michael Lewis from JP Morgan to be their new Chief Digital Officer.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “As a general rule, banks have been well ahead of insurance carriers in the move to leverage digital capabilities to improve and enhance operations and customer experiences. This pattern is, in part, the result of the competitive environments faced by these different players underneath the broader financial services umbrella. From our experience, banks can be in the neighborhood of 5 years ahead of P&C carriers in their leveraging of technology advances. To that end, bringing in this type of seasoned executive expertise can be an important way to increase organizational velocity for delivering new capabilities and creating better differentiation for AIG’s offerings in a highly competitive marketplace.”

Insurers are leading the way in drone adoption.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “A large percentage of P&C insurers have gotten approval or are pending approval for drone usage, with the intent to use them in property inspections. Not only will drones help reduce the risks inherent in this process, as we discuss in our recent report on the Internet of Things and other emerging technologies, but they will also allow a more efficient inspection and allow views and insight that humans can’t get alone. It’s likely that insurers will not only help push the adoption of drones via their own usage, but will also encourage policyholders to use them when drones can help mitigate client risks.”

S&P has a somewhat less than rosy outlook on hedge fund reinsurers.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Growing the top line at the expense of ignoring risk controls is always a bad idea. We learned this in the great recession of 2008. Smart insurers have always known this. But hedge fund reinsurers are trying to differentiate themselves in the marketplace by offering their shareholders greater returns that traditional reinsurers would. Reinsurance pricing has been soft in recent years. If the price hedge fund reinsurer charges does not make up for the risk and there is no underwriting profit, these companies will underperform the traditional players. If reinsurance prices continue to decline and investments do not cover underwriting losses, it will only get worse. As I stated earlier, growing the top line at the expense of ignoring risk controls is always a bad idea… always.”

TIAA buys FinTech firm MyVest in an effort to personalize service.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “TIAA’s acquisition of MyVest is a great example of that desire to incorporate more robust and feature rich capabilities that can directly support a rapidly evolving individual consumer / investor set of needs. Another interesting aspect of this is that for companies that have historically had a very strong place in the institutional investment space tied to defined benefit and defined contribution retirement plans, there’s a growing need to expand capabilities to support individual investors who may or may not be a plan member for a traditional DC plan. Finding ways, such as advanced capabilities driven by improved end user experiences and functionality, can both facilitate attracting new assets while helping to minimize the “leakage” of assets as the employment situations of individual investors change. ”

News and Views: Electronic Persons, Parametric Coverage, Direct-Contracting, Brexit Updates

The EU proposes designating robots as “electronic persons” and subjecting them to employment law.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “When I read this article, I thought of the movie “Bicentennial Man” from the turn of the century, about a robot who strives to be a person over the few hundred years he exists. Through upgrades he becomes more intelligent and human until ultimately he becomes so advanced, he can die. Of course, reality is starting to catch up with Sci-fi and there will be more and more robots replacing human workers. The EU is concerned about the loss of tax receipts as more workers are robots, and has come up with the notion of an “electronic person” so the robot’s owner can pay tax based on the work the robot produces. This raises interesting questions from an insurance point of view. Can the robot “purchase” insurance for itself? If the robot is a “person”, can it be insured as a product with a notion of product liability if something goes wrong? What types of insurance products cover “electronic persons”, personal lines products or commercial lines products? It is clear that the insurance regulatory framework will need to be enhanced to support this legal notion, but we probably don’t need to worry about it until the 30’s.”

Online Chinese Insurer Zhong An launched parametric coverage that will compensate policyholders if they experience rain or high temperatures at Shanghai Disneyland.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “A new insurance product that will compensate visitors to Shanghai Disneyland for unpleasant weather conditions combines a lot of disruptive industry trends. It’s an example of a simple, specific, consumer-focused product, and Novarica expects to see more insurers experiment like this as they look to profit off of a highly-mobile and experience-driven consumer base. It’s an example of micro-insurance, where small payments cover either a single event or a single item rather than long terms or big coverages. It’s an example of just-in-time insurance, where a policyholder buys the product as it’s needed. And, finally, it’s a simple parametric trigger for a straightforward non-adjusted payment, the sort that Novarica expects to see eventually built onto blockchain for a fast, transparent claims transfer. So while this specific Shanghai Disneyland weather coverage may be a small, novelty insurance offering, it has all the features of a product we’ll be seeing more of in the future.”

Boeing becomes the latest of several large companies to bypass the traditional health insurance model.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “Amazingly, when you put a floor on medical loss ratios of 85%, health insurers start exploring other businesses, like managing claims for self-insured large corporates. Meanwhile, large self-insured corporates find it easier to negotiate with an integrated provider system that covers a significant portion of their employees where they have more leverage. While this isn’t a new model, it’s interesting to see a major employer like Boeing take this step. Early pundits expected PPACA to push employers out of the health market, but moves like this may indicate that large employers may stay in the market, and push payers out instead.”

Brexit shockwaves continue to reverberate, and the final extent of the impact on Lloyd’s remains to be seen.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Lloyd’s of London has worked in a single market, confirmed by the Solvency II regulations, for many years. The Prudential Regulatory Authority (PRA), a UK-specific regulator, has been allowed to regulate Lloyd’s across all of the EU countries through a “passport permission system”. This allowed Lloyd’s to write business but not keep funds and capital reserves in those other countries to meet future insurance liabilities in those countries. Using this approach, combined with Letters of Credit and Bank Guarantees acting as “regulatory capital”, actual capital can be placed in the most efficient way across the continent. Regulatory reporting just has to be done to the UK PRA, and not other regulators in other EU countries. This will all go away with Brexit unless a treaty is signed country by country to allow this approach. Even Solvency II itself may change when the UK designs its own specific version of the law, which it will have to do.” His full blog post is here.