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 http://novarica.com/vendor-analysis/.

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.”

Data.world, 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 data.world 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.

News and Views: Brexit, Home Automation, Data Security, the DOL, and Customer Satisfaction

Novarica’s team comments on recent insurance and technology news

Britain has voted to leave the European Union.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Yesterday, the UK voted to leave the EU. Nigel Farage, the UK Independence party head, declared it “Independence Day”. What does this mean for multi-national insurers? The impact is far reaching. Consider regulations regarding data, financial product definitions, privacy, and the overall regulatory framework including capital requirements. Access to Europe’s single market, some 500 million people, will be impacted by tariffs which will be placed on transactions over the existing VAT. And what about employees that come from the EU and work in London? What will be there status going forward? Brexit only highlights the importance for global companies of maintaining flexible, globalized IT operations to be able to handle unforeseen events. Risk and contingency planning is key. Much to sort out. Stay tuned.” More from Mitch on the potential impact of the Brexit is here.

Home automation can help save on claims and Esurance launches mobile app for self-service home inspections.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “These two stories are nice examples of how ubiquitous, low-cost communications changes what’s possible within the insurance value proposition. Personal lines insurers can go from providing loss reimbursement to loss avoidance in a way they never could have before. I especially enjoyed the Esurance story, because I’ve been using the idea of self-service home inspections via smartphone video in conference presentations as an example of new potential capabilities for the last several years. Nice to see it happen in the real world!” More from Matt on the arrival of the future here.

The digital currency Ethereum dropped in value due to a huge attack.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “Ethereum is a cryptocurrency that many believe will surpass Bitcoin as the choice for businesses dealing in more complex contracts due to its ability to allow the creation of programmatic “smart contracts” on top of its blockchain base. Emerging technologies always have some stumbles during their maturation, but in the case of cryptocurrency, a technology stumble means direct losses of millions of dollars rather than a few hours of downtime. This isn’t necessarily a repudiation of Ethereum, but rather a reminder that there’s a difference between the security of a platform and the security of applications built on top of that platform. Even if the underlying blockchain is secure, those who participate in smart contracts on Ethereum will also need to trust the party that designed and programmed the contract. Eventually there will be a variety of standard base contracts that have been vetted by the community for security, and businesses will be able to adapt them to their needs rather than start from scratch.” More from Jeff on Blockchain here.

15% of agents at Citizens Property Insurance Corp face termination if they don’t sign new data security compliance agreements.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting : “The NAIC issued its Preliminary Draft Data Security Model law in March, 2016 for comment. This model law draft will become the basis for state laws and regulations over the next few years as each state adopts a version of it. The model law makes clear that insurers will be liable for data breaches. It also specifies minimum requirements largely based on the NIST framework, and gives policyholders the right to have class action lawsuits. The insurers know this is coming and are now working to minimize their financial exposure to these new regulations. The Citizens appointment agency agreements are holding agents responsible in the event that a customer’s data is breached due to the fault of the agency’s cyber-security practices. Citizens is establishing a minimum requirement for agents. Of course, the agents will sign these agreements in order to continue to sell Citizens’ insurance products. However, if a breach occurs, Florida’s Citizens Property Insurance Corp would be the deep pockets for a lawsuit, not the small agent. Citizens would try to get the money back from the agent but the agent may or may not have the money. It is also unclear as to whether small family-run agencies have the expertise to deploy the technology protections required.” Learn more about Novarica’s IT Security Planning Workshops here.

Variable annuities sales dropped by nearly 20% in Q1 and the DOL ruling will have some other side-effects.

Don Metz

Novarica comment by Don Metz, VP of Research and Consulting: “The first quarter 2016 drop in variable annuity sales of 18% and dramatic increases in indexed annuities with a 35% increase and fixed annuities with a 48% increase reflect the ongoing turbulence in the annuities market that will likely remain for some time. With the surprise inclusion of indexed annuities under the BICE in the final rule the potential for even greater turbulence is high. While many are pointing to the recent DOL fiduciary rule announcement as the principal driver of this shift, the reality is that variable annuity sales have been steadily declining for several years. Consumers continue to be concerned about overall market volatility and manufacturers continue to be challenged by the persistent low interest rate environment, neither of which appears to be calming down in the near term. These issues also mask a broader shift in the market as the investment goals of the baby boomer generation shifts from accumulation to payout as they retire and preservation of capital and income guarantees become crucial. This shift is exacerbated by a next generation that is more cautious in their investments and more skeptical of market volatility. The DOL fiduciary rule along with these broader market and consumer issues indicates that the annuities industry may be subject to a high degree of turbulence for the foreseeable future.” More from Novarica business and technology trends in annuities is here.

Study Finds Customer Satisfaction is Falling for Large Auto Insurers and Rising for Small Ones.

Chuck Ruzicka

Novarica comment by Chuck Ruzicka, VP of Research and Consulting: “Customer perceptions of the insurance industry are falling despite large investments in analytics and digital technology. Pricing increases are offsetting improvements in service in the customer’s mind. While these trends are consistent across the industry, they may be creating an opportunity for smaller or regional insurers to gain some ground on larger, more national brands as consumers become open to alternatives.” More from Novarica on business and technology trends in personal lines is here.

News and Views: Blockchain for Cat Bonds, New M&As, Activity Trackers, and Critical Illness

Novarica’s team comments on recent insurance and technology news

Allianz implements Blockchain for Cat Bonds

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “As we discussed in a blog post earlier this week, Novarica expects that Allianz’s implementation of Blockchain will be the first of many explorations of Blockchain use for insurance policies with simple payout structures. Any time an objective third-party “oracle” can give definitive information that will trigger a fixed payout or default to an insurance contract, a blockchain model will work well. Blockchain could provide a trusted and objective way to handle insurance contracts as long as all parties can agree on how to properly trigger claims, and the simplicity and transparency of the process would benefit the entire industry.”

Two insurance technology M&A stories this week point to the same trend. Insurity announced its acquisition of Tropics, (following on the heels of its recent acquisition of Oceanwide), and Ebix offers to buy Patriot National.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “We are increasingly seeing insurance technology companies pursue a portfolio strategy, maintaining parallel products or suites to support different buyers with different needs. As we discussed in a recent blog post, the diversity of the insurance marketplace means this will likely remain an attractive approach for growing through acquisition for some time to come.”

3 in 10 Americans would be willing to share activity tracker data with insurers

Tom Benton

Novarica comment by Tom Benton, VP of Research and Consulting: “As with the early use of UBI devices by auto insurers, wearable devices may offer a way to gather data on policyholder behavior, but insurers need to do more work to determine correlations to risk and pricing. LIMRA’s Insurance Barometer study indicates that at the moment, a willingness to share such data correlates heavily with early adoption and an interest in fitness, suggesting a strong likelihood that selection bias will affect any policy marketed on the basis of activity tracking.
As we wrote earlier this year
, wearables and IoT are starting to play a larger role in customer engagement.”

The federal government may try to disable critical illness insurance

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “For many carriers, the advent of the ACA and the associated exchanges for connecting with customers also meant the advent of voluntary benefits that could complement or replace traditional group benefits, and Critical Illness products in particular have seen growth as a result. While these products are hardly new, the potential for them to become confused with the minimal protection products envisioned by the ACA appears real. Carriers will have to ensure that they are understood to be supplemental coverages rather than “runarounds” for the ACA in order to keep them in the product mix and on the exchanges in the future. For carriers, considering their go to market plans for the future as well as their product development plans for the upcoming enrollment cycles should be a key part of the current planning process.

Another element that may be in play here is the generally low levels of
awareness or understanding that Millennials have about health insurance options
. Given that all options are clearly not created equal, the regulatory push may be further fueled by a desire to concurrently elevate awareness of what actually constitutes an effective option.”

More regulatory changes are afoot as principle-based reserving starts in 2017.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Current static, formula-based approaches to reserving have led to under-reserving or over-reserving for products due to increasing product complexity, and the difficulty of accurate reserving has proven to be a barrier to the creation of new products. The new Principle-Based reserving model will allow for more product flexibility by making sure that the reserve more accurately reflects the risks instead of being based on a formula. Lowering regulatory barriers to product flexibility will inevitably increase the competitive pressure on carriers to remove technical barriers to product flexibility.”

News and Views: DOL Ruling, Driverless Cars, and Targeting the Gig Economy

Novarica’s team comments on recent insurance and technology news

Another legal challenge to the DOL fiduciary ruling was filed this week, this time by ACLI and NAIFA.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting:  “While there continue to be legal challenges raised against the DOL fiduciary responsibility rules that were announced earlier this year, the probability of the actions changing the trajectory of the rule changes appears to be low. Carriers we have spoken with remain very interested in the issue, and the impact of the legal action, but the vast majority are not changing their own preparations to address the operational, product and technical issues. By the time any legal actions are concluded there simply would not be enough time to react, so the best course of action now is to proceed on the assumption that no changes will result from the courts. A growing number of carriers are moving toward a business model that will only allow for the sale of indexed annuities through broker dealers. That will put the indexed and variable annuities on an equal footing in the mind of these manufacturers while transferring more of the fiduciary responsibilities to distribution entities.”

First, self-driving cars, now, self-driving construction equipment.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “I was just reading about Komatsu’s IoT enabled construction machinery, which can receive data from drones over worksites and autonomously dig at the correct angles without human operators, and thinking about potential ramifications for the insurance industry. First, the surety bond business can leverage this technology to price bonds more efficiently based on the same drone information and reduce construction risk from delays, thereby impacting the underwriting and pricing of the bond. Second, autonomous construction vehicles reduces construction workers, lower risk to humans and to carriers covering these workers via workers comp. There will also be a shift in liability, from the construction company who manually operated the equipment to the equipment manufacturers ( the people who make the construction equipment) and the drone operators. Finally, the data form these construction sites can be aggregated and ingested into actuarial modeling. This is just the beginning…wait until 2020!”

The world’s first driverless car insurance policy just launched in the UK.
Toyota has asked owners of some recent Lexus models to go to a dealership for a software fix.

Chuck Ruzicka

Novarica comment by Chuck Ruzicka, VP of Research and Consulting: “Fully driverless cars are at least a few years from being common on our highways, but we are already living with cars full of software that already pose some of the same questions. The first driverless car policies have been developed with coverages for unapplied software updates, satellite outages, and loss or damages in case a car gets hacked. Regulators are working to define when a car can be at fault for an accident, and it’s already easy to imagine situations today when a car might be. The auto industry has a history of introducing software bugs in early versions of new automation, and the ethics issues software programmers must deal with compound the complexity of driverless car software development. I wonder when car owners and manufacturers will get appropriate coverages in their current insurance policies.”

A new insurance startup is targeting the “gig economy”.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “The “gig-economy” has long been stuck in an in-between state for the insurance industry, a cross between personal and commercial behavior that standard policies typically don’t cover. Insurers have been focusing on this blended approach for ride-sharing drivers, but the need will increase as more industries adopt a similar model. It makes sense that Bunker Project Inc, a newly-seeded company out of Silicon Valley, would attempt to help solve the insurance complexities caused by so many of their disruptive peers. While entrenched industries tend to fear disruption, that disruption often comes with opportunities to offer new products to new customers.”