Talent Quest: A Whole New IT Ballgame?

Rob McIsaac

Innovation and transformative thinking are more than just buzz phrases for insurance carrier IT organizations. In an effort to avoid their own Kodak (or Blockbuster) moments, CIO’s and their teams are increasingly focused on how technology can be leveraged to create real and meaningful differentiation for their carriers. It is both a valued undertaking and a legitimate concern if they fail. With many aspects of insurance now highly commoditized and new competitive threats emerging, just getting better at “the same old thing” won’t be good enough going forward. In fact, that may be a pathway to the proverbial “death by a thousand cuts”.

As a result, a rigorous governance and prioritization process becomes an early requirement for this new order of things. Can anyone deliver power better than the local public utility? Or email better than a legitimate cloud provider like Google or Microsoft? In both cases the answer is “no”, although hobbyist interest will persist.

For the future, real value will come in areas such as Analytics (turning data into actionable information) and mobility, to name but two of a long list of high priority events. For carriers that persist in Majoring in Minors, the future may represent a very tough row.

As the new priorities take hold, however, a new challenge will emerge: how to find and retain the best talent. The initial quest is critical of course. If you can’t find them, retention will take care of itself.

A critical new paradigm to consider is that carriers may need to take on a more proactive role in finding talent much earlier than was once considered “normal” in career management parlance. For example, for research scientists, the path to success historically went through research universities that were able to secure funding from large Federal agencies such as the NIH and NASA. Increasingly, however, the best path forward is through private industry where capital pools may provide a more stable and less political engine for keeping the research (and the patent machine) humming.

Uber’s recent move to hire a notable swath of the robotics lab away from Carnegie-Mellon University is a high profile example of the urgency some employers now approach the market for key human resources. At NC State University, students coming through graduate programs in Analytics are hired well before graduation. The competition is tough for people who have the right skill and drive and for employers waiting until after the commencement music ends, there may well be slim pickings. These are not phenomenon reserved just to the RTP or other “Silicon Valley Like” areas either. Getting into action early is crucial to both getting the right talent and moving organizational culture in the right direction.

MassMutual’s decision to set up an operation close to the UMass campus is a great industry example of a carrier moving aggressively to get the right skills cornered early and bring top talent in before they get siphoned off in another direction or to another industry. MetLife moving to RTP has put their IT group in close proximity to three major research universities that can provide a talent infusion of significant proportions.

We’ve seen this before, of course. For many professional sports teams, the talent pool they look to is younger than a generation ago … and as business enterprises they have benefitted. For carrier IT organizations considering the best way to move forward the watchword may well be “Get in the Game”.

Predictions of Insurance Future from 2011 are Materializing…

Matthew Josefowicz

In January 2011, I wrote a post on this blog highlighting three glimpses of the future of insurance. The three issues I called out were:

  1. Underwriting without questions, as illustrated by the Aviva/Deloitte pilot project featured in the WSJ in November 2010
  2. Agents optional, based on general trends, with the specific example of the NAIC basically throwing agents under the bus
  3. Maximum profitability, as illustrated by the industry’s acceptance of the minimum Medical Loss Ratio provision of PPACA

I asked insurers to:

Consider a future in which:

  • Underwriting requirements come from third-parties, not your own efforts
  • Intermediaries are only one channel among many
  • Your total loss numbers are constant from year to year at a mandated level

Is that a future in which your organization could survive?

I believe the first two, which seem far out now, will be commonplace by the end of the decade. I will be happy to buy the drinks at the 2020 IASA show if I am wrong.

The third is much more contingent on political winds. But if health insurers capitulate on this point, P&C and life insurers need to clearly differentiate themselves from health insurers in terms of public perception or face the risk of operating with the same constraints[emphasis added].

As we’ve pointed out in recent posts, agents are already just one channel among many, even in previously unthinkable lines of business like small commercial. I also recently came across an example of underwriting without questions, MetLife’s Xcelerate system, as reported in IIReporter.

Perhaps most concerning for insurers, however, is a recent example that indicates the third item — government-mandated maximum profitability — is not too far off. The ban by Florida and several other states on “price optimization” is an indication that political pressures may bring a PPACA model to P&C.

However insurers choose to try to address these changes, they cannot ignore them much longer. The industry is changing rapidly, and insurers must ensure that they can adapt their business models and the technology capabilities that support their business models.

Silicon Valley Ventures

Rob McIsaac

I recently had a chance to spend a week in the San Francisco Bay Area, which offered an opportunity to combine business and pleasure. My son and daughter in law are scientists working for startups, which gave us a chance to get better perspective on the elements driving the local economy. It also proved to be a bit of a dream trip for my “inner geek”, as we explore the history of Silicon Valley. What application do I see this having for insurance? Plenty it turns out.

The Valley is a hotbed of activity and the path to getting from its birth to today is surprisingly clear. According to the California Historic Marker, the birthplace is actually at the garage where Bill Hewlett and Dave Packard began their famous collaboration. Their first major customer was Walt Disney and the garage is only a few blocks from Stanford University. HP was where Steve Wozniak worked when he and the other Steve began the Apple journey and the garage they worked in is a short hop from HP’s. There’s an energy in the air that recognizes and rewards both innovation and risk taking.

Google is a short distance away, adjacent to Moffett Airfield, home of the Ames Research Lab (NASA) and the site of many aircraft innovations from the early part of the last century. This is also the home of the famous Hanger One, where the US Navy kept monster airships in the 1930′s. What do you do with an 80 year old building designed to house Zeppelins? Google is taking it over so they can fly things indoors, of course. And test self-driving cars with advanced features and capabilities away from prying eyes.

For the better part of a century, the area has been a focal point for innovation and creativity. Each new advance and breakthrough is a combination of new ideas built out by the next generation of technologists on a foundation that was framed by those who went before them. The next innovative idea may come from a big company with a long track record of success or a small one that is scrambling in the same mode as Hewlett and Packard … or Jobs and Wozniak … or Brin and Page.

In any case, people are surrounded by an environment of creativity, risk taking and a willingness to tackle big problems. Watching as an outsider from “back east” is engaging, particularly when you consider the financial, technical, educational and legal structures required to keep the engine of innovation running. There is clearly a case of a rising tide lifting all ships. If you want to see what the future may hold, visit The Valley.

Clearly, some others are catching this message. Pharmaceutical companies are setting up and / or investing in research labs. Auto manufacturers are moving work into the area, with BMW now being one on Google’s new neighbors. At least one P&C carrier has an operation there, putting them in close proximity to leading edge thinking and access to technical resources. It turns out things like the application of Big Data Analytics are unencumbered by notions of industry specific barriers.

Some remarkably innovative banks are also located in the same area. While my trip to Silicon Valley started as a family vacation, it became a thoughtful point of introspection on insurance.

Seeing the interaction of business elements, combined with the life changes spawned by technology advances, calls into question the potential viability of legacy systems, operations and processes. While the changes may not happen with the flip of a switch, the best defense, as always, remain a good offense. The list of companies that failed to heed this advice reads like a roll call of spectacularly failed brands. Even recognizing that changes were coming, and in possession of capabilities that could have changed their trajectories, companies like Kodak and Polaroid and DEC (to name but three) found that they could not trade the comfort of the past for the potential of future success. This Success Trap issue is one that should be a point of concern for carriers, as they contemplate both the potential for new forms of competition and the demographic shifts now underway in traditional markets.

Recognizing the value of the phrase “seeing is believing”, Novarica is in the early stages of planning a Research Council meeting to be held in Silicon Valley. We will be targeting mid-year for an event that promises to be both thought provoking and perspective expanding. To quote William Gibson, “the future is already here, it just isn’t evenly distributed”.

For more information on the Silicon Valley meeting, drop me a note at email or give me a call.

Top Five Disruptors in the Next Five Years for Insurers

Matthew Josefowicz

While managing short-term business needs is a critical role for insurer CIOs, another important part of the job is keeping an eye on the horizon to help insurers prepare for change. We recently contacted 70 insurer CIOs to ask them to look five years out and consider the biggest potential disruptors to their businesses. We also asked what steps they were taking today to prepare.

Most of the responses fell into into five major categories: regulatory changes, shifting market needs and expectations, the financial environment, increased catastrophes, and the emergence of big data and the increased importance of analytics.

As Yogi Berra famously said, “It’s hard to make predictions, especially about the future.” But for insurers, a highly probable future has more regulations, more demanding consumers, more challenging investment markets, more catastrophe losses, and much more data to be consumed, managed, and analyzed effectively.

For more, see our new report here: http://www.novarica.com/top_5_disruptors/

Re-Imagination of Nearly Everything

Matthew Josefowicz

Mary Meeker of KPCB put out her annual “State of the Internet” presentation yesterday. If you haven’t already checked it out, it’s online here.

The most compelling section for me starts on slide 29, “Re-Imagination of Nearly Everything – Powered by New Devices + Connectivity + UI + Beauty – Where we are now…” Most of the slides in this section focus on media & content businesses, personal content management (photos, notes, scrapbooking), and similar areas that have been transformed by the ubiquity of the internet and mobile connectivity, but there are also slides on business collaboration, payments, and other areas.

For example, slide 68 is the re-imagining of personal borrowing and lending, comparing the bureaucratic bank lending process to the streamlined and flexible technology-enabled peer-to-peer lending process.

While Ms. Meeker doesn’t offer a slide on insurance, many of the slides in the Re-Imagining section spoke to coming changes in the insurance market, and resonated (for me) with my recent post on simplifying the customer experience and preparing to manage new levels of complexity in data and operations.

Slide 85 is titled “Magnitude of Upcoming Change Will be Stunning – We are Still in Spring Training.” While the focus is on info tech and internet businesses, many of the points Meeker raises here will have a game-changing impact for insurers, including

  • “Fearless and Connected Consumers”
  • “Unprecedented combo of Focus on Technology AND Design,”
  • “Beautiful/Relevant/Personalized Content for Consumers”

Insurers need to be actively planning for how they will adapt to this rapidly changing world.

A Shrinking Annuities Marketplace and Implications for Technology

Don Desiderato

The Hartford Insurance just announced that they are exiting the Annuity marketplace on April 27th so that they can focus on their P&C business, Group Benefits, and Mutual Funds.  The once giant in the Annuity Industry in the early 2000’s is now another casualty of the volatile equity markets of the past few years, low interest rate environment, and risks associated with expensive products and rich living benefits.  Press releases by The Hartford indicate a desire for reduced sensitivity to the capital markets, lower cost of capital, and increased financial flexibility.

This is just another indication that the variable annuity marketplace continues to consolidate with a number of changes in players during the past few years.  The consolidation of players has resulted in the top 5 insurance companies controlling roughly half of the market.  Consider just a few examples, with potentially more to come:

  • Genworth announced an exit from the variable marketplace in 2011
  • Sun Life Financial exited the marketplace in early 2012
  • John Hancock announced that it restricted its annuity distribution to a limited number of broker dealers
  • ING stopped sales of annuities in 2009, and then took a charge of $1.5B in 2011 due to lower interest rates and stock market
  • Metlife, Prudential, and Jackson National, all in a relatively healthy position, revamped their product suite and captured significant market share with sound products and effective risk management strategies

While all of this consolidation continues, CIOs should be preparing.  For CIOs in businesses that intend to remain active in the annuity marketplace, they should look at how they can implement solutions to improve in the areas of risk management, hedging, and with their actuarial systems.  For CIOs in businesses that are exiting the marketplace, contemplating an exit, or cutting back on annuity exposure there may be an opportunity to outsource their closed blocks of business to lower operational expenses and allow the business to focus on their core business strategy.

This should be a very interesting year in the annuity marketplace !

More Banks Increasing IT Spend in Small Business Than Any Other Area

Matthew Josefowicz

One of my Novantas colleagues will be previewing some of Novarica’s upcoming research today at the 16th Annual Small Business Banking Conference that shows more banks will be increasing IT spend in small business than in any other business area for 2012. (Read full press release here)

With small business consistently cited as a potential source of job growth, it’s exciting to see banks gearing up to support this critical sector with new technology capabilities. While much of the investment will be around channels (including online, mobile, and branch), we’re also seeing investments planned in analytics and straight-through processing, which should help banks expand their ability to loan to small businesses.

This research was conducted among CIO members of the Novarica Banking Technology Research Council. Full results will be published next week.

Innovator, Innovate Thyself

Matthew Josefowicz

At the close of my 8th annual appearance on the ACORD/LOMA analyst panel on Monday, which was titled “Innovate or Die,” the very last question from the floor asked me and my colleagues from other leading analyst firms how we had innovated our businesses. It was a good question and a somewhat unexpected one. But I did have an answer:

We got rid of the salesmen.

In the expertise and advice business, the people are the product. So we give our clients and prospects direct access to the people. No service center, no salesmen. In addition, we’re the only research/advisory firm I know of that guarantees staff continuity in our contracts — if their favorite expert leaves the firm, we’ll give our clients the option to cancel their service.

Our innovation in the analyst firm business model is partly driven by the changes in information technology. In an age of information overload, salesmen are no longer the unique informational resource they used to be. And although valuable information still is often delivered in written form, written information is no longer as scarce as it was. What is still scarce, and valuable to our clients, is direct personal access to experts who can contextualize specialized information to their specific needs.

Putting this at the center of our business model is our innovation.

Variable Annuities, IT Capabilities, and the Money on the Sidelines

Don Desiderato

According to an article in today’s WSJ, the top 4 annuities writers now control 48% of the marketplace. This is a huge sea-change in this marketplace.

The 2008 crash basically put a lot of the formerly high-flying companies out of the business. These companies had unrealistic perspectives on long-term market climate, and the rich benefits they were offering were almost speculative. The current leaders are those that had great hedging programs or really realistic pricing assumptions in 2008.

These firms are coming from a strong position and dominating a marketplace of badly weakened competitors. One of the current leaders basically went into a shell in 2008, and now they’ve got the dry powder to jump solidly into the top four.

From IT point of view, the critical capabilities for aspiring market leaders are:
  1. Ability to rapidly turn product around. Product features and capabilities need to be able to be implemented quickly to take advantage of new opportunities.
  2. Comprehensive hedging and financial market capabilities. These allow companies to get a product to market quickly. This requires massive existing technology capabilities, for example 1,000-node grids that do stochastic modeling.
  3. Strong predictive analytics. Especially around marketing and distribution. Companies need to know where their sales are coming from — distribution channels, market segments, geography, in order to exploit this moment in the marketplace.
These three capabilities are going to continue to drive competitive advantage, as the money currently sitting on the sidelines in the variable annuity market looks for a safe way back in. Incidentally, “Money On the Sidelines” is the title of a new report about the mass-affluent published today by MetLife.

For more on IT strategies and the annuities market, check out my recent sector report at http://www.novarica.com/business-and-technology-trends-individual-annuity-insurers/

Tectonic changes coming to 401(k) industry

Changes will impact plan participants, sponsors, advisors and product manufacturers, resulting in an industry-wide reshuffling.

Register for Webinar on Feb 17 at 2 pm ET.

January 28, 2010 (New York) – According to a new report from research and advisory firm Novarica (www.novarica.com) , a new development in the 401(k) space may put trillions of dollars into play for advisors and plan manufacturers, while also exposing legal and fiduciary liability for plan sponsors. Due to the new BrightScope.com web site and database, the lack of transparency that has always pervaded the 401(k) industry is rapidly becoming a relic of the past.

Americans are relying more and more on their 401(k) plans for funding their future retirements. Bad or expensive plans are costing American workers too much in terms of delayed retirements and lower plan balances. BrightScope has developed a database and rating engine to score and benchmark plans, and provides detailed data that explicitly tells employees, sponsors, advisors and plan manufacturers just where their current plans fall short.

  • According to the report, the roll out of BrightScope will result in:
  • Sponsors moving to purchase more cost-effective and attractive plans to meet their fiduciary duty to plan participants.
  • Participants gaining better investment and retirement outcomes from their 401(k) plans as they pressure sponsors to provide benefits and utilize lower-cost plans similar to others among their peer group firms.
  • Advisors will be able to sell more-competitively based on the transparency of plan data showing the current costs of both the overall plan and the underlying investment choices.
  • Manufacturers will be forced to develop lower-cost plans to reflect a more transparent and competitive marketplace. Due to the BrightScope solution, plan and investment option costs are projected to rapidly decline in the 401(k) industry.

Novarica believes that the BrightScope ratings will eventually have a similar impact to the Morningstar ratings on mutual funds, identifying future winners and losers in the 401(k) industry.

“America is looking to defined contribution plans, such as 401(k)s, to replace the defined benefit pension plans, and to take the stress off Social Security,” states Robert J. Ellis, Principal and head of Wealth Management at Novarica, and lead author of the report. “The problem was that, for most of the industry participants, the lack of transparency meant that plans were more expensive than they needed to be. Especially bloated were the fees charged on the underlying investments. BrightScope.com, combined with new Federal regulations, will change all that for the betterment of American workers’ retirement outlooks, but current providers will need to adjust to a radically altered marketplace.”
The 14-page report is available from Novarica at http://www.novarica.com/report_brightscope_401k.shtml . Mr. Ellis will also be hosting a webinar discussing the report on February 17 at 2 PM Eastern. Interested attendees may register online at https://www1.gotomeeting.com/register/760027265 .