News and Views: Argo, Tesla, Aon

Matthew Josefowicz

Matthew Josefowicz on reports that Aon is in talks to sell its employee benefits outsourcing group.

Chuck Ruzicka

Chuck Ruzicka on Tesla’s win with federal regulators and why it’s just the first of many battles for self-driving car manufacturers.

Mitch Wein

Mitch Wein on Argo Risk Tech Solutions and the future of commercial and personal lines insurance.

Aon May Benefit From Pivot Back to Core Market

Matthew Josefowicz

Yahoo News reports that Aon is in talks to sell its employee benefits outsourcing group. Aon bought Hewitt for $4.9 billion in mid-2010, when large brokers were under pressure to diversify into non-commission businesses after the financial crisis. Some interpret this as a signal that Aon wants to focus more on insurance and risk management businesses. With the large commercial insurance world being transformed by new entrants from the capital markets and new technology, and with the employee benefits market under pressure from the growing percentage of the labor force operating as freelancers, Aon may benefit from a tighter focus on its core market where disruption may create opportunity (as well as threats).

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.

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:

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.