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

Novarica’s team comments on recent insurance and technology news

Predictive analytics reduces risk in Workers’ comp.

Jeff Goldberg

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

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

Chuck Ruzicka

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

SAP will start integrating with Blockchain.

Mitch Wein

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

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

Rob McIsaac

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

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

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

Steven Kaye

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

News and Views: The “Uninsuranble Underclass”, Startups, Brexit, Annuity Sales, and AI

Novarica’s team comments on recent insurance and technology news

Advances in FinTech and analytics could lead to the creation of an “uninsurable underclass”.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “As more customer data sources become available—social media, telematics, wearables, sensors, and drones—at what point do insurers have enough real-time information to switch from a demographic-based risk-pooling model to true individualized pricing? A new report questions whether such advanced analytics could lead to an “uninsurable underclass.” The insurance industry has always tried to assess the risk of a potential policyholder to the best of its abilities, but limitations in technology and data had a secondary impact of allowing a socially beneficial distribution of risk across larger pools of people. Does the industry have a social obligation to maintain some abstraction between its customers and its risk/pricing analysis in order to maintain this approach? If insurers move too far down this path, or start eliminating broad communities of people from affordable coverage, it’s likely the government will step in with healthcare-like regulations.”

Oscar, a health insurance startup, announces cuts in coverage.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “This story has been covered with a certain amount of gloating that self-proclaimed disruptors are not immune from the pressures faced by traditional providers. We saw a similar tone in the media, especially the trade media, when Zenefits stumbled on regulatory compliance. But none of this voids the fact that consumers are eager for the ease of use and customer-experience focus that these companies are trying to deliver, nor does it change how dissatisfied customers are with the experience that traditional players offer. On the bright side for incumbents, it may be easier for them to improve their customer experience than for new entrants to effectively operate in the insurance industry.”

Hiscox may set up an EU-based insurance firm in the wake of Brexit and the future loss of “passporting” rights.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “Hiscox is thinking of setting up an EU based Insurance Subsidiary. This is important since today Hiscox has access to the continent from the UK through the “passporting” rights that allows regulatory capital for product reserves to be in any EU country and the regulatory oversight to be in the EU country of origin, historically the UK since they sell their specialty products through Lloyds of London. In the near future, when the UK is not in the EU, they would lose access to EU countries for their products since “passporting” will no longer be applicable. As I have discussed in a number of blogs on the topic, we expect many carriers to set up EU companies in places like Frankfurt, Paris or Dublin to retain access to EU markets.” More from Novarica on Brexit.

Annuity sales plummeted in 2016.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “While much of the reporting on the precipitous fall in annuity sales in 2016 seems to focus on the impact of the Department of Labor rules announced earlier in the year, the actual causes of the sales decline are likely more complex. Market volatility earlier this year, the election year, and other influences, some of which would actually tend to increase annuity sales, are all having an effect.

A more important question is how the Fiduciary responsibilities will be delivered to the market for indexed annuities. Since these are frequently sold by agents who are not themselves registered reps, the broker-dealer structure for variable products does not universally apply. This could force notable changes in how indexed products are distributed in the future or in the willingness of carriers that manufacture these products to step into the breach to provide support for the fiduciary function. This will be an important element to watch over the balance of 2016.” Here is another perspective on declining life/annuity sales. More from Novarica on the DOL Fudicuary Ruling here.

Fidelity officially launches robo-advisor platform, and the Economist has more to say about AI in general.

Don Metz

Novarica comment by Don Metz, VP of Research and Consulting: “The long awaited promise of AI may finally becoming a reality as significant progress has been made utilizing a new technique called deep learning. Taking advantage of extraordinary advances in computing power and data storage and the increasing availability of large quantities of data, large neural networks are now beginning to learn rather than just process information. This deep learning technique has the potential to enable new disruptive capabilities in the insurance industry, impacting areas such as data analytics, actuarial modeling, underwriting, and predictive analytics.”

Sun Life announces a new partnership with Plug and Play.

Steven Kaye

Novarica comment by Steven Kaye, Associate VP of Research and Consulting: “As noted in our report Buying Innovation: Insurer VC Funds and Accelerators One Year Later, more carriers are launching corporate development programs and venture capital groups, as well as serving as mentors to startups lacking insurance industry know-how. Carriers can also offer startups capital and partner networks, while in turn benefiting from a chance to get ahead of innovations rather than reacting to them. Startups can provide carriers an outside-in view of their processes. Novarica regularly attends events in Silicon Valley, and talks to accelerators, carriers, and private equity and VC firms on an ongoing basis.” More from Novarica on innovation and Silicon Valley

News and Views: The US Treasury’s 2% Rule, Workers’ Comp, Direct Small Commercial, UBI

Novarica’s team comments on recent insurance and technology news

As the Worker’s Comp line reports significant profits for 2015, a class action lawsuit alleges that women receive fewer Workers’ Comp benefits than men for the same injuries.

Jeff Goldberg

Novarica comment by Jeff Goldberg, VP of Research and Consulting: “A recent class action lawsuit alleges that women are being systematically awarded lower disability payments for Workers’ Compensation claims than men for similar injuries. Without getting into the merits of this particular case, it does raise an opportunity to discuss how insurers can use analytics across their business to do more than just optimize pricing and risk selection. Insurers want to thread the needle of remaining profitable while also best serving their policyholders, and no insurer would set out to intentionally under-indemnify a particular group of people. But, if unrecognized societal bias results in individuals making biased decisions at an institutional scale, proper business intelligence would show these kinds of trends and allow a company to put policies in place to rectify them. Whether an insurer has a legal obligation to apply data analytics to identify such trends is a matter for the courts, but–even if the courts say no–it would certainly allow an insurer to make better long term decisions and, just as importantly, improve their service and their ethical standing with clients.”

Forbes profiles another startup trying to disrupt insurance distribution, this time from insurance veterans rather than the startup world.

Martina Conlon

Novarica comment by Martina Conlon, SVP of Research and Consulting: “As we note in our recent Business and Technology Trends report on Commercial Lines, direct small commercial is a market with great potential for a company that can reach small home office businesses and provide a swift and seamless process for potential policyholders to close. This isn’t about coming up with a great new idea for how to sell insurance, it’s about racing to be the first company to provide a really easy, efficient customer experience for small business owners.” More from Novarica on direct online small commercial.

Another insurer has rolled out a UBI based offering, this time based on incentives rather than pure discounts.

Chuck Ruzicka

Novarica comment by Chuck Ruzicka, VP of Research and Consulting: “Answer Financial’s innovative Streetwise Driver club has the potential to energize policyholder’s and change the tone of insurance company conversation in social media. As we note in our recent report on Telematics and UBI, a purely discount-based approach is unlikely to generate substantial market penetration beyond the current, low levels. Some insurers seem to be reaching the same conclusion, but a scheme like this is still essentially financial in nature – the next step will be to find ways for telematics to drive service differentiation and customer engagement.”

The US Treasury has adopted a formula defining a threshold of 2% of community median income for Auto Insurance Affordability,.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President and CEO: “While this ruling on affordability has no direct impact, insurers are not unreasonably concerned that, having quantified an affordability problem, the next step would be to address it. Whether this will be through subsidies, mandated rates, or other methods remains to be seen. As we noted in January 2011, once the industry accepted minimum medical loss ratios under the Affordable Care Act, the door would be open to additional intervention in insurers’ operating models in the name of consumer protection and preserving accessibility.”

The IAIS is moving towards a Global Capital Standard, but US insurers are resisting the move.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “The Switzerland based IAIS has recommended a risk-based capital standard that conflicts with a US Federal Reserve Capital Standard that was proposed last month. The IAIS has 140 member countries, many of which are outside Europe, so this effectively means the US and the rest of the world are moving towards different capital standards. Capital standards drive product mix and type/configuration, since different types of products require different levels of reserves. Additionally, liability valuation has been different in Europe which uses Market Adjusted valuation vs. GAAP in the US. The new proposals compound this difference, adding complexity to global insurers financial accounting and decision making. Global software deployments for PAS and GL will need to take these differences into account. The global patchwork of insurance regulations does not look like it’s getting simplified anytime soon.”

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

Novarica’s team comments on recent insurance and technology news

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

Mitch Wein

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

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

Rob McIsaac

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

Jeff Goldberg

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

The DOL posts technical fixes to the recent Fiduciary Rule.

Rob McIsaac

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

Pokemon GO has seized our nation’s cell phones. How can insurers seize the opportunity?

Harry Huberty

The augmented reality (AR) mobile game phenomenon Pokemon GO seized the attention and smartphone bandwidth of the entire country this weekend, adding upwards of $9 Billion to Nintendo’s valuation with a 23% jump in stock prices.

The game immerses players in an AR version of the real world, where their neighborhoods, parks, streets, commutes, offices, and homes become populated with colorful cartoon monsters. Geotagged locations (usually landmarks and local points of interest) offer in-game rewards to players who visit. A built-in pedometer tracks distance traveled to incubate “eggs” that hatch new Pokemon. The bottom line: users are highly incentivized to keep the smartphone app active at all times, an app that tracks their location and movements to a great degree.

First, the technological capabilities on display are astounding in their detail: Pokemon GO tracks users in real-time to within feet of their geographic location. And since game features require the app to be open to track steps and gain rewards, Niantic (the game’s developer, a Google spinoff) is capturing granular information about where players move, how they get there, and how long they stay. In a world in which insurers are considering using wearables like FitBit to validate claims data, apps like Pokemon GO offer the same data in much greater detail.

There are different ideas on how AR might be used in the insurance industry. Perhaps a form of live-advice that helps claims adjusters (or policyholders filing FNOL) know where to point their phone’s camera to take photos and videos of car or home damage, giving a real-time comparison to the “before” and “after” state. An augmented reality app might also help to prevent accidents, scanning a home or worksite and alerting the user to potential risks. And possibly an insurer will team up with a third-party to devise gamification methods of encouraging safer behavior. If nothing else, the mainstream success of Pokemon GO shows that augmented reality can be made usable and accessible through the device everyone carries in their pockets or purses.

Users are aware that these data are “the product,” and are savvy enough to understand the dangers of giving Nintendo and Niantic permission to monitor them so closely. Despite some discomfort, it’s clear many are willing to trade information about their habits for the fun of playing the game. As many insurers wonder how they might encourage policyholders to turn over automotive telematics data in exchange for rate adjustment, Pokemon GO shows that if the reward is attractive enough, people will bite. There’s another option, too: insurers could simply purchase user data en masse from providers who have developed games and other tools to sweep it up.

Such a tremendous data cache is an attractive target for potential hackers, and hot on the tail of Pokemon Go’s meteoric rise has been warnings of what damage could be done if so much specific, private data—much of it linked to users’ Gmail accounts—fell into the wrong hands. For insurers, it’s an important caution: as they handle an increasingly large amount of new forms of sensitive policyholder personal information—including movement and commuting information that, if lost, is not just an identity theft risk but a potential physical risk—they also grow as an attractive target to hackers. As the exposure of this information increases, so too does insurers’ responsibilities for safeguarding data responsibly.

The Salon Effect: What the Salons of the French Enlightenment Can Teach the Insurance Industry

Frank Petersmark

“Thanks to our sullen resistance to innovation, thanks to the cold sluggishness of our national character, we still bear the stamp of our forefathers.”
              -Edmund Burke, Reflections on the Revolution in France               (Burke, 1790: 64)

The twenty first century has been challenging for the insurance industry. Disruption has replaced the status quo as new technologies emerge and customer expectations shift. The industry is forced to change with the times or risk losing the one thing it can’t afford to lose – relevance in peoples’ lives.

While it is difficult to know how to proceed, historical parallels can provide some guidance. The French Enlightenment of the eighteenth century and the salons that fueled it questioned existing notions and paved a new way forward for European civilization. The open discourse of salons allowed the French Enlightenment to take shape, and they offer valuable lessons for modern insurers.

  • Democratization of Information: The salons of the Enlightenment demonstrated that it’s difficult to be truly innovative if information is restricted. Insurance companies are not known for unfiltered use of information across many constituencies, especially employees (boiler plate mission statements and strategic plans aside). This is ironic as employees are often the very people that insurers prod to be more innovative. Insurers need to be brutally self-critical and candidly share strengths and weaknesses with the people they expect to enable change.
  • Engagement of new stakeholders with fresh perspectives: It took many iterations to put aside entrenched European societal behaviors. The key was the fact the aristocratic women who hosted the salons ensured that everybody had an opportunity to speak without interruption. These women considered civility and decorum a point of personal pride, and subsequently created a model for civil discourse among diverse groups who otherwise had no reason to listen to each other. Similarly, insurance companies need to embrace diverse perspectives.
  • Cross-pollination of ideas: Existing power structures (the Church, the nobility, the monarchy) feared new ideas for the risk and dangers they brought. As Edmund Burke noted, the French Revolution was “a revolution of innovations.” The same is true today of many insurers who worry that change will inevitably create problems. The free exchange of ideas and perspectives in salons was critical to the new social, political, and cultural foundations of eighteenth-century France and Europe, and it is a model for today’s insurance companies.
  • Innovation through experimentation: It was expected that salon participants either argue the merits of an idea or point out weaknesses in its logic. This was not done to embarrass or personally criticize an idea’s author, but rather to create an open discourse. Not unlike modern incubators, they instilled a willingness to share perspectives, test different outcomes, and potentially fail. This same lesson applies to innovation efforts at modern insurance companies. Many insurance companies have created innovation centers, however few have produced innovative or interesting ideas. More often than not, the most impactful ideas come from outside the industry. Insurers often limit the circulation of ideas, and like the salons of the 18th century, they should instead promote unrestricted thinking and critique.

The impact of salons was felt even as their necessity was lost at the start of the French Revolution. Their lessons persist, especially around idea generation, critique, and community. As disruption continues and new challenges confront insurers, an eye toward the past can help organizations move forward.

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.

Something in the Air

Frank Petersmark

I recently had another opportunity to participate as a judge for the ACORD Insurance Innovation Challenge, this time held in New York. As with the last round, the event brought together a number of interesting startups who each had five minutes to pitch their ideas and approaches, and another five minutes to field questions from the judges. And once again, a few winners were chosen who now move on to the finals competition in conjunction with ACORD’s annual meeting later this year. On the surface this is encouraging news for the industry, as bright and capable people from outside the industry recognize that there are opportunities for improvement. However, it’s also a fair question to ask if those in the industry really understand the amount of energy, effort, and money others are investing to disrupt their status quo, and in the process to potentially make a lot of money.

Like last time, many of the startup ideas were aimed at disrupting the traditional relationships and processes long held in the industry – between agents and policyholders, or carriers and agents, or even eliminating agents and/or carriers altogether. A few others were focused on interesting niches like on-demand insurance, roadside assistance, and medical support as part of travel insurance. There were also a number of people from inside the industry in attendance, and in informal conversations with many of them, they commented on the validity of many of the startup ideas, but didn’t know how they might get their companies to embrace them for fear of offending existing constituencies.

It all reminded me of the old Thunderclap Newman song from 1969, “Something in the Air,” which reached number one in the U.K. and has been subsequently recorded by many other artists. The song is about the many changes occurring in the late sixties, and the notion that the only way to survive the changes was to band together behind the changes, lest they wash over individuals, perhaps violently. The analogy is a valid one, as it often feels like most of the industry believes that disruption is occurring, and that it might even be a good thing, but the disruption is affecting others and hasn’t reached their doorsteps quite yet. That’s a dangerous mentality, and the hope here is that it’ll change before it’s too late. Disruptive change is coming to the industry, but if you’re waiting for a big bang it usually doesn’t happen that way. Rather, it’s piece by piece and bit by bit – like most revolutions are – until one day, sometimes before you know it, things have changed. And of course by then it’s too late – just ask people who used to be in the music or photography industries.

One of the ways the industry could more proactively deal with the many disruptions coming its way is to have more industry-wide discussions about them, and about the opportunity to more smoothly move the industry into the new world of customer centricity as a way to stay relevant with a rapidly changing demographic. That would require a shift in thinking and behavior for the industry, and an acknowledgement that the changes in the air will eventually touch everybody – small, medium, and large insurers.

From our perspective, our recent research on the relationships between insurance CIOs and their boards of directors, and our view that the industry should appoint more board members with deep technology experience to their boards, is reflective of where the industry needs to go. There are even a few carriers that have begun to appoint board level technology committees as way to place the competitive and market implications of a well-executed technology strategy in their proper place – at the strategic top of the company. Such actions would go a long ways toward promoting industry-wide discussions about the changes to come. We’ll be presenting our research on this topic at the NAMIC Annual Convention on September 25-28, 2016 in Vancouver, BC, Canada.

CAT Bonds on Blockchain, More Will Follow

Jeff Goldberg

Bitcoin has generated a lot of press due to its volatile value and the often dramatic nature of news stories regarding heists or illicit usage. But many people, Novarica included, have long considered the underlying technology, called blockchain, to be the real area of interest and potential future platform for the insurance industry. Allianz’s recent implementation of a blockchain-based CAT bond shows exactly how the technology can be used not to disrupt the industry, but to build trust and accountability in an existing marketplace.

One of the values of blockchain is that it creates a transparent and structured marketplace for executing contracts. In the case of Bitcoin, the contracts are about the transfer of cryptographic currency, but that’s only one application. Since the insurance industry is based on trusted contracts, blockchain seems like a natural fit. However, most insurance policies still require adjudication before payment (such as a claims adjuster working with a body shop to determine car repair costs), and that doesn’t fit in with a model that’s intended to take the subjective nature out of an agreement.

A CAT bond exists to dilute the risk held by the insurer by putting it on the bond investor. Unlike an adjudicated claim, the trigger for payment or default with the bond is typically driven by objective factors, such as a hurricane or other natural disaster striking a specific region. These post-event actions happen without regard to specific losses, so there is less need for subjective review. This means a blockchain implementation can manage a contract, maintain the financial stake, and properly transfer ownership in a secure and transparent way based on the original agreement.

Novarica expects other policy types with simpler payout structures to explore a blockchain model. 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. A critical illness policy would fit this model, as long as both the insurer and the insured trust a third-party medical examiner to serve as the arbiter of the illness. A flight insurance policy that pays out if a flight is cancelled would work in this approach since flight data is publicly available, such as the winning entry from a 2015 blockchain hackathon. And “personal cat bonds” might become an option, with homeowners purchasing simplified policies that insure against disasters, relying on the National Weather Service as the adjudicator. As one example, the insurance startup Jumpstart Recovery provides quick relief after earthquakes, and fits that potential blockchain model.

These use cases might expand in the future as more of the technology we work with gets smarter. Cars will be able to make immediate assessments of their repair costs after an accident and report them to the blockchain for automated payout. Similarly, a connected home might not only be able to monitor and help prevent water leakage, but also estimate damage when inevitable accidents do occur.

The key lesson is that blockchain can be a trusted, transparent, and objective way to manage insurance contracts and handle payouts, as long as both parties can agree on how to properly trigger claims. Consumers will benefit from a simpler purchasing model and a quicker payout. Insurers will benefit from automated processing and a lower transaction costs. And the entire industry will benefit from a process that’s readily available and clear to all.

Related Reports:

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.”