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.”

Data.world, a startup with the potential to disrupt big data, raised 14 M in Series A funding.

Jeff Goldberg

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

The DOL posts technical fixes to the recent Fiduciary Rule.

Rob McIsaac

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

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.

Brexit May Revive the Celtic Tiger

Mitch Wein

With the United Kingdom leaving the European Union, there has been much discussion on whether London will retain it preeminent position as the financial capital of the world. While it is sometimes cited as #2 behind New York, in truth London has always been the capital for insurance, ever since modern insurance was invented there to help cover for financial losses from ships that sank crossing the oceans. London’s 21st century position as the gateway to the EU allowed multi-national insurers to set up there and then sell financial products across the continent. Even continental insurers made sure they had a large presence in London.

Now that London may not be able to serve this role, it opens up the opportunity for other cities in Europe. One of the most attractive options for many insurers may be Ireland. One may say I am biased because I was a CIO there and lived in Dublin. However, Dublin has much to offer:

  • It is English speaking (the commercial language of the world)
  • It is capitalist friendly
  • It has excellent network and transportation infrastructure.
  • Dublin’s cost of living is low (for now!)
  • Dublin’s corporate tax rate at 12.5% is much lower than the rest of the EU
  • It is part of the EU giving it access to the EU marketplace of 500 million people.

Dublin does have a few downsides; its airport is small (although US customs is there), and it does not have a direct train link to the continent like the Channel Tunnel. But with London’s future access to the EU in doubt, many global insurers may want to give Dublin a look.

If you are considering relocating there, let us know. In addition to helping navigate cultural and organizational issues, I can give you a good tour of the Irish pubs and clubs at Temple Bar!

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.

Three Trends in Insurance Software M&A: Verticalization, Suites, Portfolios

Matthew Josefowicz

Greetings from IASA!

Being here at the largest tradeshow for insurance enterprise software vendors is a nice backdrop to discuss this morning’s announcement that Insurity is acquiring Tropics, and the third major trend in insurance software M&A that this latest acquisition highlights.

We’ve written before about verticalization and the importance of suites. Today’s announcement is a good example of the third trend, portfolios.

Three Trends in Insurance Enterprise Software M&A

A Portfolio strategy means maintaining a portfolio of separate core systems or suites that are designed to serve different niche markets. In a portfolio strategy, a company maintains multiple product lines to support different customer profiles and serve different market segments. This contrasts with a typical tech M&A model where acquired products are absorbed into the buyers’ main offering suite, in some cases undergoing an extensive re-architecting.

A Portfolio strategy can work well in a diverse marketplace like the insurance industry, where different buyers can have very different needs. In addition, maintaining a portfolio of parallel products or suites can be easier than consolidating into a single product or suite that meets all buyers’ needs.

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.”

News and Views: Insurer VCs, DOL Ruling, Vendor M&A, and Cyberinsurance

Novarica’s team comments on recent insurance and technology news

The VC arms of Liberty Mutual and the XL Group were part of a $3.2M investment round in Notion, a company that makes home-monitoring sensors.

Tom Benton

Novarica comment by Tom Benton, VP of Research and Consulting: “Startups like Notion are seeing the insurance market as one with low barriers for innovation but high potential for funding and market growth. As more fintech and insurtech companies develop solutions with application for traditional insurance processes, carriers should monitor insurtech developments, evaluate how to apply these new solutions, engage with startups via accelerators and VC funds and transform internal operations to be prepared to meet the challenges of future insurtech disruption.”

The SEC is also looking at a new set of rules that will raise the investment advice standards for registered reps while also authorizing non-governmental advisor examinations.

Rob McIsaac

Novarica comment by Rob McIsaac, SVP of Research and Consulting: “The regulatory environment that carriers will face in the future continues to evolve, driven partly by continued reaction to some aspects of the environment that contributed to the financial crisis of 2008. As we’ve shared in reports earlier this year, the DOL regulations implemented earlier this year will have a meaningful impact on IT investment plans for annuity carriers and the distributors who sell both variable and indexed products. The potential SEC regulations will continue to evolve into 2017 and beyond, but may be an important item for carriers and distributors alike to incorporate into their intermediate term planning.”

Duck Creek Technologies has acquired AgencyPort.

Matthew Josefowicz

Novarica comment by Matthew Josefowicz, President/CEO: “With nearly all core systems vendors offering a broad range of increasingly adequate components that can be installed with or without the core administration system, it becomes harder for insurers to make a compelling case to mix-and-match solutions from different vendors in order to fill out their application portfolios… We believe that suite providers are likely to continue to snap up smaller component providers in order to provide clients with a full menu of pre-integrated components that best meet their clients’ evolving needs.” More from Matt in this recent blog post.

CoverHound is launching Cyberpolicy.com, a new online brand for cyber insurance.

Mitch Wein

Novarica comment by Mitch Wein, VP of Research and Consulting: “CoverHound is attempting to make buying cyberliability insurance easier for small businesses, following in the steps of other direct sellers of small business insurance, by focusing on simplifying the product and buying process. The other interesting innovation here is shifting the underwriting from the buying entity to their security vendor, which reduces the cost to evaluate individual risks.”

Reading KPCB’s Annual Internet Trends Report

Matthew Josefowicz


As always, the KPCB Annual Internet Trends Report, published yesterday by Mary Meeker and her team makes for some fascinating reading.

Insurers may want to pay particularly close attention to the following sections:

  • Pages 61 and following, on how retailers like Amazon and others have used their massive data collection capabilities to launch private labelled products in far-flung categories like outdoor furniture and fashion.

  • Pages 66 and following, on how companies are micro-segmenting their target markets and designing niche products for them (see our “Quick Quote” thoughts on how It’s All Program Business Now)

  • Pages 102 and following, on the evolution of new messaging platforms to support business conversations. While financial services examples are in Asia today, they’ll be in North America over the next decade.

  • Pages 151 and following, on changes in the auto industry and usage trends, of special interest to Personal Lines insurers.

  • Pages 188 and following, on how non-tech incumbents have increased their purchase of tech new entrants by 2.6x since 2012. Insurers aren’t the only ones buying innovation.

The data-as-a-platform and cybercrime sections are also interesting, although those sections are heavily focused on what seem to be KPCB portfolio companies.