What to Expect When You’re Expecting (Your Software Vendor to Be Acquired)

Matthew Josefowicz

Another day, another suite vendor buys another small independent component vendor. This time, Guidewire bought FirstBest Systems. The Age of Suites is certainly upon us, and the suite vendors are taking their cue from Pokemon Go. Gotta catch’em all!

As we wrote in June, there are three major trends driving M&A in insurance enterprise software these days: verticalization, suites, and portfolios.

Three Trends in Insurance Enterprise Software M&A

For insurers who rely on systems from independent software vendors, it’s time to think about the inevitable. What would it mean for your favorite vendor to get rolled in to a suite or a portfolio?

Back in 2008, we wrote an executive brief on this topic called What to Expect when You’re Expecting Your Core Systems Vendor to Be Acquired. We’ve updated it and republished it today.

Insurance Industry Doesn’t Own Risk Transfer

Matthew Josefowicz

Interesting article in today’s WSJ about the impact of Catastrophe Bonds on the insurance industry. According to the article, cat bonds and similar investments now account for $72 billion in risk transfer, equivalent to 12% of the $562 billion in the overall reinsurance market. This is triple the level projected for 2016 by Guy Carpenter in a 2012 report.

As information technology makes it more possible to understand and price risk, insurers are losing their monopoly on this kind of risk transfer. At its core, insurance is a very simple industry. There are some entities with more risk than ability to bear it, and there are pools of capital that will take that risk on for a fee.

Novarica Presentation for PCI Tech 2014

All of the entities that facilitate that transfer — whether they are distributors, resellers of risk, carriers of risk, or others — are vulnerable to disintermediation and disruption if they’re not adding sufficient value to justify their existence.

Related: Novarica’s 2014 Webinar on Technology in Insurance: Change, Legacy, and Disparity

News and Views: 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.”

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.