Merrill Lynch will be Cutting Commissions for IRAs

Rob McIsaac

The impending implementation of leading aspects of the DOL Fiduciary rules continues to have significant implications across financial services, including insurance and related business. Recently, we noted that Nationwide’s purchase of Jefferson National gave them an important new asset in the fee based product / RIA space. At the same time, Merrill Lynch has announced that they will be cutting (flattening) compensation for IRAs, moving this business toward a fee-based model that is consistent with enduring compliance with the “client best interest” provision of the regulations. This move by the wirehouse is significant both because of the implications for its own business but also for the pattern it may set for other firms. Many have been watching for patterns with the expectation that some major distribution players would drive the path forward. This appears to be an interesting and relevant example of just that.

Hartford Steam Boiler Acquired Industrial IoT Startup Meshify

Tom Benton

As Internet of Things (IoT) devices and data become increasingly important for smart homes, smart buildings and smart facilities, insurers are considering how to leverage IoT for underwriting, loss prevention and claims. However, they face several challenges, among them the lack of standards for interfacing with IoT devices and platforms to take in the data and integrating the large volumes of data into analytics platforms to leverage the data. Hartford Steam Boiler (HSB) remains on the leading edge of IoT through their acquisition of Meshify this week, along with their investment in IoT startup Waygum last year. Meshify provides a cloud-based platform that “makes any device smart” along with tools for real-time monitoring, alerting and access to information through mobile applications. HSB and parent Munich Re consider the acquisition as a strengthening of their technical capabilities for providing innovation to their customers. Meshify’s capabilities will help HSB’s customers collect important data for risk reduction, but should also enable HSB to go beyond a value-added service for customers to better analyzing customer risk for underwriting and product pricing.

Annuities Special Interest Group Session Offered a Great Preview for 2017

Rob McIsaac

Earlier this week we facilitated the latest in our series of Special Interest Group meetings, this one focused on Annuities. This portion of the insurance industry is facing some notable headwinds from both regulatory and compliance perspectives, as well as economic pressures fostered by the persistent low interest rate environment. For our meeting, which took place in Des Moines, Iowa, we had 10 carrier participants representing companies with a significant variety of distribution channels and products. As they finalize their budgets for the New Year, all are facing a period which may be substantially different from the one being closed out now. Some of the key areas of discussion included:

The DOL Fiduciary Rule is a “big deal”. The most significant challenge facing carriers is preparing to deal with the changes fostered by this regulatory change. The changes in business practices and technology that will be required are both significant and pervasive. While carriers appear to have a general sense of how they will respond to the changes that will be required either at the end of this year or in April 2017, a common concern is that the business requirements for what needs to be implemented remain surprisingly vague. The reoccurring theme from the IT organizations at the session was that they may simply be running out of time to fully implement the changes that will be needed for the New Year; one carrier noted that they are really trying to find whatever the minimum level of effort required to support the change will be, with an understanding that there will be rework (Day 2 items) required later in the year. Commission changes are certainly part of the effort and there appears to be a general conclusion that new products will also be part of the response to these regulatory changes. That said, given the lead time required to get new products filed and approved, the discussion led to a general conclusion that significant product changes ahead of the implementation date would now appear to be unlikely. For variable products, it appears that the interaction between carriers and broker-dealers provides for a compliance framework that can be leveraged. Also, for carriers that have captive, or directly controlled, distribution systems, there also is a structure in place to ensure compliance with the new regulations. How this compliance will be accomplished in a world of independent distribution for products (such as indexed annuities) which do not have the framework provided by a broker-dealer environment, remains an open question. Major changes in the business model, including State Farm’s decision to route the annuity sales through a highly controlled call center environment, and Nationwide’s purchase of Jefferson National to support a fee-based (RIA) model also garnered notable attention during the session. The bottom line on this is that there is significant work to do and not a lot of time in which to do it, which is going to keep this front and center on the priority list for participant carriers right up through the implementation date for the regulatory changes.

Human Capital Management is increasingly important too. Carriers noted the challenges associated with having the right people, in the right jobs, at the right time, to get key work done to support business initiatives. In an era when many key subject matter experts are maturing in their career, finding and retaining new talent is ever more important. Organizations also have a split challenge in as much as they need to find people who can work on new technology even as they recognize that many legacy systems will persist well into the future. This led to a discussion about how carriers can recruit new employees to deal with older solutions in their technology stack, and creative solutions were discussed related to recruiting from technical schools or partnerships between carriers and colleges to create tailored curricula which provide for new talent pools. Partnerships, such as the one between the University of South Carolina and Blue Cross Blue Shield of SC, illustrate how businesses can work with educational institutions to foster shared positive outcomes. Another item of interest was an effort that carriers have made to transition appropriately talented business associates into technology rolls, a process some carriers last employed during the Y2K era. Concurrently, as carriers look to recruit talent from the Millennial generation, one of the recurring themes that they need to be aware of is that these new employees anticipate building careers from a series of experiences rather than by staying with a single employer for a long and contiguous period of time. Most carriers represented at the meeting indicated that they were experiencing that these new employees would typically stay for 2 to 4 years before moving on, which is a particular challenge if it takes you longer than that to train them to become fully productive assets. In a fundamental change from earlier generations, however, it appears that these employees are willing to come back at some future date if no bridges are burned; they simply are looking for the opportunity to grow experience sets in ways they can’t with a single employer. This has significant implications for how hiring managers think about the issue as well has how human resource department support IT organizations. What becomes clear is that successful IT organizations need to think about the resource “problem” in some new and different ways in order to be successful in the future. Another interesting thread we pursued was a discussion related to performance management. A number of carriers at the session lamented the “forced ranking” methodology used to evaluate organizations annually. While it requires significant work to complete, the results produced appeared to be dubious at best. One carrier indicated that they have moved beyond the forced ranking methodology and are now in a continuous review approach which provides mentoring and coaching as a means of dealing with issues “early” and which appears to be far more consistent with moving to an agile methodology. There was universal interest in how this approach was being implemented. When discussing agile as a methodology, all carriers indicated that they were moving in this direction, albeit at different paces. In order to support this many have looked to reconfigure their buildings with a drive toward team oriented workspace being key. This has introduced a number of challenges, some of them appearing along generational fault lines, but one carrier noted that with effective change management, they have been able to gain strong support from their employee base for moving toward a more open office environment. The move to agile appears to be so pervasive, and the creation of work spaces that support this is so foundational to success, that some carriers felt that it would be a competitive disadvantage for hiring in the future if they were not moving in this direction.

Electronic Apps and Signatures Matter For a Variety of Reasons. There was a broad consensus that some form of straight through processing is going to be increasingly important in the future both because of the DOL issues and because it’s simply represents a better way of doing business. Most carriers indicated that they are forced to use a variety of electronic application tools to support their varied distribution partners, although this remains a sore point. For those with some form of captive distribution or direct to consumer capability, the idea of standardizing on a solution owned by the carrier is very attractive. Unfortunately for many carriers, the fact that distributors control the use of the electronic application platform means that they are in a position where they have relatively little control of the outcome. Recognizing this, the best that many can hope for is to try and influence which of a limited number of solutions their key distribution partners will leverage. That led to a discussion of electronic signature solutions and the broad agreement amongst the group that it is impossible to have an effective straight through processing capability without marrying electronic signatures to the electronic application platform. We discussed a number of best practices for implementing these solutions as well as approaches for driving utilization, which becomes key to justify the investment. We had some discussion about whether or not product pricing supported the use of varied electronic application capabilities for new business processing, which may lead to an interesting conversation between product development and IT organization’s in the future. It could also lead to some thoughtful discussion about the due diligence associated with bringing on new distribution partners in the future.

Cloud is here to stay. We also had an extended discussion about cloud-based computing capabilities. Most carriers are moving key workloads into the cloud with the most common being electronic mail, financial systems, human resources systems and collaborative work tools. Using these as a means of validating the functionality and demonstrate the security of the applications, most carriers at the meeting expressed an interest in seeing what other workloads could be moved in time. We discussed how increasing numbers of solutions which are core to the insurance technology stack are in fact making themselves available “on the cloud”. For the L&A lines, we are already seeing some capabilities including claims and underwriting which are being offered “as a service”. For some other lines of business, such as personal lines property and casualty insurance, a broad array of core systems capabilities are now offered this way … so the direction of technology evolution appears to be quite clear. A number of carriers at the event noted that companies like Oracle and Microsoft are making it increasingly difficult to buy solutions any way other than through the cloud offerings. This is certainly a switch from the recent past where the “on premise” solutions were the ones being pushed by the technology giants. This confirmed what we heard at Open World in 2015 in terms of Oracle pushing aggressively in this direction. Recent changes in how they compensate their own salesforce appear to have solidified the move, although one part of the Oracle stack which appears to be slower in making the transition to being a cloud-based capability is, in fact, there are insurance solutions. No doubt this will continue to evolve quickly in the New Year.

Security is a big deal. We also spent considerable time talking about some of the security related issues which carriers face, which is consistent with recent research we have done. Earlier this year we estimated that 10% of IT budgets are spent on security related items but that fully 50% of the time company boards spend on IT issues are focused on security elements. Carriers at the session generally confirm that these numbers are in the correct range and that they are focusing on increasing attention on security items in the future. We also discussed how decisions related to deployment can impact the security profile. For instance, at one point cloud-based solutions were viewed as being less secure than those that were hosted locally by carriers. Increasingly, when looked at on a fully objective basis, carriers are coming to a different conclusion; in other words it may be that cloud-based solutions are in fact more secure than things which they do in their own environment. As a result thinking differently about how solutions are acquired can have a fundamental impact on the security issues which are carrier will face down stream. The broad expectation is that the security discussions will become even more meaningful in the new year, so this is not an issue but is going to go away anytime soon, if ever.

This was another terrific networking event between carriers that are members of the Novarica Research Council. The sessions provide for a thoughtful exchange of information and ideas in a format that preserves confidentiality and anonymity. We are already working on framing an agenda for our next event and are looking forward to continuing the discussion. If you would like to explore any of these ideas in more detail, please let me know. Also if you would like to be included in the planning for our next SIG, we would be happy to discuss that too. It turns out that the future really is already here, it is just not evenly distributed!

Allianz, Toyota, and BMW are Partnering on Autonomous Vehicle Development

Chuck Ruzicka

Rather than choosing to ignore the undeniable emergence of self-driving cars, Allianz had chosen to engage in this development by leveraging its resources, data analytics capabilities, and risk management skills. What better way to understand the future than to help create it. By understanding the capabilities and limitations of the software and having access to enormous driver data sources, Allianz will be well-positioned to define emerging risks, new products and their risk appetite.

New DOL Report Signals Possible Increase in Federal Regulation of State Workers’ Comp

Mitch Wein

The Federal Government started regulating insurance companies after the Great Recession of 2008. Additional regulatory reporting is required of insurers that are deemed to be a Systemically Important Financial Institution (SIFI). MetLife is spinning off some of its pieces so it will no longer be classified SIFI and AIG has had discussions about breaking into three pieces due to its SIFI designation.

In a new development, the Federal Government may regulate Workers Comp if it fails to meet certain standards. This is another departure from the state-based system that has evolved in the US. The claim is being made that the Workers’ Comp benefits are insufficient to prevent workers from falling into poverty in certain states, and that some states like Tennessee and South Carolina are looking to establish opt-out laws or already have created one, like Oklahoma. If this moves forward, look for increased regulatory expense in those states that have Federal regulations triggered, putting pressure on the combined ratio and probably forcing carriers to leave certain states.

MetLife is Spinning off its U.S. Retail Unit

Rob McIsaac

MetLife, in response to a variety of financial and regulatory headwinds including a SIFI designation, is moving closer to a spin-off of their US retail and related businesses. The company recently confirmed the intention to spin off these operations as a separate unit traded under the ticker BHF, so that they could focus on the remaining higher growth businesses in their portfolio. The spin-off is an alternative to an IPO, which the company noted could produced varied results given the “choppiness” of the equity markets.

Both units will clearly remain large organizations, but one thing the company hopes to shed is the SIFI designation, an outcome that could happen after the transaction is completed. Another item that is top of mind at the carrier has been the impact of the implementation of the DOL Fiduciary rules for 2017. MetLife had previously sold business units that they felt would position them poorly in light of these changes. The new year will bring a series of industry changes and usher in an era of MetLife and Brighthouse Financial as distinctly different competitors.

Thoughts from Insuretech Connect

Tom Benton

Last week I moderated a panel discussion on insurance innovation and accelerators at the Insuretech Connect conference in Las Vegas. The conference attracted over 1500 with a mix of insurance carrier innovation leaders, startup entrepreneurs and venture capital executives from the U.S. and all over the world. The conference sessions were mostly standing room only, and the exhibit floor was buzzing with conversations around innovating the insurance business.

On day one we heard from Scott Walchek, CEO at Trov, about their disruptive approach to insuring personal items – any item, any time for any duration. They are currently only operating outside the U.S. and for electronics items only, but expect to expand the categories covered and enter the U.S. market next year. He spoke about the need for transparency for insurance distribution, and shared thoughts on how to stay focused when faced with the uncertainty and challenges of launching a startup.

Other sessions on day one focused on Insuretech trends, with active discussion around customer experience and how to lower the friction of doing business at insurers. I talked with startups like Roost, Sureify,, Amodo and others that are finding innovative ways to use data and IoT devices for insurance applications. I also had great discussions with innovation leaders at insurers looking for ways to integrate new ideas into their distribution and operations as well as established solution vendors looking for how to engage with startups to improve their current insurance technology offerings.

Day two started with an interview with Daniel Schreiber, CEO of Lemonade, who talked about their strategy to build a vertically integrated insurance company and to leverage both analytics and behavioral economics to reduce operational friction and shape the customer experience. For example, they expect to build trust in the company by having customers designate a charity for return of unclaimed funds – they see this as a way to reverse the general negative perception customers have about insurance carriers.

My panel discussion was on day two and it included the managing directors/founders of four prominent startup accelerators – Global Insurance Accelerator, Plug and Play Ventures, OnRamp/gener8tor and Startup Bootcamp Insuretech (London). The panelists talked about their programs, the key success factors of working with accelerators, how they help bridge the gap in culture between startups and sponsor carriers (in their language, “incumbent insurers”) and how they see insurers integrating Insuretech into their operations.

As I talked with various attendees, we discussed how quickly disruption will happen from innovation in the industry. Many startup leaders see disruption happening now and in the next few years, while carriers and others see it taking longer. Considering the active interaction and interest of the conference attendees, it’s clear that no matter how one defines innovation or how long one thinks it will take to see major disruption, the new era of Insuretech is beginning to have an impact on the industry.

If you’d like to hear more about the conference, please contact me. Also see Novarica’s update report on accelerators and VC and our report on disrupters.

Take DR Plans Seriously

Rob McIsaac

Like many this week, I’ve been watching with concern as Hurricane Matthew took aim at the coast of the Southeastern US. For those of us in NC it has been with a certain relief that the storm has a projected path the moves it east. The storm, however, reminded me of a different storm almost exactly 20 years ago that proved to be my first DR “test” as a CIO. The lessons that came when Fran unexpectedly veered west from the coast and slammed Raleigh are vividly etched in memory. I discovered that CNN has preserved my observations from that night at:

I didn’t know it then but it would be many days before we saw electricity again. By morning, chainsaw was the only way to get to main roads and many members of our team were stranded; help brigades were one of the early orders of business. It never dawned on me that fuel in underground tanks was worthless without electricity, although I was amused that we were able to rig a siphon to get heating oil sucked out of the ground. Someone apparently remembered this was a good technique for transferring fuel from their parent’s car in high school and we repurposed the knowledge. One of many MacGyver moments that we’d rely on in the coming days and weeks as we scrambled to recover.

One key lesson that day was to pay attention to the weather reports! My first indication that something was wrong was on my drive home that night. Power was gone within an hour. The phone call a few hours later that started with “the good news is that the fire department has left the data center …” was a prelude to one of the most challenging weeks in my career.

Forevermore after that, taking the DR/BCP planning process seriously and evangelizing it with teams and boards alike was viewed as a “mission critical” undertaking.

Another major lesson? Plan before things happen and play out scenarios broadly. If the plan isn’t baked before the bad thing happens, CIOs and their organizations can be left to flap around like a lawn chair in a hurricane.

Pun intended. For more information, please see this CIO checklist ( from our research library.

News and Views Roundup: Robo-Advisors, HSB & Church Mutual’s IoT Initiative, and Nationwide’s Acquisition of Jefferson National

Rob McIsaac

Rob McIsaac on the growing importance of robo-advisors

Chuck Ruzicka

Chuck Ruzicka on HSB and Church Mutual’s joint IoT initiative

Rob McIsaac

Rob McIsaac on Nationwide’s acquisition of Jefferson National in the wake of the DOL ruling

Hartford Steam Boiler and Church Mutual Partnered on an IoT Initiative

Chuck Ruzicka

The Internet of things is just beginning to change risk profiles and loss costs for insurers. The recent IoT partnership between Hartford Steam boiler and Church Mutual shows that collaboration between carriers and third parties can accelerate implementation of new services. It is also a terrific example of an insurance carrier thinking about how to increase their value proposition to existing customers, proactively moving to reduce loss frequency and severity. Carriers that provides products and services to a well-defined niche or set of customers have an advantage in this area. Carriers don’t have to be large to be innovative; they just need to focus on customer needs and define the relationship they want to establish.