At the analysts' panel at the ACORD LOMA conference in Las Vegas, insurance analysts differed significantly on the issues confronting the insurance industry and their outlook on the technology strategies and tactics insurers should adopt to achieve growth.
Analysts were first asked to name the most significant changes affecting the insurance industry in the past year.
“There is a new awareness of the magnitude of change and the amount of change we have ahead of us in the industry,” said Kimberly Harris-Ferrante, VP & distinguished analyst for Gartner Group. “They are becoming very keenly aligned with the need to change,” she said, adding that there is a growing awareness from CIOs that the IT organization has some significant gaps in skills, building roadmaps, filling gaps and preparing the department for next generation business needs.
Matt Josefowicz, managing partner at Novarica disagreed, addressing the question from both tactical and strategic perspectives. “There is an evolutionary imperative and — closer than some companies think — a revolutionary imperative,” he said. “The evolutionary imperative is about efficiencies and streamlining processes, using third-party data wherever possible to accelerate the underwriting and claims process and companies are looking at their core systems to make sure that they can support those incremental changes that are coming shortly,” he said, including fully-automated underwriting, which is expanding across lines of business.
But he also spoke of structural changes that could occur. “There is a huge potential transformation in terms of the capital markets ability to access risk. The current configuration of reinsurer, broker, primary broker, corporate — all of that structure was designed to solve an information management problem that at its core is not an information management problem any more. Now, that [organizational structure] is held in place by cultural inertia, the regulatory environment, accepted behavior and experience. But it was developed to meet an absolute necessity, and the absolute necessity that it was developed to meet is no longer there.”
Chuck Johnston, research director for Celent, said that insurers are becoming more comfortable with change and the rate of change. “There’s a recognition that disruption is OK,” he said. “One of the best examples is in the voluntary space, where there are two submarkets colliding. The business model has changed because of external drivers, basically the PPACA in the United States, where all of a sudden exchanges and direct, which once were anathema are now cool, simply because [President] Obama said they would be. So that has changed the entire landscape of that space. And people are shrugging their shoulders and saying disruption is happening, now it’s something to manage.”
Data and data quality issues were a recurring topic. Johnston said there is a realization that the external data is better than the internal data, to which Josefowicz added that the internal data was collected in a different information age.
Josefowicz also observed that the customer experience is now the product, rather than the policy; and Johnston said that the customer tools to do research have advanced so substantially that millennials increasingly believe that insurance is bought, and not sold, a significant shift in perception from previous generations.
Harris-Ferrante disagreed, countering that while 18- to 25-year-olds do research online, they prefer to buy from a live agent, and that this increases the significance of having a highly functional, engaging Website, as it acts as a funnel to the agent for gathering appointments.
Josefowicz allowed that online sales doesn’t mean ‘no people’ and that call centers are still an important channel. “It’s still a human being, but it’s a human being doing a different job. It’s a human being doing a job much more like a Fidelity rep than an independent agent,” he said. “A lot of carriers are going to have to invest in customer service that they have been outsourcing to their distribution centers for a long time. Or the MGAs and larger intermediaries will evolve this channel.” And many are already proving a lot of information and services online, including quoting and essentially run their own call centers. Josefowicz added that millennials have a built-in skepticism when working with a commissioned agent, and that 20 years ago, people really had no choice but to work with the commissioned agent.
Johnston suggested that insurers design a tiered approach to marketing, rather than a segmented one, which he illustrated by describing his wife’s approach to shopping, which she accomplishes largely online, but that she wants to escalate at will to a human interaction. Don’t assume that all 50-year olds prefer human interactions, he warned.
Further, Johnston suggested that generational differences lend themselves to bundling insurance products, especially for millennials, who supposedly are inclined to shop online, have shorter attention spans but who also want to understand the products they buy. They want more choices, but less noise in the process, he said.
In that process, Harris-Ferrante noted that the language of insurance has been driven by regulation and needs to be simplified and clarified for buyers.
All of the analysts, when asked to grade the insurance industry, allowed that there is much room for improvement in the customer experience. Josefowicz said that consumer auto is leading the way, in part because the products are simpler, but that other segments, where possible, will adapt some of those methods.
Harris-Ferrante offered that on a 10-point scale, the insurance industry was at a 3 or 4, adding that one of the challenges is that the agent, not the insurer, largely owns the customer relationship and that as a result, insurers don’t know what customers want. She illustrated with mobility. Despite the hype, customers just don’t yet care about mobility solutions; it doesn’t make a difference in choosing an insurance company or whether they stay with one. “We are putting money out and wasting it on things customers don’t care about,” she said. However, most customers say their insurance carrier offers average or slightly above average customer service.
On the topic of the customer experience, insurers benefit from the fact that customer interactions are relatively rare, Johnston said, the exceptions being health insurance and benefits, which could offer opportunities for insurers. “There’s nothing good going on in the market, you’ve got to go out and create it.”
Asked to discuss the biggest changes not yet taken seriously by insurers, Johnston said SIFI designation from Dodd-Frank, and the possibility of regulatory changes.
Harris-Ferrante said that cyber threats are the biggest threat not taken seriously, despite the reality of the threat and the impact they can have on the business and public perception of the business. “The world is increasingly at an electronic risk. You are putting more data out to partners, access to transaction systems, customer data, cloud, you have all this stuff sitting out there,” she said. “I don’t think we take it as seriously as we should.
Josefowicz said business continuity planning and disaster recovery. “Think about the insurance companies in downtown Manhattan. A lot of them were forced out of their primary site for weeks after Superstorm Sandy. A plan that lives in a folder is a dead plan.” Changing weather plans is also a big issue, he said. “The industry needs to evolve its underwriting models and actuarial models in the face of extreme weather patterns.”
Looking forward, Josefowicz said 2014 is going to be a continuation of bread and butter issues.
“Core systems rationalization and capabilities, distributor experience, customer experience, data and analytics. Probably every carrier in this room has a project or a wish list for one of those areas that is a page long and there is plenty of work to do on the known issues,” Josefowicz said.
Harris-Ferrante said that digitization would continue to drive efficiencies and savings, as it allows for content to be customized and published across platforms, offering more and better usability to various users.
One of Johnston’s primary concerns is the changing role of quants in the insurance industry.
“We are hiring all these great people, these massive quants that understand how to do theorem based processing and know great models. I think that is a very dangerous position for insurance companies to be creating. I think they are going to become chief scapegoat officers,” Johnston said. “My fear is that people are going to abdicate responsibility. [Chief data scientists] are going to be really great at proving and disproving theorems – and by the way, 70 percent of your theorems are going to be wrong… But they are not going to take responsibility for business strategy. They are high functioning quants, who are going to learn insurance in a year? I’ve been in insurance 30 years and I’m still learning, he said.”
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