The insurance industry is under greater pressure to change than any time in modern history. Low interest rates have depressed margins, while flat markets, product commoditization and new entrants have combined to greatly intensify competition. At the same time, new digital technologies have greatly increased the potential for customer engagement, even as they have provided customers with new choices and heightened expectations.
These shifts demand innovation and the further application of technology to streamline operations, create new efficiencies and pursue new forms of customer interaction. To explore how insurers are is coping with these challenges, and to share experiences and best practices, Insurance Networking News recently hosted an executive roundtable in our lower Manhattan offices. These executives met to discuss the impact of technology on the business and what they are doing to adapt to a 24 x 7 digitalized insurance environment:
- David Lawless, Executive Vice President and Chief Administrative Officer for the Magna Carta Companies
- Ajay Manchanda, Chief Information Officer for The Navigators Group
- Karen McIntyre, Vice President of Enterprise Operations Services at XL Catlin
- Darryl Siry, Chief Digital Officer at ProSight Specialty Insurance
- Elliot Kass, Editor-at-Large, Insurance Networking News (Moderator)
- Michael Nemeth, Senior Vice President of WNS Global Services
What follows is an edited version of that conversation. The roundtable was underwritten by WNS.
Moderator Elliot Kass, Editor-at-Large, Insurance Networking News: We frequently refer to technology as a disruptive force in the insurance industry. But how does this play out? Can you talk about specific processes and operations that have been affected?
David Lawless, Executive Vice President and Chief Administrative Officer for the Magna Carta Companies: There's no doubt that when we go through a software roll out, there's a huge social component to how it is introduced, how it's followed up, what the users expect and how it will affect them. Users are often frustrated when a technology roll-out happens. It's not always perfect.
At our company we have a tendency to roll out a little bit earlier than we'd like, only because you get eighty percent of the work done very quickly. It’s the last twenty percent that takes eighty percent of the time. What is that twenty percent? If you're live, it will surface to the top very quickly. So in a certain sense, we've kind of always cut it to the edge when we introduce something. We like to introduce the end users to what they should expect, and then we talk about the trough of disillusionment. We're all excited about this right now, but guess what? Tomorrow is going to be a bad day here, and we're not going to be the most well-liked people in the company. But we're going to look forward and dig ourselves out of the hole a little bit better every single day, and that has been quite effective for us.
Ajay Manchanda, Chief Information Officer for The Navigators Group: Our big initiative last year was when we first introduced automated workflows. We took manual processes and mimicked them with the system, so there wasn’t too much of a learning curve—and suddenly, after eighteen months, we woke up and we had two hundred and twenty different workflows.
Lawless: Correct. “My branch does it differently than your branch.” We're all processing endorsements, but none of us does it the same.
Manchanda: Exactly. We had 27 submission workflows alone. This is simply taking a submission that comes into some automated e-mail box and processing it. Either you're clearing and sending it, or you're declaring it. So last year, in the process of upgrading our technology, we said, okay, we're going to consolidate all of these. We consolidated two hundred and twenty-seven workflows down to about ninety. And there is now one submission work flow.
Karen McIntyre, Vice President of Enterprise Operations Services at XL Catlin: Being a global company, it gets expensive to just jet-set wherever you want to go. So we use video conferencing on our laptops. We constantly are having video conferences with our teams around the globe. Even team meetings through a video conference makes that room feel so much smaller. It does close that gap. So when you go to do a system implementation or a change of process, you're talking peer to peer. You're not having somebody speak to you; you're actually working with them.
Darryl Siry, Chief Digital Officer at ProSight Specialty Insurance: We're a business of risk, and technology is changing the way we assess and manage risk. Drones are a perfect example. People are using drones for surveying sites. The ubiquity of video has completely changed the way that we insure commercial automobiles. We offer a video in the cloud solution that will catch any kind of accident that occurs. The claims adjustor sees the accident from both inside and outside the truck, and it's completely transformed the way we view risk.
But if you were to ask me, what is the thing that is going to being transformative for our industry from a technology standpoint, I think that it really lies in distribution. The insurance distribution channel is really the one that's lagging the most in terms of potential for disruption. If you look at the transformation of the distribution channels for personal, in the late ‘90s and early 2000s, that's almost complete. It's very difficult to compete in personal if you don't have very robust digital and mobile solutions, and everybody who has automobile insurance accepts that. What's starting to transform right now is small commercial, where Hiscox came in and is trying to replicate their success from the UK. And in the U.S. you have Berkshire Hathaway, which just announced that they’re starting a new division for online direct sales for small commercial. Five years ago nobody was talking about this, but now people are thinking that small commercial, small professional lines is really where that transformation is going to happen.
Ultimately, the consumers at the end of the value chain, especially the ones who are in their twenties, have the complete expectation of being able to transact business with you anytime anywhere. If we don't transform the way we interact with our customers, and our distribution channels don't evolve as well, there's going to be a huge disruption between the agents and the sales.
Lawless: Do you think that insurance agents are going to go the way of the travel agent?
Siry: I think the distribution channel is going to split into those that provide value and those that offer a commodity. If a distributor or an agent only provides access to a product, they're not going to exist in the future. They're either going to become a valuable provider of advice and solutions, in which case people will pay them for that value, or they're gone.
Moderator: Let's talk about this from a systems perspective, and let's use the banking industry as an example. The banks are having a fit because of digitalization and consumerization. The retail banks are having a terrible time trying to adapt and keep up with this from a couple of different standpoints. On the one hand, they're the slow-moving dinosaurs, compared with all these fleet of foot FinTech operations that are coming in and scooping up high-margin pieces of the banks’ business. On the other hand, they're surrounded by regulators and various governmental requirements. And they’re further burdened by the way their systems have grown. Every time they added a product line, they put in a new system. Now they've got a multitude of different systems and they're all under different regulatory requirements. So trying to integrate and provide a consistent customer experience, and then take advantage of certain analytical abilities to get a 360 view of the customer—this is a major challenge for them. Sound familiar?
Lawless: Are the margins getting so thin that there is going to be a major consolidation of the insurance industry? Are we going to go down from three thousand insurance carriers down to three hundred?
Manhcanda: It's already happening.
McIntyre: It's the regulations. There are a lot. I think part of it, though, is that the regulators haven't really kept up with the technology. In the United States alone, it's not one governing body; it's every state's got their way of wanting to do things. So you've got somebody sitting behind a typewriter sending you information, and you've got to accept it digitally as well.
Siry: As cybersecurity becomes more important to everyone, the regulator doesn't necessarily understand technology, or how rapidly it's advancing, particularly with relation to the cloud. That's something I'm anticipating—when they start asking, ‘where is this data residing?’
Manchanda: In Europe, what are EU requirements? There is no clarity and there is no guidance from the EU, and now every country has a different set of guidelines for where the data can reside. You will end up having your data centers or cloud providers in every single country.
Michael Nemeth, Senior Vice President of WNS Global Services: So where do you get help keeping up with technology? Where do your applications actually come from? Do you take all of that on internally, or do you go looking for solutions? We've become a cloud company. We use other people's clouds—Amazon’s and Microsoft’s—but we have to live in the cloud, so to speak, because our customers are demanding holistic solutions. And so we've become the first consumers of new technologies. So rather than all three of you having to launch projects internally to digest robotics, as an example, we do that, and then our clients look to us to perfect that and bring it to the table, so that we can cut nineteen-and-a-half years to fifteen or so. The appetite for service is changing. We have to come to the table with provable, implementable technology, because people like yourselves are tired of taking your own risk; tired of investing your own money in new technologies.
Lawless: It's interesting you say that. Do I continue with a fixed-expense model, where I have my own resources and own systems? Or do I go to a variable-expense model, where if my transactions go down, my costs go down—and if my transactions go up, my costs go up? I think that there are certainly more people moving to a variable-expense model. Certainly when you talk about outsourcing low-hanging fruit transactions—name-change endorsements, routine renewals, answering a question—those are upscale tasks from ‘here’s an application; please enter it so I don't have to.’ I think what's going to happen in your business is the skill requirements are going to go up.
Nemeth: Exactly, because automation takes care of what we used to do clerically. We can now buy a robot to interact; we don't have to interact anymore. If people aren't self-serving themselves digitally, we can be the digital surrogate with robotics. So absolutely, we have to do more complex tasks in order to be a value.
Siry: I think you made a good point. Technology is advancing so rapidly, do you try to build that expertise and keep up with that in house, or do you partner with somebody who lives and breathes it. Just go to an Amazon conference; it's extraordinary. Can you afford to have that expertise in the house? Or do you partner with somebody who's going to be staying on that learning curve, and you can expect to get the benefits from it.
Moderator: Let's talk a little bit about how each of you are handling the tension between do it yourself and putting it in the cloud. We've talked about various reasons why it makes sense to farm certain things out and certain objections to that. So how are you handing the balance?
McIntyre: On the IT side of the house, we farm some of that out, because you're always going to be getting the newest, the best, the brightest. From an operations perspective, we don't outsource it. We do not do a lot in the cloud today. We have with our e-mail, our HR systems and our financial systems. But outside of that, our legacy systems are inside. We're talking about a global company. There're a lot of people, products and regulators around the globe that we have to deal with, and just being able to flip a switch for technology—it just doesn't happen like that in reality.
Manchanda: We have some outsourcing for production support, but new application development we have kept in house. But then we also have vendor products. So it's a mix of everything within our organization.
From the operational standpoint, what we are looking at right now is not only optimizing our workplace, but also shifting the work. We have a syndicate in London, and you know how expensive that is. So we are looking at whether we can shift some of that work to a low-cost area in the United States. If somebody's sitting at a $155 per square feet space, can we shift that to somebody sitting in an $18 per square foot space? This isn’t the large box work; it’s your regular data entry clearance and all that. So we are trying to shift that back here to the U.S.
Lawless: We had a lot of success with server virtualization in the early 2000s, and we were an early adopter. That helped us get a lot more life out of our hardware and systems, and it was much easier to keep control of servers and server growth. Everyone's trying to consolidate their number of servers. Oddly enough, with server virtualization we've got more servers, but they're on fewer pieces of hardware. So we can spin up servers fairly quickly.
Also, we have now virtualized all our desktops. There are no PCs in the company, and we've eliminated desktop support. If someone says, I have problem with a virus on my machine, we just tell them to reboot; they get a brand new machine every time they log in. So, if they have something on their virtual machine like a piece of software that they installed, the next time they log in that is gone. It has helped us dramatically from that perspective, and given us one extra tool in the security arsenal. So if you're not coming into a virtual machine, you're not getting in. What it also has done is allowed people to log in anywhere. If there’s a disaster, or some other event where people can't work from their work stations, no matter where they log in, they’re going to get the same desktop, the exact same experience.
We have our own data center in Secaucus, New Jersey at a co-location facility. About three years ago, we outsourced, and we put a backup into the cloud. So storage is very cheap, and we use SoftLayer as our disaster recovery site, and that software is replicated in a timely fashion. We only keep a couple of virtual machines up and running, so we know that the site's live, or for applications that you want instant access to. That’s made us more nimble and maneuverable. Now that I have virtualized machines, I can take advantage of outsourcers more effectively, because they're logging into my virtual machine; they're not housing any of my data. I don't have to worry about ‘where is my data?’ and ‘who's got my data?’ The virtual machines that we use have no hard drive, no memory; it's just a box. It's really gone back to mainframe days at our company.
Moderator: This is really an interesting twist on the very common problem of system proliferation.
Nemeth: In the life industry this is a really serious problem, because the platforms they used in 1985, off of which they sold two million term policies, are actually still in operation today. Systems were added every time they went through a new product introduction. If you looked at the Met Life data center floor, you would find a hundred administrative platforms. But even in the PNC industry this happens. They introduce a different sort of product that's more for the digital age, or they figure out what Millennials really want to buy and invent a product specifically for them. Sometimes the existing infrastructure can handle that and sometimes it doesn't, and when it doesn't you're faced with, do I build something? Do I buy something? Do I add something to the floor? How am I going to do it in time?
Siry: I'm a skeptic of the school of thought that outsourcing is always going to be economically better, not only because labor arbitrage has shrunk, but also because it doesn’t take into account the cost of quality. When Ajay said that he insources new development and outsources production support, I suspect that's related to IP and quality. I've been where the cost of the project was cheaper when it was outsourced, but the long-term cost of the project was much higher, because the quality of the development was not high, and debugging something that was built by somebody else, if you don't have an understanding of the code base, gets very expensive.
Manchanda: Some of our noncritical production applications are just a distraction for the developers, so that's what we have outsourced. But we build everything else. We are one of a very few companies that has our own home-grown policy system, because we are a specialty company. We could have taken one of those [packages], but we wouldn’t have fit within the box. We could have customized it, but then getting the next version is almost impossible; the cost of the upgrade is more than the project itself.
With that in mind, in 2007 we said we are building our own, and that's what we have done. We have about seven lines of business on it and want to consolidate all our lines on that single platform. Yes, we did it in 2007 and the technology has evolved, but one of my goals as a CIO is to never fix a working line of code. If it ain't broke don't fix it. So, I'm not putting every single line on the new platform, but I a putting every new line on the platform, and then slowly we'll see if we want to migrate stuff over.
Lawless: The wonderful thing about that is the second time you build a product it is so much better than the first time you built that product. Take work flow alone—you’ve just taken a tremendous amount of complexity out of the legacy product by saying we don't need to do all the stuff that we thought we needed to do.
Manchanda: Yes; you take seventeen screens and shrink them down to ten.
Moderator: I'd like to go around the group one last time and get everybody to talk a little bit about what keeps you up at night. What's your biggest concern or challenge, and how are you addressing it.
Manchanda: It's cybersecurity and how disruptive it can be to our business. That’s what keeps me up.
McIntyre: We’re coming off an integration right now, and I think what's keeping us up is making sure that everything is addressed and all the clients are happy with the service that we're providing. We're taking care of the human side of the integration right now; the technology will follow. I think the scary part is where are we going to go? How lean can we be? Right now, the business case is for us to continue to service out of low-cost centers. Until the head count actually gets to a point where it's costing more than the technology would to implement, I don't know that we have a business case for change.
Siry: The thing that keeps me up at night is managing complexity. As specialty insurance provider, we have more than forty different unique programs. We don't just write lines of business. We write custom segments, and we have proprietary rates, rules and forms for each custom segment. That complexity is why we are successful in the business, but from an IT and operations standpoint, it also introduces extraordinary complexity on the back end. And what comes with managing complexity is not just the technical challenge, but managing the expectations, because you've got a finite budget. People want you to implement a policy administration system and you have to manage their expectations about what can be accomplished in such a complex environment with the finate budgets that we have.
Lawless: I always hated that question, what keeps me up at night? Usually it's my kids. I'm a Cubs fan, so that kept me up last night. My daughter had no problem ridiculing me, watching the end of the game, and I told her she might have to find another place to live, and she answered that she's ready to go. But in any case, certainly meeting the needs of our agents and our insureds. How can we do it as a smaller carrier with an inferior rating? How can we do it better, faster, cheaper, and still compete in the marketplace? Do I bring technology resources? Do I bring human resources? What are those things that we need to do to keep going?
