In Innovation, It's Not the Most Obvious Changes That Make the Biggest Impacts
Whether it's technical, analytic or systemic change, the insurance industry has undergone profound transformation, industry leaders say.
- Lori Chordas
- January 2022
In the insurance industry, data and modernization can no longer be ignored.
Industry leaders say a host of innovations largely driven by data, analytics and technology have rightfully pushed the market forward over the past two decades. Not only have those innovations helped the industry move more quickly, they've also helped companies to launch products and initiatives more easily and helped them underwrite and analyze their own operations and markets with greater accuracy. AM Best TV recently spoke with several industry leaders about these innovations and their impact on the insurance market. They included Bill Pieroni, chief executive officer at ACORD; Deb Smallwood, senior partner at Strategy Meets Action; Mario Vitale, president of Resilience; and Bill Jenkins, a managing partner with Agile Insurance Analytics. Following is an edited transcript of interviews with them.
“You have virtually 100% of the cost of a carrier going into underwriting and claims, and you’ve got less than 8% of the insurtech spend devoted to improving those areas. We need more innovative solutions around underwriting and claims.”
When you look back over the past 20 years, what are some of the innovations that have most changed the insurance industry, and why?
Pieroni: First and most profound would be straight-through processing and real-time underwriting. Twenty years ago, there was still a great deal of manual underwriting at the desk and a huge effort was required to rate, price and ultimately buy cover. There's been a profound change, not only within personal lines, but even in small commercial and mid-market. We now have real-time straight-through processing in the underwriting area.
There is also internal and third-party data utilization—taking data at the moment of value, such as when you receive first notice of loss, when there's a call from a customer, or as you're thinking about an underwriting or marketing decision, a cross-sell or a retention action. The ability of the industry today versus 20 years ago to turn data into information that can't be ignored at the moment of value is truly innovative and unique.
Lastly is IT sourcing. Twenty years ago, most carriers, brokers and independent agents needed to own and oftentimes operate their data centers and IT infrastructure. The on-demand computing revolution that we have—cloud computing applications, professional IT services—is having a profound impact in driving down scale and scope economies.
A small regional carrier, a small broker or a large carrier all have the same overall economics and access to the same types of capabilities, both IT processing as well as applications. Straight-through processing and underwriting, data leverage, and IT sourcing are the three most profound innovation impacts I see.
Smallwood: Probably the most significant, largest innovation changes were predictive models, the beginning of artificial intelligence and bringing data into the transaction process. If we look back at the turn of the century, insurance was different. Every aspect, role, process and use of technology were all anchored in core systems. We've had such an evolution of digital, mobile and customer. When you start to overlay artificial intelligence and the whole platform economy, a lot has changed.
A great example of an innovative tipping point in the industry was at the turn of the century when Progressive started using predictive models and external data in the actual transaction process. Fundamentally, we've always used data and predictive models, but we actually brought it out of the actuarial back office into the transaction processing for the underwriter. In real-time automation, Progressive was able to understand, assess and price the risk they wanted and reject those they did not.
At that time, we really thought it was just bringing new models into the process and creating automation, but it really facilitated significant changes in our industry. It facilitated straight-through processing and moving data capture out to the agents in the channels, and changed the underwriting process. It has also facilitated direct sales and the evolution of products.
Vitale: I don't think the insurance industry has ever won the award for “most innovative.” I mean, take financial services, for example. In just a few clicks or swipes of your phone, we can today securely send money around the world. Health care is another industry that has made huge gains in innovation with life-saving medical technologies and disease detection. I've been in the insurance business for 45 years, so I can say that we've certainly made some important gains since the typewriter and the paper copies of everything.
I would say the biggest change, though, is the speed by which we are able to transact business. That speed came from the introduction of new technical capabilities, the computer, mobile devices, etc. Everything from an insured sending information to their retail broker, a retail broker filing a submission to an insurer, the pricing of product to the binding of the coverage, the agreement of terms and conditions, and policy issuance. When I first started in the business, everything was done on paper and was produced on a typewriter, and then sent by mail. It all used to take a month—or longer. Today, all of that can be done in less than a week.
I think the real change we are starting to see in the insurance industry is that our clients expect the same innovation, speed and comprehensive service they see in financial services or health care. Customer experience is really driving innovation for us. It's what is happening right now as we're talking about it, and it's how we use that going forward that will drive more significant changes that will benefit everyone in the insurance value chain.
Jenkins: There have been a number of technology and processes being touted as innovation that have been around for a number of years. Many have been, however, enhanced and have become more sophisticated in their use. The lack of wholesale use of these innovations have been the result of organizational culture and overall organizational leadership in most cases.
Two significant innovations impacting our industry that stick out in my mind are the use of analytics and the digitization of the organization. Both have resulted in major changes in the way insurers do business. These innovations have impacted the types of staff, processes, technologies and organizational structures companies employ today.
What is your favorite innovation over the past two decades that few realize was innovative?
Pieroni: New capacity in the form of alternative risk transfer. In 2021, the ART market was about 56% of all of the total risk financing versus 44% for guaranteed cost market.When you think about the ART market, it's exploded to include not only catastrophe bonds but also captives, risk retention groups and financial options. The innovation around who and what solutions can best serve those wishing to transfer and mitigate risk is unique and innovative. Over the last 20 years, brokers have played a profound role in driving alternative forms of risk transfer. I don't know that many people think about that as innovative. When you think about nearly a doubling of capacity in the marketplace without a doubling of the balance sheets of carriers through innovative mechanisms, that's something truly unique and special.
Smallwood: Over the last seven to 10 years, we have had an explosion of insurtechs, many with the mindset that “we're going to disrupt the industry.” What I love about insurtechs is the assortment we have across the ecosystem. We have insurers, MGAs, digital agents and those that are part of distribution, underwriting, claims, data, new-user interfaces and IoT. To me, the insurtechs are the innovative ones. They're showing us that the business of insurance and the entire experience can be different and how to do it.
Vitale: Much of this has to depend first on the specific product itself. In the auto insurance world, the introduction of telematics, for example, was a great leap forward in allowing us to better understand driver behavior and use vehicle data to indicate better or worse risk. If we were talking about climate control or weather-related products, we'd be talking about satellites and the technologies around predicting hurricanes, storms and floods so we could take preventive measures and give people notices about upcoming storms that they didn't have 50 years ago.
If we were to pick anything from homeowners to automobile to commercial risk, a lot of it has to do with the technology for that product book. The one that I'm most excited about that sits over all of that is artificial intelligence. Today we can teach machines to make the kinds of decisions that we as humans had to make before. We start to realize with the kind of world growth that we've had and how much risk transfer has grown in all product lines and all over the world, there are so many more transactions. Taking the cost and effective efficiency, and delivering what it is we do in the insurance business into the process, artificial intelligence has really helped by taking the cost out of it.
In auto insurance, for example, when you have a claim, you can take a picture and begin to file that claim on the spot by using machine-taught devices to help adjust that claim faster. In the world of cyber, we're using the ability we have with technology today to understand risks and vulnerabilities in real time, and by the capabilities of the computer, artificial intelligence and programming help decide how to make companies safer and more resilient.
Jenkins: I see change from a handful of perspectives—people, cultural, organizational, technology and process changes. I believe an organization has to have all of those components addressed when they put in innovation.
If an organization doesn't have all of these components addressed then the chances of an innovation being successful and being embraced fully within the organization are going to be reduced. An example of an innovation I lived when working at a large P&C carrier was in the development/building of a commercial lines core processing system that impacted all of the above-mentioned components of people, culture, organization, technology and process.
“In the past, insurance organizations differentiated themselves from three perspectives: pricing, product or service. Today, I believe it’s data that is a company’s differentiator.”
Agile Insurance Analytics
What types of innovations get too much attention, and which get too little?
Pieroni: Innovations that commoditize what we do are troublesome. We, as an industry, put people's lives and businesses back together and restore people to normal as best we can after a peril.
New carrier models that emphasize price competition tend to cloak themselves in improved experience or ease of doing business. But in the end, they're commoditizing what we do, and that doesn't benefit insureds, carriers, brokers and independent agents who spend their days trying to understand and solve clients' needs. Yes, there's some marginal cost savings to a customer, but in the end, it's so trivial relative to actual loss costs. The new carrier models and aggregator sites that we see rising, not only within the United States but particularly in the U.K., Western Europe and parts of Asia, that's a real problem. Again, it commoditizes.
There's nothing wrong with price transparency, as long as it comes with service transparency, balance sheet, claims-paying ability, and carriers' and agents' ability to add value to the solution. When they train consumers to focus only on price, I'm bothered by those commodity technologies.
Where do we receive too little? Insurtech is obviously in the press these days and there are billions of dollars being invested in it. At ACORD, we track about 2,000 insurtech initiatives, and we've done it over the last decade or so. Interestingly enough, when you look to underwriting and claims, less than 8% of insurtech spend is going to those areas. Underwriting for most property/casualty carriers is about 30% of the premium dollars; claims is 70%.
You have virtually 100% of the cost of a carrier going into underwriting and claims, and you've got less than 8% of the insurtech spend devoted to improving those areas. We need more innovative solutions around underwriting and claims. Candidly, it's hard. You have to know what you're doing. It requires experience, time and resources. There's some risk associated in executing it. That does not receive enough attention.
Smallwood: We've been talking about innovation for a long time. I can go back to 2012 to an SMA Summit. We were defining innovation. There are three things that get too much attention. One is innovation labs. Pooling people and organizations outside of the operations and building proofs of concepts initially was fun, and they were fine to explore and test different things. But, in essence, these proofs of concept never made their way back into the business operations.
Secondly, we're still focusing a lot of time, energy, money and resources on core systems. They are not innovation. They could be part of your transformation journey. They are foundational. The third is we spend a lot of cycles also around digital. Digital is the automation of engagement or the experience. It's portals, self-service, technology-enabling automation, but to me, that's not innovation.
The one that doesn't get enough attention, which is where I get really passionate and excited about, is customer experience and design thinking. If you think about the majority of those insurtechs or even about Apple and the design of iPhones, it's design thinking. It's really empathy and understanding the customer.
When you start to go with outside-in thinking, that's where the innovation will happen. That's where we'll start to redefine either processes, roles or technology. To me, design thinking is the gateway into real innovation.
Jenkins: I'm a data guy. I believe that data still does not get the attention that is needed, even though it is somewhat of a buzzword in this industry. If you speak with CEOs, they will all tell you that they're happy with the data they have. But if you get into more detail with them, you'll find out that they're not happy with what they get and that the data they possess is being used or is available to provide them the information they need and expect to run the business. Unfortunately, this is a common theme with most carriers.
In the past, insurance organizations differentiated themselves from three perspectives: pricing, product or service. Today, I believe it's data that is a company's differentiator. Each company possesses different data, whether it be what is captured, how it is used, etc. We hear a lot about technology, pricing and product changes, whereas most carriers can have these changes in place and available in the marketplace within an 18-month time frame.
Many of these technology changes have been around for years. It's just a matter of how they're using them today. For example, we hear a lot about cloud technology. Today, it's no longer seen as a disruptive type of technology. Many praise cloud computing as a major innovation. Again, a technology that has been available for many years.
Years ago, we used the term “timesharing” for cloud computing. Timesharing was much slower and much less sophisticated, but used universally. Although cloud computing has now become more prevalent, I think that the hype on cloud computing is over-hyped. Many carriers still are hesitant to use this technology. And while it's a fine technology and offers a tremendous benefit, I see it as being over-hyped.
“Customer experience is really driving innovation for us. It’s what is happening right now as we’re talking about it, and it’s how we use that going forward that will drive more significant changes that will benefit everyone in the insurance value chain.”
What is it that most people think they know about innovation, but they're wrong?
Pieroni: Too many people looking at innovation think that it's the “what are you going to do, and how are you going to do it?” But in reality, it's less about how and what you're innovating and more about when and where. When is that innovation going to become viable for the marketplace to use? Where might it become viable?
Also, it's about culture. In the end, the culture of an organization, along with its shared values, work norms, teaming environment and rules of engagement are key factors in determining whether or not an innovation is going to be successful or could be rejected by an organization or industry. ACORD tracks 2,000 insurtech innovations globally. We also study which ones make it, which ones don't and why. There are a number of common factors that are required but not sufficient to make it. One of the key factors is are you driving that innovation in a culture that's going to embrace it, use it and leverage it?
Smallwood: The word innovation is scary to many. Go back 10 or even 20 years, it wasn't a common word in our industry nor was transformation. I remember, it was about seven years ago, one of our clients said, “We don't use those words.” So, insurance has come a long way. Here is where we have gone wrong. Innovation isn't about throwing everything out and starting over. It's not the big splash. It's not creating the iPhone for insurance. It's not about reinventing or reimagining every aspect of what we do. It is about picking a process or a product and reimagining and redesigning it.
The best scenario I can give is the evolution of the suitcase. To me, innovation for insurance is the suitcase. Suitcases have been used by human beings to carry their belongings for a long time. But about 20 plus years ago, an airplane pilot said there's got to be a better way to carry a suitcase. They took a small suitcase, tilted it on its side and put a long handle and two wheels on it, and voilà, everyone is now wheeling suitcases.
To me, innovation is how do we take something that is practical and successful and works and make it even better? Now we have suitcases with four wheels, and they swivel. It isn't this big, massive thing. It's really about looking at things a little differently with a new lens.
Vitale: Everybody can classify almost anything as innovation, and sometimes it's recreating exactly something that had been done before by someone else and calling it a different name. Today, in order to make a quicker, better decision, we can make it in real time with all the information at our fingertips. That's quite powerful. Whether it's your iPad, iPhone or another mobile device, having that information readily available when you need it most to communicate or make a decision is very powerful. That's what we see the entire industry on the verge of revolutionizing right now.
Jenkins: Not all innovation is equal. One innovation seen as “outstanding” in the eyes of some may not be seen as that “outstanding” by others. An aspect in making innovation successful and is overlooked is the need for having a formal process or discipline followed. The innovation identified needs to solve a particular business problem and provide value to the organization. Even doing this does not guarantee that an innovation will be fully embraced.
To be successful, innovation must have the support mechanisms (the back room and infrastructure support) for the adoption and support of the innovation to sustain it going forward. This supporting function is often overlooked by many companies.
“Innovation isn’t about throwing everything out and starting over. It’s not the big splash. It’s not creating the iPhone for insurance. It’s not about reinventing or reimagining every aspect of what we do. It is about picking a process or a product and reimagining and redesigning it.”
Strategy Meets Action
What did insurers who are now considered innovative do over the past 20 years that non-innovators did not?
Pieroni: I believe they did three things. One, they moved to a model incrementally. Incremental change can be oxymoronic, but they did it incrementally to a 24-by-7 interaction, enabling consumers, insureds, brokers and counterparties to interact with that entity on a round-the-clock basis.
Next would be omnichannel, the ability to interact on that 24/7 basis via phone, face to face, mail or email. Lastly is self-service and looking at how you can enable personal and commercial lines insureds to do things like endorsement processing and first notice of loss.
Collectively, it's about investing in a set of capabilities, business processes, inputs, outputs, tasks, key performance indicators, IT, data, applications, infrastructure, skill sets, shared values, work norms and culture to do that 24/7 interaction, omnichannel and self-service. Those three things are truly innovative. You see leaders today who are gaining share with very superior combined ratios possessing those capabilities. They're almost a baseline capability for sustainable, profitable growth.
Smallwood: I believe that those companies who have accelerated in innovation, there is executive leadership and the board support have a vision of a future innovative state, and have focused on the culture, people and then the technology investments around it. These companies have given the permission to act and be a little different. They stayed the course, continued to invest and didn't give up when things got murky or hard.
Also a change in accepting failures and quick decisions to cancel and move on. Historically, many have initiatives that take years and millions of dollars spent. It's about quickly making decisions and giving permission to fail fast. Innovation is an evolution. It is a journey. This isn't a couple of quick investments and we're done. Instead, it's the next-generation leaders that have a vision and have stayed the course.
Vitale: One of the things that innovators have done that non-innovators have denied is the idea of trying to move legacy systems that burden large insurers into one cohesive system by which they could operate, model and improve. I know that a lot of insurers have, through acquisitions and other ways, always battled with the inefficient operations of several legacy systems that are not integrated. It's created a real drag on IT budgets to be able to move forward into modern technology in one consistent way.
The great innovators today are looking at CTUs and artificial intelligence and to essentially outsource all of that manual labor that used to be done by thousands of people.
I look at some of the startups today. Many larger ones are looking at outsourcing a great deal of these decisions to artificial intelligent companies that help teach machines how to process that business more effectively and efficiently, and not outsourcing to highly-educated, low-cost professionals but to machines that have learned to do the behavior that humans used to do. That's a real innovation, and I think that's the direction the industry is moving toward. Those that are starting up without legacy systems have the benefit of jumping ahead of others in that area. Time will tell, but it's certainly an issue that the new startups are attempting to do right now where I know a lot of the companies that have been around for a long time are struggling.
Jenkins: I guess the great example of this is the use of data from companies like Progressive, Allstate and Geico. What they did was balance the tradition of insurance culture and thinking against the new ideas and new ways of doing things that were being brought into the company/industry. Insurance carriers are well known for being risk-averse. What you're looking to do with innovation is the introduction of new ideas that are going to change processes and the way people think insurance should be run—i.e., “this is the way I have always done this.”
You're always going to have the naysayers and receive passive outward resistance. To overcome this resistance, you need to have a CEO or a member or members of the senior management team who are going to champion the cause of innovation. Fortunately, I'm beginning to see a lot of innovation “championing” today as I speak with CEOs.
There's a new mindset of CEOs coming into these jobs who see change as good and who are getting more interested and involved in technology as they see the benefits of technology. These CEOs are also focusing more on getting better information and around issues like better understanding their customer base so that they can design more personalized services and products and to do more personalized pricing.
To be successful in these areas they need to get the proper talent, and those organizations did that. They were able to harness the data that was available across the entire insurance value chain to determine how this data could satisfy their innovation strategies around pricing and service. These companies collaborated not only within their companies but outside of their organizations to find how companies seen as leaders were using data to further their strategies for success. Companies like American Airlines and Harrah's were researched by Progressive to understand new ways of using data. This represents using the process of benchmarking or looking outside to see how other industries were using innovative ways to enhance their businesses.
A requisite of innovation includes having a corporate culture that promotes and accepts failure as a means of progress. This mindset has to be reinforced and promoted throughout the organization. That's what I see innovative organizations like the Progressives of the world doing. Take a step back and you see new entrants, such as Lemonade, coming into the insurance space and using data innovatively. Many companies that are traditional in the way they do things need to change their mindset and the culture if they wish to become an innovative company.
What areas of insurance will see innovation?
Pieroni: I mentioned the dearth of insurtech investments in underwriting and claims of less than 8%. It's my hope that it will be underwriting and claims.
We need increased levels of digitization and integration across core underwriting and claims. I think that AI enablement is going to be key in helping to drive innovation there.
These things tend to be quiet because they truly are unique and a differentiated source of advantage if you can get it right. Right now, ACORD has 36,000 members globally, and many are driving real innovation internally, with not much fanfare. But they are thinking about how they can digitize the value chain, integrate those two capabilities, and leverage deep learning, machine learning and AI to improve the efficiency and effectiveness of the core.
Smallwood: So often the focus is front and middle office, all about distribution, underwriting and claims. The low profile, not the right attention, is all about culture and talent. I believe that with COVID and work from home, being able to hire anyone from anywhere in the world, retiring baby boomers and with this new generation coming in, we have to look at insurance from an innovation culture and from a new generation of talent, with reinvented roles.
We often start with automation, technology and data, and then move it into process and people. I believe that what we'll start to see, and we're seeing a bit already, is the culture and people, then process and technology. That's where I believe we need to begin.
Jenkins: It's always the backroom and the folks in it who are making the engine run. That's the area that I see great opportunities for things like artificial intelligence, machine learning and the use of data. There are now a number of different artificial intelligence and machine-learning functions coming about, using algorithms and band development that take in the data. The plethora of data that has become available over the last five years is amazing.
The organizations who are innovative and who are developing AI and analytics tools are using all types of data today to do innovative things like sophisticated two-way chatbots and analyzing who their customers are and what types of products and services suit their needs.
Vitale: At the end of the day, it's how we transact business in a way that brings lower cost to the insurance buyer. How can we make risk transfer more effective and efficient by putting more of the cost on that side of the equation rather than on the operating cost side of it?
As we start to shift in that direction using some of the things we just talked about, you have to take cost of each dollar spent on insurance out so everybody can see more value.
Look at the pay-as-you-drive approach in auto coverage—pay only for as much as you drive. It works for all parties because it's based on seamless technology, human involvement when necessary—but otherwise is AI-driven. It's thriving.
That model is one of the ways to help reduce cost by focusing on the risk transfer portions of real use rather than the cost of operating a full-time venture.
Those are the kind of things I'm excited about. We'll see where the industry goes.