No matter who you are in insurance, it’s likely that you still pay attention to signals and signs from the economy and other industries as you make important decisions. Economic indicators are sometimes very straightforward. How strong is consumer spending? How does income hold up against inflation? What does the labor market look like?
Within insurance, you may also see signs that are forcing you to make changes. “Where do we need to adjust premiums? How are our claims ratios? Are we invested properly? Are we staying compliant? What forces are pushing us to make moves we wouldn’t normally make?”
The difficulty arises when the trends are not so straightforward, or we don’t grasp the full potential impact of trends that might seem inconsequential.
For example, what factors are behind the rise of MGAs? At first, MGA growth seemed like a simple thing. New world. New risks. New, efficient methods for dealing with risk. Peek under the curtain, however, and you see something completely different. New and complex risks must be managed. Innovation can’t be caged. Insurance innovation is now forced to burst out of the seams of insurance tradition. MGAs are one result.
Recently I asked two industry experts to join me in a webinar entitled, Insurance Transformation — Operationally and Strategically — Where are We?
Our goal was to look at innovation in terms of signs and signals. What can we tell about the future of innovation from what we see today? We split our interview into two sections. Today we will look at the practice of innovation within four trends you may or may not have considered.
Our experts on the webinar panel were:
Edin Imsirovic, Associate Director, AM Best
Seth Rachlin, Executive VP, Global Insurance Industry Leader, Capgemini
And myself, Denise Garth, Chief Strategy Officer, Majesco
In this portion, we discuss:
- The present opportunity for mutual insurers to catch up to public insurer levels of innovation.
- Innovation areas of focus for P&C and L&A insurers.
- The growing idea of innovation applied holistically across product and experience.
- The growth and innovation within MGAs as a signal for insurers
- Focus priorities for 2023
Do mutual insurers currently have a technology opportunity in the race to innovation?
I think there is an opportunity for next-gen cloud technology investment — a potential advantage that mutual insurers might have over publicly traded insurers. Both are sitting on a lot of capital, because they must from a regulatory standpoint, but there is still a lot of money that’s available for investment. Instead of investing in other areas, maybe these companies should accelerate investments in their own businesses.
From AM Best’s perspective, we do see both very innovative mutual and very innovative public companies. The mutuals do have this benefit of not having this pressure to meet their ROA targets on a quarterly basis, so they can focus more on the long term. Public companies tend to move faster in general. They have this increased scrutiny they’re facing from the stockholders and the market and, so their need for urgency is definitely higher.
There’s certainly a sleepy quality to the mutual business. But there is certainly an opportunity, right now, for a mutual to invest policyholder surplus in the future of their company. The opportunities are profound. Plus, there is an insulation from market pressure, particularly as we head into what would appear to be an [economic] downturn.
I’m a big fan of mutuals in terms of what they do for our industry. I think this is a real opportunity for them to leapfrog and embrace a level of change. We see some of our larger mutual clients doing this. I’m really impressed by what some of the larger mutuals are doing with that surplus, to embrace the change that the market is seeing.
What are the innovation areas of focus for P&C and L&A?
Let’s talk about some innovation areas of focus. What areas do you think are a priority? Where are companies investing in the most innovative capabilities? What are some of the differences between P&C and L&A?
We see a lot of innovation in both the life and P&C space, with a little bit more in the P&C space, simply because the P&C space is so diverse. There are so many different risks that P&C insurers try to address or solve for, so there are many different innovative avenues to do that.
Overall, I think the focus is very similar between P&C and L&A. Both focus their innovations on customer engagement and the customer experience. They are also focused on operational efficiency. I think those are the two biggest areas for both.
I would agree with that. On the P&C side, you see certainly more focus on the claims area. The claims experience is a key driver of customer satisfaction and claims is also a significant driver of cost and expense. Claims is an area where I think some of the technology innovation that we’re talking about has an enormous potential impact.
Life companies are very much in the innovation game, with both their focus on underwriting and customer acquisition, as well as their attention to wellness topics. When I talked to people at InsurTech Connect recently, there was definitely an excitement about the life space that there probably wasn’t two or three years ago.
What might it look like when insurers holistically apply innovation across product and experience?
At ITC this year, we also witnessed the efforts that are being made to see innovation through the eyes of the customer.
I was moderating a panel, and one of the panelists talked about a new critical illness product that they were bringing to market. There is a rising ability to apply specific cancer treatments based on DNA. So their company will provide access to DNA that could actually help target treatments for cancer within a critical illness product. If you think about this beyond the technology, it’s a case of empathy by the insurer to want to target cancer in a personalized way, and of course, it improves the customer experience. That is added value.
For another company that was vying for an innovation award (I was a judge), they use IoT in the home in order to drive precision insurance pricing for the home. However, they expanded their service to allow the IoT devices to assist the elderly who wish to stay in their home. It reminds them to take their medicine, it will let them know about upcoming appointments, and it could also determine if they have fallen so that they can send help.
These types of innovations go beyond a risk product perspective and create more of a holistic wellness kind of experience. These insurers are shifting from product-centric thinking to customer-centric thinking.
I absolutely agree with that. It’s relevant to consider in terms of silos. We view P&C and life & annuity as silos, which is a natural distinction the industry makes because of how it has evolved, instead of something that makes sense from a customer perspective. Within those silos, I think there is a good understanding about the need for customer centricity. We are insuring human beings, not insuring various types of assets and those types of things that would continue to call for a product-centric approach.
Does the growth of MGAs tell us anything about insurance’s need for innovation?
We’ve seen amazing growth in MGAs over the last three or four years as a part of the whole InsurTech phenomenon. But now, instead of just MGA startups, we are seeing existing companies stand up their own MGAs and driving innovation through that approach. Do we see this trend continuing?
It’s been remarkable, the growth of MGAs. Part of the reason is that an MGA can be a very efficient way for capital to access underwriting risk. We see all types of program administrators at the forefront of product innovation, especially in difficult areas, like floods, or cyber. InsurTechs choosing the MGA route creates growth opportunities for the whole sector. One of the benefits of MGAs is that they can enter and exit the market much more quickly than a “balance sheet” insurance company can. And the speed to market could potentially increase the overall level of innovation in the space.
Starting an MGA today is much easier than it was in the past. You can have an InsurTech provide the technology and service needed. So, if you have the idea and the backing of a capital provider, you can just plug into the ecosystem and hit the ground faster.
MGAs are the laboratory to the future of the industry. To Edin’s point, it’s so much easier to stand up an MGA than it is a full-stack insurance company. And it’s also so much easier to bake innovation into an MGA than it is to do all of the legacy retrofitting that you have to do to accomplish the same work in a full-stack insurer.
On my panel at ITC, we had a company called FloodFlash which has created a parametric product for commercial flood insurance based on an IoT sensor. That’s something that’s hard to do if you’re a full-stack insurer.
What about technology? Can an MGA afford the full functionality of core systems? Or, are they more targeted in their technology investments given their revenue model?
I think it depends on the MGA. The margins in the MGA business are slim but I also think that the full-function technology is indeed becoming more affordable, and particularly in the cloud. The cloud is a great equalizing factor, because, whereas the operational, “state of the art” core system might have been beyond the reach of an MGA from a pure operations standpoint, those systems are now available and workable in the cloud.
Right. There are MGAs that really have very strong growth plans, and they have a lot of capital back behind them. They want robust systems that can support and scale their business. Cloud has made it very affordable because it’s a pay-as-you-use type of model. A robust cloud system with a lot of capabilities in the box will help them rapidly launch their products in a few weeks, versus months or years.
When you think about technology as the core competency of an InsurTech startup that’s taking an MGA route, it’s important to note that they are developing certain aspects of their own technological infrastructure as a competitive advantage.
Focus for 2023
What would you recommend for companies as they focus on their planning for 2023?
The most important thing to focus on is customers’ needs. I know it’s a simple answer, but consumer demand and behavior is what we’ve found to be the most compelling reason behind innovation. In addition to that, we also found that the leadership and the culture of the company are very important. Having the type of culture that fosters and enables innovation is crucial.
I think culture is at the root of it. Insurance companies typically have a certain culture with respect to risk that is very different than the risk culture for technology companies. The risk culture of technology companies is based on the fact that innovation doesn’t come from avoiding mistakes. My hope is that over time, as insurance companies become technology companies, that their approach to execution risk is such that they tolerate greater levels of experimentation and greater levels of investment in uncertain return, in order to create the same change that’s needed.
I would add to that, “Have a strategy, guys.” A strategy will give you focus, and help you prioritize and execute on that strategy. Don’t let things sideline you from that execution, because it’s all about execution. Strategy is only as good as the execution.
And, be curious. Change is constantly happening around us, you have to be flexible within that execution to leverage new types of technologies or to adapt to what’s happening in the market.
If focusing on the customer is key and creating a culture that meets customer needs is vital, then it pays to learn more about what insurance customers are seeking. Be sure to sign up for our December 15 webinar, Creating Customer Value, Security, and Loyalty in Times of Change by Rethinking Insurance. To view the complete conversation of today’s webinar, including Edin’s overview of AM Best’s Innovation Rating, be sure to watch Insurance Transformation: Operationally and Strategically, Where are We?