Innovation + Regulation = Opportunities to Shape the Future of Insurance

Who would have thought the combination of innovation and regulation would join together to accelerate the future of insurance!  These two words – innovation and regulation — which seem contradictory, are actually working together to ensure that the industry is relevant in a new digital era.  We are seeing this in action, with AM Best publishing its draft “Scoring and Assessing Innovation Methodology and Criteria” proposal, and with the first state – Kentucky – implementing the “sandbox” concept that has been discussed by the NAIC the last couple of years.

These two topics along with InsurTech and technologies like Cloud, AI, machine learning, and more, were front and center at the recent NAIC Insurance Summit in Kansas City, KS, which was attended by over 1,200 state regulators and insurance companies. This made for some exceptionally fascinating conversations!

Of particular interest was the Innovation Keynote, How AI, ML and Other Innovative Technologies are Disrupting the Insurance Industry, by business futurist Patrick Schwerdtfeger. His presentation really drove the point home to the audience.  He talked about what is happening across multiple industries with these and other technologies, and highlighted how these are influencing rapid changes in insurance customers’ behaviors, risk needs and expectations, which, in turn, are requiring insurance companies to rapidly change.  As we have highlighted in our Future Trends reports, the accelerating pace of change and introduction of new technologies, business models, economies (sharing, Gig) have intensified the demands on leaders to be responsive.  Change is no longer following a predictable linear path. Its course is now on an exponential growth curve — accelerating and intensifying change and disruption.  As Patrick shared, the exponential effect can impact growth, taking an organization from 1% to over 100% additional revenue in 6 ½ years or less.

The Exponential Effect Impact

This exponential effect is disrupting all industries, including insurance. This is reflected in 2018 study by Innosight on the turnover of the S&P 500. The average company tenure on the list has been rapidly declining, from 33 years in 1965 to an estimated 12 years by 2027 due to market changes and disruption, including new technologies. The study also suggests that 50% of the companies will be replaced in the next 10 years if the churn rate holds. [i]

What could this mean for insurance leaders, particularly since most are not publicly traded or on the S&P? It means that change and disruption will shake up the leaders in our industry whether we like it or not … and at an accelerating rate. As the research notes “a company cannot endure in the long-term without reinventing itself.”

And this is where innovation and regulation coming together is necessary to help reinvent our industry.

Opportunities for Insurance to Reinvent Itself

The first opportunity comes with the proposed scoring on an insurance company’s innovativeness within their overall rating by AM Best, who introduced and opened their draft methodology and criteria for comments from mid-March through mid-May.  This additional score, which will shape insurers’ ratings, recognizes the significant change and disruption within the industry, from new technologies to new customer expectations, and the shifting market boundaries that demand investment in innovation – and their future.

The innovation scoring and assessment includes two components: innovation input score and innovation output score, both of which have sub-components. The innovation input subcomponents include leadership, culture, resources (allocation, strategy, management), and processes and structure for innovation.  Innovation output subcomponents include results and level of transformation.

The report states, “the sub-components capture both a company’s innovation capacity and its innovation ability.”

In reading the details for each, what struck me was how the first component reflects what we define in our 2019 Strategic Priorities Report as the “Knowing – Doing Gap.”[ii] This links insurers’ awareness or knowing of the internal and external forces of change with the reality of how they are responding, both in terms of planning as well as doing. Insurers’ responses to these forces fall into three categories:  modernize the existing business, optimize the existing business, and create a new business for tomorrow. These responses align to the innovation output score because insurers must demonstrate a well-balanced mix of operational and growth-oriented innovation, plus the ability to respond to both internal and external pressures, and also the dexterity to balance short and long-term initiatives.

In our assessment of this balance in the Strategic Priorities Report, we classified insurers based on their response of knowing, planning and doing as leaders, followers and laggards. Interestingly, we found that Leaders are:

  • 42% ahead of Laggards and Followers in embracing partnerships, ecosystems and InsurTech
  • 39% ahead of Laggards in the API and Platform economy
  • 37% ahead of Laggards in creating a new business for the future
  • 24% ahead of Laggards and Followers with extensive distribution strategies
  • 20-30% ahead of Laggards and Followers with customer digital engagement capabilities

Leaders are moving at a pace that is leaving followers and laggards behind – placing them at risk of being able to respond – particularly given the exponential effect of change.

Where is your organization?

The second opportunity comes with the “sandbox” concept proposed and discussed at the NAIC over the last two years. It would help lower the barriers to test new ideas, and address how new, innovative concepts can be quickly developed and launched in an environment that is strictly regulated. In late May, Kentucky became the first state to pass a bill to create a “sandbox” for the development of creative risk management solutions.

“Implementation of the regulatory sandbox,” said Gail Russell, Secretary of the Kentucky Public Protection Cabinet, “will establish the Commonwealth of Kentucky as a safe space for entrepreneurs to test and launch insurance-related innovations and programs not yet contemplated by the Insurance Code.”[iii]

The launch of the first sandbox offers one of the most potentially impactful shifts made by regulators to encourage insurance innovation. This is a potential game changer in the industry. Those that embrace new ideas and innovation to build new business models, products and services by rapidly and cost-effectively launching minimal viable products (MVP)in weeks, rather than months or years and will be able to capture the growth opportunities unfolding in the market.

Regulation Paradigm Shifts Open the Door to Two-Speed Strategy

With both AM Best and the NAIC recognizing the need to support innovation, insurers need to be prepared to adapt and respond. They need to ask themselves, “What will it take to move from knowing to doing – and do it rapidly?”How do we modernize and optimize the existing business while we create a new business model for the future?”  These questions should be asked out of the realization of the urgency to create the future.

Successful management of the existing business and reinvention of the future business requires making a bet—one that can overcome the drag of the old way of doing things.  Making that bet requires leadership, confidence and expertise.  At Majesco, we increasingly see this from the growing number of InsurTech and incumbent insurers with whom we are actively working to modernize, optimize and create new businesses – accelerating their path for innovation and future market leadership.

How are we able to do this?  Majesco recognized the future was coming quickly and placed itself among the early leaders in embracing the “insurance platform” concept. The insurance platform model replaces the old paradigm of the integrated suite of core insurance systems implemented in an on-premise environment – often over years at the cost of tens of millions or more.  Our CloudInsurer® platform, which includes our P&C and L&A core systems, is content-ready and architected for software-as-a-service (SaaS) cloud-enabled platform – one of the first in the industry and with 54 customers to-date.  And our Digital1st Insurance™ platform comprises a range of real-time, insurance specific capabilities in a microservices-based, cloud-native platform, which is pre-integrated with our core and other related offerings.

Together, these solutions support what we describe as a “Two Speed Strategy”:  Speed of Operations for the traditional business model with mature systems and processes needing incremental operational improvements through modernization and optimization; and Speed of Innovation for agile, fast and MVP models to explore, test and learn new business opportunities – many in 12 weeks or less – by creating the new business for the future. This strategy embraces both the transformation of existing insurance operations and the launching of new business models or products – critical elements to be considered in the new innovation scoring.

As insurers begin to consider the implications of these regulatory paradigm shifts, we would encourage them to think of new benchmarks as opportunities to modernize and optimize their existing business, while enabling them to experiment and innovate to build their future of insurance at speed and scale.

Getting out ahead of the curve is more important than ever. Leadership, responsiveness and speed matter.

[i] Anthony, Scott D., Viguerie, S. Patrick, Schwartz, Evan I., Van Landeghem, John, 2018 Corporate Longevity Forecast: Creative Destruction is Accelerating, pp.2-3, Innosight, February 2018

[ii] Garth, Denise, Westlake, Glenn, Strategic Priorities for 2019: Securing a Spot in the Future of Insurance, January 8, 2019, Majesco

[iii] The Lane Report, Kentucky creates insurance innovation ‘sandbox,’ May 20, 2019

About the author

Author Denise Garth

Denise Garth is Chief Strategy Officer responsible for leading marketing, industry relations and innovation in support of Majesco’s client centric strategy, working closely with Majesco customers, partners and the industry.