The End of Insurance as We Know It

by Rob Galbraith

  Brokers

  Often lumped in with agents, brokers are less likely to be disintermediated by technology because they specialize in more complex (usually commercial) risks. Nevertheless, brokers have opportunities to benefit from technology to streamline their efforts and more fully concentrate on their specialities. Brokers help clients provide a strong foundation for success including more than just placing insurance, but also loss control and risk management. Similar to agents, brokers have opportunities to leverage technology in the following realms:

  •lead generation and prospecting

  •assessing client needs

  •designing risk management programs

  •providing high-touch services, in-depth analysis and expert advice

  •negotiating renewals to ensure continuous coverage at the optimal rates

  •assisting clients in managing their exposures holistically

  Call centers and back office

  Over the last two decades direct writers have relied quite heavily on call centers as a major channel through which they interact with customers, with a fair degree of success based on their gains in market. Increasingly, agent-based carriers are also leveraging large call centers to perform a variety of tasks that supplement their agents. In addition to having their own call center employees, many large carriers also rely on outsourcing firms to handle a portion of their call volume. Typically calls and back office tasks that are outsourced do not require a licensed agent, but outsourcing firms have become more diverse and sophisticated over the years and often can handle licensed work as well if carriers wish to leverage this capability.

  Due to the high volume of transactions that are handled by call centers, any technologies that make call center employees more efficient, even marginally, have meaningful results that translate to the top and bottom line. Shaving off a few seconds per transaction, multiplied by hundreds of transactions per week per employees times thousands of call center employees, easily results in millions of dollars in savings. In addition to reducing average handle time, helping customers to take care of business in a “touch it once” or “one and done” fashion is equally important. Reducing average handle time per call is meaningless if the result is that it takes three calls to complete the customer’s request.

  Finally, any technology that helps call center employees have a robust conversation with customers is also valuable. In theory, consumers should have the same quality of conversation with a call center that they do when they visit an agent’s office. In reality, this is exceedingly challenging. The calls are from all over the country on any number of issues with customers they’ve never spoken to before. Generally, except in the cases of video telephony, call center employees cannot see the customer to read their non-verbal cues in the way that is possible in the cozy confines of an agent’s office. Additionally, call center employees are almost guaranteed to be using a less-than-perfect mishmash of systems and technologies and continually flipping between open windows on their desktop, all while being asked to weave together a seamless and personable conversation with the customer. If that isn’t enough of a challenge, for those handling inbound calls they can often get one call right after another, so call center employees are often working on multiple accounts at once. The best analogy is to sports announcers who are describing the action in real-time while attempting to converse with the color commentators while also simultaneously listening to the producers in their headset and seeing the next promo ad on screen to read when there is a lull in the game or match.

  Quoting and the pricing process

  As stated previously, insurance today tends to be a “set it and forget it” product for consumers, particularly in personal lines. It stands to reason that the less time needed to obtain a quote from one or more carriers, the better. In the past, insurance was considered a “major purchase.” This involved making an appointment to go visit an agent’s office and spend at least an hour reviewing coverage options, answering application questions and being presented with a quote (often for just a single carrier) was considered a necessarily evil. While insurance is still just as needed as ever, time is the most precious commodity that people value today and the thought of spending hours obtaining quotes for insurance rather than getting one in 5 minutes - or even less than 60 seconds - is rapidly becoming the new expectation from consumers. Additionally, consumers often delaying their insurance purchases until right before the period of time coverage is needed: for instance, at the auto dealer right before driving the new car they purchased off the lot.

  Carriers have responded accordingly by generally reducing the length of their application. In some cases, the questions were deemed to not hold enough value to keep on the application but more often, the information that was previously requested can now be obtained through third-party data providers. Several large data providers have built sophisticated enterprises for gathering and packaging data for insurance carriers, reinsurers, agents and brokers to easily consume and utilize. A benefit of leveraging third-party data is that it is often considered more reliable than data that is directly provided by the agent or consumer on the application. For example, how many people truly know the square footage of their house, backing out their garage and including their basement if finished? For auto insurance, virtually all of the relevant vehicle characteristics used in rating and underwriting can be found from the Vehicle Identification Number (VIN). There are also variables such as insurance score that are modeled based on underlying consumer transactional data, modeled and sold by third-party providers which are highly predictive of insurance losses. When carriers are able to obtain this type of information that is both highly predictive of losses and does not require asking on the application, it is exceedingly valuable.

  Binding coverage (issuing the policy)

  Not only do consumers expect speed when requesting an insurance quote, they also expect coverage to be bound quickly as well. In the past, there was often a lag that occurred between quoting a policy and binding coverage: sometimes a policy request needed to be reviewed by an underwriter to ensure it met the carrier’s guidelines for acceptability or qualified for a particular discount or preferred rating plan. To shorten the time between quoting and binding, carriers rely on automated rules to underwrite applications in real-time and flag accounts that need to be reviewed further during the application flow before a price quote and decision to bind coverage.

  Binding coverage also means that a record of the contract between the carrier and insured must be created and paperwork related to policy issuance must be sent from the carrier to their new customer, including legally required documents such as the declarations page, proof of insurance, and the policy contract itself. While some documentation is required by insurance regulation to be sent through regular mail, sometimes even certified mail, some of it may be delivered electronically. Understanding which documents must be printed and sent through regular mail in which jurisdictions and which others may be sent electronically (which is the cheaper option) is important for carriers. Similar to the cost of call center transactions and handle times, a small reduction in the cost of paperwork can add up quickly due to the massive amount of documents involved in the insurance product.

  Underwriting

  For people who not familiar with the function of underwriting, it can be a bit hard to describe. Many people outside of the insurance industry quickly grasp the broad functions of areas such as marketing, sales and distribution, product management, pricing, claims, IT, finance and accounting, HR, legal and compliance, etc. The term underwriting dates back to the origins of the insurance industry in the coffeehouse known as Lloyd’s of London where merchants sought insurance for the cargo and ships crossing trade routes by sea. Those financiers who were willing to insure the risk signed their name on a line, binding them to underwrite the coverage for a particular vessel.

  As someone who has spent the majority of my career as an underwriter, the best characterization I give to peop
le about my role is to quote the old line from BASF, a well-known chemical company: “we don’t make the products you buy, we make the products you buy better.” Perhaps best known for risk selection, underwriters determine which exposures are acceptable for the carrier to insure and which are unacceptable. In addition, underwriters often are asked to apply the rating plan that is developed by actuaries and pricing analysts and determine the rules for what criteria is needed to qualify for a discount or surcharge. Underwriters are responsible for rate integrity to ensure that there is no premium leakage and must devise programs to ensure that the rates contemplated in the rating plan devised by the pricing team are applied as fully as possible.

  Underwriters also review individual risks, both in personal lines and more often in commercial lines. These line underwriters often review risks at new business to ensure that they are comfortable with the financial risk that the carrier is being asked to take on in the form of additional exposure represented by the application. Underwriters also review policies prior to renewal to ensure that they are still within the company’s appetite; if not, an underwriter can choose to modify the policy by changing the terms and conditions (such as removing contract endorsements, raising deductibles, lowering coverage limits and more) or simply to non-renew the policy. Non-renewing a policy means the carrier refuses to continuing insuring the risk beyond the end of the current policy term, forcing the insured to seek coverage elsewhere.

  Much of underwriting in the past was based on conventional wisdom honed over years of experience. These underwriting rules, whether rigorously documented and applied or used as a guiding principle or rule of thumb, shape a carrier’s appetite for risk - and often their personality and culture as an organization. Underwriting interacts with agents, brokers, actuaries, product managers, claims, legal and compliance, and many more areas and historically has been the backbone or nerve center of many carriers. Due to the breadth of their work and the need to blend both quantitative and qualitative data together from both internal and external sources, honing underwriting rules and practices is a big challenge. There is always room for refinement to improve product growth and retention, profitability, or both.

  Claims

  The promise of insurance - the entire reason people have insurance, aside from meeting legal or other requirements - is delivered by claims adjusters. Handling claims is a complex process, and some companies receive tens of thousands of claims a day. The claims process starts even before a claim is reported as loss reserves include an estimate of claims that are incurred but not reported (IBNR.) IBNR is intended to reflect that claims that will ultimately be paid by the carrier are continually occurring and can be estimated with some accuracy even before the insured notifies the carrier through the First Notice of Loss (FNOL) process.

  Once a carrier is notified that a claim has been reported, it needs to go through the claims adjustment process which includes an investigation of the amount of the damage caused based on a claims estimate that is generated as well as applying the facts of the loss to the specific contract language to determine if the loss is a covered claim. If the claim is determined to not be covered, it will be denied. If the claims is covered, then the deductible and policy limits will be applied to the estimate and an initial payout will be made (if the remaining amount exceeds the deductible and falls below the limit; otherwise the claims will be a zero-paid claim meaning that it was covered by after applying the policy terms, the result was zero dollars owed by the carrier.)

  Claims handling is governed by both legal statutes and regulatory requirements, which can be more or less onerous depending on the jurisdiction. Due to the high volume of claims they receive, carriers generally become fairly adept at handling the majority of claims. Nevertheless, some claims are inherently more complex than others, particularly those with a long tail that involved liability exposures, serious injuries requiring prolonged medical care and those involving lawsuits.

  Similar to agents, brokers, and call centers, because of the volumes involved and the cost of loss adjustment expenses (LAE) associated with handling claims, any technology that can make claims adjusters at all levels of experience at every step in the process more efficient is valuable. Handling requests from insureds and claimants is costly and time-consuming. Technology that can both help improve the claims process itself and speed up the cycle time from when a claim is reported to when it is resolved helps to save expenses and has the potential to reduce losses from fraud as well. In addition, the claims area is responsible for salvage and subrogation that can return monies to the enterprise that help offset losses that can benefit from technology to boost recoveries.

  Compliance and supporting functions

  In addition to the major business functions of an insurance organization, there are a number of support functions that also play a vital role. The legal department is involved in a wide variety of areas from interpreting and drafting contract language to claims litigation to interpreting new and pending legislation and regulations to coordinating with outside counsel. Compliance is another department that ensures that all legal and regulatory requirements are met, such as licensing for agents and claims adjusters to rating plans and underwriting guidelines to policy forms and mandatory coverage offerings. Finance and accounting are responsible for managing the inflow of direct and net written premium and tracking earned premium, unearned premium, and loss reserves. They handle the investment of reserves to earn a rate of return while insuring capital preservation and liquidity to match the duration of when claims are expected to be paid, and they also are involved in external financial reporting to statutory authorities and rating agencies as well as internal management reports.

  All of these support functions are essential but not directly responsible for revenue growth or operational profitability (known as an underwriting gain.) Leveraging technology to allow these important supporting functions to be highly successful while holding the line on expenses can help achieve an optimal balance and allow these areas to boost growth. By contrast, simply cutting expenses without investing resources in them may be an attractive short-term strategy but often leads to long-term complications that result in thorny problems. For instance, investing in an upgraded HR system may seem like a large expense item with no corresponding revenue benefit, but a good system will allow employees and managers to work more smoothly and effectively, saving expenses in other parts of the organization that are directly responsible for revenue growth. Easing administrative burdens on managing work schedules, leave balances and approvals, access to benefits information and training schedules can prove to streamline some back office work internal to the organization that allows people to focus more on their role and less spinning in circles trying to work with an outdated system.

  Information technology (IT)

  Virtually all traditional players today in the insurance ecosystem rise or fall on the strength of their IT systems. The P&C insurance industry were early adopters of technology in the 1960s and 1970s when they embraced batch overnight processing. Today, the accelerating pace of technological change has caused headaches for almost everyone in the industry as they struggle to maintain legacy systems while integrating newer technologies and pursue a strategy of digital transformation. Many players today have layers upon layers of complex systems tied together through loose connections that were “hot fix” solutions to enable speed-to-market but have never been upgraded to more stable formulations. There are several coats of paint on top of the aging walls of core systems, and while these systems have held up, they are not flexible and limit the ability to move quickly in today’s rapidly changing market.

  IT departments have to find the right balance between operating and maintenance of current core systems and integrating new technologies as well as overseeing systems modernization projects that are enablers of growth for organizations. Not only does this dual mandate drive up costs, but attracting and retaining the right mix of talent is a huge challenge in an insur
ance IT department. Add to that the perception that many young people have today of the insurance industry being a slow and dull place to work relative to other opportunities and it becomes a mission critical task for CEOs, CIOs and CTOs to attract and retain talent.

  Many traditional players are expanding their thinking to go beyond doing everything in house and behind their firewall, but standard ways of working in the tech world are relatively new concepts in the insurance industry. For insurtechs looking to partner with traditional players to leverage APIs, platforms, and other enablers to enhance product offerings and streamline processes, it can be a high hurdle to overcome all of the built-in barriers within an IT department, not to mention the lengthy contracting and procurement process that is common with most organizations in the insurance space.

  A NEW DAY

  Innovation historically has been of the “adjacent possible” variety that is incremental - added features to existing products, enhancements to the agent or customer portal, choice to select electronic delivery of documents rather than hard copies through the mail, and so on. Revolutionary changes - transitioning from millions of paper files to computer systems, the rise of call centers, the ability to quote coverage over the Internet - are few and far between.

  Organizations seeking to compete today need to quickly get comfortable with the accelerating pace of change and find ways to speed up their ability to operate in a world that is moving ever faster. Insurtech startups are rising up from all over the world offering new products, services and business models that are radically different than anything currently in the insurance market. Armed with loads of investor cash and unconstrained by outdated IT systems and ways of thinking, these new entrants are hungry for growth and aggressively pursuing a customer base. While the vast majority will no doubt flame out, others will survive and find a comfortable niche in the wide insurance universe.