In another Insurance Nerds article, Lamparelli discusses the potential for blockchain to reduce a large part of the roughly 10% that fraud adds to insurance losses annually or $34 billion.[194] Blockchain has the potential to simplify the need for authentication and provenance. Put simply, how can an insurer know that the item being insured, such as a diamond ring for example, is in fact owned by the person seeking to insure it and that it matches the description given with regards to cut, clarity, color and carat weight (known as the 4Cs) to properly value it? Everledger is a firm based on London that is tackling the estimated $2 billion problem with document tampering and fraud related to diamonds. Everledger has establish relationships with major certificate houses in the US, Israel, India and Antwerp that grade and certify diamonds for the market, and they use this data to create a “digital DNA” for each diamond that includes not just the 4Cs but also 14 metadata reference points and a unique identification code for each stone. This information allows Everledger to know who owns which diamond and where it is, even if sold on a platform such as Amazon or eBay.[195] Everledger works with insurance companies when diamonds are stolen; the incentive for insurers to cooperate is to reduce the potential for fraud and recoup costs associated with paying claims (loss adjustment expenses).
Another example of a blockchain technology use case is in the settlement of catastrophe bonds, which are a form of Insurance-Linked Securities (ILS). ILS financial instruments pay investors a slightly higher yield than bonds of similar duration and liquidity characteristics in exchange for the risk that they could lose their investment if the bond payout for catastrophes is triggered to provide capital to the cedant for use in paying claims. In 2017, Solidum issued the first private cat bond notes for $15 million that were digitized on a private blockchain using its ILSBlockchain.[196] The bond was renewed in 2018 and listed on The International Stock Exchange.
TRUST ME
Insurance, at its core, is about trust. Blockchain holds the promise to digitize trust, removing the need in today’s economy to rely so heavily on third-party verification which adds overhead costs and complexity. However, for all of the potential blockchain holds, there have been almost as many examples highlighting the perils of blockchain. These spectacular failures have usually been associated with cryptocurrencies which have been early adopters of the technology but have shown the ability to be manipulated by bad actors. That has not stopped many financial service firms from exploring the rich possibilities for blockchain, but many executives are taking a cautious wait-and-see approach,[197] which has limited the potential for disruption to date. According to Cooper Cohen, an International Underwriter with CNA Financial, most insurers see the greatest opportunity for blockchain in microinsurance, peer-to-peer insurance, asset tracking and authentication, smart contracts and the exchange of sensitive information and documents. Cohen believes that commercial insurers will see the most potential due to the more dynamic nature of their products and complexity of partner relationships with insureds and others.
Blockchain, like similar technologies that have network effects such as social media platforms, provides exponentially greater benefits as more parties use one particular platform. If a single blockchain were to be used for all insurance-related transactions by all parties, that would be a very powerful technology indeed. By contrast, a proliferation of blockchains that are only used for some applications by a handful of parties is far less valuable. The promise of an industry-wide standard is tantalizing, yet likely to be highly elusive. Consortiums are much more likely to be successful in their role as honest brokers that can help overcome the thorny problems of standardization. There have been many other technological standards and protocols negotiated and agreed upon over the course of the past three decades that has led to the rise of the digital economy. Whether consortiums focus on a single technological implementation of a massive blockchain or, more likely in my view, facilitate a “blockchain of blockchains” that allow proprietary implementations to “talk” to one another in some manner remains to be seen.
It is unclear how exactly the technology landscape will play out, but there is far less doubt that blockchain will be an increasingly critical technological solution in the insurance space. Willis Towers Watson published an article at the beginning of 2018 acknowledging that technologies such as AI and IoT have clearer short-term applications in insurance, but they state that the potential uses for blockchain cannot be ignored.[198] Which solution(s) will ultimately emerge as the leaders in this space remains murky as the use of blockchain in the insurance world is still very much in its infancy (similar to use cases in other industries.) What is clear is that the competition promises to be fierce as the potential rewards for being the single blockchain platform or “glue” that holds the entire ecosystem of blockchains together are enormous. At maturity, blockchain is likely to fade into the background the same way that key enabling Internet protocols like HTTP and TCP/IP. Most people outside of a few technical experts even know they are using enabling Internet technologies, much less how they work. The key insight is: people do not have to know in order to use and trust the Internet. The same potential exists for the adoption of blockchain in the insurance ecosystem.
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CHAPTER 20 - SEND IN THE ROBOTS: PUSHING PAPER IN THE MODERN ERA
THE PAPER CHASE
So is insurance a product or a service? Again, it has elements of both but what is undoubtedly true is that the tangible “product” part of insurance is paperwork. The insurance contract is a key document and the core product as a legally binding agreement between the insured and insurer. Insurance comes with a lot of other important documents as well including declarations pages, renewal packets, inspection reports, substantiation of value, proof of insurance interest and more. While electronic delivery has become much more popular, some documents are still legally required to be sent via postal mail. All of this paperwork must be transmitted between two or more parties and processed in some form of fashion. Insurance agents, brokers carriers and third-party administrators (TPAs) and other servicing firms have a legacy of reams of paper files. Even documents that are classified as “digital” may be simply a PDF form that someone had to enter manually and may need to be transcribed manually into a system.
In my view, there are four main reasons why inefficient paper-based processes still exist in the P&C insurance industry:
1.The cost to automate the process is too great (or perceived to be)
2.The people involved in the process do not have or have access to the technical skills or knowledge to automate or streamline it
3.The resources needed to automate or streamline the process are working on higher priority processes
4.A lack of competitive pressure to change (“that’s the way we’ve always done it”)
In prioritizing efforts at streamlining processes through automation, insurance agents and carriers have worked hard to reduce the time needed for prospects to receive a quote. This is where competitive pressures drive behavior - if a company’s quoting process is inefficient and cumbersome, consumers will go elsewhere. For most product lines in insurance, there are enough competitors to choose from that consumers can find someone with a better quote experience. These efforts at streamlining the quote process have occurred through a combination of digital user interfaces (UIs), incorporation of third-party data, API calls and other proprietary methods such as screen scraping, macros, and offshore resources that are the equivalent of duct tape and bailing wire. In other words, even user-friendly digital experiences often have some inefficient steps behind the scenes that are a challenge for agents and carriers even if the consumer does not see those back end “behind the curtain” steps in the quote process.
While the quote process has improved during the course of the digital era for consumers, servicing transactions can often be another story for existing policyholders. From a customer perspective, many people have horror stories of multiple transfers, call backs and hours o
n the phone or in an agent’s office attempting to accomplish some task related to their policy. These frustrating experiences seem to consumers as if the left hand does not know what the right hand is doing - and often times they are right. Much of the inefficiency in processes are due to the fact that traditional incumbents have underinvested in systems modernization projects to replace legacy systems.
A LEGACY UNLIKE ANY OTHER
These legacy systems can be improved upon but it is a challenge: many of them are written in obsolete programming languages that are no longer taught or actively used by IT professionals, are poorly documented and are not modularized in the way that modern systems are. Often times programmers must dig through the actual code to understand why a legacy system is behaving in a certain way. The lack of modules makes it much harder to “switch out” one component for a modified version and hard to fully understand the downstream impacts of a change that is made upstream in the legacy system. Legacy systems are a blessing and a curse. They often work far beyond what was originally anticipated when they were built, they house an enormous trove of valuable data and keep the trains running year after year. Legacy systems also make it expensive to modernize the product offering, interfaces, self-servicing digital capabilities, maintain compliance and more.
Since legacy systems are such a limitation on innovation, why not undertake a systems modernization project? Systems modernization projects are what I describe as the “green whales” of the industry. These efforts often run far over budget and are massively delayed and inherently have missed requirements: in short, they are a nightmare. Many of the reasons for this are the massive size, scale, scope and opacity of the legacy system that is being replaced. It is virtually impossible to properly size the IT effort and ensure all of the necessary requirements are documented. Another factor: the aging of the workforce and retirement of IT professionals who built and maintained those legacy systems for decades. Every time one of these workers leaves, an enormous amount of tacit knowledge leaves with them - and it is virtually impossible to capture all of that knowledge in a systematic way.
In addition to the massive size of the undertaking for systems modernization effort, the payoff for these “green whales” are over 5-10 years, not a traditional 3-year ROI based on a CBA. When evaluating opportunities and tradeoffs, there are often other IT efforts that can yield higher returns in a shorter period of time. Kicking the can down the road on systems modernization efforts, however, becomes increasingly more painful. Some recent technological breakthroughs such as cloud computing have given rise to companies like Guidewire and Duck Creek that more and more carriers are looking to leverage to make the leap into the 21st century. These systems are much more scalable and modular and are essentially already built: the key challenge is to transition from the legacy platform to the new one, a migration that is large and complex.
TRUST THE SYSTEM?
As mentioned previously, there are a number of key systems that power the insurance ecosystem. In general, some of the major systems involved include:
•Agency management system
•Customer Relationship Management (CRM) System
•Policy administration system
•Claims system
•Document management system
•Billing system
•Financial accounting system
•Human resources system
Specific implementations vary widely depending on the role that a firm pays in the insurance ecosystem. Some of these functions may be incorporated together in a system; others may be part of modules that work together as part of a larger system. Some systems are proprietary, others are purchased or developed by third parties. Some systems are highly customized while others are “off the shelf” but almost all of them are old, if not ancient.
Regardless of which systems are used and the specific characteristics, it is perhaps the understatement of the century to say that these systems often do not integrate well. Many insurtech startups looking to partner with traditional carriers have looked to find fruitful territory in helping to bring together disparate systems that do not talk to each other effectively. Providing smoother integration between large systems that do not work well together can help to reduce some of the data entry work often classified as paper pushing. Gains in making these back office processes more efficient include a reduction in costs, better speed to market and increased customer satisfaction. Some startups may have only brought gains on the margin, but given how behind traditional carriers have been, the investments may still make economic sense for both parties.
Another challenge is pulling data out of these systems and synthesizing it in a way that analysts can use it to evaluate the business and make recommendations for data-driven decisions. One of the limitations for traditional analysts as well as data scientists leveraging AI and advanced algorithms is the lack of access to all of the data that could be examined. Data may only be captured in the form of an image, even if that image is of a form with fielded data that is ripe to be analyzed. Data that can be extracted may not be well understood and not categorized in a data dictionary or have robust metadata documented to accompany it. Many legacy systems rely on arcane codes and other devices that were used in the past to limit the storage requirements for data but make interpretation of it difficult to people who do not have intimate knowledge of the system. Any technology and/or service that can “unlock” data that is being captured in a legacy system but not available for analysis today is valuable, especially by leveraging powerful new processors, cloud computing and AI algorithms to better make sense of Big Data and identify previously hidden patterns and trends.
Getting systems owned by disparate parties that need to work together, such as agents and carriers, is another huge challenge. No party in the insurance ecosystem works alone in a vacuum: every player relies on many other external parties to execute on their business strategy and meet the needs of their clients. With a plethora of new players entering the insurance space, the ability to have systems talk with one another through APIs and other means is crucial for competitiveness. The days of brute force methods of integration between systems owners by two or more different entities needs to quickly come to an end as the competitive environment heats up. Agility, flexibility, scalability and speed to market have not been synonymous with the P&C insurance industry in the past, but they are table stakes in many other industries. It is hard to imagine that insurance will remain immune from these competitive pressures much longer.
Complexity and reliance on creaky legacy systems cause major headaches and make innovation and progress a particular challenge. Insurance firms can only move as fast as their core systems will allow. Along with bureaucracy and complacency, legacy systems make the “deathly hallows of insurance” where disruptive ideas go to die.
AUTOMATING HOT FIXES AND LIFE HACKS
What can be done to overcome system challenges? As in many other realms, knowing that these challenges exist, formally acknowledging that fact and having the leadership courage to fix them is half the battle. There are four major components that can help your organization make progress.
•Process engineering
•Customer journey mapping
•Surveying the technology landscape
•Managing efforts using agile methods
Process engineering
Process engineering has been around for a long time but became big in the 1980s in manufacturing settings and has expanded to a wide variety of industries today. In a nutshell, the purpose of process engineering is to document and truly understand various processes to the extent possible, identifying critical failure points or inefficiencies along the way. Process engineering can be used for a wide variety of settings but can be exceeding effective when looking for efficiencies in back office processes. The role of a process engineer will vary at each company.[199] No matter their exact duties, some key questions process engineers seek answers for when examining processes include:
•What are the critical failure points within this process?
•How would people be alerted if the process is broken or not working properly?
•Where is human intervention required?
•Where do you have the tech equivalent of hot glue and pipe cleaners?
•How many transactions run through this potential failure point?
•How much would it cost if this failure point broke for 1 week? 1 month? 3 months? More?
Customer journey mapping
In addition to process engineering, more recently the idea of a customer journey has become popular. Creating a customer journey map can help companies closely examine how their processes work from the perspective of that outside customer who is seeking to interact with the company. The more touchpoints your customer has along a certain process, the more complex that process is and the greater the need for a customer journey map. Some maps reflect a “cradle to grave” cycle that spans the entire arc of a particular customer engagement. Other maps focus in on a specific engagement point to gain a deep understanding of that single touchpoint. One specific touchpoint that many companies has been examining is the “out-of-the-box” touchpoint when the customer has the very first interaction with a company’s product or service after making a purchase.[200] Companies strive to make this a positive emotional experience for customers to improve satisfaction and turn them into a repeat customer and brand advocate.
According to Adam Richardson in his Harvard Business Review article titled “Using Customer Journey Maps to Improve Customer Experience”, customer journey maps go well beyond mapping out process steps on a timeline. Good maps also consider the following:
The End of Insurance as We Know It Page 22
