P/C Insurers Blocking Their Own Roads to Innovation

Property/casualty insurers face a number of external obstacles on the road to delivering more innovative products and reimagining their operations, but the ones that really get in the way come from within, industry leaders say.

Executive Summary

Insurer traits of risk aversion and complacency are the biggest obstacles to innovation in the industry, leaders say.

“We, ourselves, are the biggest obstacle,” said Manny Rios, former president and CEO of American Modern Insurance Group.

Rios was one of 16 industry leaders who responded to questions about innovation in the insurance industry posed by Carrier Management earlier this year. While the usual suspects—regulation and legacy systems—came up among the emailed responses to the question “What is the biggest obstacle to innovation within the insurance industry?” Rios summed up the most popular answer.

Rios, who was CEO of American Modern at the time of this interview, left the company in August.

“Too often in the insurance industry we say something can’t or won’t be done,” he said. “When I went to an online direct-to-consumer startup personal lines insurer 20 years ago, people told me I was crazy—that no one would ever buy insurance on the Web,” said Rios, who started his career at Allstate in 1985, went on to become chief underwriting officer of Homesite Insurance in 1999 and CUO of United Services Auto Association in 2007, before joining specialty insurer American Modern in 2011.

Mark Watson, president and CEO of another specialty insurer, Argo Group, agrees. “Insurers are a fickle bunch. We are inherently risk averse, and for good reason. But to be truly innovative involves taking risk. There’s that traditional threshold of what is and what isn’t acceptable, but regardless of an insurer’s risk appetite, we need to embrace a level of uncertainty we may not be terribly comfortable with,” Watson said.

“Now more than ever, we need to challenge the status quo with an open and inquisitive mind. We must start rethinking everything to respond to change effectively for our customers and ourselves,” he said.

Giving an external perspective, Anand Rao, a principal in the U.S. Advisory practice of PwC, said: “The biggest obstacle to innovation within the insurance industry is complacency and the mindset that insurance is a highly regulated industry with very little scope for innovation.” Citing results from PwC’s annual survey of CEOs across industries, Rao noted that survey results over the past few years consistently reveal that “the insurance industry is one of a handful of industries—in the same group as entertainment, media and technology—that is facing significant business model disruption.”

“Using regulation as an excuse for inaction will leave the door open for external players to disrupt the insurance industry,” he warned, referring to the fact that 88 percent of insurance CEOs surveyed by PwC for this year’s report (both P/C and life CEOs) said that changes in industry regulation will be somewhat or very disruptive to their businesses over the next five years. While insurance CEOs selected regulatory change as the most disruptive force, only 66 percent of respondents in other industries made a similar assessment. (See accompanying chart below.)

At XL Catlin, CEO Mike McGavick cited a problem beyond complacency and uncertainty. “We’re not fast enough,” he said. “We need to innovate faster to outpace the risks that our clients are facing or will be facing. Insurance has relied too long on hindsight to develop and price products. Change continues to pick up speed. Therefore, we can’t expect to make judgments on today’s risks based on long data sets—meaning the industry can’t afford to collect 10 years of data before providing a solution. Whole industries will come and go in that time frame.”

“While it‘s important to have a clear view of how innovation fits with the company‘s long-term strategy, it‘s equally important to break the work into smaller pieces so the company can see the value and recognize benefits in a shorter time frame.”

David Lightfoot, Guy Carpenter

David Lightfoot, managing director and head of GC Analytics-Americas at reinsurance broker Guy Carpenter, sees potential innovators biting off more than they can chew. “One potential obstacle is taking on expensive, longer-term projects that are outside a company’s comfort zone. While it’s important to have a clear view of how innovation fits with the company’s long-term strategy, in my view it’s equally important to break the work into smaller pieces so the company can see the value and recognize benefits in a shorter time frame while still working toward the longer goal,” he said.

Innovation Speed Bumps

Giving an overview of the glacial pace of innovation, Alan B. Colberg, president and CEO of Assurant, noted that “homeowners insurance has not evolved dramatically over the last 30 years.” In auto insurance, one of the biggest changes over the same time span was carriers selling direct to consumers, he said.

Like his counterparts at other specialty insurers, Colberg noted the insurance industry’s reputation for being conservative when it comes to innovation. That “is often appropriate as we balance risks, are highly regulated as an industry, and need to be compliant with applicable statutes and regulations. Sometimes this has affected the rate of change in our business,” he said, noting that the rate of change has quickened recently as insurance companies begin to compete with nontraditional competitors.

Regulatory obstacles from U.S. and international regulators are top of mind for Conan Ward, CEO of Hamilton USA, and John Lupica, vice chair of ACE Group.

“The regulatory system heavily favors existing products and players,” said Ward. “In the name of consumer protection, consumer choice is getting short shrift.

“If each state mandated the size, shape, type and color of cars or clothing sold in its state, what would we be wearing or driving right now?”

Lupica, who is also chair of North American Insurance at ACE, noted that insurers face a climate of increasing regulation both domestically and globally. “This climate has the potential to stifle innovation while adding unnecessary complexity and costs for insurers, with little benefit for policyholders,” he said.

“ACE is engaged at the state, federal and international levels on the subject of a global insurance capital standard. We support the U.S. insurance industry and U.S. state regulators in urging federal regulators, including the Treasury and the Federal Reserve, to resist changes to capital standards that would unnecessarily raise costs and hurt U.S. insurance buyers. (See related article, “International Capital Standards: A Risk Management Mirage,” by ACE Ltd. CRO Sean Ringsted and Patricia Henry, ACE’s executive vice president of global government affairs.)

Ward and Stanley Galanski, president and CEO of The Navigators Group, also see U.S. courts blocking the road to insurer innovation. “The biggest obstacles to innovation in the U.S. insurance industry are regulatory requirements and the historical willingness of courts to seek deep pockets to pay claims regardless of coverage,” Galanski said. While customers value simplification, “it is increasingly difficult to simply express a grant of insurance coverage,” Galanski said. “As a result, our policies have become more complex and legalistic rather than simplified.”

Ward added: “We, as an industry, are so focused on what and how to exclude coverage that we forget that a normal person has to read our actual policy. So, we have to ask ourselves whether we’re creating a greater problem than the one we’re solving.”

Moving Past Tradition

Mark Watson - cropped — Mark Watson, Argo Group

“To be truly innovative involves taking risk…Regardless of an insurer‘s risk appetite, we need to embrace a level of uncertainty we may not be terribly comfortable with.”

Mark Watson, Argo Group

Identifying another obstacle, Ward echoed Rios and Watson. “We tend to be hostages of our own traditions. Because we’ve always done something a certain way, we think it has to be that way forever,” Ward said. “Technology is meant to liberate us to think about problems that machines inherently can’t solve. If we spend all of our mental energies in the manufacture of today’s products, we’ll never think about new sources of risk and better ways of doing things.”

Reflecting on the power of technology to shake P/C insurers out of their traditional mindsets, John Wurzler, President of One Beacon Technology Insurance, said that the Internet and the smartphone “represent the paradigm shifts that will let the industry develop and implement groundbreaking ideas.”

“The foundation is now in place to launch fantastic tools for use by insureds, agents, brokers, loss prevention engineers and underwriters alike. Importantly, the mobile platform will enable faster communication and customer service across the board,” he said, noting that mobile applications “to enable almost instant requests for coverage” already exist.

“Imagine going to the car dealer to purchase a new truck for your company, and while there, you log on to your smartphone to input the motor vehicle ID and set your insurance parameters. You immediately see the price and bind the coverage, and finally view and print the proof of insurance. Or, similarly, you can immediately add a new computer server to your scheduled inventory of covered business equipment.

“The limitation of what comes from innovation is simply our own imagination,” Wurzler said.

John Wurzler, OneBeacon Technology

But moving from efficiency of product delivery to the actual development of new coverages—discretionary ones, in particular—Kevin Kelley, CEO of Ironshore, noted that slow reactions from the buyers of insurance can thwart carrier innovation efforts. “There is often a lag between the time a product is launched and the time when the coverage generates significant adoption to earn market share.” After it’s introduced, market buyers of an innovative product “tend to wait to see how the product evolves,” he said.

Kelley said that Ironshore works to accelerate customer acceptance of valuable but discretionary insurance products by offering support services. These services help “to educate and inform the market on product attributes [and] can be invaluable for achieving timely product success,” he said.

“Risk financing services, engineering evaluations, environmental science assessments that enhance a new product offering are just a few examples,” Kelley said. To offer services and to help clients identify and mitigate evolving market risks, Ironshore builds relationships with sector-specific experts—financial advisors, consultants and industry professionals. These experts offer an additional level of insight into risk identification and approaches for managing potential financial or reputational impact of events covered by some newer specialty coverages, he said.

Kelley and Wurzler both said the service offerings are key ways that insurers innovate beyond risk transfer solutions. “We must also continually evaluate these services to ensure they remain relevant to the insured and help mitigate risk,” Wurzler said, citing data breach notification and response handling, safety training and employment background verification services among the add-ons OneBeacon Technology provides. “Some of the services we offer alongside or embedded within our products today did not even exist a year or two ago, such as a cyber-framework analysis,” he said.

At XL Catlin, McGavick also sees the breakthrough value of insurers collaborating with experts to broaden the P/C insurer toolkit beyond the simple delivery of an insurance policy and the payment of claims. “We need to be more forward-thinking. To help us, we’re connecting with both industry and nonindustry partners to seek their expert advice, pool resources and intellectual horsepower to see what we can do together.

“I stress the importance of collaboration—both inside and outside of the organization—to break down innovation obstacles,” he said.

A Different Legacy—The Systems Kind

Leaders in both the insurance and reinsurance sectors said legacy systems are some of the biggest roadblocks to innovation in the P/C industry. They “do not readily lend themselves to Internet-based interactions or the use of mobile technologies,” Wurzler said.

Berto Sciolla, executive vice president and manager of North American Treaty Reinsurance at Gen Re, said legacy systems can hamper the ability to compete with new threats and challenges. “The cost is one problem, but it’s really the speed at which we can respond with insurance solutions. We might want to take advantage of technological innovations, but our infrastructure can get in the way.”

Gen Re, he reported, is making great progress on its own transformation with a major resource commitment. “Not all companies can make that commitment,” he said.

Laura Hay, the national insurance sector leader for KPMG LLP, cited legacy systems as one of a set of formidable innovation roadblocks for insurers. “Property/casualty businesses are operating in a highly competitive and complex environment, whether they’re tackling legacy IT infrastructure, attracting and retaining the right talent, or meeting regulatory compliance requirements,” she said.

“The fragmented nature of the P/C industry makes it difficult for one player to amass a great amount of cash to invest or disrupt other companies and keeps insurers mired by inflexible systems, products and filings,” she added.

“Technology will be one of the key engines of change, providing knowledge of customers through data analytics and customer interfaces through social media, smartphone technology and other channels,” she said, noting that insurers with a flexible and agile infrastructure will be better equipped to “manage complex and varying regulatory requirements worldwide and provide the actuarial and statistical underpinnings of new products, pricing and risk management.”

Laura Hay, KPMG LLP

Importantly, Hay believes technology and data issues need consideration at the top levels of P/C insurers. “Once managed and run by the IT team, it’s time change management in information technology areas are elevated to a higher level of decision-makers and, ultimately, into the boardroom. Aligning big data and analytics with the business strategy requires top-down implementation and the investment in infrastructure to support these business needs,” she said.

Emerging talent issues are equally as important, she said. “As baby boomers begin to retire and fierce competition for generation Y candidates heats up, it’s more critical than ever that insurers create a culture that attracts talent like data scientists,” Hay added.

But even with data scientists on board, there are other problems with data to tackle, leaders suggest.

“When dealing with new risks, you have little data to go on,” said Greg Hendrick, chief executive of Insurance at XL Catlin. “You don’t always have robust information to support your product development or underwriting decisions.

“To overcome that obstacle while still maintaining our drive for innovation, we quite often limit our net exposure on new and emerging risks, allowing us to gain more knowledge about the risk and potential losses,” he said.

At catastrophe modeling firm AIR Worldwide, CEO Ming Lee points to a lack of data quality across the industry as a continuing impediment to the development of innovative catastrophe risk management tools. Noting that the starting point for such tools is the collection of high-quality, detailed global exposure data, Lee said that while insurers have made progress on improving the quality of their data over the years, “the absence of agreed-upon data standards continues to be a hurdle.”

“AIR has long been a proponent of open standards,” he said, noting his firm’s 1993 development of UNICEDE—an open data format.

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