Evolutionary Strategies for P&C Insurers

Value Envisioned. Value Delivered.

Evolving P&C Insurers

Carriers have historically been backwards-focused and have tended to maintain established processes without question. They also have the propensity to be risk-averse. These characteristics need to change. Carriers must be willing to try new things without betting the ranch or subjecting the company to undue risk.

Executive Summary
The insurance industry has undergone a gradual, technology-driven transformation over the last four decades. From the 1970s through the 1990s, mainframe and client server applications changed the efficiency equation. At the end of the 20th century, the Internet signaled the beginning of a new era of complex interaction between insureds, agents, and carriers. Today, entirely new technologies such as telematics, mobile technologies, advanced underwriting models, and the shift to a customer-centric paradigm are further altering the industry. Signs indicate this third wave of transformation may be more significant and far-reaching than those preceding it, surfacing significant issues and exposing inefficiencies. The recent soft market, combined with broader economic challenges such as the sudden decrease in investment income that accompanied the most recent recession, have exposed carriers with less efficient operations or poor underwriting disciplines. Carriers that thought they could wait-out the cycle as they have in years past now face a new reality. The transformation currently underway is causing operational, organizational, and IT pain points. Carriers that fail to address process inefficiencies and evolve business processes to address current challenges risk being left behind. The insurance industry has traditionally been slow to evolve. In todays business environment a slow evolution is no longer an option

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Insurers need to embrace commoditization, at least partially, and develop boxed products demanding better predictive analytics, automated underwriting, analysis of abundant social data, and distributor-friendly sales support systems.

Introduction
In the past, the insurance industry operated in a world that required little transparency. Insurance companies could hide behind walls. The relatively long cycle times accepted in the market allowed carriers to mask underwriting, servicing, and claims inefficiencies. Waiting days or weeks for a quote was acceptable to the average buyer. But consumer expectations have changed. Todays consumers demand instant service, transparency, and convenience. New expectations are forcing the insurance business to evolve from a productcentric model to a customer-centric model. To keep and grow business, carriers need to redesign and refocus their entire business process around the individual buyer. Implementing a customer-centric model places significant pressure on carriers to invest in technology and operations that use personnel more efficiently. As the industry becomes more competitive, carriers that are not extremely efficient or specialized will no longer compete effectively. Already, less efficient, middle-tier carriers are getting squeezed by large, national players or outmaneuvered by affinity companies at the local level. Mid-sized companies that are not hyperspecialized or extremely good at serving specific needs are at risk. Mitigating this risk requires adapting in three major areas:

Embrace Commoditization
Ten to 12 years ago, before the widespread use of online insurance quoting and servicing, carriers relied on agents to sell insurance for products such as personal lines auto and home coverage. Today, because of the availability of Internet research, ratings, and reviews, the ability to run real-time quotes, and the overall explosion of information, these products have become more commoditized. There is no longer a special sauce for general products. Perceived and actual differences in products and service continue to be eroded. Rating models are more sophisticated. Pricing parity is matched with service parity, and the bar is constantly rising. While such innovations take time to percolate in a highly regulated and conservative environment, carriers need to foster innovation in measured steps.

Value Envisioned. Value Delivered.

A J.D. Power and Associates study of U.S. insurance shopping found that, despite the growing popularity of online shopping, insurance agents still have the upper hand when it comes down to an actual purchase. Over 50 percent of quotes initiated online were eventually closed by an agent or call center representative.

Respond to Customer Demands for Transparency

Today, not all consumers are interested in buying insurance in the way most insurers sell it. Demands for better and faster service from insurance carriers continue to rise. Todays customers expect transparency and convenience. People on the road shop their business from anywhere at any time. They expect up-to-the-second information, multi-channel access, and immediate responses, as well as the ability to purchase multiple products across lines of business, regardless of the back-end environment. Demand for multi-channel strategies will explode as focus shifts from selling to buying preferences. While some will continue to be comfortable with local agent models, others, particularly those of Generations X, Y and Z, will choose to buy through retail, banking, or online channels. Despite all this, there remains a need for the trusted advisor role an agent or broker provides. A J.D. Power and Associates study of U.S. insurance shopping found that, despite the growing popularity of online shopping, insurance agents still have the upper hand when it comes down to an actual purchase. Over 50 percent of quotes initiated online were eventually closed by an agent or call center representative.

Operational efficiency and IT effectiveness are now table stakes, as opposed to being good to have in years past (heading in the direction of personal banking, where interactions and transactions are becoming increasingly efficient and less mysterious). Insurers need to embrace commoditization, at least partially, and develop boxed products demanding better predictive analytics, automated underwriting, analysis of abundant social data, and distributor-friendly sales support systems. While certain niche markets and very large commercial accounts may be somewhat insulated from the forces of change, most small and midmarket products are already heading in this direction. Business managers and corporate risk managers are applying the same lessons they learned in managing their personal policies and asking for the same or better from their commercial carriers. This trend may be lagging personal lines by a few years, but it is evident none-the-less.

Invest in Flexible Technology

In the 1980s and 1990s, most insurance carriers built proprietary policy administration systems that allowed for little flexibility. Technology was oriented toward developers and long testing lifecycles. Carriers offered a limited number of packages, which were rated and underwritten as a package. Each package might take a year to put together, and changes required significant business process changes, new underwriting, new forms, etc. Today, most carriers offer configurable products, allowing consumers to

J.D. Power and Associates 2011 U.S. Insurance Shopping Study, June 2, 2011.

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SMA Research reveals that one-third of North American insurers plan significant investments in mobile in 2013, up from one-quarter in 2012.

select indefinite combinations of coverages. And the entire process has sped up dramatically. Competition is increasing the focus on niche markets. When a niche market is identified, a carrier needs to put a product together, package it, sell it, and be ready to process claims in a month rather than in a year. Yet carriers today often operate utilizing a hodge-podge of technology systems that limit their ability to respond to market changes quickly. Additionally, the cost of supporting and maintaining or propping up such systems can be significant, with some carriers spending two to three percent of gross written premium on IT simply to maintain the status quo. The technologies carriers invest in today must allow them to turn on a dime. Toward this end, some carriers have abandoned their homegrown systems over the last five to six years in favor of third party systems. Newer technologies such as cloud computing offer opportunities to migrate off legacy core systems, improve operational efficiency, and challenge existing business norms. Predictive

modeling and advanced analytics can also be instrumental in a carriers quest to differentiate themselves through more efficient underwriting, enhanced customer experience, and fraud control. Meanwhile, the mobile space is becoming a key battleground. Mobile features and functions offered by the leading carriers are becoming increasingly sophisticated. SMA Research reveals that onethird of North American insurers plan significant investments in mobile in 2013, up from one-quarter in 2012. This is yet another way mid-level carriers are feeling the squeeze. A lack of mobile capabilities may give consumers the perception of lower service and support levels; or more importantly, could affect customer acquisition or retention.

Evolve with the Times

The key take away of this third wave of transformation is that it cannot be ignored. Doing nothing is not an option. Carriers have historically been backwards-focused (relying on actuarial tables, loss history, etc.), and have tended to

Top 10 Mobile Trends in Insurance 2013, an SMA Research Brief, February 28, 2013.

Value Envisioned. Value Delivered.

maintain established processes without question. They also have the propensity to be risk-averse. These characteristics need to change. Carriers must be willing to try new things without betting the ranch or subjecting the company to undue risk. P&C insurance carriers need to focus on integrating internal and external innovations to create end-to-end customer experiences that achieve the level of customer-centricity necessary to improve loyalty, reduce churn, and grow revenue. They need to build change-capable organizations and focus on becoming operationally excellent using lean processes. To achieve these goals, carriers need a measured approach and a long-term strategy. A few strategic drivers should be selected and floated to operational and technology initiatives that are well funded, supported by a change-capable organization, and driven with a sense of urgency. Many P&C insurers pride themselves on their ability to respond rapidly to emergencies and/or natural disasters. Those urgent response mechanisms and the all hands on deck mentality should be used to address todays business issues, ensuring a carrier is prepared to survive both hard and soft markets, the changes happening now as part of the third wave, and changes yet to come in the future.

About Paragon Solutions:

Paragon Solutions is an advisory consulting and systems integration firm that specializes in enterprise information management to help clients leverage information assets for better business results. The company does this through its industry practices, solution accelerators and specialized technology competencies that help clients achieve operational efficiency, business scalability, and regulatory compliance. Paragon works with businesses that are focused in a few key industries communications, financial services, healthcare, insurance, and life sciences. The industry-focused practices work with Paragons competency groups to address todays client concerns in Process Optimization, Information Management, and Information Insight. For more information, please visit the Paragon website at www.consultparagon.com, or call 1.800.462.5582.

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