Change is coming to the insurtech sector. The assumptions that went into the founding of the last wave of startup companies no longer apply. Carriers and investors alike are looking for new ideas with promise. Bill Pieroni, CEO of ACORD, joins DI editor Nathan Golia to discuss:
- What technologies proved themselves as winners over the past several years
- What successful companies need to achieve in order to win over partners
- How assumptions about consumer preferences and patterns are poised to change
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Nathan Golia (00:09):
What will the next wave of InsureTech look like? I'm Nathan Golia, editor of Digital Insurance, and I can't wait to jump in on this topic with my guest. Bill Peroni. Bill, why don't you introduce yourself and tell us a little bit about yourself.
Bill Pieroni (00:20):
Thanks, Nate, and thank you for having us today. I'm the president and CEO of Accord, the global standard setting body for the insurance industry. Our organization is comprised of 36,000 members spanning brokers, agents, insurers, reinsurers, software and solution providers across 100 countries globally. Our standard solutions and software assets support about 85% of the world's insurance premium in some form or fashion.
Nathan Golia (00:51):
And the thing about this topic is that I think everyone in the insurance industry, regardless of where you're sitting in the value chain, everyone knows of Accord's role with standards and the support that it gives, insurance distribution and everything with that. But I think everyone's interested in this question and I think that this is a theme that we'll be hitting often even if we're not, it's not the explicit topic of the talk every month because I think that is the big question on everyone's mind. Last month, to recap quickly, we talked with Penny Crossman, who's my sort of, I want to say counterpart at American Banker in that she covers the FinTech world and after the collapse of SVB, there was all these talks about how startup companies, which included fintechs and InsureTechs were going to have to reset their strategy and think differently about what they were doing.
(01:45):
And that was just after in the wake of that event. But when we started talking about this presentation months before that or weeks before that even, we were talking about how InsureTechs and fintechs were going to have to reconsider their strategies and their go-to market ideas because of other changing market conditions, most notably a bit of a pullback in funding. So let's start there. We're coming into 2023. We've got a little bit of a changing economic environment, a little bit of a pullback in funding across sectors including insurance. So what do you think will define the companies that are surviving and thriving this year? What do the successful InsureTechs look like that have made it through there?
Bill Pieroni (02:30):
So I'm thinking about the adage that life is understood looking backward, but you have to be forward looking as you live it. KI guard in looking, we've tracked well over 2000 InsureTechs over the last decade, and we came up with a common set of attributes that actually determined whether or not they were going to not only survive but thrive and really have impact in our industry. Now, I'm going to go through these things briefly. I don't want to imply that these are sufficient, but they are required. In other words, even if you do all the things I'm going to talk about, you still may not make it. You still may not have the type of impact in our industry that many want to have, but if you don't do these things, it causes real challenges for survival, much less thrive in the marketplace, first anticipated versus actual value captured by your customers.
(03:37):
If you don't have an alignment between what your customers expect, they're going to get improved claims capabilities, enhanced underwriting, reduced efficiency or reduced effectiveness, improved efficiency, whatever that may be. There has to be an alignment between expectations and what ultimately is delivered. When clients and customers have unrealistic expectations, it oftentimes is met with a dismay and it creates a problem. Next, given that our industry has a great deal of accumulated legacy, not only IT data, software, architecture, infrastructure, but also underlying business processes, inputs, tasks, outputs, KPIs, and more importantly, organization skill sets, incentives should values and work norms. There's so much accumulated legacy in our industry. If people can't test your solution, if it requires a wholesale transformation of everything you've got, you're not going to make it because no one's going to take all of that accumulated legacy regardless of what you think the business case will be to make it work.
(04:46):
Demonstrate ability. Will your client believe that your solution led to that impact or will it be argued that a hardening market reduced claims frequency and severity led to it? Is it compatible with those legacy capabilities I talked about? Will it work? I mean the insurance industry, despite what people think, was a very early adopter of many technologies, which is why there's so much legacy here. These capabilities work, they have relatively low cost, they're not ideal perhaps in today's marketplace, but these solutions need to work in the context of legacy capabilities. Next homogeneity is the way that your solution is going to be implement by one carrier the same as it will be implemented by another carrier, by a broker, by a reinsurer in the marketplace. If every time it's installed it's different, you're not going to get the economies of scale and scope. Next co-option, are you part of an ecosystem that compliments and extends other competitors, other solutions? And finally, and most importantly, authoritative adopters, do you actually have early adopters that actually carry brand value and gravitas in the marketplace? Again, to remind you, you need all these things. They're required, but they're not sufficient. So Nate, when I look to who's survived in looking at well over two thousands InsureTechs over the last 10 years, these are some common capabilities that they all possessed. Sorry for the long-winded answer, but it's really based on a deep empirical evidence as to who made it
Nathan Golia (06:18):
Well, what's interesting about that though, and what I wanted to circle back to a little bit is to think about some of these things that you talked about and then understanding that there are changes, that these were the things that they were, the expectations were set five to 10 years ago about what was going to happen in the insurance market. But look where we're today, for example, you talked about the belief that an InsureTech solution drove the results that happened, and what's interesting about that is that what I think what we're dealing with a lot in this industry right now is a shifting landscape of what could be expected. So for example, you mentioned two things, a hardening market and reduced claims. Let's start with just reduced claims for what I'm gathering that's not happening. And for an insured, if there's an InsureTech that's saying, here's the baseline you are at, we're going to bring you to here, but the new baseline is here, even if they drop you down farther in terms of costs or whatever, it's still greater than the previous baseline. So I guess my question is are insurers understanding that? Are they able to reset expectations and is that driving a change in their strategy for how they work with InsureTechs given that there are changes in the market that are out of everyone's control? In a way,
Bill Pieroni (07:43):
When you look to global premium, the top 200 carriers globally and there are over 12,000 carriers globally, but the top 200, right over 60% of all the premium. So these are relatively sophisticated organizations. I think they've got a really good handle on what's going on in the marketplace, and obviously knowledge within those respective organizations is normally distributed, but by and large, these are sophisticated buyers. I think they do have an appreciation. Clearly when you start talking about the greater ecosystem of 12,000 carriers globally, again, you may have some carriers in the left tail. They're expecting, Hey, what happened to my favorable severity and frequencies that during the pandemic when people weren't driving and they were home and businesses weren't open and there were lower workers' comp claims, but I would say for the target rich environment of the top 200 carriers, these are very sophisticated buyers and brokers are even more concentrated in terms of the in league tables. So again, sophisticated buyers, I think they have a handle on it. I can't speak to smaller buyers and what their expectations are, but where I expect the insure are seeking to drive the solutions and impact. Those are sophisticated buyers,
Nathan Golia (08:57):
And I guess I wasn't saying that insurance companies don't understand this was going on, but I think there's also an expectation that basically like, okay, we're all sort of in this together and we we're trying to affect change, but the assumptions that we made that went into the first wave, those assumptions now kind of have to be redrawn. And so when you're looking into the future, how has the view of what digital transformation is going to produce and what the results are going to be for the insurance companies, how have the, are insurance companies looking at that changing? I know that you had some research in there as well from Accord.
Bill Pieroni (09:36):
Oh, yeah. I will say, and Nate, I think you're referring to our global digitization study where we look at five stages of digital maturity. We started doing the study about seven years ago, which was very fortunate for us in that we had pre and post covid results, and what we did was we developed a methodology where we segmented carriers and those same 200 carriers that I talked about, we look at those, stage one are what we call digital laggards. Those are carriers who are frozen, very limited awareness of digital capabilities and what the impact could be. The next stage. Level two would be localized digitization. These tend to be carriers with very isolated purpose focused type of automation, so maybe a call center or first notice of loss, some very specific technology chat to allow them to prove efficiency or effectiveness. Then we've got carriers who are, which we call digital aspirations.
(10:44):
They've got a strategy and they've got a budget leadership intent. Spending all the rest doesn't mean they're going to make it. I do need to tell you, we also look at change efforts in our industry. Two thirds of change efforts in our industry fail along one or more of the dimensions of scope, time and resources. The penultimate one is category four. Those are digital firms where they're really using digital capabilities for efficiency and effectiveness. With the ultimate category being digital competitors and digital competitors really use technology and digitization both strategically and tactically to drive and optimize outcomes. I will say we've been doing this study for seven years and we don't have time today to go to the results pre and post covid, but covid was a real inflection point where I think we've got a true widespread appreciation for what digital capabilities can do.
(11:39):
And I will tell you from a total shareholder return standpoint, real share price appreciation just for inflation plus dividends from a premium growth standpoint and from an overall cashflow standpoint, driven through underwriting claims and investment returns, digital competitors materially outperform and that outperformance accelerated during covid and persist to this day. The number of dimensions we look at, again, if you want we could talk about those dimensions are, but I think there's a wide split appreciation now there certainly are those digital laggards I spoke about, limited awareness, limited execution, so there are some, but I would say carriers have gotten it. Many of them had it before Covid, but at this point I think that was a true inflection point and they understood the impact that not having the state of the market digital capabilities had on their growth share and underlying economic for their business.
Nathan Golia (12:36):
So if insurance companies are coming out of Covid more willing to transform digitally, you've got maybe an interesting situation where there's more interest. But as we talked about, there's some sort of impacts on the in InsureTech market, and I think there is a changing understanding of what the top, what's the word for maybe practice areas is the right way to put it. Just like what do we want to tackle with this first? And I'm curious, is there something in what your research, have you seen, hey, what people are really looking like in the first, the past few years people are focused on very broadly, and one thing we saw a lot was getting distribution online. Can we get people to buy insurance online? But now that that's kind of settled through, what are the next things that people are looking at?
Bill Pieroni (13:27):
Nate, I think this is a great question and it's a pet peeve of mine, so I'll try not to get on my soapbox so to speak, but we've been tracking again, well over 2000, almost 2,500 in SureTech over the last decade. 61% of all the spend went to carriers, online carriers, new startup, pure digital carriers and distributors, 41% to carriers, 20% for distribution. So I don't want to comment on how well they fared and how well they're doing, right. You could look at share prices, combined ratios, growth rates. The thing that does bother me though is when you look to an insurer, on average, 75% of premium dollars go out the door through claims loss adjustment expense and pure loss. The other 25% is spent with underwriting. When we look at insurtech spend over the last decade, what we find is that less than 3% of insurtech spend went to claims. 75% of premium dollars go up doors with claims. Now underwriting is a bit better. It's 25% of premium dollars. It's a whopping 5%. So if you want my perspective, please go where the money is. Willie Sutton, to quote him, there are claims why is only 3% of insurtech spend being put in claims when it's 75% of premium dollars?
(14:59):
I just think we need to look at the economics of our business. And by the way, it's hard. You have to genuinely understand claims first, notice of loss, verification of coverage, subrogation, salvage, all the activities that go into adjusting. You have to really understand underwriting pre and post buying all the data. It's hard. Maybe it's not a badge of honor to say, gosh, I don't know anything about insurance. Look at me, I'm completely new. And how come they haven't figured it out? Well, if you want to solve some problems, help us with claims and underwriting. I don't know that we need another carrier running a 350 combined ratio.
Nathan Golia (15:40):
Well, what's interesting about that is, okay, well, is the energy for innovation coming from, and you talked about the kinds of companies that were dominant in the past few years, but there's question, what does the industry really need? Where does the industry need to impact when we talk about an economic environment that is impacting the entire InsureTech, which is not just InsureTechs as startups or members of a startup community, but InsureTech as a shorthand for insurance, digital transformation, insurance technology overall. Some of it is anecdotal. We've talked to, we have some scientific research that we do on this, and we actually, I don't want to speak too much about it because our next survey on the pulse of insurance digital transformation is I'm getting the data for it next week, so we'll revisit them. But I remember talking to a person, a claims executive who said like, Hey, I'm looking for solutions and there aren't everything. I can't find something that speaks to me, but insurance companies right now claims and the cost related to claims, whether it's from supply chain or natural disasters or other things that is, it's become a crisis in Florida and other carriers everywhere have to be looking at like, Hey, we've got to figure out, we've got to get our arms around claims in a bit. So that's when we talk about the next wave of InsureTech, are there people ready to meet that challenge or is it going to be driven internally by carriers?
Bill Pieroni (17:14):
I think that when I look to this next era, if we call it of InsureTech, it's going to be returning to normal. And by normal, I mean who's doing the investing? What are they investing in and how are they doing the investment? So as it gets more driven by true stakeholders, those with claims imperatives, underwriting imperatives, maybe front and back office integration, things like that. I think the essence of strategic intent is resource allocation. That's why I focused on the spend 5% for underwriting, less than 3% for claims. The reality is, as it goes back to normal, I think you'll see funding levels for really core capabilities. Underwriting claims rise as you change the who, the how and the what will follow. There'll be a different approach to it. It won't necessarily be driven from exogenous capital coming to the industry, but more driven by stakeholders who operate within it. That's just my hypothesis,
Nathan Golia (18:20):
Right. I mean, I think it's probably a good hypothesis. I think that because that's what we're sort of taking a look at here, it's like, well, it's great. One thing that we've been doing throughout the year, and one thing actually, I had just finished a small part of this project right before we got on the call today where I was looking at InsureTech that I had written about several years ago, and I was just kind of checking in on where they are now. We had been tracking them and we've done a couple more follow-up stories on them, but basically the company had started with an idea, we're going to create a process for, we're going to create this kind of insurance product, a new insurance products that meets this need. And over time, the company has abandoned that and now, but what they've done is they took the a i integration platform that they had built and now they're licensing that to other companies. So they're getting away from the product, the idea that spurred them to start an insurance company, InsureTech company in the first place and are now just kind of a technology licenser. And I'm wondering if you see that kind of evolution happening as people say, well, look, we're not interested in like you said, this new carrier or new product, but we want the technology for other reasons. I'm wondering if you see that kind of thing happening.
Bill Pieroni (19:43):
Yeah, I mean, we do. Look, when you look to the distribution of these insurtech startups, many of them start with a germ of an idea, and I think it's completely okay that as you learn by doing and you go on, you abandon, refine, redirect. There's absolutely nothing wrong with that. I worry about those that start and dogmatically stick to the exact strategic intent because very few times you start out and end up in the same place. So I do see that for those that are here, and I think there's nothing wrong with that at all. I think there's a lot of stubbornness sometimes that they want to stick with the idea. So I like hearing stories like that, that they pivot and redirect resources and leverage what they've built. So I do see that for those that have made it through very few times, does the original strategic intent end up as exactly what they thought? That's exactly,
Nathan Golia (20:45):
That's exactly what I was getting to because I do think that when times were good and interest rates were low and it was easy to get funding, you're like, I've got an idea. And yet someone here is like, yeah, that's a good idea. We can do something with that. And then as you sort of push it and you see like, well, look, this idea just doesn't have an addressable market right now, which is something we've learned a little bit. We as an industry have learned a little bit what I'm going to be interested in seeing. We're just talking a little bit about what you said, tracking all these companies. Are you seeing that kind of transformation within an InsureTech to a new kind of strategy? We started out because we wanted to do X, but it turns out that what we're really good at is y. And so now we're a Y company. Do you get what I'm saying?
Bill Pieroni (21:30):
Yeah, absolutely. I would say the vast majority of the ones that we track started out with some explicit idea and have for those that survived, right? They've refined it and it looks less like the original intent. I have to look back the numbers, but I'm sure it's quite over 50% as they've learned by doing and executed, have refined and redirected.
Nathan Golia (21:55):
Yeah. One thing I wanted to say, I know you have an opinion on this, but is this something that people will only figure out once they come into insurance? I mean, I think about all the startup heads I talked to over the years, and even people at carriers and places where people come in, they have an idea and they don't understand how insurance or they think it works like this other industry and then they, they're sort of befuddled by 50 state regulators and all that stuff. I'm curious if there's a little bit more maturity of an understanding of how insurance works and that will also drive some sort of change in InsureTech
Bill Pieroni (22:31):
Strategy. Yeah, I think there's a number of factors within our industry that perhaps many InsureTechs did not appreciate it. You mentioned 50, we have 54 regulatory regimes in the United States, and they are profoundly different. As you move from jurisdiction to jurisdiction, you've got to look at things like Puerto Rico, dc, Samoa, us, Virgin Island, we've got 54, and they're very different. So you've got that. Next you have to look at the economics of the insurance industry over the long term. Most industries earn zero economic profit. That's not zero profit, but zero economic profit. And after hundreds of years in the insurance industry, there's not a material amount of discretionary spend, which impacts change capacity as well. So this idea somehow that I'm going to take you from a hundred combined ratio to a 60, no, you're not because you're going to give it back in rate or the regulators aren't going to let you, depending on the line of business, have a 60 combined ratio.
(23:32):
So that's a bit unrealistic next, even if the idea is sound and it will work. We are very conservative as an industry. We're very thoughtful. I think there's an over expectation around how fast we make decisions in our industry, and I've had senior roles at carriers and brokers globally. We are conservative, we're thoughtful, we're risk averse. We attract people who are conservative, risk averse. We're very compliant. So even though you may have a great idea and the value proposition is clear, I think there's an unrealistic expectation from many of these InsureTechs about how quickly a decision will be made to embrace it. And even if the decision is made that they'll do it, you've got to fit it in with all of the existing change initiative. In the end, our scarce resource and insurance is talent, and we've got to do things like rate changes, regulatory changes, implement new systems that are there.
(24:32):
So even if this is a great idea, it's got to join the queue to be executed. And I think I've only ever worked in insurance. Perhaps this is the same way it is in banking and manufacturing and retail, but I do think we're a bit special only because, which is why I get a little frustrated when I look at, we looked at, one of the things we looked at was average tenure experience level of these InsureTech startups. You see a profound and significant correlation between years in the business and experience in different roles and success. And I think it has to do with realistic expectations around how quickly insurance stakeholders move to make these decisions. Do I think that that experience informs features and functionality? Absolutely. But I think the more profound impact is we make decisions in a very unique way that I don't think other industries make. And I think as has been said, markets can remain irrational longer than you could remain solvent. You have a good idea, doesn't mean that they'll decide quickly enough. And the remember one reason why any business goes out of business is it runs out of cash. I mean, it's cashflow. So if you had an expectation that you are going to get X number of accounts and in less than 12 months, maybe not this industry is the right thing for you, we're Penn. We're thoughtful about how we do things.
Nathan Golia (26:02):
One thing I want to tell, we've got a couple minutes here, and one thing I wanted to think is because of just thinking back to about 10 years ago, because I think I was saying, oh, this, in InsureTech wave, we had about seven years and it sort of was in flux during Covid, and now we're obviously going to be starting a new way. But you talked about the industry being conservative, but even then, sometimes I go back and read things I wrote in 2013 or 2012, and I'm shocked at how, oh, this seemed like this was a new thing and I thought it was never going to stick, but now I'm writing about it all the time. Or I thought this was a sure thing that by 2023 would be all over the place. Can you talk a little bit about insurance companies?
Bill Pieroni (26:45):
This is Fortu
Nathan Golia (26:47):
Deciding what's worth their attention investment. Yeah,
Bill Pieroni (26:49):
This is a great question. We were asked by our members to take a forward look for technology. So back to my kike guard comment, I wanted to look back or santiana, if you don't understand history, you're doomed to repeat it. So I did. I looked back at some of the things that I were saying and others were saying in the industry, and there were some strategic things that we thought were going to happen in technical things. I know we're close to the end of our president, but first four gl, these four GL tools, they keep showing up again and again for decades. We've got a wave of them now. Look, they're not new. They're very difficult to extend and maintain, and a lot of what people who've embraced these four gls are going to get are very expensive front ends. Next, I thought by now we'd have autonomous vehicles.
(27:42):
We're breathing on level four, but we're not level five yet. And for the billions of private equity money that's been put into these things, both by manufacturers as well, we are kind of breathing on level four, but we are not anywhere close to level five. Remember the idea of best of breed, Nate? We'll buy best of breed. This idea that you'll cobble together multiple solutions that didn't work out very well. Linux desktop, that didn't work out. Object oriented programming and client server computing didn't work out the things that kind of worked out straight through processing for underwriting, we thought it would be here. Well, it's here for some lines. Customer self-service, both personal and commercial, right? Usage based insurance, it peak 20 to 30% depending upon what line wearables, the idea that there'll be wearables. I'm not saying these ideas ultimately won't come to fruition, but some of them are stuck. Now we're running out of time, but I also had some strategic things that we thought would happen. No,
Nathan Golia (28:50):
We can go over by a couple minutes here. It's fine.
Bill Pieroni (28:52):
Okay. So strategic manufacturers as underwriters, back to the economics of our industry. Surplus. Yeah. Maybe you as an auto manufacturer really don't want to be a car insurer. When you start to see the billions of capital that you have to maintain in policy over the surplus bank assurance, it's still in parts of South America and parts of Europe, but by and large, this idea that you're going to buy all of your insurance products, both life and PNC at a bank, not really. Hey, we'll come up with different brands across different channels and omnichannel, omni brandand didn't work out. New product developments and product innovation, combining different products together didn't really excite consumers, and this was incredibly interesting emerging markets over the last 10 years, emerging markets have shrunk in terms of relative global market share, and they have been much less profitable than mature markets.
(29:51):
Now, from things that kind of made it choice. Choice kind of made it, but there's something around the paradox of choice. Too much choice didn't work out this multi-line, I'm a bank, I'm a life insurance writer. I'm a P and C writer. Yeah, economies of scale and scope. Scope became more important. Offshoring, well, you're seeing a lot of it come back. The economics didn't work out. Inflation took off, and then smart devices. I believe iot will be transformative, just not yet with this idea of iot devices, and right now we've got more iot devices than every human being on the planet. It will have a profound impact, but there's some other technologies. So great question. I'm glad I got to revisit this, but I looked back to see, and by the way, these are things that I believed that we would have by 2023 and didn't make it, so it's an indictment on me as well.
Nathan Golia (30:45):
Well, it's not even that, so take an example from the current place, artificial intelligence. We did a bunch of reporting on large language models, chat, GPT. Well, what is it? Well, people are saying by the end of next year, it's going to replace all these jobs. It's going to take all these people out of work, but no insurance company wants to turn their customer service over to a black box computer that could say anything tomorrow
Bill Pieroni (31:10):
They don't. We overestimate the role of technology in the near term and systematically underestimate its impact in the long term.
Nathan Golia (31:19):
That's where I wanted to come back. That's come back to your point about self-service.
Bill Pieroni (31:23):
Yeah. I mean, look, it's a future inevitability, but how fast, how much which segments, which geographies, which products, right? And what's the relevant timeframe? Are we talking about a year as you said, or are we talking about decades now? I do believe that you need to engage in it early so that you learn by doing, as we talked about, but this idea that somehow it's going to be next year, these things tend not to move as fast in our industry.
Nathan Golia (31:52):
I think the place I would take an AI lesson is something like you talked about with desktops, right? In 2013, there was still like, okay, are people really going to want to do all their work on their phone? The answer turned out to be yes, that people do want to be able to sign with your finger on your phone and fill stuff out with the phone
Bill Pieroni (32:13):
Keyboard. Well, you said that the thing that did make it edge, I called it edge. We didn't call it iPhones and Google phones. They were called edge Edge computing did work out. That was what we have, things that actually did happen, like cloud, like microservices, like open source data analytics, like edge computing. Those things we thought would happen, and they have exceeded our expectations.
Nathan Golia (32:37):
I think blow it away in a way as I just moved this house in December, but the amount of stuff I just did, getting home insurance for this house that was different from my previous house four years ago where I did it all with my phone and with what I thought was from my experience working here, I would say my new carrier is less digitally mature than the one I had before, and I still was able to, the advancement in self-service using form factors, all that went crazy. I think with ai, the AI language model, I think the lesson for that is you're applying it to what people are doing right now, but you're not seeing exactly how that's going to evolve over the next 5, 7, 10 years and where it's going to come in. Bill,
Bill Pieroni (33:19):
I think make a point. New technology on old process, the real transformation will occur when it's new technology, new process. Yeah, exactly. Exactly. Then you've got real transformation occurring in the industry.
Nathan Golia (33:30):
Yeah. Bill Poni, thank you so much for joining me today. Thanks to our audience members, and we'll see.
