In his keynote address at DIG IN 2022, Michael Mahaffey, executive vice president, chief strategy and corporate development officer at Nationwide, spoke about how the insurer had digitized significant parts of its operations before the pandemic. Digital Insurance spoke to Mahaffey recently about Nationwide's ongoing digital transformation efforts since then, including how it keeps up with the increasing speed of technology development without losing its way or losing the momentum it had built in its previous modernization efforts. Part of Nationwide's strategy is seeing its mission as protection throughout all its lines of business.
How are Nationwide’s digital transformation efforts going and what benefits do you see?
In 2021, we were on the tail end of massive, concurrent systems modernization efforts across most of our core businesses. We're generally past that, although for one of our major lines of businesses, we've just started that, although it will be a smaller, faster effort than the ones we've done over the last decade.
Michael Mahaffey, executive vice president, chief strategy and corporate development officer, Nationwide.
We have a modernized digital core, from which we're doing a lot more shorter sprint, rapid-fire digital evolutions. On that basis, it's how do we enable customer-facing digital capabilities and how do we prioritize and digitize the right customer journeys to have the right impact. It's how we digitize our relationships with our distribution partners, not just the traditional independent agencies and financial advisors, but some of the non-traditional partners.
For many years, we have embedded native digital relationships in other people's ecosystems. Those are examples of where we have continued to accelerate over the last two to three years in ways that have distanced ourselves from some of our competitors, at scale that's different than a lot of the insurtech and fintech players.
But it's never fast enough. The pace of technology evolution necessitates that we constantly look for ways to do things faster.
How does Nationwide accelerate this while keeping its core business emphasis?
Over the last three to four years, we leaned into creating more focus and investing in competitive capabilities at the business unit level. In our pet insurance business, we have roughly a third of the market. Those are different customers with different products and different channels than our personal lines or our financial services lines.
The speed and agility that we amplified focuses the strategies of each of those businesses to be category specialists and to make the right investments and partnerships with each of those businesses to position them to compete and win first, and then second, trying to extract value by having them as part of an enterprise portfolio.
We are in the business of protection, but protection takes on many forms. In fact, one of the evolutions that's possible within our industries is to stop thinking about protection through the stovepipe lens of the product, and to start thinking about it through the lens of the customer, whether that's a business or an individual consumer, and how do we create that?
We must have the right capabilities, the right advantages, if you think about the competitive landscape of those businesses. It has to be a business that gives us the right to earn the right risk adjusted return on capital. We're a risk intermediary in everything we do. One of the things that we do across the portfolio is make sure that we are positioned well to meet the needs of the consumer but to do so in a sustainable way by producing the right risk adjusted return on capital.
How do you meet the insurance industry’s post-pandemic challenges?
We need to build attributes in our system of an athlete that can navigate that volatility successfully, as opposed to betting that interest rates are going to rise and stay higher for longer, or growing business lines that guarantee income based on S&P 500 volatility.
We anchored our strategy in three pillars. Get closer to the customer, and understand their needs. Optimize our operations for speed, agility and lower cost. Third, manage our diverse portfolio of businesses, so we have strong financial strength in all scenarios, a strong balance sheet and a strong income statement.
We focused on those pillars under the premise that technological change is unpredictable, weather changes are unpredictable, and economic change is unpredictable. In hindsight, notwithstanding even the pandemic, we were spot on. Nobody's base case plan in any business reflected what we've seen happen, not with inflation, not with weather and not with interest rates.
That guided our macro conversation over the last three to four years. Within that, the micro conversation is different business by business. The evolution of the pet business is different than our personal lines business, which is different than commercial lines and financial services. But we have more options to lean into one business when it's the right time to do it, and to pull back from businesses when we think the timing is wrong, or our positioning isn't right. We've done a lot of that over the last several years.
The macro theme is the pace of change has forever quickened. The effect is that last year is always the fastest year we ever experienced but will be the slowest year we will have experienced going forward. So we're trying to constantly find ways of getting faster, more agile and more adaptable to changing scenarios. That has served us well and it will be something we continue to work on.
How has Nationwide contended with uncertainty about how technology develops?
Our value chain, in my opinion, is more susceptible to disruption because of technology, because we don't manufacture physical widgets. I don't have warehouses of inventory. We deal in data and risk and pricing and underwriting and then ultimately legal contracts that result in claims settlements and payments.
The application of new digital technologies to change the nature of that value chain is hugely important. It unlocks all kinds of ways in which we can create more value for customers. In our operating model, that's a fascinating example of the kind of athlete we're trying to become. No more multi-decade core systems modernizations. Instead, shorter cycle, faster experimentation with the application of new technology to unlock value for the customers we serve.
AI is a perfect example. We responded in that domain very rapidly and stood up in our digital and innovation team, a federated approach balancing central coordination of the tools and the approach we're going to take and the prioritization of AI use cases of artificial intelligence. This is in a federated model where these use cases are piloted, tested and scaled in each of the individual businesses. The nature of where that technology applies is different from one business to the next.
Technology is a core area where the pace and unpredictability of change, the impact of that change, means we have to be faster and more agile to respond at scale. There was a false narrative over much of the last five or six years that large companies can't adopt new technologies at speed and scale. In fact, it's quite the opposite. Some of us have proven that it is in some ways an advantage because the application of those new technologies can be rapidly scaled in large systems like Nationwide's with great effect. We are the ones with the resources, data, customer relationships and distribution partnerships to be able to experiment, test, learn and figure out which ones work in the marketplace and have big impact.
What technologies scale well for Nationwide's size? What do you embrace or avoid?
It's not a new technology, but something that has been instrumental in creating embedded insurance experiences is just APIs, application programming interfaces. Our partner platform is basically a collective effort for API development, deployment and scaling through all of these partners. We've got hundreds of partners that use this platform and the API has enabled. Year to date, so far, we're probably at 13 to 14 billion transactions digitally enabled by those. That's an example of using emerging technology to create truly embedded digital experiences. We can do it at scale very rapidly, given the the breadth of businesses and the number of customer and partner relationships we have.
How did the pandemic change the way Nationwide works with those it insures, and how those clients function?
Post-pandemic behaviors play through the insurance industry in strange ways. You saw a wave of changes to customer behaviors like driving patterns. People didn't drive for a long time, then they came back and drove at 100 miles an hour to get to work because there's nobody on the freeway. You saw frequency and severity changes, but I think we're back to a more normal post-pandemic reality where some of those modified behaviors have stabilized.
I don't want to have any one exposure that says, I've bet the farm on the persistence of some behavior to survive. I want a portfolio of options that say, no matter where the consumer goes, or no matter where the business goes, we're going to have solutions to help them to protect what matters most.
You can take glass half empty view of the world and say, how does a company navigate all of that change? On the flip side, you can say all of that change is exactly what drives the need for the products and services we sell. All of that uncertainty is why people buy financial protection products. They save for a more certain and secure financial future. They buy life insurance, they buy auto insurance, they buy liability insurance. There's uncertainty that they're not willing to live with. They're looking for a diversified strong, stable partner, a digitally enabled partner that helps them do that the right way.
Nationwide recently suspended online and mobile quoting. What led to that decision?
In the midst of pretty significant property and casualty profitability pressures across the industry, most companies have reined in their underwriting appetite, and taken actions to make sure that either their property and casualty entities or their balance sheet writ large was protected against the headwinds of the industry.
We're no different in that we wanted to make sure that we're containing growth where we don't think we have rate adequacy, and also freeing up capital to deploy where we do have opportunity. In some cases, in some areas of property and casualty, we have restricted our underwriting appetite. It could be geographic based, it could be product line-based, but just like every product within our portfolio, we want to make prudent risk decisions, given the data on weather pressures and inflation pressures, and a revised view of rate adequacy.
We have to make sure that we have all of our product in a row before turning the spigot back on to take on new risks. It's making sure that we balance effectively navigating the heightened pace of change in the now, while we also reserve enough capacity to place strategic bets for the future.
All of this change necessitates agility in how you respond in the moment to what's happening, but it also creates immense opportunities, particularly when you have our portfolio breadth. We see transformative opportunity across the property and casualty organization. We have a leading franchise in the excess surplus and specialty lines. While all of this disruption is sometimes difficult to navigate, we hold a very strong hand. The pace of the athlete we've built is well positioned to capitalize on this for decades to come.
