Insurance carriers are re-evaluating their businesses and making internal disruption a priority in order to keep up with rapidly changing customer expectations and a wealth of newly available digital solutions.
From innovation labs to staffing new executive positions, insurance companies are traveling several avenues to encourage new thinking.
Insurance is shedding its reputation for stodginess in the wake of massive digital disruption across the value chain. While a growing insurtech cohort is contributing to the change, incumbent insurers are beginning to assert themselves as leaders and define the direction of the industry going forward. “We're definitely seeing an evolving trend toward incumbents playing an active role in transforming themselves and the industry as a whole,” says Samantha Chow, senior analyst with Aite Group. “The actions of major players have grabbed the most headlines, but we're seeing many innovation efforts at smaller carriers too.” Insurers have begun to consolidate efforts under executive-level leadership, with mission statements and budgets to match. Some have installed newly minted “chief transformer” roles, who report directly to the company's CEOs and are tasked with moving their business and, by extension, the industry toward a more nimble future. Carriers are also launching a range of innovation labs to ideate faster and easier across the enterprise. As Guardian's Andrew McMahon puts it, establishing a formal transformation role creates a permanent agenda item among the top brass. “It ensures everybody continues to talk about our innovation agenda and what we need to do as a 158-year-old company to transform ourselves and our industry,” says McMahon, who was named EVP of strategy and customer development late last year and charged with developing enterprise strategy and bolstering the life insurer's digital customer experience. In fact, industry experts say the move to giving transformers a seat at the C-suite table is fundamental to innovation leadership success. “Support from the very top of an organization is critical,” emphasizes Robert McIsaac, SVP of research and consulting for Novarica. “CEOs and presidents must create an environment where it is culturally okay for things to be tried that are different, new and unique. This includes making it just as safe to fail, learn and move on – even if the investment is significant – as it is to succeed.” Despite these common headwinds, Guardian and others are committed to transformation
leadership by also making Silicon Valley practices a priority. McMahon's company is focused on becoming more data-driven and is preparing to unveil a number of transformation-related projects later this year. “We're working toward creating a culture where we'll have the human capital to allocate as quickly as we can allocate financial capital,” McMahon says. “To start, we're training all 9,000 of our employees, spread across the country, in agile methodology. Then, we'll begin to apply that to all areas of our business.” “We're definitely looking at ways to combine historical data with third-party sources for looking at leading indicators, rather than only lagging indicators, to determine potential policy holder behaviors and provide relevant customer experiences,” McMahon continues. “In the end, we want to have a more satisfied client.”
Squads fail fast at Argo
One key for incumbents that aspire to transformation leadership is adopting the fail-fast Silicon Valley operating model insurtechs have introduced to the industry. A pioneer in this is Argo Digital, which was formed in August of 2016 with the hiring of Andy Breen for the new position of SVP of digital for Argo Group. Externally, Argo Digital is pursuing the increasingly common strategy of supporting a venture capital unit for driving innovation while also supplying potential technologies the carrier can use via partnership or outright acquisition. Internally, however, Argo Digital takes a far more novel approach. Small teams, called digital product squads, tackle business problems of all types by applying iterative methodology to quickly determine which ideas could solve the problem and which should be learned from, but abandoned. “For instance, we discovered many small businesses customers are actually more time sensitive than price sensitive,” says Breen. “Customers express frustration with the historical commercial insurance quoting average of more than two days as it delays projects, loans and other imperatives. Our charge was figuring out how to reduce quote times to two minutes.” Functionally, Argo Digital's squads are composed of about five people. “Teams beyond that size require overlaying structure, process and associated reporting,” Breen explains. “This inhibits creativity, interpersonal relationships and — due to activities like reporting — output.” While composition varies depending upon needs, each squad is formed at a project's outset, rather than working from provided documents, and is led by a product owner. Other expertise includes business analysts, designers, data scientists and engineers. When squads complete their work, successful projects are transitioned to IT and team members move on. In practice, about half of Argo Digital's current projects incubated out of a previous one, where a new opportunity was uncovered. “In such cases, one or two individuals from the original project will stay with the new one, with others added to fill out the needed skill sets,” Breen says. The genesis of Argo's squads occurred about five years ago, when CEO Mark Watson looked to implement a plan to get a jump on the digital revolution. Watson tapped into Breen thanks to the expertise he demonstrated as an adjunct professor at the NYU Stern School of Business, combined with his 20 years of past experience bringing digital products to market for various companies — none of which were insurers. “During my academic work I created an `impact vs. complexity' framework that we've expanded at Argo for vetting new ideas,” Breen says. “Essentially, we assess the impacts on our customers and our business of an idea versus the technical, operational and regulatory complexities to execute it.” Interestingly, Argo discovered the outcome of its vetting framework is non-binary. “Instead, it's definitely no, definitely yes and not now, meaning it's worth re-evaluating quarterly until it becomes one of the other two,” says Breen. With the market competition for related talent high, Breen must go beyond compensation to entice candidates. “We present our industry as one of the few that hasn't been disrupted and tell them `if you're interested in disruption, you've a chance to do so at scale,'” he says. It's a particularly compelling argument for veterans of startup companies, says Breen. “They're still passionate about disruption but have been burned by chasing the stock options dream,” he explains. “We offer concrete compensation and a work-life balance, while still working on cool technology, such as AI and machine learning, in a cool environment. That really resonates.”
AmFam's transformation hub
Another way of leveraging Silicon Valley lessons is evident in American Family Insurance's new digital transformation office (DTO), headed by the insurer's first chief digital transformation officer, Todd Fancher. With an expected staff of as much as 90 once hiring is completed, the DTO is bringing discipline to defining business problems and then helping the associated unit collaborate with others, both internally and externally, to determine which technologies, partners and ecosystems are needed for the solution. Part of that could be determining that the solution isn't viable for AmFam after all. “We want to ensure an individual project isn't addressing step four before completing steps one, two and three,” Fancher explains. “The goal is building an overall infrastructure where our technologies not only integrate with each other, but also provide us with a flexible, robust and adaptable environment that enables us to offer the ultimate customer experience, regardless of what comes next.” Functionally, the DTO is carrying out its mandate via the activities of three teams: strategy, portfolio management and ignite. “Although we expect the size of each teams to fluctuate over time, mirroring enterprise needs, every business initiative will flow through the three teams,” says Fancher. “During the process, initiatives will also tap into expertise from other departments, including our innovation team,
“We assess the impacts on our customers and our business of an idea versus the technical, operational and regulatory complexities to execute it.” —Andy Breen, SVP of digital for Argo Group
data science lab, AmFam Ventures, IT staff and various other centers of excellence across the enterprise.” At the start of an initiative, the strategy team assists a business unit with laying out a vision and roadmap. This involves breaking down a challenge, formulating a business case and creating a cross-functional team to work on it, which the DTO calls a “pod.” The skill set of strategy team members is akin to a business architect, says Fancher, with individuals having specialized expertise within each of AmFam business line. “At any given time, a strategy team member will understand a line's profit and loss plan for the year, what the operational struggles and customer pain points are, where the gaps are and what initiatives are currently underway or necessary to close those gaps,” he explains. Picking up from the strategy team, portfolio management determines what resources are required to address each pod's requirements, such as collaborating with a data scientist, as well as developing and monitoring key metrics that drive results. “Portfolio management team members have experience in human-centric design, lean start-up and project management,” says Fancher. “They know how to break down a problem into an iterative approach in order to create a minimum viable product.” The net result of the portfolio management phase is determining whether a pod should stop, pivot or persevere. “Examples would be stopping a pod because the solution path is proving insufficient, pivoting because assumptions about the customer pain point proved incorrect or persevering because customers have confirmed that the MVP addresses the pain point,” Fancher explains. Ignite team members take persevering pods through lean customer value and lean start-up processes by applying their direct experience lean methodologies. “The ignite team works with the business to ensure a pod only digitizes needed processes,” says Fancher. “Then, using lean start-up, ignite helps the business maximize outcomes while de-risking potential solutions.” For 30-year AmFam veteran Fancher, the DTO holds game-changing potential. “Among other projects, we're helping our business marry historical and real-time data to create something more powerful,” he says. “Overall, the goal is establishing new, data-driven ways of working to become more proactive and valued in our customers' lives. With the possibilities that new tools and technologies offer us, it's an exciting time.”
Exploring new angles at MassMutual
When Sears Merritt first took over as head of MassMutual's data science program in 2013, he spent the majority of his first year building up the insurer's data science profile, which was nonexistent, he says. The company went on to open its physical lab in August 2014, and now sports 80 data scientists on staff — divided into senior, middle and junior level roles. In September 2015, MassMutual also finished construction on a new 5,000-square-foot facility in Amherst, MA, where its data science team operates from today. Employed technologists' knowledge spans a variety of different educational backgrounds, Merritt says, including computer science, statistics, economics and physics. In order to fill necessary talent gaps early on, MassMutual partnered with five local universities — Smith College, Mount Holyoke, UMassAmherst, Amherst College and Hampshire College — to create a data science development program. Each year, the company takes five to seven accepted applicants fresh out of college and splits their time up between taking data science courses and working on company projects. All classes and faculty are paid for by the insurer. “We wanted a way to grow talented junior-level science individuals into mid-level roles within two to three years, and senior roles in about 10,” says Merritt. “Some applicants even choose to go forward and get their Master's degree.” The regional insurance carrier also has additional partnerships with Mount Holyoke College and Smith College for its MassMutual Women in Data Science program. The $2 million, four-year curriculum began at both schools in 2015. It's also pledged $500,000 to the University of Vermont's Complex Systems Center for a data science Ph.D. program. MassMutual's overarching goal is to leverage data science for customer experience optimization. Algorithms built in house are crafted to match consumers up with products and services they want, and how they want it delivered, according to Merritt. In regards to partnering with outside insurtechs, MassMutual's data science lab only gets involved if the company's venture-capital arm, MassMutual Ventures, finds startups specializing in their domain. “We help evaluate them,” says Merritt, adding that the company has no preference in where innovation comes from. “If data exists on an industrious scale, and we don't have the time to collect and curate the information a startup already has, that's a partnership opportunity. But some problems are fixed best by incumbents because we have data they can't have.” The company's investment in data science is paying off with a newly launched subsidiary, LifeScore Labs, which offers FICO-like life-insurance underwriting risk scores. The initiative was derived from major successes on bigger data science initiatives around risk modeling, says Merritt. Consumers can take results generated from up to 48 different standard underwriting inputs to any carrier for a quote. “We've been working on mortality risk scores over the last few years, and have developed algorithms for them,” Merritt says. “We realized that the industry and consumers could benefit from a platform like this, if it was transparent.”
“We've been working on mortality risk scores over the last few years, and have developed algorithms for them. We realized that the industry and consumers could broadly benefit from a platform like this, if it was transparent.” —Sears Merritt, head of data science, MassMutual
A macro focus at Liberty Mutual
The evolution of innovation labs can be best depicted by insurers' growing focus on making consumers' daily lives easier. In the last six months, Liberty Mutual's innovation center, Solaria Labs, has leveraged third-party data to deploy several new products for consumers in response to developments in the sharing economy, smart home and autonomous vehicles. Established in 2015, Solaria Labs is treated as a part of a larger innovation ecosystem that includes the insurer's core business and partner network, including startups and original-equipment manufacturers. The lab has two locations: one minutes from Liberty Mutual's Boston headquarters and the other in Singapore, launched last summer. Despite the disparity in markets, the labs are identical in workflow, Adam L'Italien, VP of global consumer markets innovation at Liberty Mutual says. Each begins by ensuring pitched offerings by product owners, operating as mini CEOs, have a consumer focus. These owners are also responsible for testing their ideas in market and understanding what features need to be built on. Meanwhile, Solaria's applied science team is tasked with developing algorithms needed for the projects. Software developers and designers then build out the functionality for apps and online solutions. Total Home Score, launched in October, is one consumer-focused product born out of Solaria Labs. The offering uses a customized Shine API to get a clearer picture of residential neighborhoods through 3-D maps, rating road safety and noise levels around homes consumers may want to purchase. The platform's Road Score service also measures the prevalence of aggressive driving in selected areas, while the Quiet Score estimates the noise levels surrounding a home due to traffic or public transportation. The insurer plans to use the same publicly available data used for Total Home Score to expand the use of Solaria Labs' API and deploy an auto offering in the near future, according to L'Italien. The envisioned product would offer a “safe route” for drivers to follow, in addition to the quickest route or toll avoiding options provided by traditional GPS systems. In January, the innovation lab also launched Dwellbeing, designed to help homeowners maintain the infrastructure of their property. The platform offers a customized website where users can manage heating, ventilation and air conditioning systems; plumbing; common house appliances; and home safety gadgets. The technology relies on self-reported information from customers to work, but automatically sends mobile notifications to homeowners when maintenance tasks are required. “Instead of just focusing on disruptive forces, and studying them, we wanted to proactively extend protections beyond insurance,” says L'Italien, who leads Solaria Labs' efforts along with lab manager Chris Moss. “Now that we have all this knowledge and expertise, we are thinking about how take action to protect people in new ways, including their experiences.”
The road ahead
No matter which specific strategies incumbents pursue, the trend toward transformation leadership is expected to advance even as insurtechs continue to push the envelope. However, it's also important for incumbents to realize that not all insurtechs, no matter how groundbreaking their innovations may seem, will survive. “Frequently the insurtechs fail to respect all of our industry's challenges, particularly around regulations that are in place to protect carriers and consumers,” Chow says. “Many insurtechs will eventually hit the same brick walls that incumbents face every day.” For incumbents, this means transcending the industry's preoccupation with insurtechs to also consider and address the impacts of coming generational shifts. “It's common for the existing dominant cohort to assume the next generation will grow up to be like them, but it's just not the case,” McIsaac says. “For example, the upcoming generations are far less interested in automobile ownership. This will likely cause a shift towards insurers contracting with automakers, rather than consumers, with coverage coming packaged within payments made for leasing, or renting, a vehicle.” But for life insurance, say the analysts, upcoming cohorts seem more oriented to products that can adjust or adapt to changing life stages, creating dramatically different product needs and processes than selling and administrating fixed 50-year contracts. The bottom line is that transformation leadership goes beyond improving existing business models and processes. “For incumbents across all business lines, it's critical to move away from the outdated concept of being all things to all people and decide where you can be competitive,” says McIsaac. “This enables focusing capital and human resources effectively to truly be a leader in the transformation to digital.” —Danni Santana contributed to this article. DI
American Family's new digital transformation office will have as many as 90 employees tackling disruption when fully staffed.
Liberty Mutual's innovation center, Solaria Labs, works on initiatives related to the smart home and sharing-economy macro trends.