We at Bowery Capital released the 2016 edition of Opportunities In Vertical Software two weeks ago which laid out our point of view on ten specific verticals and the potential for various software solutions to dominate each of these ten verticals in the coming years. For ten weeks, we are releasing content focused around the impact of software on these ten industries. Following our Construction Software Interview released last week we conducted an insurance software interview with Larry Wilson to talk through four big questions about the property and casualty insurance industry. Larry was the Founder and Chief Executive Officer of Policy Management Systems Corporation (NYSE: PMS) which served as the backbone for most of the P&C industry through the 1980s all the way up to today. PMSC served nearly 70 percent of the world’s insurance companies in 30 countries and was acquired by Computer Sciences Corporation in 2001. Since then he has founded or co-founded 9 technology companies and he spends most of his time advising insurance technology companies as a Board member of Fineos, Worley Claims Services, Duck Creek Technologies, and Assured Partners. Larry is also Chairman of Ventus Risk Management, and an Executive Advisor to Apax Partners, Aquiline Capital Partners, and McKinsey.
What are some of the most interesting developments in your industry over the last 10 years and how has software added value?
The pace of technology evolution in the insurance industry is accelerating. The biggest development is the beginning of a fully digital infrastructure. Insurance agents must understand risk transfer opportunities for clients through insurance products offered by carriers. The carriers really have a simple set of questions they must answer: which risks to write, what premium to charge and when a claim arises, how much to pay. That’s it, these questions are the basis of the business. The complexity however is huge. Electronic connectivity to all industry participants is increasing dramatically: insureds, agents/brokers, adjusters, appraisers, investigators, attorneys, reinsurers, repair/replace/healthcare providers, and others that use industry standard ACORD formats. As this is occurring mobility is also increasing. Some examples of innovation across insurance via technology are:
CRM systems are beginning to allow agents to use an exchange structure to have information about a family or business client (frequently at least partially populated by access to on-line data bases) that can be submitted to multiple carriers to get multiple quotes for multiple product/coverages. When this is fully adopted it should reduce the customer service rep costs in agencies by more than 70%.
Machine learning is another example of applications that take costs out of insurance through correlating variables of non-linear relationships to more accurately price premiums, estimate claim severity quickly, determine lifetime value of a client, and other answers to questions that traditional actuarial linear science does not answer accurately.
Claims supply chain integration across the settlement process will allow for pre-agreed networks of suppliers (contractors, materials, health care and rehab) of materials and services to be purchased at scale for catastrophic events without surge pricing and eliminate the perceived need for public adjusters that drive up cat costs. Policies are designed to provide option of repair rather than $ indemnification.
Overall I think most property and casualty insurance is about 20% over priced from what it should be with optimum use of technology and more efficient business models. I believe there are about 10 areas of cost reduction opportunity with each accounting for around 2%. These include complexity reduction of quoting and binding by use of automated application pre-fill and exchange structures with CRM, cloud computing, advanced electronic aided claims investigation, appraisal and settlement, claims supply chain integration, sophisticated claims severity management, fraud detection, litigation management, and billing efficiencies so families and businesses only receive 1 monthly bill for all of their insurance policies.
What are some of the challenges / hurdles that still exist?
Several challenges still exist across the insurance landscape. On the carrier side I think organization structure is the biggest. Most carriers are organized in silos: distribution, underwriting, claims, and policyholder service. Because a carrier never knows the ultimate cost of a product sold until all of the claims are paid overall profit accountability is not possible until reaching the C level. The capital markets approach of portfolio managers would be a better organizational structure where PMs decide which risks to write, how much to charge, and how much to pay for a claim. This would produce better accountability and incentive structures. This idea is 300 years old as it is basically how Lloyds Coffee house, the inventor of insurance, operated. The problem is the legacy systems they use cannot effectively support this structure.
Similarly independent agents are paid a lot of commission, which they need due to their high labor costs. Clients need multiple policies (families: auto, HO, umbrella, etc; businesses: property, liability, workers Comp, commercial auto, bonds, D&O, E&O, etc). Agents are expected to get multiple carrier quotes to find the best fit of price and coverage for multiple policies. Agents may have to get a dozen or more quotes to bind coverage for a client. Today the coverage process is extremely labor intensive.
When looking to enable a process with software what are the most important points for a buyer to think through?
The buyer should have an overall enterprise architecture and fill it out with the needed apps. The days of coded software are quickly coming to an end. Buyers want configurable software that business analysts, not coders, can install, customize and maintain. They also need constant updates to reap the benefits of competitive advantage. Finally, insurance is the only industry in the US exempt from interstate commerce laws and is solely regulated by the states. This results in thousands of state specific rules, rates, forms, and practices. Modern systems have to accommodate these constant, mandatory, and time critical changes.
What is your vision for the industry in 5-10 years?
On the IT delivery side I believe there will be a major migration from on premise data centers and applications to cloud delivery/SaaS. The capital expenditure and operating costs can be dramatically reduced and security and availability increases by leveraging cloud computing. I ask insurance CEOs with a data center “with this business investment strategy why don’t you build another building and install diesel generators and hire a team to service and maintain them and cut the line to the public utility you are using?”
The big systems move will be to a digital infrastructure based on 4 areas: mobility, connectivity, big data and worldwide access to participants in their business model. I think there will be a lot of progress in getting the 20% cost reduction opportunity.
Thank you for reading this Insurance software interview with Larry. Make sure to check out the 2016 edition of Opportunities In Vertical Software for the full report and we will be back tomorrow with our final post on the Insurance software industry and the software that powers it.