INNOVATION DRIVERS

Innovation is not something that is naturally associated with a sector which, after all, is run by actuaries. No surprise then that taking the entire financial services industry into consideration, insurance is the area that has seen least product innovation over the past decade. However, changing demographics, the increased levels of threat in some areas, the potential for using new technologies, and the desire to bundle some aspects of financial services provision is forcing some insurers to review their product types and the way they are delivered, and most importantly quoted. In addition changes in legislation around the world including the relaxing of pension regulations in the UK, will undoubtedly result in opportunities for more innovative pensions and insurance products. Moreover, as the developed world gradually becomes older and fatter, the savings and investment sectors as well as the core insurance sector need to produce products and services that match the needs of this changing demographic. Similarly another major threat to the insurance sector- that of climate change and associated natural catastrophes - has resulted in a number of initiatives. In 2005 natural disasters killed 97,000 people and cost the insurance industry $83 billion. This has spurred the sector to launch initiatives such as Lloyds 360 risk project to assess these risks. Swiss Re has introduced its Climate Adaptation Development Programme, which is designed to provide financial protection against weather risks in emerging countries, and the Climate Wise initiative backed by global leaders in the insurance sector aims to reduce risk associated with climate change. Linked to this, insuring risk from investments in Clean Development Mechanism approved projects that fail to deliver could add 4 to 5% of growth to insurance markets. However the focus in the insurance sector is clearly about better understanding risk rather than, just yet, offering any green products. Finally the effects of the global credit crunch and the associated economic slowdown will slowly work its way through the insurance sector and surely impact the way such companies innovate. We are already seeing some major players stopping withdrawals from some funds and it remains to be seen the extent to which this will increase, or decrease, innovative activity.

Advances in technology, particularly centered around business intelligence and global positioning systems, are set to radically alter the insurance industry over the next five to 10 years, predicts a report from the TowerGroup, a Needham, Mass. research firm that specializes in the financial services industry.

The insurance industry has managed to plod along without the major upheavals seen in many other sectors, but that is about to end, says TowerGroup Research Director David West. Several technologies are coming together that will result in dramatic improvements to safety in vehicles as well as enable insurance companies to offer a wide range of new pricing plans based on distances driven, time of day, and individual driving habits.

The direct result is that companies that seize the opportunity to innovate first will have a distinct advantage to survive and lead as the industry goes through the predicted upheaval. "The timing is right for it," says West. "I don't think this [the major changes forecasted] could have happened 10 years ago - the technology wasn't ready. But what we're seeing now is a convergence of

several important technologies and behind those technologies is information - information to make better decisions on risk and price plans accordingly."

In his report, The Digital Chauffeur: Real-World Principles of Innovation for the Insurance Industry, West notes the evolution taking place in such areas as passenger air bags. Early air bags required inflation forces much stronger than those of modern air bags and produced unexpected consequences such as injuring passengers who sat too close to the air bag. To better learn how air bags performed in crashes, vehicle manufacturers such as General Motors and Ford Motor, began installing event data recorders in vehicles to capture information related to the seconds immediately before and after an air bag deployment.

By combining the two technologies, vehicle manufacturers were able to reduce the number of fatalities per million vehicles from about .35 per million in 1991 to practically zero from 2004 through 2007.

Now a number of insurance carriers are making use of that same event data recorder (EDR) information. The practice has raised privacy concerns, and some states, such as California, have enacted legislation requiring manufacturers to disclose to customers whether EDRs are installed in their vehicles. The National Highway Traffic Safety Administration issued a rule in August 2006 that will require all automakers to tell new car buyers if an EDR has been installed, beginning with model year 2011 cars.

West says one insurance carrier he spoke with, which could not be named, used EDR information to reconstruct an accident in which a driver claimed to have hit a deer. The change in velocity recorded by the EDR clearly showed a collision with a fixed object, not a deer. It was later determined the driver hit a concrete barrier.

The direct result is that through this innovation insurance carriers have been able to better reconstruct events that took place at an accident and, in the process, better determine appropriate damages and deter fraud. As vehicle manufacturers implement further safety systems, such as systems to detect if a vehicle is approaching another vehicle too quickly and is in danger of being involved in a crash, more information will be at their disposal.

An equally important innovation is taking place in the area of pay as you drive (PAYD) insurance. By combining global positioning systems, along with cellular technologies, insurance companies are beginning to offer policies where drivers are charged based on the amount they drive, as well as the time of day and how well they drive. Progressive Insurance introduced the concept in the U.S. about 10 years ago, but with limited success.

The Progressive system was called Autograph, and combined GPS technology with cellular systems to record and transmit driving information. However, the technology was still relatively new and expensive to purchase and install. They were not being installed directly by automakers, so insurance policy holders had to pay for the installation themselves. The idea was ahead of its time, says West, but since then more cost effective systems have been developed.

One insurer, Norwich Union, has launched what appears to be a successful version of PAYD insurance in Britain. Powering the system is a large Teradata data warehouse and business intelligence systems. Through an on-board GPS system that is about the size of a compact disc player and cellular technology, the carrier can now track an individual's driving patterns, from how many miles they drive in a day, to whether they drive on city streets, major highways or rural roads, what time of day they drive, and how fast. In turn, the carrier is able to greatly reduce the risk associated with pricing a policy and offer discounts to qualifying customers. In some cases, Norwich says customers have changed their driving patterns to qualify for lower pricinga win for both sides.

In the U.S., Progressive Insurance relaunched its pay as you drive program in Minnesota in 2004 under the name TripSense, and expanded the program in 2007 into Oregon and Michigan. Other carriers such as Safeco are offering other innovations, such as Teensurance, which allows parents to track their teen's driving. According to Safeco's Web site, the GPS-based system allows parents to set "safe driving zones", essentially a perimeter in which the teen is allowed to drive. If a vehicle goes outside the perimeter, the parent is notified by phone or text message.

"A lot of the innovation in the years ahead will be driven by competition," says West. "If you want to capture business from your competitor, you're going to have to be more innovative, you're going to have to consider what your customers want, be able to implement systems to offer it, then price it accordingly."

TowerGroup estimates the global insurance industry spent $1 billion on development projects for information management in 2006. By 2010, TowerGroup forecasts spending will increase to $1.25 billion and in the years thereafter will increase significantly as the industry attempts to capture the value of new sources of information.

6 Hot Technologies That Will Transform the Insurance Industry in 2011

Where will insurers seek a technological edge in the coming year? Industry analysts and consultants identify the technologies that will demand carriers' attention during the coming year. Tags: 2011 Insurance Technology Outlook, By Anthony O'Donnell More from this authorJANUARY 04, 2011

1. Data Management Whatever insurers have planned to improve processing, the success of their projects will depend on the quality and availability of data. Consequently, they will invest in a variety of data-related technologies, including data warehouse, data storage and metadata initiatives, according to Karen Pauli, research director, insurance, TowerGroup (Needham, Mass.). "It's not possible to execute any meaningful strategies or comply with regulation without getting data into usable condition," she comments. Related Resources

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In order to drive greater precision in risk management, insurers will pursue master data management (MDM) solutions, says Scott Mampre, VP in Capgemini's (New York) insurance practice. Insurers have made limited progress in liberating data captured in isolated spreadsheets and local databases, according to Mampre. "MDM solutions enable a consistent, unobstructed top-down view of risk across an insurer's divisions by breaking down operational barriers to achieve a seamless alignment of governance objectives, technology and disciplined data management processes," he says. 2. Business Intelligence and Predictive Analytics Insurers are sitting on a gold mine of customer and operational data, and they are recognizing that they need unified business intelligence (BI) systems to be able use these insights to improve customer experience, develop new products and markets, and align resources to the point where the business performance is accelerating, says Ellen Carney, a senior analyst with Forrester (Cambridge, Mass.). "Hand-in-hand with the interest in BI, predictive analytics is helping insurers with premium and claims leakage by driving better underwriting decisions and helping root out fraud," Carney relates. In the life insurance arena, carriers increasingly will use heterogeneous data to better predict mortality experience, producer success, lapse rates, propensity to buy and other leverage points, predicts Clark Troy, senior analyst, Aite Group (Boston). Across the industry generally, insurers will use predictive analytics to manage better through tough economic times, according to Matthew Josefowicz, director of New York-based Novarica's insurance practice. "Insurers continue to invest in better technologies in search of identifying profitable growth opportunities in a hyper-mature, contracting market," he asserts. 3. Open Standards Architecture Carriers and distributors increasingly will look to open source technology in order to tap the cost advantages and negotiating strength that come from avoiding vendor lock-in, says Aite Group's Troy. "P&C insurers such as Geico and Travelers have taken the lead in implementing open source middleware solutions such as JBOSS, and Aegon Religare in India has been a pathfinder with its use of Linux-based e-mail," he reports. As more organizations rely on external sources of intelligence to inform key business decisions, they will need open standards to enable easy interoperability among and further orchestration of an organization's core services, asserts Capgemini's Mampre. "Open standards will also become crucial in facilitating shared methodologies, frameworks, tools, and even certification of skills and competencies," he foresees. "In terms of service orientation, integrated service management platforms will become crucial to manage all the components of an organization's SOA services, which can be defined, executed, monitored and managed from one unified view." 4. Cloud Computing/SaaS Many insurers remain skeptical about cloud computing's risk/reward proposition, but business still is likely to boom for cloud-based applications such as e-mail, CRM and even policy administration in P&C insurance, according to Chris Curran, a principal with PwC's Diamond Advisory Services. After a year of cautious exploration around the cloud, insurers are becoming more comfortable with it as a tested deployment model, opines Michael Costonis, executive director, North American insurance practice, Accenture. "Look for CIOs to leverage cloud-based services up and down the stack, from infrastructure on demand to applications and services," he says. "This will also open a world of new vendors [e.g., Amazon and Google] to the insurance world." Forrester's Carney sees cloud computing and software-as-a-service (SaaS) as means for large carriers to expand into external markets as they face stagnant growth domestically. "They've got to establish beachheads in new markets fast -- meaning the legacy 'we'll build it ourselves' approach simply isn't going to work," she explains. "Enter rapidly deployable SaaS options that provide multi-language and multi-currency capabilities pretty much out of the box that stay standalone or run the new business while IT integrates this new business into their legacy systems." 5. Social Media Insurers' interest in social media will continue to develop in the coming year, but with a greater focus on B2B applications, according to Donald Light, a Palo Alto, Calif.-based senior analyst with Celent. Adds TowerGroup's Pauli, "Carriers that have dabbled with blogs will recognize that information in social media will take their customer insights to a whole new level if they integrate it with core systems and generate new information for new strategies." 6. Mobile Technology

Explosive adoption of smartphones and tablet computers such as Apple's iPad will continue to drive insurers' mobile strategies, according to Novarica's Josefowicz. "Internal uses will lead the way at most carriers, but direct writers will continue to push consumer-facing apps," he predicts. "Life producers are a mobile group, and more and more of their CRM, quoting illustration and other functions will migrate to smartphone and tablet platforms," notes Aite Group's Troy. "Producers see the advantage and are responding to carriers' efforts in this area." In the coming year, insurers will be taking mobile platforms "beyond the basics," deploying things such as disaster management apps to tap into the crowd to channel resources during a catastrophe, according to Diamond's Curran. "In addition, there will be further 'outsourcing to the customer' in areas such as first notice of loss, claims preprocessing and home inventories."