It’s the End of Insurance (and I Feel Fine): Q&A with Rob Galbraith

Insurance carriers and brokers collect mountains of data, but they still struggle to gain the insights needed to accurately assess and price risk. If you had to give the industry a report card, how well do insurers manage risk today?

In terms of managing risk, I would give insurers a B- and that grade is trending in the wrong direction. The industry needs to move from a point-in-time, periodic and historical view of risk to one that leverages the power of modern technologies such as sensors, cloud computing and advanced algorithms including AI to move closer to a real-time view of risk.  A great example is cyber risk. What is a better measure of the current cyber threat to a business: 3-5 years of historical cyber-attacks, or current network activity this morning? Cyber risk is ever changing, ever evolving and while historical data can provide some value, it quickly diminishes over time.  The same is true of telematics, smart home sensors, wearables and more: insurers can now directly “observe” behavior and conditions, “see” near misses and have access to a ton more data than ever before. I’m not aware of a single carrier, however, that has fully been successful in not just capturing and integrating this data but using it in their pricing and underwriting processes. Carriers are still looking for variables such as the age, gender and marital status and what has changed since the last renewal a year ago. This is outdated thinking that leads to more conservative views of risk and does not account for emerging exposures in the mobility space, the way property is used and what businesses need in terms of coverages today. The market is demanding a lot more customized products that better suit the needs of today’s diverse consumers and businesses around the globe.

If you look behind the curtain at the insurance back office, there is still an incredible amount of paper pushing and what Ryan Deeds, host of The Digital Broker podcast calls “soul-sucking” manual work. Why do digital transformation and workflow automation still seem so far off?

I think there are a few reasons for this lack of investment in digital transformation and workflow automation. First off, I would say that there actually has been a fair bit of investment in this space – it hasn’t always translated into unmitigated success stories and is very much a work in progress. Having said that, I do think there has been an underinvestment to date.  Part of this is due to how we measure success in the industry. Expense ratios can be held artificially low by remaining on legacy platforms one more year, because the cost to run these fully depreciated but outdated systems is simply the cost of electricity to keep the machines running.  Investing in large capital expenditures now that have a big payoff 5-10 years down the line can be challenging when your company is focused on hitting its numbers this year and your strategic time horizon is 3-5 years. In addition, a big push to automate workflows can benefit workers who are struggling with mundane manual labor, but a large amount of automation can significantly change jobs and what skills are needed. I’ve seen the chief underwriter at a Top 5 carrier choose a 5% productivity improvement from process efficiencies over a 50% productivity improvement enabled by AI before. Why? Because a 5% productivity improvement means you don’t need to hire as many people next year, reducing expenses. A 50% productivity improvement means you now have too many people in your organization that need to find a new role at the company, a big short-term headache to manage. Finally, we have yet to see the companies who have embraced automation take a huge competitive leap ahead of those that have not. I think this is coming, but time scales are elongated in the insurance industry and it usually takes at least 2-3 years for decisions today to play out enough for them to impact bottom line results.

What do you see as the next big breakthrough in insurtech that carriers and brokers need to prepare for?

There are 3 main areas of technological advancement that I think carriers and brokers are not at all prepared for to the extent that they should be: wearables, computer vision and blockchain or, more properly, distributed ledger technology (DLT).

Wearables have now been around for a while, but it is tricky to get the value proposition just right. There is a general rule in the innovation space known as the 10/10 Rule as articulated brilliantly by Steven Johnson in his book Where Good Ideas Come From. This rule states that it takes about a decade – 10 years – to build a new platform and another 10 years for that platform to find an audience. Wearable startups such as MākuSafe, Kinetic and others have done a great job in my view refining their hardware and software to the point where they are now being successfully deployed in manufacturing facilities and other work environments, providing a tremendous amount of data and insights to make workplaces safer for employees.  Many more wearables and even mobile phone apps can detect all manner of health conditions, diseases, etc.  There are legitimate concerns about privacy and data security yet to be ironed out, but the power of these technologies in the life and health space are undeniable.

Computer vision is the next generation of AI which has already powered startups such as Arturo, Cape Analytics, Flyreel, Zesty and more that derive insights from still images. Computer vision can turn “dumb” video footage from cameras and gain valuable insights. Companies like Owlcam and Dreyev are “seeing” what drivers see and assisting them in avoiding accidents, both looking outside of the vehicle as well as inside to help combat distracted driving. This technology will eventually render the retroactive phrase “let’s go to the videotape” meaningless because you won’t have to review old footage to see what happened in an accident – the conditions will instead be monitored and assessed in real-time to help avoid injuries from occurring in the first place.

Distributed ledger technologies (commonly referred to as “blockchain” but encompassing a broader array of technology) hold the promise of “digitizing trust” which is critical in the insurance space. An insurance product is a financial instrument and legal contract all rolled into one – this isn’t just a ride from your house to the airport or other “low stakes” product or service offerings. If you get it wrong as a consumer, your financial loss won’t be covered, and you could be out large sums of money! Additionally, there are so many more parties involved in insurance transactions than the parties to the original contract – the insured, agent or broker and carrier. Third parties such as claimants, inspection vendors, appraisers, claims adjusters, body shops, medical providers, salvage yards and a host of others are often involved and need to exchange information back and forth with one another – all while avoiding fraud. This exchange of information and need for verification and trust is huge and drives a large amount of expenses in the insurance industry, which overall can account for roughly 30 cents of every dollar collected in premiums. The potential savings by leveraging DLT are vast and, while the timeline for developing industry solutions is unknown, likely coming sooner than most realize.

The insurance industry faces an uphill battle in attracting millennials to the profession. Your company, AF Group, has been recognized as being one of the best employers in the insurance industry. What do insurance companies need to do to attract top talent?  

This is a key question that often goes overlooked! The talent retention strategies of companies have not kept pace with a changing workforce. While many companies in the insurance industry have been around for decades and historically relied on loyal employees, it’s never been easier to find another job elsewhere in the industry. I’m also starting to see many career insurance professionals make the jump to the insurtech startup side for the opportunity to build something new and innovative and not be constrained by old ways of thinking, red tape and “that’s the way we’ve always done it” mindsets. Repayment of student debt is much more attractive as a benefit to millennials and the first cohort of Gen Z entering the workforce than a generous 401k match. Robust employee recognition programs and opportunities for challenging assignments that can lead to promotions and additional responsibilities, rather than simply promoting based on time in position, are also key for companies to recruit and retain talent. Companies are not valuing their internal talent enough! They too often take them for granted and assume that they will stay for years, and that they are easily replaceable if they do decide to walk out the door. Neither is a smart assumption and the amount of tacit knowledge and understanding of how to get things done within your corporate culture that walks out the door annually is staggering to me.

You’ve been called “the Prophet.” So, tell us, what will the insurance industry look like in 10 years?

I don’t profess to have a crystal ball so I’m very likely to be wrong here! At a high level, I believe that companies who are earlier to embrace emerging technologies and gain valuable experience through trial and error while actively seeking to “pay off” their technical debt will gain a key competitive advantage over the long run, both from an expense savings standpoint due to greater automation and efficiencies as well as revenue and loss avoidance standpoint.  Companies are competing on the 3 As – algorithms, agility and automation. Over time, these companies can live on smaller margins due to their competitive advantage which will put pressure on those that have not invested in these technologies. When you are a margin-driven industry, you need to achieve scale to survive so I also see a lot of industry consolidation on both the agent/broker side as well as the carrier side as larger, more efficient firms gobble up smaller, less efficient ones. However, there will always been room for smaller players that are able to be nimble and identify market opportunities in specialty areas and can take advantage of them ahead of larger but slower competitors.

Rob Galbraith is the Director of Innovation at AF Group and the author of the Amazon bestseller The End of Insurance As We Know It. Rob is a popular keynote speaker who has spoken at events around the globe on the topics of innovation, insurtech and the future of insurance. Rob has over 20 years of experience in the financial services industry in a variety of leadership positions with AF Group, USAA, Citigroup, and the Federal Reserve Board. He is a recognized thought leader on P&C insurance who is a frequent media contributor and well-known industry influencer. Rob holds a Master of Science degree in Insurance Management from Boston University and a Bachelor of Arts in Economics from Michigan State University.