Two questions can be way markers for U.S. property & casualty (P&C) insurers when contemplating their response to existing and emerging business challenges: If we had the opportunity to design an organization from the ground up today, what would we want it to look like? And second, how do we get there from where we are today?
A team of WTW North America insurance experts hosted a webinar to discuss some of the trends that are helping shape thinking on those questions. From WTW’s perspective, key issues and themes for future P&C insurance business models include analytical decision making, agility and effectiveness, resilience and digitalization. Here’s a summary of what they had to say.
Ravi Sharma — Associate Director, Insurance Consulting and Technology
Scott Gibson — Director/U.S. Business Process Excellence Lead
Jamie Mackay — Director/U.S. Insurance Target Operating Model Lead
Frédéric Matte — Director/Americas Environmental, Social and Governance (ESG) Lead
Jon Sappington — Director/U.S. Inflation Impact Lead
Ravi: When it comes to tackling analytical decision making, the first tendency in recent times has been for insurers to jump right into some form of modeling or advanced statistical analysis. This places a lot of emphasis on the analytical part but potentially downplays the decision-making component. Scott, with your expertise in automation, could you give us some insight into how and why you think that’s changing?
Scott: Models get a lot of airtime, but if you aren't able to deploy advanced analytics successfully, they're not much use to the business.
In an ideal world, you would survey the landscape of technology and data that's out there and then carefully plan out how to use those technologies to their fullest extent within processes, to maximize how those fancy models produce actionable insights.
But most organizations probably have multiple legacy systems and infrastructure that they have been and maybe are continuing to replace. What's often forgotten as you're modernizing your core infrastructure and your systems is that the processes that are currently in place were designed for that old infrastructure. And now that you have new tools, you also need to rethink your processes.
You need to think about where and who is consuming analytical insights and how they’re presented.
Ravi: How then can building out infrastructure, business intelligence and processes enable more powerful analytics?
Scott: It comes back again to ensuring that analytics are reaching the right individuals at critical decision points. Creating stronger end-to-end automation, rather than piecemeal automating steps, will enable things to move quickly and efficiently and help achieve “more for less.”
The second thing is around the information that's circulating in the business. It needs to be consumable. It needs to be relevant to the individuals receiving it. There needs to be an interpretation layer. This is where I think data visualization has been really key in the industry lately — to distill that information down into something that is consumable and manageable for decision makers.
But more than that, I think there's an opportunity when designing your processes, when applying automation tools, like robotic process automation, to help with information curation, by surfacing the information that is relevant and useful.
Ravi: Traditionally when we talk about automation, we think about building out rigid processes that are efficient and free from error. So, how do we make automated processes agile enough to accomplish dynamic needs?
For example, recently we’ve experienced inflation numbers that many of us haven’t seen in our careers. Jon, you’ve been able to incorporate these impacts in reserving analyses quickly and efficiently, in large part due to, not in spite of, automation. Could you talk to us a little bit about agility in a future insurance organization and how that links to effectiveness?
Jon: On inflation, I feel the best part is that now we don’t have to talk as much about COVID adjustments in our reserving work!
Typical actuarial reserving methods assume that the future is similar to the past — that there are no big shifts in speed of claims reporting or inflation. But basically, now you have to look closely at how you’re going to adjust for inflation, what kind of lags to place into models (including for post-COVID social inflation) and how much excess inflation to allow for.
You have to go beyond just projecting an ultimate because you also have to project cash flows, a timeline of inflation and things like that. A well-structured model, to which you can easily add other pieces, is therefore extremely helpful.
Within our own models that we use in client assignments, we’ve been able to quickly produce cash flows and to scenario test different inflation forecasts. The benefit of appropriate agility in your models is that if what you thought was going to happen in the summer suddenly changes in the third quarter, you can quickly drop in a new inflation forecast and roll with that.
Ravi: I think we can say that agility and effectiveness are, in general, key components of business resilience to change. A particular facet of resilience that is becoming ever more important is climate resilience and insurers’ approaches to ESG (environmental, social and governance) matters. How so, Fred?
Frederic: There are sticks and carrots linked to ESG for insurers. External pressures, or “sticks,” are typically arising from regulatory requirements, shareholders' expectations and changing customer demands. Set against those, though, we see real “carrots” for insurers in the way they approach and can benefit from strong ESG practices, based on four core principles.
Just like you can't run a business without an effective strategy, insurers will first and foremost need an integrated ESG strategy. Integrated is the key word there. Second is a phased approach with the capacity for continuous improvement. You can’t figure out all likely future ESG requirements on day one. It must be thought out as an intuitive and multiyear journey that allows for adjustments over time. Third is cohesion across all business functions. The last thing you want is inconsistencies between, for example, underwriting and investment policy that could result in negative reputation impacts or hinder the company achieving its objectives. And fourth is a top-down approach. The board's buy-in to ESG, ownership and engagement will be crucial so that it isn’t just a check-the-box exercise that is driven solely by regulatory requirements. That’s how value creation opportunities will come about.
Ravi: Nonetheless, we can’t ignore the role of regulated disclosures in ESG’s growing prominence. What’s the current 30,000 feet view of ESG disclosures?
Frederic: Where to start? On the climate front, we have the Task Force on Climate-Related Financial Disclosure, or TCFD. That is quite well established in many jurisdictions and is actually becoming mandatory in some of them. Then you have the emerging Task Force on Nature-Related Financial Disclosure, or TNFD, which is somewhat similar to TCFD but introduces a need for companies to disclose their impacts on nature and biodiversity.
Just released by the Partnership on Carbon Accounting Financials, or PCAF, is the Global GHG Accounting and Reporting Standard for Insurance-Associated Emissions. And in parallel, we have the Net-Zero Insurance Alliance, which has issued the first version of its protocol for insurance companies to set emission reduction targets. Then you also have sustainability-related reporting developments, such as the International Sustainability Standards Board’s, or ISSB, disclosure standards.
That’s not a comprehensive list either. The problem with all this regulatory activity is it can be quite easy to get lost. Insurers will first have to figure out the nuts and bolts of these frameworks and standards and then identify those that are relevant and valuable for their business in order to establish the necessary processes for compliance, decision making and value generation purposes.
Ravi: While all the topics mentioned are important on their own, how can digitalization act to wrap them all together and enable insurers to address today's problems and tomorrow’s challenges — what we at WTW typically refer to as business transformation?
Jamie: Taking a step back to the question of “why digitalize,” Scott talked about legacy systems and the challenge that these present for automation, efficiency and moving the business forward. The core issue for many businesses is they’ve got legacy equipment, but they’ve also got milestones and timelines to meet. Work still has to get done. I compare the situation with a locomotive moving along a track. Many insurers realize things in the business need to improve to address emerging challenges, yet they can’t simply pull the train from the tracks. They’re faced with the task of rebuilding the train — maybe even relaying the tracks, to stretch the analogy — while keeping that same train on schedule.
Transformation, however, needs to be taken literally. This challenge of rebuilding the locomotive while it’s still running means that we often see incremental investments in innovation that often don’t pay off, and the drivers of the change are often forgotten once we’re five or six stations down the line. Key is having a clear vision of your company’s target operating model (TOM). What are the guiding principles? Maybe it’s ESG? Or efficiency? Is it increased analytical ability? Is it less siloing? Of course, different insurers will have a different TOM, and it’s a case of making sure that digitalization or transformation is supporting what's best for the business in the wider market and regulatory context.
Digitalization is really just about turning unstructured “stuff” into structured data points. We’re not looking to automate the actuary out of the process; we’re generating more data, better data, for them to work with.
We have to acknowledge that transformation, digitalization or automation sometimes raises fears of the “robots taking over.” This is massively undervaluing of our human resources, in my opinion. The nature of some of the skills insurers will need in a more digitalized marketplace will change, and I think we have to be open to that and adjust our recruitment and workforces to meet those challenges; however, the essence of digitalization, as I said, is turning unstructured data into structured data. So, the aim is not to remove people from the equation at all but instead to give them greater focus and opportunity to generate value from the broader, richer fields of data that are being created.
