Insurance Product Development

The Race to Autonomous Vehicles

by Michael Goldman

The $2 trillion global automotive industry is ripe for disruption from autonomous vehicle technologies that make driving safer, more energy-efficient and more convenient. Driver error causes more than 9 out of 10 crashes.  Autonomous vehicles are robots on wheels that eliminate driver perception, distraction and incapacitation errors. While cybersecurity risk poses a safety threat, there is little doubt that robots can drive better than humans under normal conditions. Most autonomous vehicles are powered by eco-friendly, zero-emission electric batteries, and they are designed to drive safely and efficiently. Autonomous vehicles offer limitless opportunities for convenience by changing the driver into a passenger.
Following several years of product and strategy improvements along with making progress in gaining regulatory approvals for road testing, the major players are emerging in the race to commercialize fully autonomous vehicles. To name a few, Waymo started as Google’s self-driving car project and is a self-driving taxi service currently operating in Phoenix, Arizona with a pilot program for employees in California. Waymo is the largest active self-driving company in terms of daily miles driven. General Motors’ Cruise provides an autonomous ride-hailing service for its employees in San Francisco and recently unveiled plans for its fully autonomous Origin with no steering wheel or pedals. Volkswagen and Ford have made large investments in self-driving software company Argo AI with plans to implement Argo AI’s software in new vehicles in the early 2020s. Uber is heavily investing in replacing its human fleet with a driverless fleet. Startups like Optimus Ride and Pony.ai have launched self-driving ride-hailing services in designated areas of cities like Brooklyn’s Navy Yard.
These companies have really smart people, breakthrough technologies and deepening pockets. And they are all watching Tesla whiz by in the race to commercialize autonomous vehicles.
Here are several reasons why.

ADVANCED TECHNOLOGY WITH NO BOUNDARIES

Tesla’s autonomous vehicle system primarily uses cameras to identify stationary and moving objects in the vehicle’s surroundings. Radar and other sensors are used to help see in dark and adverse weather conditions. The Autopilot system is a standard feature and currently qualifies Teslas for SAE Level 2 Automation, which means it can handle all aspects of driving under certain conditions, but the driver must be ready to intervene at all times. Tesla deploys the hardware needed for self-driving in all of its vehicles sold to consumers, and they use the hardware to train artificial intelligence systems called neural networks that are designed to automatically improve with new data.
Virtually all major players except Tesla are using LiDAR technology to build autonomous vehicles. LiDAR is a sensor system that measures reflections from laser pulses to build a 3D representation of the environment around the vehicle. Geofencing is used to define spatial boundaries, and detailed maps of the terrain and objects within the geofence are developed. The self-driving car projects the sensor data on top of the map to gather information and determine the safest path.
Proponents of LiDAR argue the technology is crucial to reliably assess and measure the environment around the car in all conditions. Argo AI describes a “street-by-street, block-by-block” mindset[1] underlying their LiDAR-based technologies to make self-driving vehicles safe and accepted by society. The goal of this approach is SAE Level 4 Automation, which does not require any human intervention in limited spatial areas.
Elon Musk, Tesla’s founder and CEO, criticized the use of LiDAR in autonomous vehicles at Tesla’s 2019 Autonomy Day event. “In cars, it’s freaking stupid. It’s expensive and unnecessary…once you solve vision, it’s worthless. So you have expensive hardware that is worthless on the car.”[2] He has a point. Although the per unit cost of LiDAR is dropping, it still costs a few thousand dollars per vehicle. Researchers at Cornell University found that cameras can detect objects with near the precision of LiDAR at a fraction of the cost[3]. Also, developing capacity for LiDAR use by geofencing and mapping communities is costly and slow whereas camera-based systems can be employed in cars anywhere in the world.  Musk’s goal for Tesla is SAE Level 5 Automation, which does not require any human intervention with no spatial limitations.

TESLA HAS THE DATA

Training a self-driving car requires a lot of data. Tesla has over 3.3 billion Autopilot miles and 22.5 billion miles in Tesla vehicles[4] from its fleet approaching 1 million units sold worldwide. On an average day, Tesla collects approximately 650x more driving data than Waymo.[5] Tesla feeds the vast amount of data it is collecting into its advanced neural networks, which use the data to improve the vehicle’s ability to predict common behaviors as well as behaviors for rare situations that are difficult to simulate. Although Autopilot is currently intended only for use on highways, Tesla is using the data it gathers in all environments to train its cars how to handle intersections, traffic lights and pedestrians.

VERTICAL INTEGRATION FOSTERS INNOVATION

Many autonomous vehicle companies are partnering with automotive companies to implement their self-driving platform into new vehicles. Waymo has equipped several types of cars with its self-driving equipment. Argo AI partnered with Ford and Volkswagen to roll out its autonomous vehicle technology in both the U.S. and Europe. Daimler has partnered with Baidu to equip Baidu’s Apollo program, an open-source autonomous vehicle platform, onto Daimler’s Mercedes-Benz vehicles to test self-driving vehicles in Beijing, China.
Tesla is an automotive company and an autonomous vehicle company, allowing the company to fully integrate hardware and software autonomous vehicle specifications into its vehicle design and build processes. Large automobile companies typically source their parts from suppliers all over the world who can meet their quality demands at the lowest cost. Tesla learned the dangers of a global supply chain the hard way when its Model X deliveries fell far short of demand in early 2016 caused by a shortage of parts from a supplier. Tesla has moved many parts manufacturing operations in-house, which has led to new types of batteries, seats, motors, windows and other parts that differentiate Tesla from the competition. Bringing parts manufacturing in-house allows Tesla to be flexible and nimble in pushing improvements into its products. Musk noted Tesla pushed 20+ improvements per week into the product development process of Model S[6]. Tesla’s culture of continuous improvement is key for automation where iterative development is required to make driverless cars safe.

SELF-DRIVING TESLAS ARE STILL PERSONAL AUTOMOBILES

Most autonomous vehicle companies are intending to provide ride-hailing services. These companies are making big bets on the future of shared vehicles, but they don’t have much choice. Consumers do not want to buy a personal automobile that doesn’t operate outside of the town’s geofence, and the LiDAR-based system is costly equipment to pass on to the consumer. A vehicle-sharing model makes sense in highly congested urban areas where parking space is limited, but it will not displace personal automobiles anytime soon. Car owners value the accessibility and independence of having their own vehicle. Also, in the new era of social distancing and extra health safety precautions, vehicle sharing and ride sharing faces serious headwinds.
In contrast, when Musk and the regulators determine Tesla’s fully autonomous vehicle technology is safe for use, a simple over-the-air software update can transform Tesla’s automobile fleet into a fleet of driving robots with human-driver capabilities.
In 2019, Musk predicted Tesla’s self-driving vehicle technology will be feature-complete by the end of 2020. While this timeframe seems overly aggressive, I hesitate to doubt Musk. After all, one of Musk’s other companies, SpaceX, just became the first private company to send humans into orbit, and the company is seeking to send humans to Mars and beyond. Compared to space travel, teaching robots to drive safely at 55 miles per hour is a manageable problem.
In reality, there will be room for many winners in the autonomous vehicle market. Global automakers like Volvo, BMW, Nissan and Toyota have stumbled out of the gates in building self-driving vehicles, but they continue to invest and will not be far behind. Ride-hailing startups could shift consumer preferences on car ownership if people are able to order a ride on their phone anytime, anywhere. Autonomous vehicles have the potential to be used for a multitude of purposes including for commercial cargo transportation and in vehicles used for urban commuting or long-distance transit.

The time is now to start planning your insurance needs for the autonomous vehicle age.  Contact our product development and product design experts for help.

 
[1] https://www.argo.ai/2019/09/the-argo-ai-approach-to-deploying-self-driving-technology-street-by-street-block-by-block/
[2] https://www.theverge.com/2019/4/24/18512580/elon-musk-tesla-driverless-cars-lidar-simulation-waymo
[3] https://www.therobotreport.com/researchers-back-teslas-non-lidar-approach-to-self-driving-cars/
[4] https://lexfridman.com/tesla-autopilot-miles-and-vehicles/#:~:text=The%20following%20is%20a%20plot,Tesla%20vehicles%3A%2022.5%20billion%20miles
[5] https://towardsdatascience.com/why-teslas-fleet-miles-matter-for-autonomous-driving-8e48503a462f
[6] https://www.caradvice.com.au/367472/tesla-model-s-gains-20-engineering-changes-per-week/

Six Impacts of COVID-19 on the Cannabis Insurance Market

by Kyle Hales

When the current Coronavirus pandemic finally ends, we’ll have seen that no industry was left unimpacted by its path of disruption and change. This includes the ever-expanding legal cannabis insurance industry in the United States. Below are what I believe to be six impacts of COVID-19 on the cannabis insurance market.

1. Insurers who currently have programs on file are well-positioned to see continued growth in this marketplace.

The good news for the cannabis industry is that it has been deemed an essential service by numerous states; similar to grocery stores, pet stores, and beverage centers, among other businesses. As such, the cannabis industry can continue to grow, sell, and distribute their product in a similar manner as before. And analogous to the large increases beer, wine, and alcohol sales, I would anticipate that the cannabis market will continue to see booming demand during the pandemic.

2. Smaller cannabis manufacturers, processers, and distributors will be negatively impacted.

The recent trend of capital markets drying up for the cannabis industry will only be exacerbated by COVID-19. Additionally, coronavirus assistance through the CARES Act and other federal programs is unavailable to the cannabis industry. This will put further pressure on businesses that were not immediately profitable. With unemployment recipients receiving an additional $600 in unemployment benefits through the CARES Act, many of these smaller businesses will find it difficult to hire new employees. They may need to offer higher wages to entice furloughed individuals to reenter the workforce, further putting a squeeze on smaller businesses. It’s likely that larger companies will buy out some of these smaller entities, forcing consolidation of the industry. Cannabis insurers will need to be cognizant of the market forces impacting certain areas of the cannabis industry.

3. Current insurance carriers will likely more closely focus on the business they have already written, while their expansion plans are put on hold.

The efforts for the cannabis marketplace to continue to expand its presence has been put on hold. In New York, for example, last month Governor Cuomo conceded that it’s, “unlikely marijuana will be legalized in the state this year,” essentially delaying its legalization until 2021, at the earliest. With state governors dealing with more complicated issues, such as when to reduce/eliminate the quarantine restrictions, I don’t anticipate the legalization of cannabis to grab the attention of many state legislatures.

4. It’s likely that the approval of new insurance products offering cannabis coverage will be delayed, while excess and surplus lines carriers continue to enter the market in an effort to scoop up any excess demand for coverage. 

In March, the state of Pennsylvania requested that insurance carriers not submit any “non-essential” filings in their jurisdiction. With the possibility of other states potentially implementing similar restrictions on filings, it is possible that any new program or rate change filings would get further delayed or rejected by the states. This likely means that insurers will have short-term pricing power to increase premiums through flexibility in their rating plans. They will also be able to more closely underwrite their insureds without fear of losing business to the competition.

5. More carriers will strongly consider reducing their product liability exposures for cannabis products

This has been evidenced in the vape pen manufacturers, especially those manufacturers who were sourcing products overseas. The COVID epidemic has begun to expose how underlying health issues are adversely impacting the death rate. It wouldn’t be a stretch to me if insurance carriers draft further exclusions, especially those that specialize in smokable cannabis products. It’s likely that COVID-19 is addressed, by name, similar to asbestos.

6. Reinsurance will be more difficult to find. 

Fear of the unknown has always been a hindrance to the availability of reinsurance markets and the cannabis insurance industry is in the unenviable position of being a relatively new marketplace for reinsurers. The added stress and uncertainty of the future due to COVID-19 will only exacerbate the already tight market conditions for cannabis reinsurance. Hopefully, this will be at least somewhat offset by the natural aging process that an industry goes through, as reinsurers become more familiar with the risks and exposures they underwrite.
When this pandemic finally ends and life returns to “normal” or “new normal”, we should expect to see the cannabis market continue to grow, but with fewer and mostly larger entities. Insurers who understand this marketplace and can quickly adapt to these changes will be able to rapidly respond to its inevitable expanding insurance needs.

Questions about how the insurance industry is being impacted by recent events? Contact us today.

Rate, Rule and Form Filing Activity in Response to COVID-19 Crisis

by Dee Dee Mays

We have all seen the various headlines regarding what companies are doing in response to the COVID-19 Crisis. Many Departments of Insurance (“DOI”s) are encouraging companies to act quickly to provide relief to policyholders during these difficult times. Perr&Knight is closely monitoring the rate, rule and form filings submitted by insurance companies to the DOI in each jurisdiction, to the extent these filings are publicly available.
If you are interested in obtaining additional information on filings related to the COVID-19 crisis, please complete our contact form.
Here are samples of changes included in company filings:

  • Allstate has made two changes:
    • Revising their rules and forms to include an exception to commercial activity exclusions to cover the delivery of food, medicine or other goods while a statewide Emergency Order is in effect related to the COVID-19 virus.
    • Adding a Shelter-in-Place Payback Endorsement to Allstate, Esurance and Encompass personal auto policies. Per the Allstate press release, “…customers will receive a Shelter-in-Place Payback. Most customers will receive 15% of their monthly premium in April and May, totaling more than $600 million.”
  • American Family has announced that they are refunding $50 per insured vehicle to their personal auto policyholders for a total return of approximately $200 million. We have not seen any filings publicly available as of yet.
  • Clear Blue Insurance Company temporarily removed late fee and reinstatement fee surcharges to provide relief to the insureds in their CB Rideshare Commercial Auto program that covers transportation network company drivers.
  • Erie has filed a new Additional Payment, Gift Card and Gift Certificate Reimbursement Coverage. This provides reimbursement for the remaining balance of an unexpired local business gift card or gift certificate when the local business has permanently gone out of business. The coverage will be added to all ErieSecure Home, ErieSecure Condo and ErieSecure Tenant policies covering a primary residence, at no additional charge.
  • Germantown Insurance Company is notifying homeowners policyholders with payment issues to arrange for delayed billing or switch to an installment payment plan. They have filed changes to their underwriting scorecard to avoid penalizing policyholders who make these changes.
  • Silicon Valley-based insurance company Go announced that it is offering a 50% discount on auto insurance to all Essential Workers in Texas who are on the front lines of the COVID-19 crisis. See the press release at https://www.goclub.com/get.
  • National American Insurance Company has added new Contractor and Subcontract Epidemic Bond Riders in response to the impact of COVID-19. These riders amend a surety bond to allow for equitable adjustments of contractual obligations if work is delayed, disrupted, suspended, or otherwise impacted as a direct or indirect result of any virus, disease, contagion, including but not limited to COVID-19.
  • Next Insurance has submitted filings to implement a temporary relief measure regarding COVID-19 for insureds in their Commercial Auto and Liability (Errors and Omissions, Premises and Operations, etc.) programs. The Company’s intent is to reduce 25% of April’s 2020 premium for all insureds who purchased a policy prior to March 1, 2020.
  • Utica National group has expanded the eligibility for Commercial Auto lay-up credits to all risks/vehicle types. The expanded eligibility is intended for businesses that plan to take vehicles out of service due to loss or reduction in business due to the COVID-19 pandemic.
  • Several companies are filing COVID-19 related leave of absence endorsements for their medical malpractice policies to help their insureds whose employment may be affected due to COVID-19 related lay-offs, office closures, and illness, among other things.

If there is anything that Perr&Knight can do to assist your company with any filings, please complete our contact form at https://www.perrknight.comcontact/.

InsurTech: The New Frontier for A&H

by Jim Vallee

As troves of data and lightning-fast processing capabilities become increasingly available to insurance companies, cumbersome manual processes are being replaced with faster, more advanced data capture and analysis. The applications for property and casualty insurance, particularly with personal home and auto coverage, were evident straight away; therefore, P&C providers quickly began utilizing innovative technologies from InsurTechs to streamline their workflows, increase rating accuracy, and improve the customer experience.
These technologies are now starting to expand to additional insurance types, ushering in an exciting new era for accident and health coverage providers as well.

InsurTech’s new tools and new opportunities

As millennials and Gen Z buy homes, start families and advance their careers, their needs for insurance increase. However, these emerging customers are unwilling to compromise on the speed and accessibility of any products they buy – including insurance. Therefore, the traditional method of over-the-phone insurance sales or person-to-person broker relationships no longer apply. These customers demand control, transparency, and ease. They want to complete transactions with a few clicks.
They are also accustomed to an unprecedented level of control and customization in their own lives. Non-traditional career trajectories, home-ownership as a second income stream, greater flexibility with travel and work schedules…all add up to a clientele that demands fast, flexible coverage that conforms to their specific needs. This often means shorter coverage periods, specific add-on coverage, and instant payment – again, all accessible via website or smart phone app.

The changing face of A&H

Traditionally, insurance product development for accident, health and travel has adopted a “one size fits” all approach, offering protection that covers a wide variety of scenarios over an extended period of time. However, new technologies enable A&H coverage to achieve an entirely new level of customizability that can provide customers with exactly what they need, only when they need it. Some forward-thinking examples of InsurTech applications for A&H that we have seen include:

  • Travel Insurance
  • Short-term Accidental Injury coverage for specific activities
  • Customizable Supplemental Health Insurance plans such as Critical Illness
  • Major Medical price transparency comparisons
  • Health benefits packages for gig economy workers

This level of tailoring serves customers more effectively, generates new product potentials, and creates efficiencies that ultimately lower internal operations costs for insurance companies.

Apps, IoT and AI – oh my!

InsurTechs have evolved many aspects of today’s insurance industry, but we have seen the most advancement to A&H in the areas of smartphone apps, the Internet of Things (“IoT”), and Artificial Intelligence.
Insurance companies are finally beginning to recognize the value of smart phone apps in connecting with their customers. Mobile technologies are invaluable to insurers, enabling more efficient product marketing, a direct point of sale, and the ability to collect data from wearables. These streamlined products and advanced data collection can reduce or even eliminate the need for underwriting. The result for insurance companies: more efficiency for a lower cost.
“Smart devices” that connect to the internet and transmit data over a network are known collectively as the Internet of Things. These devices work quietly in the background to collect and transmit data that can help insurers provide more accurate premiums to customers. Some major medical insurance companies offer incentives such as premium discounts or gift cards for meeting exercise goals while wearing specific devices (think: Fitbit trackers). Insurers can now tie premiums and rewards to real data, not theoretical projections.
Finally, artificial intelligence (or “AI”) is releasing insurers from burdensome manual processes. These technologies have the ability to learn and reason, freeing up their human counterparts to focus on areas that require more complex reasoning or subtle discretion. Insurance companies have successfully used AI to develop chatbots that streamline the customer service experience and applied machine learning to build more accurate algorithms and models for analyzing data. By applying machine learning to predictive analytics, insurance companies can analyze key consumer data claims risk, fraud detection, anticipated demand for a new product, claims processing and underwriting. This could lead to better rate adequacy and a better overall risk profile.

Control the risks

Emerging technologies are already transforming the insurance industry, but regulation is still woefully behind the curve. Though coverage offerings are more flexible than ever, insurance product development is still subject to a rigid regulatory environment. Regulation of coverage periods, marketing materials, and underwriting processes are still rooted in traditional ways of thinking.
Additionally, InsurTechs may bring the technological expertise, but they often lack industry-specific knowledge. They usually do not even have an underwriting company or reinsurer to take on the insurance risk. This can come back to haunt you if you’re not careful. With this in mind, it’s smart to connect with an experienced independent insurance product development partner to manage regulatory requirements as you incorporate new technologies into your product suite. Their expertise regarding the jurisdiction-by-jurisdiction requirements will be invaluable as you head into the approvals process.
InsurTechs are set to make sweeping changes across the insurance industry as their technologies provide opportunities for insurance companies to respond to never-before-seen coverage needs. These innovations are not trends – they’re here to stay. As data collection and analysis evolve, A&H insurers are positioned to develop systems and products that feature faster policy uptake and fulfillment,  greater flexibility in coverage, and increasingly targeted customer service.

Want to know more about how technology can advance your A&H offerings? Our team of insurance and actuarial experts can help.

Common Mistakes When Pricing Long-Term Contracts

by Michael Covert

Developing pricing for long term contracts, specifically auto warranty, poses a tricky challenge for insurers. Determining rates for losses that will not occur until three, five, or seven years into the future requires balancing multiple factors to help ensure profitability and appropriate matching of premium earnings and future losses.
Auto warranties, supplemental tire and wheel coverage, guaranteed auto protection (“GAP”), and other long-term contracts require careful actuarial analysis of multiple variables. Mistakes can be costly – and won’t become apparent until well into the future.
Luckily, by avoiding some of these common mistakes, you can develop pricing for long term contracts that protects your customers and keeps you in the black.

Best in class rating manual structure / pricing flexibility

The long-term contract space, specifically for auto warranty, is much more competitive than ever before, as many insurers and InsurTech companies create brand new programs to corner a piece of this market. Therefore, in order to remain competitive and profitable, insurers must achieve as much flexibility on rating plans as possible. Greater flexibility means you have a higher chance of achieving profitability from the get-go without having to continually refile your rating plans to adjust rates.
Working with actuarial experts who apply expertise with long-term contracts across multiple states can dramatically enhance your pricing process. Actuarial consulting experts can develop a factor-based manual that makes it significantly easier to understand the base rates, rating factors and the impact of rate changes on future policyholders. Determining actual relativities for the main rating variables, along with associated base rates, can turn those old school 500-page “rate cards” into concise rating plans, lessening the time drain on your staff for review and understanding of the material as well as reducing the likelihood of erroneous price quotes and premium reversals.

Misjudging your competition

Competitive analysis provides both a starting point and a point of comparison for your rating plans. It’s a valuable component of the big picture. In addition to jurisdictional and coverage plan comparison, there are two lesser-known areas where you may not be obtaining a true sense of how your pricing stacks up against the competition for auto warranty business.
Less experienced folks in this space may compare rates and factors without thoroughly examining the class plan (actual vehicles) to which these factors are assigned. Not everyone assigns auto classes the same way, so it’s crucial to confirm that you’re looking at comparable plans.
Differences in individual components covered in vehicle service contracts can also throw off the accuracy of your competitive analysis. In order to achieve a true apples-to-apples comparison, you must drill down into individual components of each vehicle service contract to make sure that coverages align.

Incorrect profitability analysis

While you may see your market share rise quickly in this space from a balance sheet perspective, in order to understand profitability, you must earn premium appropriately over the life of the long-term contract. Too much upfront premium earnings may lead you to believe that your loss ratio is strong, but when earned premiums start to slow and losses begin to stack up – there is little that can be done to course-correct at that point. It’s imperative to track your earning patterns alongside your loss development to maintain a consistent loss ratio over time.

Rate level indication inaccuracies

Relying solely on an overall rate level indication can paint an incorrect picture. For example, development of losses will vary considerably on whether a vehicle is new versus used. Similarly, with comparing new cars with say 0-10,000 initial miles versus “new” vehicles with 24,000 to 36,000 initial miles. The rate level indications are generally very different for numerous combinations of new/used, term/length of the contract and initial mileage of the vehicle. It’s important to understand how to best break out each one in order to achieve accurate rate level indications as well as balancing homogeneity and credibility in your data.

Not peer-reviewing your work

If you’re not already writing business in this space, much of the above is likely not apparent. As a result, you may inadvertently begin writing a significant amount of “bad” business while other insurers are steering clear. Even if you have been writing certain types of extended service contracts, it’s easy to fall into oversights that could result in leaving money on the table. Experienced actuarial consulting partners can provide an unbiased, fresh perspective on your work, taking into account product expertise, state-by-state knowledge and a deep understanding of rating plans and rate flexibility to ensure that your rates are reasonable for the associated risk.
As competition in this space rises, insurers are rushing headlong into product offerings that might end up costing them dearly down the line. The old saying, “You can’t fix old business” has never been more applicable than to long-term contracts, because the bottom line is: you’re on the hook until the end of the contract. However, by carefully analyzing each element in your rating and working with an experienced actuarial team comprised of subject matter experts, you can sidestep the mistakes outlined above and develop a proven, competitive and profitable product.

Are your extended service contracts priced correctly? If you’re writing new business or want to double-check current offerings, the actuarial experts at Perr&Knight will let you know if you’re on the right track.

Predictive Modeling: 5 Benefits of an Independent Review

by Denise Farnan

The practice of predictive modeling is a powerful tool for risk assessment for today’s insurance industry. What once was considered a new technique for insurance pricing is now getting utilized in all aspects of the industry.
Your models are only as sound as the industry knowledge that goes into their development. Lack of complete regulatory support for predictive models has slowed InsurTech companies and carriers on their path for regulatory approval.
Instead of dealing with the expensive and time-consuming fallout of stalled approvals, it makes more sense to get ahead of potential pitfalls by investing in an independent review of your model from experienced insurance actuarial consulting experts.
Here are five reasons an independent review of your predictive model is worth the investment.

1. Discover your model’s strengths and weaknesses

Independent review from actuarial consulting experts will reveal areas where your model can benefit from improvement as well as verify its biggest benefits. A review that combines proven industry benchmarks with professional actuarial judgment will surface erroneous assumptions, incomplete support and lead to model improvement.

2. Comply with state regulations

Many predictive models have been rejected by state insurance departments due to lack of compliance in that jurisdiction. States have their own unique regulation and you want to be prepared. By partnering with an independent reviewer who knows the nuances of each state’s regulatory process, you’ll strengthen your chance of approval.

3. Strengthen your case with key decision-makers

Achieving buy-in from the customer is crucial when marketing an InsureTech predictive model to insurance carriers. Though your model may perform impeccably, if your company has a limited track record in the insurance industry, it may be a hard sell to the carrier’s executive team. Getting an independent review with comprehensive documentation will demonstrate to decision-makers that your product has been carefully evaluated by insurance industry professionals. This vetting of your model and accompanying written proof may be the deciding factor between your product and a competitor’s.

4. Increase your speed to market

Presenting your model to regulators without thorough pre-submission scrutiny may reveal surprise shortcomings. Discovering these deficiencies while your model is deep into the review process adds unnecessary time. It’s much smarter to pressure-test your model before submitting to state insurance departments to speed up approval for your model’s implementation.

5. Trust in your results

Your data may support strong predictors used in your model, but to be truly effective, results must be combined with subject matter expertise. Insurance experts who understand all steps in the insurance process give you insights for model improvement.
High level assessment of your model’s viability, paired with detailed scrutiny from subject matter experts who specialize in insurance, is a smart way to protect your investment. An independent reviewer will ask tough questions, and follow best practices for predictive modeling in order to assess your methodology to add credibility and strength to your work product. It’s like investing in “insurance” for your insurance product.

Get your independent predictive model review today! Perr&Knight’s experienced actuarial consulting team can help.

How to Make the Most of Your Software Evaluation Period

by Dana Pagliarulo

Determining whether a new software system will meet your company’s needs may seem like a gamble.

  • How can you tell if this new product will really streamline your workflow?
  • Will it actually increase process efficiency?
  • Can you guarantee that it will add value to your organization?

Vendors understand that you’ll need to get your hands on the product before you can make an informed decision. Luckily, some offer a time-boxed “trial” period where you and your team have a chance to apply the software to your workflow and obtain a much sharper perspective. By taking full advantage of this evaluation period, you’ll be able to determine whether or not the solution will work for you.
Here’s how to make the most of your evaluation period before investing in full.

Take time to prepare. Don’t just dive in.

After identifying software that seemingly checks all the boxes, it’s tempting to want to begin trying it immediately. However, preparation is a crucial step that lays the foundation for an accurate assessment. Here are some less obvious things to do in order to be thoroughly ready to analyze the new product:
Develop test cases: Include both standard transactions and anomalous outliers, as well as things that are on your team’s “wish list.” Identify and document an array of scenarios such as initiating records from scratch, conducting tests on reporting at the beginning/middle/end of the workflow, and interfacing/importing external records.
Use existing data: If your prospective software will replace an existing system, use your trial period to evaluate how your new solution works with your existing data. Your IT department can provide your vendor with a detailed list of the types of data objects you’ll need to manage which can be used to populate the new system with your current data set. Even if you must scrub some of your data before sharing with the vendor, the more you can provide, the more accurately they can assess your needs. If you were to license the software, using the data from the evaluation period may be used for your implementation of the product.
Gather requirements from your legacy system: Your current system was built on set of requirements and design documents. If you want your replacement system to mimic those assumptions, share these details with your vendor. This information will help them determine if the system will meet your needs as-is or if it will require customization.

Treat it seriously, like a project

Though your evaluation period might not cost anything upfront, there is a very real opportunity cost if the software ultimately doesn’t deliver or if you dismiss a quality product without sufficient review. Therefore, treat your software evaluation period like a mini-project. Dedicate the same level of attention as if your company had already invested capital.
Create a one-page “mini” charter that defines important specs such as: What is the purpose of this project? What is its perceived benefit? Who is assigned to work on it? Who ultimately “owns” it? What are the roles and responsibilities of each individual or team? What is the scope of the project? Developing an official “work order” enables you to obtain signoff for teams to dedicate their time to evaluating the software, thus increasing the chance that all parties will take the evaluation period seriously.
As part of defining the scope of this mini-project, don’t hesitate to bring in an outside subject matter expert who can springboard you into software usage to accomplish your goals straight away. Their detailed answers about your specific questions can save you plenty of time that may otherwise be wasted on back-and-forth between you and your vendor.
Finally, be sure to hit your dates. All projects have a timeline and this one should be no different. Work with your vendor to establish an achievable schedule that will keep your teams on track. During evaluation periods for our own state filings software, StateFilings.com, we create a week-by-week plan that outlines what we will accomplish, from training to full implementation. A timeline creates a necessary structure that keeps everyone on track and enables teams to identify any hiccups early on.

Ask plenty of questions

Don’t make assumptions about what the software may or may not be able to do. If it is important to your particular process and the answer is not apparent, ask! Be specific about what you need. By describing your workflow requirements in detail, the vendor can train you on how to perform your desired task, explain how the software handles the requirement in a more efficient manner, or determine that the software may need further customization to meet your needs. Don’t be afraid to ask questions that may seem obvious. It’s faster and easier to confirm that your needs will be met than to worry whether or not the software can perform the basics.
Additionally, feel free to ask the vendor to share the product road map with you, which will detail upcoming features. This might answer some of your questions about functionality and may reveal opportunities for you to improve your own workflow when new features are launched.

Determine how close you are to going live

If you present your vendor with a full set of current data, going live may be as easy as “flipping a switch” after signing the licensing agreement. If the data is only a partial set, or requires additional software customization, fully operational real-world use may take longer. Work with your internal teams and vendor to determine what functionality is mission-critical and what can be postponed until after launch. Strategic configuration during the evaluation period can minimize implementation delays. Perr&Knight’s StateFilings.com evaluation period has resulted in many near-immediate go-live implementations for customers.

Help your vendor help you

Your vendor wants to do more than just sell you a product. Ultimately, they want to solve your problem. Make sure that your teams are not impeding the process. When the vendor asks for information, keep turnaround time to a minimum. Establish a regular meeting schedule (once a week is preferable, but bi-weekly meetings can suffice) and keep communication clear and frequent. As mentioned above, if you have questions, ask them ASAP. Finally, if it becomes clear that the software solution is not what you expected and will not meet your needs, let your vendor know immediately. Instead of wasting everyone’s time, it’s better to move on.
The goal of your software evaluation period is to reduce surprises further down the line. Pressure-testing the system from all angles will provide a clear perspective on what the software can and cannot do. By taking the trial period as seriously as you would any other project, you stand the best chance of achieving your ultimate goal: implementing a smarter solution for your organization.

Want to know if your proposed insurance software will actually perform? Our insurance experts can help you better capitalize on your evaluation period.

How the Right Requirements Can Make or Break Your Next IT Project

by Rob Berg

Authors: Rob Berg SCPM, CSSBB and Mark Nawrath, PMP, MBA
According to the Standish Group’s Chaos Report, an alarming 19% of all IT projects fail. Meanwhile, a full 60% fail to meet expectations. Stats like this show that tech projects run the risk of failing more often than they succeed. For insurance companies, these numbers should be alarming. The amount of capital—both human and financial—invested in IT projects for insurance companies mean that missteps in implementation planning and execution translate directly into significant waste, both of time and money.
We have found that one of the most impactful ways to shield tech projects from serious setbacks is to invest in establishing a clear set of requirements well before system configuration begins. If you’re not paying attention to the fact-finding and requirement-defining phases of your project, you may be unwittingly setting yourself up for failure.

How do you define “good” requirements?

In a single word: unambiguous. This means painstakingly translating information from subject matter experts into a language that can be easily consumed by developers or those configuring IT systems. Too often, subject matter experts get mired in their own vernacular. They forget that terms and definitions that seem obvious due to daily use and a shared language among colleagues are not likely to be fully understood by the developers—who also communicate through their own shorthand. Insurance technology consulting partners must not only record requirements, but they must also take the time to outline specifically what each requirement means and communicate how it fits into the greater context of the project.
Read more: The Importance of Unambiguous Product Requirements.
From there, consistency is key. By taking ad hoc approaches to write their own requirements from scratch at the outset of each project, we’ve seen insurance companies fail to capture and organize important information along the way. The formatting of the project outline plays an important role, even down to details like consistent sentence structure and naming conventions. When each project looks like an entirely new animal, developers and project managers are forced to spend more time taking in the basics, instead of capitalizing on their expertise to document an exhaustive set of requirements and spot areas of ambiguity that require more clarification.

The cost of hazy requirements

We’ve all heard horror stories about IT projects at insurance firms that have been drastically delayed or simply abandoned because the train got so far off-track that it couldn’t be redirected. For example, we saw a company spend millions buying a new policy admin system, trusting the assurances of their software development vendor that the project would take six months to implement. After six months passed and the project was still around halfway from completion, Perr&Knight was called in to try to salvage the struggling project and stave off a lawsuit.
We discovered that the project was doomed from the start because even basic requirements weren’t clear. Obvious problems included project requirements outlined in disparate emails, multiple stakeholders weighing in at different stages and actuaries who simply passed along a rating algorithm, assuming that programmers could just use it to program for a different state or new line of business. Lack of context was stifling each party’s ability to deliver their full level of expertise. 

Far-reaching consequences

Poor product definition – the core requirements that document the use of insurance product rates, rules and forms – has the potential to become a quadruple whammy that can hurt the company on multiple fronts, not just the IT or actuarial department. Here are some of the ways badly defined insurance product requirements leak out across departments and damage the company as a whole.

  • Lost time – When product parameters require constant clarification from underwriting and regulatory staff, project phases extend to weeks or months instead of days, and the delay drains time that could be better spent elsewhere. This lack of efficiency leads to…
  • Frustration – Projects that proceed at a snail’s pace drain morale and lead to increasing personal frustration as teams struggle to deliver.
  • Skyrocketing budgets – Resuscitating shaky IT projects that are midway through development often requires throwing good money after bad. It’s the only way to justify the expenditure up until his point and salvage the project.
  • Regulatory implications – For projects that do reach completion, those with poorly written product requirements often fail to address the true standards required by state departments of insurance. Configuring incomplete or incorrect forms or rates leads to a significant regulatory risk that can take a toll on the company’s reputation and seriously impede their speed-to-market objectives.

The key to establishing clear requirements

In an industry that depends so heavily on specialized expertise, one of the smartest ways to ensure that your product definitions are clear is to approach the requirement through the eyes of a layperson. It sounds counter-intuitive but boiling down needs and specifications to their most basic, plain-English functions enables project managers to deliver the vital translation between insurance company and vendor described above. Additionally, it helps insurance companies gain a deep understanding of what amount of “out of the box” functionality will truly apply to software products they purchase, versus the amount of customization that will be required to achieve the final end-product.
Though it seems like a safe bet to hire the big guys, we find that when insurance companies go directly to big technology consulting firms for development, they often end up with well-meaning tech developers who may lack adequate insurance domain knowledge. This specificity plays an important role in translating the needs of insurance companies into software that not only improves productivity and speed-to-market objectives, but supports compliance in an increasingly burdensome regulatory environment.
Hiring an insurance technology consulting company to painstakingly outline and define your entire project scope may require a slightly higher initial outlay but think of it this way: you’re in the insurance business. Taking the time to do it right the first time is your own insurance policy against expensive delays and demoralizing headaches.

If you have questions about the adequacy of your stated IT project requirements, our expert insurance software consultants can help.

4 Hurdles to Overcome When Considering a Cannabis Product Offering

by Kyle Hales

The times certainly are a-changin’. As of this publication, thirty states have legalized cannabis use in some form, with eight approving marijuana outright for recreation. As new avenues open up for production and distribution of plants, oils, edibles and the wide variety of other cannabis-related consumer products and medicines, new insurance product development opportunities emerge for companies to provide coverage for every corner of this fledgling market.
As cannabis widens in legal acceptance, the insurance industry is realizing that the market demand for coverage will continue to grow (no pun intended). Before wide-spread legalization, cannabis coverage was part of the non-admitted market; however, as legalization spreads, more and more regulators want companies to write coverage on an admitted basis, which will increase regulation.
The road to cannabis-related insurance product development is still under construction. There are bumps and unforeseen detours along the way.  Here are four hurdles to prepare for as you gear up to offer coverage for cannabis products.

Hurdle #1: State vs. federal laws

No matter what is happening on a state level, the bottom line is: according to the federal government, marijuana is still a schedule I controlled substance. It occupies the same classification as heroin, LSD, and peyote. This throws a measure of uncertainty into the entire line of coverage. What if the Feds start cracking down on cannabis companies? If your company pays a claim, could your organization be held liable for participating in what the federal government considers to be a black market? Meanwhile, on a more niche level, certain insurance coverages are regulated under federal standards, such as terrorism and most types of flood insurance. Would your clients be eligible to purchase TRIA or flood insurance? As of now, the answers are unclear.
Just because an insurance product is approved at the state level doesn’t mean you’re fully in the clear to proceed. When the state governing body approves the legality of a product, from an insurance standpoint, the product is fine. However, it’s up to the judicial branch to interpret the contracts. The courts will determine the mechanics of coverage, and those outcomes are still being decided.

Hurdle #2: A long learning curve

Cannabis coverage is uncharted territory, with a lengthy education process for everyone involved. Agents need to be informed as to how the product works, what it covers, what it doesn’t, etc. This information must be sorted out, then communicated to policyholders. Regulators, claims handlers, underwriters—everyone along the entire insurance pipeline is tasked with learning about the new norms and standards for this unconventional product. There are still many ambiguities that require clarification and dissemination among insurance professionals.

Hurdle #3: Product development and pricing challenges

Cannabis insurance product development and pricing are wide open at this point since there is no specific historical information to reference regarding the frequency and severity of claims. It’s also difficult to ascertain an accurate exposure base. Yes, borrowing from other industries that are similar in scope and nature such as tobacco, agriculture and liquor liability can provide the broad strokes. However, when you’re developing a form or trying to determine rates, there’s no specific past data from which to draw. Rate and form development in the cannabis business require a “use your best guess for now” approach.

Hurdle #4: Clarifying what/whom you want to cover

The cannabis industry has three main categories that will require coverage: producers (growers), processors, and distributors. Depending on who you’re insuring, coverage offerings could differ greatly.
Growers and processors require a product liability-type coverage. They will be most concerned with coverage related to product contamination, accidental or deliberate tampering, or recalls. They’ll also need coverage for equipment, general liability, building structure coverage, non-employee slip-and-falls—standard manufacturing-type policies that have nothing to do with cannabis itself.
On the other hand, distributors will need coverage that relates mostly to their place of business, not unlike the types of coverage that apply to a bar or liquor store. As the public consumes the product on their premises, distributors will want to protect themselves against liability from over-serving, fights between customers, product spoilage, etc.

Where do you go from here?

Now that you’re aware of the hurdles, the smartest step is to start drafting a plan. Consider getting approval for products related to one aspect of the industry (production, processing or distribution), then expanding from there. Like all aspects of insurance, regulatory requirements differ by state. Add to that the push-and-pull between state and federal legality, and suddenly the variables multiply exponentially. As mentioned above, there is not a lot of precedent here to draw from, so it’s important to time and proceed carefully. If your company is not set up internally to handle the mountain of research required, work with a proven insurance services provider who already possesses experience drafting policies. Their deliberate methodology and expertise can save you from a significant drain on time and resources.
Cannabis insurance is still uncharted territory with a lot of work to be done. However, if you take your time and proceed carefully, you’ll be in the best position to break in early to this “budding” market opportunity.

At Perr&Knight, our insurance product development experts have already received approvals in a number of states for cannabis-related insurance product. If you are thinking of expanding into cannabis coverage, contact us today to discuss your strategy.

The Sharing Economy: What You Should Know Before Jumping In

by Courtney Burke

Authors: Courtney Burke, JD, CPCU, Michael Goldman, FCAS, MAAA, Les Vernon, FCAS, MAAA
The proliferation of the sharing economy impacts both commercial and personal property casualty insurance by creating new insurance needs. This new landscape brings many opportunities to better serve your customers – but also plenty of pitfalls. If your company is considering undertaking a new insurance product development project to address the needs of this fast-growing and quickly evolving marketplace, here are some key factors to keep in mind.

Mind the gap

Networking companies like UBER, Lyft and Airbnb have specific insurance needs that require customized commercial insurance. If not modified, traditional personal auto and homeowners policies may have gaps in insurance coverage for transportation network drivers and home sharing network hosts due to standard exclusions. For example, although UBER provides liability insurance for its drivers while they are working and Airbnb provides host protection insurance covering third-party liability claims related to a stay, the driver or host may not be protected for damage to their personal property.
The sharing economy also impacts the accident and health insurance industry. The majority of gig workers, i.e. service providers in the sharing economy like UBER drivers or Taskers on TaskRabbit, do not receive employee benefits through their networking companies. This creates a market for individual supplemental health products customized for gig workers.
These gaps create opportunities for insurance companies to develop bespoke products that address highly specific coverage needs.

Insurance + technology = opportunity

Much of the sharing economy is technology-based – services are engaged online or via a mobile phone application. If you’re considering targeting the sharing economy, you may need to mirror this online delivery model for your insurance products. This modernized distribution of insurance provides an opportunity for insurtech companies who can help deliver insurance products that feel native to this tech-centric landscape.

Finding the right insurance product development partner

As the sharing economy becomes more prevalent, you’ll likely begin to explore different methods to provide coverage. If you’re new to the sharing economy insurance market, you may wish to develop products with features specifically designed for this arena, including episodic or short-term insurance, or industry-specific coverage.
To design a solution that keeps pace with the market, you should partner with an insurance consultant who has extensive experience in developing new products. Experienced insurance product development consultants can draft coverage enhancements to incorporate specific coverages that may not be currently offered in your product. A product design consultant will also work with you to understand where coverage gaps or limitations exist in your current product and then make recommendations to address each.

Right pricing requires close actuarial attention

One of the sharing economy’s unique features is shortened exposure periods for coverage. Sharing economy insurance products typically offer coverage just during heightened time periods of exposure to risk, aka “insurance on-demand.” For example, home sharing insurance coverage, such as that offered by Airbnb, would depend on the frequency and length of stays, the number of guests, accessible areas of property, etc.
Understanding and correctly pricing for risks during unique exposure periods requires actuarial experience to correctly handle expense loads, increased risk of adverse selection, potential fraud and risk of litigation. If you’re thinking of entering the sharing economy, work with consulting actuaries and data scientists who have the expertise and experience to utilize predictive analytics and advanced pricing techniques in the development of rates.

Regulation varies by state

Sharing economy insurance products must comply with each state’s insurance regulations – those that apply to all insurance products as well as those specific to sharing economy insurance. For example, several states have passed specific legislation regarding transportation network companies. By working with an experienced regulatory compliance consultant in the markets and jurisdictions you wish to enter, you can ensure that your products comply with applicable regulations and that your products are filed with the states as required.
Strict governmental and industry oversight make insurance one of the most demanding industries for regular and accurate data reporting. Property and casualty insurance policies designed for the sharing economy present unique challenges. For example, for a ride-sharing driver, when is s/he covered by personal auto versus commercial auto? To which special statistical code does the vehicle get assigned? Your regulatory compliance consultants will make sure all these details are covered before you file.
To best capitalize on this exciting time, work with an experienced insurance consulting services team who can help you develop a proactive strategy to release products the correct way. In addition to actuarial expertise, make sure your partners possess years of statistical reporting experience, technical expertise, and data management best practices to help you navigate your unique reporting requirements. With a clear objective and the right team, you can develop a comprehensive solution that puts you ahead of the market in this new economy.

For more information about how to best develop insurance products specifically for the sharing economy, contact Perr&Knight today.