(Image source: Guidewire Software.)
Insurance Innovation Reporter recently had the chance to sit down with Marcus Ryu, CEO of Guidewire Software (Foster City, Calif.), to talk about the disruption and innovation in the industry, how the vendor aims to be a partner in innovation, and the company’s transition during the last year from being a multi-product core system company to being the provider of what Ryu calls a Core-Data-Digital platform.
Insurance Innovation Reporter: The industry commentators I talk to agree that there’s never been a more exciting time to observe the industry. However, pain comes with disruption too. What challenges to insurance carriers face today?
Marcus Ryu, CEO, Guidewire: These are momentous times. The headline message at Guidewire’s Connections conference was that more of consequence has happened in the last two years than the last two decades. Some challenges are obvious—there’s been a tremendous rise in customers’ digital expectations, new services that didn’t exist a short while ago that are now woven into life. The insurance industry is out of synch with some of these changes, and customers know it—a study from BCG and Morgan Stanley showed insurance coming 14th out of 16 industries in providing a satisfactory digital experience.
That means the competitive battleground of insurance has changed. It’s no longer adequate just to have an attractive web page connected to a back end. That doesn’t make you a digital insurer. Your whole value proposition has to be digital. You have to rethink the entire consumer journey, from consumers’ search for the right product to the customer service they expect.
And a lag in digital customer experience is by no means the only significant challenge. The P&C industry is seeing a steady decline in passenger auto risk, the industry’s single biggest market. It’s happening for a variety of reasons: here’s been a demographic shift, new technologies have made driving safer, new transportation services are emerging, and now we’re seeing the advent of self-driving cars. To address this challenge, insurers will need to innovate. They’ll have to think in a pretty existential way about how they generate growth in this new environment.
There’s also a proliferation of new entrants to the industry, startup insurers who have gone from zero to a billion dollars really quickly. There are native players such Metromile or Trov, and overseas examples, such as Cuvva in the U.K.
IIR: It’s typically hard to see precisely how technology developments will pan out. What technology areas do you think will cause the greatest disruption in the near and longer term?
MR: To add to what we’ve already discussed about the digital revolution generally, today everybody has a super computer in pocket that we call a smart phone. The Internet of Things is a real phenomenon. It may be overhyped, but the fact that you can have a sensor and network and attached to a risk will affect how that risk can be managed and help to proactively prevent losses. Drones are no longer sci-fi: today they provide an efficient way to visually survey a location, whether for new business or claims. These developments are all hyper relevant.
Then, for us as a software company, the coming of age of cloud-based architectures means that a huge number of technology decisions that IT organizations used to agonize about can be swept away. One consequence of that is that it is easier for new companies to take advantage of capabilities, and if you’re a larger player, you have to disburden yourself of costly infrastructure maintenance and go for things that are value creating.
Analytics are still not anywhere close to maturity in insurance today. Things like data mining and machine learning have not been applied meaningfully but it’s an inevitability that they will. Insurers will harness internal and external data sources for increasing analytical insights. That will inevitably happen and its consequences are likely to be profound. The companies that get it right could have an almost impregnable competitive advantage over those who don’t. They can adverse-select the competition in a way that’s invisible. That hasn’t come to pass yet but it would be naïve to think that it won’t.
IIR: What do these things mean for insurance product and business model innovation?
MR: Well, there are many areas of risks that have not been productized, that ought to be insurable risks, and data makes it possible to do so. Anytime you have a statistical regularity and economic loss you ought to have an insurance product.
There are many categories of risk that the insurance industry could expand into, if it can get get the product, predictive modeling and underwriting right. There’s a conceptual dimension, and in execution it’s a technology and data problem. There’s a great deal of anxiety today about the possibilities of growth and—in the case of auto business—there are threats that the premium base will shrink. But if the industry can get these opportunity created by data right, it can be dramatically larger. Also distribution in many categories could be bigger if there were less friction in distribution process.
Consider single-item insurance: if you buy a new, expensive thing, you should be able to insure it instantly. But today it’s a big hassle. Take a photo, scan the bar code, and you’re insured. More people would buy more insurance. So the industry has growth opportunities. But it has to rethink how it goes to market and make some technology investments.
IIR: During the last decade or so we’ve seen rules-based, configurable systems prove themselves. However, there’s a paradox in that by becoming mature and reliable, these systems cease to be a source of competitive differentiation. Where do we stand in the trajectory of core systems?
MR: It’s important to know that the vast majority of insurers, and therefore transactions, still happen in very “legacy” environment. It’s still a small proportion of the industry that has modern systems. Even Guidewire’s customers are still on an implementation journey, although maybe just for some lines of business.
So we’re still early days in core system replacement, but the larger point is correct. It’s true of every category of technology that things that are a source of competitive advantage quickly become table stakes. That’s why it’s the duty of every technology company to keep generating sources of competitive advantage on the frontier, while compressing, standardizing and lowering the cost of what should be general and universal.
We have a major initiative to lower the total cost of ownership of InsuranceSuite 50 percent over the next few years. We’re doing that through a combination of productizing integrations, embracing cloud based architectures, and enabling more of the core system in a cloud-based service through our partner program. These will allow them to prebuild content so that they can integrate with us more easily, and refine implementation methodology to drive a faster, more conforming product.
We’re doing that with respect to our core insurance suite while investing in future state software for digital engagement, predictive analytics and data visualization.
IIR: Not only is core system functionality becoming commoditized in some ways, but other technologies are gaining prominence within the carrier technology environment. What does this mean for core system vendors’ efforts to stay relevant to the insurance industry?
MR: I think we’re more relevant than ever. Core system replacement is a prerequisite for any modernization effort, even if you stipulate that it doesn’t give competitive advantage. You cannot successfully undertake a sophisticated digital engagement or analytics strategy predicated on decades-old core systems. The old systems haven’t gone away. There are still structural limitations in the core that need to be overcome.
IIR: OK, but does the increasing importance of data-related and customer/distributor experience-related technologies imply a new insurance IT architecture—possibly even one where what has been “core” no longer is, if only in an architectural sense?
MR: I would maintain that the core is still core. As an insurance company you have to underwrite policies and support the whole lifecycle. These things don’t go away. More of those capabilities can be enabled to be service that you invoke. That’s exactly what we’re doing. The proportion of on-premise implementations will be smaller and most newer capabilities delivered in a cloud-native form.
A system of record is always with respect to some data set—what policies or premiums, or what losses paid against them. However, it’s not the only system anymore. Has to either be or work in close concert with a customer system. Legacy systems were not customer systems.
IIR: There’s another paradox that core insurance system vendors face: on the one hand, they need to understand their customers’ needs. However, there’s a danger of identifying too much with their way of thinking, such that you’re validating their assumptions rather than pushing them to the next stage. How do you balance customer empathy with candor and a spur to progress?
MR: It’s a classic challenge for any technology company to be both responsive to the current customer and forward-looking. We don’t see such a painful tension there. Our customers are all looking toward the future and realize that the status quo does not present a stable equilibrium. Moreover, there’s a broad consensus about the direction they need to pursue—the themes we talked about: digital engagement, predictive analytics, etc. Prioritization is always a challenge but we’re not torn between what customers think they want and what we do. We just have a lot of software that we need to build in order to fulfill those ambitions.
IIR: One reason I’ve enjoyed following Guidewire’s trajectory is that the company’s CEO chose philosophy as his academic subject. Engineering and business administration will always be important, but in times of disruption, creative thinking and a certain skepticism about the status quo become engines of differentiation. How important is creativity in a time of business disruption in the insurance industry?
MR: Any technology company needs to be an engine of innovation and a repudiation of conventional wisdom. You have to have that strain of DNA in you company. But even more important is a strain of rational decision making. Look at facts, set aside all the wishful thinking and ask what the facts mean, and what matters. Imposing that rational optic is the most important job. Synthesizing all the signals and distilling them to what an organization can do effectively. That’s my most important job. I don’t generate a lot of ideas. It’s not my job to generate new ideas but force valuation and prioritization on the few that we can execute successfully.
IIR: But is it not also necessary to project possibilities for your clients? I often think of Steve Jobs as a great exemplar in his approach of seeing what was possible, working from the outside in, as it were, and breaking from convention to what needed, in a sense, to be created.
MR: There’s a need for self-awareness. Steve Jobs mind was like light. He just saw. I have no illusions. I’m not like that, nor is anyone else. We take a more humble approach. We’re listening carefully to our customers and getting a huge amount of signals. We have many customer conversations, and we synthesize these to trends that we see are important, as well as smaller set of actions that we can execute on.
IIR: To ask the question in a somewhat different way, what are some of the ways Guidewire’s creativity is helped by its increasingly global footprint, and the cross-pollination of ideas that permits? How can you learn from what’s possible in different regulatory regimes, and what occurs to customer in different places for either cultural reasons or simply accidents of individual creativity?
MR: One big observation I’d make is that no company and geography has a monopoly on best practices. There are ways in which Australia is ahead of U.S. or the U.K. is light years ahead of the U.S. in some way. We can bring that into our product platform and this community. And we try to recruit some of those best minds into the company. One of the nice things, if you’re creative, love technology, you’re going to want to come here. We’ve been able to attract some superstars because of the stature that we’ve achieved in the market painstakingly over the years.
IIR: Speaking of attracting talent, Guidewire has made some key appointments in recent months. What do those appointments represent in terms of Guidewire’s strategic evolution in the insurance software market?
MR: The main evolution in Guidewire’s strategy over the last year has been from a multi-product company to a multi-product family—that is, from just InsuranceSuite (policy, claims, billing, etc.) to a Core-Data-Digital platform. This has necessitated an evolution in the Development team’s leadership and structure. Changes include a new Chief Product Officer and new VP Engineering, appointments to a newly designated “Business Owner” (GM-like) role for each of the Core, Data, and Digital teams, and the creation of a new Chief Program Officer role to coordinate the design, launch, and delivery of new products. All of this reflects Guidewire’s ambition to become a comprehensive technology platform and industry standard for P&C insurers adapting to a changing market.