(Image source: Guidewire Software.)
During the last decade insurers answered the question of “buy versus build” with regard to core systems, leaving the task of coding to the experts—software companies. Guidewire Software’s (Foster City, Calif.) success exemplifies this trend as much as any other supplier, and its recent acquisitions manifest other important trends rapidly shaping the industry’s future, including cloud sourcing and advanced analytics. Insurance Innovation Reporter recently met with Guidewire CEO Marcus Ryu to get his perspective on the direction of the industry, the emergence of the InsurTech phenomenon, and what it means for core system providers—and for Guidewire’s own roadmap.
Insurance Innovation Reporter: What are some of the biggest trends you’re paying attention to in the insurance technology realm today, and what is their relevance to the core insurance systems market?
Marcus Ryu, CEO, Guidewire: It’s a very exciting time. It’s absolutely a time of change, which is a big theme in our positioning. There is an unprecedented $3b going into InsurTech, a term that didn’t exist until recently. We see a bold new entrant like Lemonade threatening to upend the competitive landscape, and things like new devices creating opportunities beyond the traditional insurance relationship.
I would caution that when new technology is brought to market, there are always exaggerated expectations about what will be delivered. Many ideas are not yet viable—concepts rather than working business propositions. That’s not to dismiss the potential of developments we’re seeing, but more so than ever in Guidewire’s history, there’s an intellectual task to deliver what’s relevant, and to distinguish between what’s substantive and speculative. That’s of vital interest to us because we’re not only a vendor but an advisor, and our customer base gives us a unique vantage point.
Digital engagement is at the top of the list of relevant developments. The agenda is being set by players outside the insurance industry, such as Amazon, Uber, etc., and there is a set of universal phenomenon that you see in financial services and other industries, such as transportation and retail, which will change the way insurance is distributed and serviced, and the way that claims are managed. It’s a certainty that we’ll see the consumerization of small business insurance—meaning direct sales and service—and there is a variety of players betting real capital that this is the way insurance will be distributed.
I’m not offering this as an insight on my part, but rather where we see consensus. Every insurer we talk to has digital aspirations, and most have allocated the budget needed to fulfill that proposition.
IIR: In addition to the customer engagement side of digital, what kind of transformation do you see coming from advanced analytics and artificial intelligence or cognitive computing?
MR: There’s very little of that driving the P&L of insurers now—there are large, often underestimated operational challenges to making it work. There’s consensus that there’s a host of decisions that get made in high volume across the insurance lifecycle—such as the classic question of how good a risk is and at what price shall we underwrite it. Other important ones are How likely is the policyholder to buy other products, what set of products will likely appeal? How likely is this claim to be fraudulent or have litigation risk or subrogation potential, etc.—in short, classic retail and financial services-type questions.
Insurance professionals ask these categories of questions in high volume every day and have every reason to believe they can be augmented and even replaced by machine-learning techniques. While we’re likely to see the impact within the next few years, we’re at early days of an inevitability that this kind of decision-making can be augmented through these techniques. We see ourselves as near the forefront in developing and helping insurers adopt them.
IIR: Just how great an impact could AI make in the longer term?
MR: The fundamental model of insurance will be transformed by AI. At the heart of insurance is an actuarial bet: given what we know of the risk, what’s the loss profile? We’ve been doing that with actuarial science that’s been around for hundreds of years—you identify a defined data set you model over years. It is a well-understood practice of actuarial science that is retrospective. There’s an insurgent school of thought that that’s the Stone Age.
There’s no reason that the same analytic techniques for photo identification or for a world-beating chess program couldn’t be applied to insurance. And if that’s the case, then huge swaths of the insurance industry will look very different in the future. There are a couple of companies betting on that. A small business owner today has to fill an application with lot of information before getting a commercial policy. Two Sigma hedge fund is investing in an approach that requires one element: just give them your address and they can underwrite as well or better than a conventional insurance actuarial approach. It’s very bold—and potentially explosive for the established structure of the industry. If that works, what will all the actuaries and underwriters do? I don’t know of an example of it working yet, but the possibility is very disruptive.
IIR: Where do these observations leave some of the other things making news, drones, the potential of the Internet of Things (IoT) to shape the insurance business model, etc.
MR: We see these two dimensions—digital engagement and AI—as the drivers of genuine disruption. Again, this is not Guidewire’s unique insight but rather just our reading the writing on the wall. All the other phenomena—for example, drones and IoT—are interesting but not as transformative as those two frontiers where the disruption is happening.
IIR: And how do these developments, taken all in all, resonate for the mission of core insurance system vendors?
MR: They are more relevant than ever. Obviously, that’s a self-interest statement, but I think logic is on our side. If you’re an insurer and want to position yourself to compete in a radically different landscape, we can help. If your relevant data is hardcoded it’s like bringing a slingshot to a machine gun fight. You need a robust, contemporary, highly flexible modern core system platform as an antecedent to data and digital initiatives. That’s not to say that they can’t happen in parallel but you can’t pursue a digital engagement strategy without a modern core platform.
That’s what has catalyzed the demand for what we do more than any other factor in last several years. That’s why we’re engaged in deeper discussions with a broader array of carriers than ever.
What is stressful is that what the market wants to do is sometimes very aspirational, like Sci-Fi. It wasn’t that way at the beginning. Today insurers are forming bold aspirations that look utterly different in terms of operations, and they have a set of technical requirements that neither we nor anyone else fulfills today. That’s very exciting—you want to sell to a market that’s agitated and eagerly exploring new ambitions; but on the other hand, the strategic and organizational challenge is to distinguish between what’s realistic, speculative or substantive.
IIR: So how to you adapt as an insurance systems vendor to these more energetic and ambitious aspirations? How does it affect your roadmap?
MR: As a company, we have voluntarily embraced that we have to take on more complexity, more product threads than in the past. So not just one domain, but digital, advanced analytics, driving hard for a new mode of delivery—cloud—and adding further complexity by acquiring, in our view, the leading company serving smaller insurers with an entirely cloud-based approach in ISCS.
It’s a lot to take on, but we do it because many voices in the market are speaking, and we need to answer that with a broad range of product categories. It’s tremendously galvanizing, but it means we have a lot of software to build and a lot of promises to keep.
IIR: Where does the emergence of InsurTech fit with your view of the market you compete in?
MR: Very little InsurTech capital has gone to our direct competitors. The vast majority has gone to people competing with our customers. We want them to succeed, but it’s very stimulating to be able to tell a customer or prospect not that there’s a new technology, but there are smart entrepreneurs who are betting capital that they have new idea, and we don’t know if they’ll win or lose, but you have to take them seriously. I generally bet on the incumbents as insurance is a complex domain, difficult to enter. But InsurTech is helping to realize many ideas that are very different than the conventional insurance approach, especially in digital and data areas.
IIR: How are the changes in technology, consumer behavior and the aspirations of your actual and potential customers shaping your acquisition strategy?
MR: We were not very acquisitive in our first 12 years, having only one very small acquisition, and then three years later, we acquired three companies in a single year. You’ll see us slow down. We’re very happy with where we are. In EagleEye we have the preeminent machine learning company focused on P&C.
With FirstBest, which typically focuses on complex commercial, we have the only company with a next-gen underwriting management solution. It’s a difficult category to build a company around, but it’s an app that many insurers need. Not all do complex commercial underwriting, but, frankly, that’s a domain we weren’t covering well. They are the only company doing that—and in a cloud-based way—and are now part of our platform.
ISCS is, in my view, the preeminent all-in-one, cloud-based core system suite focused on low cost and rapid implementations generally suited to smaller insurers. We look to expand its reach beyond the U.S. but that doesn’t happen overnight. There’s a difference in the needs between a $100 million carrier writing in one or two states, on the one hand, and companies like Nationwide, Travelers, State Farm on the other. And while we had smaller customers, there were many for whom our approach to market was not ideally suited. Now we have a choice of core operational support in either InsuranceSuite, which is modular, and InsuranceNow, which is an all-in-one, highly standardized, rapid implementation, straight-forward upgrade, cloud-based option.
As for any potential future acquisitions, we’re still very well capitalized, with well over a half billion in cash. We’ve always been very selective. Now we have to be especially so, given that we have new companies to integrate, which comes with technical and cultural challenges to address.
IIR: What is Guidewire’s long-term ambition in the industry?
MR: You’ve heard me say that our overarching ambition is to be the utility of the industry, providing capabilities that are dramatically less expensive and more reliable than insurers could build for themselves. A lot of carriers ask where they get competitive advantage; well, we tell them we don’t bestow that. We enable them to focus on the things that are competitive by providing a modern foundation. Taking that mission seriously means we have to make software reliable, inexpensive and easy to implement.
With the acquisition of ISCS, I think we now cover the waterfront very well, although there’s still some gray area, for instance there’s plenty of work to do to fully internationalize. But broadly speaking, we now have the assets. We’re not in this to be a financial holding or rollup company; we’re here to build one unified platform.
IIR: You have spoken about moving beyond the P&C industry into life insurance systems.
MR: This is a longstanding dream and intention on Guidewire’s part. Insurance sectors are like different continents; the nearest is the L&A continent but it’s still an ocean crossing. We just added a lot of complexity to our business and we want to make sure we have the homeland well defended before taking on a new adventure. That’s a long way of saying that it’s off the table for 12 months, something we’ll be taking seriously in the following 12 months, and then becoming a priority during the following 12. Of course, the world is moving, but it’s critical that we follow through on the promises we’ve made before taking on a new raft of challenges.