Dante CAFARELLI
Partner and Executive, Head of Insurance Sector Italy
Internet of Things Insurance Leader Europe
IMB Italy

25 February 2016 — Daniela GHETU
Dante CAFARELLIPartner and Executive, Head of Insurance Sector ItalyInternet of Things Insurance Leader EuropeIMB Italy
dante_cafarelliXPRIMM: As far as it seems, the Internet of Things (IoT) technologies may foster the shift to a new level of services in insurance. Please explain for our readers, in a few words, what it is about.
Dante CAFARELLI:
To be very synthetic, IoT matters to Insurers because it matters to their clients, especially to the emerging class of clients represented by the "Millennials".

We are living in a world in which "intelligent things" have already become of common use: smart phones managing all kind of App's which can monitor different kinds of activities, intelligent cars, all kind of portables continuously measuring our health parameters, intelligent house devices etc. All these "things" are collecting and storing lots of data defining our behavior as drivers, inhabitants or in what our health is concerned etc. In such a context, insurers need to figure out how to use such data stream in order to improve client's loyalty by expanding products and services beyond the classical core insurance coverage. Value added services are already becoming very important in this process and IoT technologies may help insurers, on the one hand to provide such personalized services, on the other to improve their core business processes such as pricing, claims management etc., while at the same time achieving significant cost reductions in the back office and claims expenses area.

XPRIMM: Can you provide some examples?
D.C.:
Insurers are willing to deploy IoT solutions for the sake of attracting and retaining good customers as well as to achieve a better risk segmentation and pricing, leveraging "next generation pricing" as a differentiator. Also, they will be able to define risks with more precision and to identify fraud patterns and to provide tailored products that incorporate risk mitigation features.

On the insurance customers side, they will benefit on one hand from the enriched offer of products adapted to their own needs and characteristics, and will also receive an ever-larger range of additional services through which the insurer will act not only to compensate losses, but also to help its clients to avoid or at least mitigate losses, proving to be a real "partner" of the insured.

As IBM, we believe in covering the entire value chain for IoT solutions supporting motor insurance consisting of four layers: sensor data provided by telematic devices, smart devices, smart phones, homes, vehicles, appliances or fleet packages will be processed by the data management system and enriched with other contextual information as weather, road and traffic data etc. As a result, streaming data analytics provide real time services using Big Data, Analytics and predictive models. At the same time, analytics are used to develop usage and risk models based on driving behavior, driver's feedback and claims analysis, all of these being used in the product management sector for product design, pricing, claims analysis, marketing and value added services delivered to consumer via portal, car console or mobile apps.

XPRIMM: Considering the large volume of data collected directly from the customers, should insurers fear that customers will hesitate to participate in it?
D.C.:
According to recent surveys young customers, the GenX and Millennials generations are feeling pretty comfortable with insurers using the data from these devices and also agree to a large extent that if their insurer would use such data, most probably their loyalty to their insurance provider would improve. In fact, it is for these generations that insurers need to adapt their systems and become able to interact on all channels with their current and potential customers. Price alone will no longer be the main feature considered when choosing an insurance product and provider.

XPRIMM: In this context, how do you see the European eCall initiative?
D.C.:
The eCall requirements are a good way to start one's "IoT Journey", with the purpose of building out a distinctive capability as insurance companies can now implement their own holistic and complete IoT platform supporting multiple IoT solutions. In this respect, IBM's eCall solution covers the entire operational cycle of the eCall functionalities from the device to the integration to the assistance services and it is relevant to emphasize that the IoT Foundation for Insurance is at the core of eCall capabilities deployed by the German Insurance Association.

XPRIMM: What is IBM's proposal for the insurance industry?
D.C.:
IBM's commitment to IoT for Insurance dates about 40 years back and we are now positioned such that we can significantly extend the current market offering. We will invest USD 3 billion into the Internet of Things over the next 4 years including building an ecosystem of partners using IBM's IoT Platform. We have already invested USD 24 billion in Big Data & Analytics; we have 15,000 Analytics consultants have issued 500 Analytics Patents per year. Moreover, insurance is the no1 focus for Analytical Insights.

In December 2015 IBM, joined by top European clients, opened its Watson Internet of Things (IoT) global headquarters in Munich, Germany for the cognitive era. It will serve as the global headquarters for IBM's new Watson IoT unit, as well as the company's first European Watson innovation super center and up to now it is the largest investment in Europe in more than two decades. The campus environment will bring together 1,000 IBM developers, consultants, researchers and designers to drive deeper engagement with clients and partners, and will also serve as an innovation lab for data scientists, engineers and programmers building a new class of connected solutions at the intersection of cognitive computing and the IoT.

Further developing our technologies will lead to bring customers and insurers together and reduce call center costs; it will help to determine appropriate risk models by line of business to decide on optimal pricing and also to decide on best approach for commercial underwriting with better access to historical data and analysis.

XPRIMM: How is the insurance industry responding to this daring offer? Are insurers keeping the pace with the technological advance or the industry lags a little behind as compared with the high speed developing of the IT offering?
D.C.:
First of all, we should admit that the industry must be a little behind or else we wouldn't be selling the next thing. So it is expected that we am bringing some innovation. That is all right, is physiological.

I can only speak from our own experience with the insurance customers. In my opinion there is a lot of interest. The real problem is not insurers' understanding of the need to make a real shift from the old world to the new world. For instance nobody is happy anymore with the telematics service providers. They understand there is no longer enough to buy the "box", but you have to buy the box and the analytics, so it is important to own your own solution. They know it, they want to try it, but than the real problem is that you have to find the way of making it happen without being disruptive for your business. This is the really difficult part. People understand the value, they try it, but when it comes to make it to go from the experiment to the real thing, some of them stop because they can't manage it. Is a problem of transformation rather than understanding. They understand but they are struggling with the legacy system.

XPRIMM: What are the main challenges insurers are facing in making this shift?
D.C.:
When you are a large telematics business the first problem you have is that you worry about migrating the business to the new platform. This is common. Imagine that you need to change your portfolio management system. Your problem is that you have to pass millions of policies from one system to the other. It seems easy, but in fact is very difficult and there are several ways of doing it. Also it is not so easy because the contractual agreements insurers have with the current providers are such that there is a strong lock in. So there is a problem to migrate from a system to another when you have a strong lock in with your current provider.

From a cultural point of view the problem inside is that when you give to people that are used to a different level of service the possibility of shaping and changing this service as they need it: it requires learning how to do it. So, when providing insurers with advanced analytics, you have to make them simple for them, so that they can use it with the current resources. The smart way of doing it is that you offer basic analytics, you offer the skills for running and transforming these basic analytics and then, over time, the client becomes able to do it in house. That is how it works, it takes time, because it is completely different from receiving data at the end of the day from your current telematics service provider, checking the scoring and passing it in for pricing. Instead, with the new technologies of you are seeing the data streams coming on and you need to manage the data streams online, sett the business rules for managing the alerts to the clients etc., which is completely different. People have to get there; it is a problem of skills. In summary, obstacles are the migration from a system to the other and than the skill problem of taking over the new system.

Typically these things happen when there is a management team that wants to make them happen or there is a company that is institutionally able to innovate. So, I see that some of my clients are institutionally willing to innovate and some others are not (they don't have enough time and people to understand the complexity).

XPRIMM: What would be an ideal client for you? Is it a problem of size?
D.C.:
Size doesn't matter very much because we do contracts on the basis of volumes, so we price by device meaning that if you decide with us what is the device type and the analytics type you need, you get a price per device. And then you tell us what is your business plan - let's say that your business plan is of doing 250,000 policies in three years, which is typical for a small company; that is all right, we sign a contract based on this value. It is not like you have a fixed contract value, say of USD 10 million, and you have to support that expense from a small number of policies. This means that the size is relevant, but to a limited extent.

Our ideal client would be somebody that has already tried telematics 1.0, which has already done it and understands the complexities and also the limitations. The most difficult clients are those that have already done multiple proofs of concepts badly designed or badly executed and they have lost fate. The other semi-ideal client is the one that has been not doing anything in telematics at all, because at least it doesn't have the problem of legacy. They might have the problem of skills, but not the legacy, so they look at this stuff in a much opened way.

XPRIMM: Finally, how much is IBM targeting the CEE insurance markets?
D.C.:
We are just starting now to cover the Central and Eastern Europe. The problem there is not so much with the clients, but with us covering that territory. There is an entry mode for every market. So, if in one particular market we are particularly strong in selling infrastructure, but we're not yet into applications, advanced technologies etc., the problem is that we need to reshape our business there and have more people in the field. My expectation is that if we will have some interesting requests - and they are already arriving -, we will adapt very rapidly and have more people in the field and we will serve these clients. I am expecting that during 2016 there will be at least one deal in the CEE. As for Turkey, we are already having requests and developing our business there.

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