Tower seeks to leave rivals in the dust with tailored digital insurance model

Tower Insurance chief executive Richard Harding says "The shift that we want and the opportunity we see is how can we have a better connection with our customers"
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Tower says it aims to leave its larger rivals with 'clunky legacy systems' in its wake by transforming into a "digital challenger" offering customers more tailored products that draw on deeper pools of information.

The Auckland-based insurer is raising $70.8 million to bolster its balance sheet and has adopted an ultra-conservative approach to the most problematic claims lingering from the Canterbury earthquakes seven years ago. Chief executive Richard Harding says that gives it the headroom to overhaul its IT infrastructure and embark a new way of doing business which will deliver better products for customers, tailored to their specific needs and priced accordingly.

Tower has hired EIS Group to scope out and cost the process of integrating four systems into one core infrastructure as part of a wider programme to simplify the business, putting the insurer on the front foot against its rivals which are carrying more cumbersome systems that struggle to keep up with changing consumer demands.

"It's that flexibility to use data from all sources, get that data compiled in a way for you as a customer that we actually have insights about you so we can make a compelling price for you," Harding told BusinessDesk in an interview. "It's really about turning around insurance to be simple and easy for customers.

"We won't get to that in financial year '20 but we've certainly built the foundations that will enable Tower to have the flexibility to deliver that sort of claims outcome or customer experience," he said.

Harding doesn't anticipate the country's larger insurers can match that strategy, because "they're not as nimble and they don't have that ability and flexibility."

Tower's online drive has already started paying dividends, with yesterday's announcement of the capital raise and lingering issues with Canterbury claims clouding a robust underlying business. The firm's online sales generated 30 percent of new business for the insurer in the September quarter coming through digital channels, compared to just 9 percent in the March quarter of 2016.

Still, the insurer booked $19.6 million of impairment charges on software in the 2016 financial year after finding its current systems restricted its ambitions and accelerated the amortisation charge on internally developed software in 2017. The closing book value for Tower's software was $31.3 million as at Sept. 30, after accumulated amortisation of $33 million.

Information is the key benefit for insurers in the digital environment, and Harding said the industry will be able to deliver better pricing for customers with more robust data analysis. He points to the cross-subsidisation in the larger insurers, where about six Auckland policyholders are effectively paying more for their earthquake premiums to cover one Wellington policy, which carries greater risk.

"By having cross-subsidisation you're encouraging development in places where it shouldn't be developed," Harding said. "Should we be building commercial property on reclaimed land in Wellington harbour? Should we be allowing continued construction on 60-degree slopes on the Wellington foreshore?

"At the moment we do because there isn't a risk signal coming from the insurance industry saying that's not a viable thing to do."

Harding expects big data will let insurers move to more accurate pricing for risk, which will "mean unfortunately a higher cost in Wellington, but more affordable insurance for other people." That's a decision which will need wide societal input, "and is a challenge New Zealand will have to face up to in the next five years or so," he said.

That shift to a digital interface will also change the nature of Tower's workforce, something the insurer has been to develop over the past year. Harding said one of the biggest issues service staff have contended with is the duplicated systems and large suite of products, which has meant they spent less time focused on the customer.

Tower has been working on overhauling its culture from an old-school insurance firm to that of a "much more nimble challenger mindset", although Harding says they've "still got some way to go".

He doesn't anticipate a shock to the make-up of the workforce in the way some industries have been scaling back staff numbers to make way for automation, rather he wants to take staff "on a journey through as we change the company" where they can become more valuable to the customer.

"The shift that we want and the opportunity we see is how can we have a better connection with our customers, because our staff aren't being bogged down with our processes and the way the system works and are freed up to do more for the customer," Harding said. "That does require a greater level of capability and a change in people's expectations around work, but I think it gives them greater satisfaction and greater opportunity as well."


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8 Comments & Questions

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Talking about cross-subsidization.

Using Tower's online quoting system:

2017 Toyota Corolla with agreed value 31,283 = 954.56 pa
2017 Audi A4 with agreed value 80,740 = 1,901.64 pa

The Corolla is paying 3.1% of agreed value pa vs 2.4% for the Audi.

All other details were kept the same.

How is this fair?

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I'm betting, that the excess on the Corolla is a helluva lot less than that of the Audi. What Jesus giveth with one hand, he taketh with the other.
No free lunch here when it comes to insurance companies.

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Excess on both vehicles was $500.
Again, all details for the quote were the same for both vehicles (policy type, driver, excess, etc) and no fixed price add-ons were selected such.

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It's not just your own car you're insuring, plus minor accident costs are not necessarily proportionate to total value. Take this example. Two accidents. 1x Audi into 1x toyota, and 1x toyota into 1x toyota. All cars are written off. Total exposure to the insurance company that insures the person at fault in the 1st example is $112k (1.7%), and $62k in the 2nd (1.5%), so your math is reversed.

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Ok so answer this then:

Same vehicle - 2017 Corolla

DRIVER 1 - parks on the STREET in REMUERA
DRIVER 2 - parks in the GARAGE in GLEN INNES

Both drivers NO EXCESS with driver 0 claims in 2 years, 4+ years of license.

Driver 1 - 226.73 p/m / 2,493.72 pa
Driver 2 - 239.14 p/m / 2,630.18 pa

5.5% difference in yearly premium.

THIRD PARTY: (No theft or fire cover)
Driver 1 - 29.23 p/m / 321.31 pa
Driver 2 - 32.23 p/m / 354.40 pa

10.3% difference in yearly premium

How does that work?

"Tailor made with Tower Insurance".
Price Discrimination much?

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Vehicles for Driver 1 and 2 were a:
2017 Audi A4 TFSI Sedan 4dr S Tronic 7sp 2.0T

ie - still same vehicle.

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It’s driven by data... The main drivers of risk based pricing are average cost of claims and frequency of claims. Simple examples are likely to be that Corollas are more likely to be involved in accidents than Audi (frequency of claims), and Corollas are more prone to theft (frequency of claims).

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What a glorious puff piece, who cares how many times Tower has tried this trick, it’s a dog of a business struggling to recapitalise and in need of a new suitor. Someone please do it the kindness of putting it down.

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