A lot of property/casualty insurers are talking about digital transformations these days but the change taking shape at a midsized super regional carrier in Columbus, Ohio is different from the rest, executives of the carrier say.

“Ours is a real one,” Michael LaRocco, chair and chief executive officer of State Auto Insurance Companies told Carrier Management during an interview in early November. “As other people talk about it, we’re actually doing it,” he said, referring to an 18-month effort to stand up a separate greenfield platform for new policyholders on which all transactions are absolutely paperless.

“No paper, no cash, no checks. The transaction is all e-signature. You pay with your credit card, or by giving us your checking account. That type of digital transformation is the core of what we’ve done,” LaRocco said.

Greg Tacchetti, senior vice president for information technology and strategy, elaborated on the CEO’s description of what going “completely digital” means at State Auto. “For us, digital transformation is about meeting the customers where they are with what they need, when they want it and how they want it, on whatever device that may be. In order to accomplish that, it really comes down to a complete rebuild of the [technology] platform and data architecture,” the IT leader said.

Contrasting the “all-in” effort at State Auto with less intensive efforts in the industry, he said that a carrier “can very easily put up a mobile app today” and call that a digital transformation. “But if they don’t have customer email, or mobile phone numbers at the core of their data architecture, then how are they really going to reach out to that client?”

“We started from the ground up with this transformation,” he said.

LaRocco used different words, highlighting the enormity of the effort. “What we were able to do in 18 months was basically stand up a new insurance company,” the CEO said, also describing an insurance product rebuild that is accompanying technology changes. (See related article, “Growth Ahead as State Auto Exits Specialty Biz,” for a discussion of product innovations.)

To date, State Auto’s digital transformation relates only to new business transactions. “The customers we are talking about on the new platform have agreed to do business electronically and have automated billing set up as part of how we do business. They came on board to the new paradigm, and accepted that as a condition of doing business,” said Tacchetti. “For the time being, there won’t be any change in the way our legacy customers do business with us. They can still mail us checks, and we don’t require their email addresses,” he said.

LaRocco reported that the new business effort will be complete for all the company’s personal lines states—28 in total— by the end of the first quarter next year. “If you buy an auto or home policy from us, it’s no different than if you were buying something on Amazon or Costco.com or any other website,” he said, referring to the paperless aspect of the sale.

“Small regionals, small mutuals, if they fail to change, given the environment that’s changing around us, are going to be dead men walking.”

Michael LaRocco, State Auto

LaRocco joined State Auto in May 2015, replacing a retiring Robert Restrepo. At the time, State Auto was losing customers and suffering a multiyear string of underwriting losses. While turning around both trends has been a key focus, the management team believes that regional carriers have to make more sweeping changes. “Small regionals, small mutuals, if they fail to change, given the environment that’s changing around us, they are going to be dead man walking,” LaRocco said.

Joined by leaders of the personal and commercial lines businesses—Jason Berkey, SVP-Personal Lines, and Kim Garland, SVP-Commercial Lines, LaRocco and Tacchetti expanded on the reasons for embarking on a digital transformation, the approach they used, progress to date and next steps. LaRocco also shared his views about the future of insurance distribution and even suggested that State Auto might be willing to share its technology with other P/C insurers.

Q: Why did State Auto decide to do this? Were you trying to solve a problem internally? Or, is it simply a reaction to external trends?

LaRocco: It was both. This team came on board a two-and-a-half years ago. State Auto had struggled over the last number of years.

Prior to coming here, Greg and I had done a startup in Seattle, in the direct response online digital space for the small commercial. And we realized that if you look at everything that’s happening across our industry around the technology, data, and the changing needs of consumers, it’s very clear that the move to digital was a primarily strategic decision.

Everything is moving. It’s not a bold statement to say that the world is going digital. It is a little bolder in the insurance industry to actually do it, and commit to it 100 percent …

So our decision was based a little bit on the fact that we could see where we had been in the past and realized that that wasn’t going to be a good, successful strategy [for the] long term. And we believe[d] at our size, and [with] our ability to be nimble and responsive, and creative [that] if we could build a digital platform, we could win in an industry that we believe is going to change, this time, in a much, much more significant way than it has in the past.

Q: It sounds like potential customers still go to agents in the same ways they have in the past—by phone, visiting the agent, or on the agent’s website to buy a State Auto policy—and that the agency interface has been updated. Is it correct that customers are not buying your policies directly on stateauto.com?

Tacchetti: That’s correct, for the most part. You can’t buy directly from us. Going [back] to what I said… about meeting the customers where they are, [we have seen that] in the face of billions of dollars of advertising and IT investment in the industry, the independent agent channel has really not decreased in size. So, for us, the customers are choosing independent agents. Our mission is to really help our agents have a different, and in a lot of ways better, relationship with the customers that are choosing to shop online.

LaRocco: [Using] the digital platform on the agent’s desktop or phone or iPad, it’s about five minutes from start of the quote to the issuance of the policy. Instead of the agent spending a lot of time entering information and going through screen to screen with data, we access external databases in our digital world….The effectiveness of the platform allows the agents to do what they do best, and really add value to the customer by being a trusted adviser and a professional, to explain coverages that help them make the right selections to meet their needs.

Q: Earlier you described the digital transformation as being about “meeting the customer where they are with what they need, when they want it and how they want it, on whatever device that may be.” Given that, would State Auto consider a direct-to-customer distribution option if customers ever want that?

Tacchetti: Never say never, but, no, and for two really important reasons.

• First, we believe customers are better served by having a professional independent agent, who understands their client’s unique needs [and] make[s] recommendations for companies and products to meet these needs.
• Second, and more practically, the amount of money required to acquire enough brand recognition to make a direct operation profitable is more than we can justify spending.

Q: In addition to encouraging agents to build out their own digital capabilities to drive customers to their websites, State Auto is also building a “white label” capability for agents. What does that mean?

LaRocco: If it’s 9 o’clock at night and the potential customer [searches for] homeowners insurance in Columbus, Ohio, and then clicks on a local agent [in the search results] and gets into the agent website, there is a button that could say “Get a quote.” They will basically stay on the agent’s site—feel that they’re on the agents site but they will come into our website still seeing all the agent branding…They can get a [State Auto] quote on homeowners, and then they can hit a “buy” button, and buy it and they’re done. Agents love of that.

We’re actually up already in a test environment with one agent. This will get expanded to more in the first quarter next year.

Q: In other interviews, you have spoken about the potential issue that agents could have with this—the fact that the redirect to the State Auto platform limits the choice of carriers—and a potential solution, which is allowing other carriers on your platform. Is that in fact something you would consider?

(Editor’s Note: In an interview on Agency Nation Radio, LaRocco referenced the idea of “partners” with commitments to independent agents making the delivery of two or three carrier quotes to an online customer become a possibility.)

LaRocco: The agents don’t have to do the “buy” button. They can simply say, “Call us at this number and we’ll finalize tomorrow. We’ll give you two more quotes.”

I will tell you candidly that a lot of our agents are going to be agnostic as to whether that customer just goes ahead and takes that quote and buys it right there online. So this is a way to empower agents to get at customers they otherwise would not get, in an efficient manner….

Q: Discuss State Auto’s progress with the transformation so far.

Tacchetti: Relative to October of last year, our new business sales were more than double to what they were last year.

LaRocco: The platform is ready to be delivered in all of our states. Right now, we’re in 19 of our 28 states. By the early part of the first quarter, we will be in all 28 for home and auto new business. We are now in five states for commercial auto and our BOP [businessowners] product. And probably by the third quarter of next year, we will be completely launched for those products.

Our inforce customers remain on the legacy platform but in the coming 12-36 months, we will migrate them onto the new digital platform.

Q: Why did State Auto start with the new business platform instead of revamping the whole thing?

LaRocco: The main reason is speed. The second reason is using a green field, or a clean sheet of paper.

“Everything is moving. It’s not a bold statement to say that the world is going digital. It is a little bolder in the insurance industry to actually do it, and commit to it 100 percent,” LaRocco said.

What we were able to do in 18 months was basically stand up a new insurance company. Taking this greenfield approach also allowed us to not only build new products but also to build in capabilities that you probably would not have been able to build if you’re trying to convert legacy business into this space.

Tacchetti: Just about every P/C carrier has a patchwork of legacy systems. In our case, they were 26 or 27 years old, but I don’t think we were in any way unique in that regard.

The reason the traditional approach takes so long is that you have to decompose all of that legacy COBOL code that was developed back in a time when mainframe space was very expensive. So, one code might mean multiple different things by different product lines, and different legal entities in different states. That is affectionately referred to as a spaghetti code. Translating that into the new environment is very problematic and risky….

There is about a 50 percent failure rate when you get to that go-live date. All those conversion logics don’t hold, and you start affecting real world customers with bad renewals—and you’ve got to pull the products out of the marketplace. There’s been some spectacular fails over the last 10 years….

Q: Did you encounter any obstacles or problems along the way? How did you overcome them?

LaRocco: There were lots. The way we really overcame it was [that] we have a lot of really smart, driven people, and a culture that encourages people to challenge the process and get involved and take accountability. We had good external partners, for the most part, and I think that they came together.

(Editor’s Note: In an online case study and video featuring LaRocco, Deloitte describes its role in State Auto’s digital transformation and the creation of a technology platform powered by Guidewire.)

We understood going in that we had a very aggressive goal. People embraced it. As problems came up, we didn’t have a bunch of steering committees. We didn’t have a lot of bureaucracy. We empowered people to make decisions. We are a flat organization, and we just got things done. That’s the benefit of kind of being our size, and being very driven.

Q: In your view, are bold innovative moves more likely to take place at small and midsized companies than larger ones? Are super regionals, perhaps, uniquely positioned to jumpstart innovation?

LaRocco: As far as other carriers, I don’t think they’re going to have much choice…At the end of the day, we have to adjust to what’s happening around us regarding data technology and the emerging consumer changes, changing needs. For a long time, this industry said, “Here’s the way we do business. Take it or leave it.” Consumers are no longer going to accept that.

And then you have another factor of external startups and lots of money coming and looking at our industry and saying this isn’t very well run….

So, you put all those factors together, and I think the amount of change that’s descending upon us is significant enough that if smaller carriers don’t adjust, they’re just going to become irrelevant.

Q: At a time when job one was probably turning around the profitability of the company, how did you get a board to buy into a bold innovation?

LaRocco: Not every board of directors would be willing to do what ours has done. It takes fortitude and financial support, both….

Board backed State Auto’s bold bet to go “all in” on a digital transformation.

Given that, juxtaposed against a plan that just said, “Let’s do something bold that nobody else has done—let’s build a digital platform; let’s go all in on digital,” I think they were smart enough, and had enough fortitude to say, “That’s a good plan. We’re going to back it, we’re going to go with you on this journey.”

Q: Did you encounter any resistance from employees or from agents? How did you deal with that?

LaRocco: From both…The internal resistance was more just kind of shock. A lot of associates who had done business a certain way for a long period of time were wary of the change. But the vast majority pretty quickly got on the journey with us, and were excited about it. Quite frankly, those who didn’t feel that it was the right journey decided to go elsewhere, and that’s of course OK as well.

“For us, the customers are choosing independent agents. Our mission is to really help our agents have a different, and in a lot of ways better, relationship with the customers that are choosing to shop online.”

Greg Tacchetti, State Auto

We always say to folks there is no guarantee. We don’t think we are right and everybody else is wrong….If others choose another path, they may be successful, and things may work out for them. All we are suggesting is this is the right path for State Auto…

For the agents, it was probably a more sensitive change. [They] have done business a certain way, have always collected checks and cash, have always had paper to deal with, postage to deal with. You’re asking them to sell a product in a very different way. Just like the board, I give the vast majority of our agents a lot of credit. They hung in there with us. We asked them to be healthy skeptics, to just give it a chance.

There’s probably three buckets. A good-sized bucket embraced it 100 percent….Remember, they have seven or eight companies they can write with and do business in a more traditional way. So they really loved having this option.

There was a big group of agents who were a little skeptical but came along with us.

And then there was a very small group, who just said I can’t do business that way. Just like with the associates I spoke about, that’s completely their right. We respect that, and we parted professionally. They went on to other ways of doing business.

Q: State Auto was losing some customers before this went into effect, and one would think that there are some customers who will want to continue using cash or checks. Do you see that as an obstacle or will more people just embrace the efficiency?

LaRocco: More of the latter. We have started to turn around a long string of inforce policy declines. For many many months—well before we got here—they were declining. In the last two consecutive months, our policies in force have grown. Not only is the new business coming in in record numbers, but inforce policies are actually increasing.

Q: Why was State Auto losing customers previously?

LaRocco: It’s never just one issue. Our products, up until a couple years ago, were pretty dated. So we had lost some ability to be as segmented, and getting the right rate for risk was something that we had lost as we inherited the products. It was clear that pricing had fallen behind the curve. And when you do that, you tend to lose customers who can find better opportunities elsewhere.

Our legacy technology platform, because it was very dated, made it harder than it should have been to write new customers, which put a lot of put more pressure on the policies inforce and [keeping those] customers.

There were a number of issues. We made some decisions to exit certain areas…Based on some bad results, there were parts of our 28 states that we chose not to write in.

We don’t like to look backward, but those are things that happened over the last two to 10 years.

Tacchetti: In the old system, it might take 25 or 30 minutes to get a quote, at which point, if the agent wanted it and the client wanted it, we would then try to issue that. And that was a separate system. It didn’t always cross over. You had clerical intervention to try to make your rates match.

Long story short, paper went out, on average, about five days later.

In the new platform, for most risks, it’s about five minutes to get to a quote. Get a credit card number and send the client an email, activate their account and have a PDF with their policy documents, ID cards. It’s just a totally different world.

Q: The two of you launched a startup—AssureStart—a technology company selling small business insurance online a few years back. I can’t think of any other traditional carrier CEO that has that experience of launching a technology-driven startup. What enticed you to do that? What drew you back to the traditional industry, and what did you learn from the experience?

(Editor’s Note: AssureStart, backed by American Family Insurance from the beginning, is now homesitebusinessinsurance.com. Before launching AssureStart, LaRocco served in prior CEO roles at Fireman’s Fund and SAFECO. Tacchetti was previously chief administrative officer at Firemen’s Fund, served as senior vice president of P/C Financial Operations at SAFECO and as Northeast Operations director at GEICO.)

LaRocco: Having left the corporate world, I had a couple of former colleagues who said you should really think about doing from a startup standpoint. So Greg and I started noodling. I had always had a view of commercial lines as being a line that could really use innovation. And then, Greg had a lot of ideas around a platform that could be much more effective than what the industry had seen before. So that’s what led to it. We were just excited about doing something outside the corporate world, quite frankly, after many many years of being in the corporate world.

Candidly, there were two things that worked as far as coming back. One was that while we were doing the startup, … we [had] talked about was the fact that these regional carriers really we’re well-positioned if they were willing to do some really bold things to win. So, we had talked a lot about regional carriers and that at their size, they had some advantages. They could do some really creative things. But it would take a lot.

And then, when the interviews started happening, I realized that State Auto could be that platform.

So you put the combination of the idea that regionals, if they were willing to take risks, could emerge as more of the fun, creative places to work [and wanting] to do something very very different in the corporate world….Then, when I found a board that was willing to do it [and] the team of people that was willing to embrace this journey, everything just came together.

People like Greg and Kim go all the way back GEICO together. And our claims leader and I have worked previously together. All that and the fact that I grew up in Ohio didn’t hurt either. So, I came home.

Q: In the 2016 annual report, your letter to shareholders refers to changes at State Auto aimed not only turn around the company but “help it to launch forward to be an industry leader.” On what leaderboard would you like to see State Auto to appear in five years?

LaRocco: I think the most logical place will be around innovation and delivery to meet the consumer’s needs in an innovative way.

[Going back to] this unique circumstance of massive data impact, massive technological change, and then a growing group of consumers who are going to demand that this industry service them better than they’ve been serviced before—in five years, my belief is that State Auto will be looked at as that company that emerged through all this transformation to very very effectively meet those consumers’ needs….The platform we’re building is just the beginning of what we can do to interact with the consumer in a way that insurance companies heretofore haven’t really done effectively. Whether it’s service, or sales, or handling of claims, or just interacting with them and connecting them with other consumers around the importance of insurance, we’re just at the cusp of what we can deliver. In words, that’s how I would describe it.

Obviously, the results of that—what we hope we will see is a P/C company that is growing significantly. More importantly than growing, one that is profitable.