The unabridged version of this interview originally appeared in the Summer 2018 Edition of IASA’s Interpreter. It is the 44th in a series of interviews conducted for the publication by Nolan’s Executive Director, Dennis Sullivan. Joining Dennis is Rod Travers, IASA's Executive Director.

DENNIS SULLIVAN: I'll start by asking you to share with our readers about your background and then the genesis of the Arity story.

GARY HALLGREN: I’m only a couple of years into my journey at Allstate and in insurance, but I spent 20 years working inside of the telematics business. For more than two decades I’ve been collecting data from cars and trucks, pulling useful information from that data, and doing something interesting and impactful with our findings. So, for me, the industry standpoint of this is new, but the technology and the work that we’re doing is very similar to the work I’ve done and managed for a long time. Arity is not an insurance company. We are building a technology company that is owned by The Allstate Corporation. There are many companies inside of The Allstate Corporation; the Allstate Insurance Company is certainly the largest, but there are several well-known brands like Esurance, Answer Financial and others that operate under The Allstate Corporation umbrella.

The U.S. personal transportation system needs restructuring. There are over 240 million vehicles out there that are only used 4% of the time. We collectively spend 8 billion hours a year in traffic. This dysfunction costs us over $4 trillion each year. Finally, what’s central to our mission at Arity, more than 40,000 people were killed in vehicle accidents last year.

When Arity was launched in 2016 our initial aim was to provide the insights and intelligence to help insurance companies better understand risk and more precisely price insurance. But we quickly realized that we understood a lot about how people move from one place to another and that there was a real opportunity to leverage these insights across the entire transportation ecosystem to potentially make it better for everyone.

Arity was founded to build upon everything Allstate knows about driving behavior and the nuances of how people get to the places they need to get to. This puts us in the best position to shape the future of mobility.

Our Platform is built on more than 35 billion miles (and counting) of historical driving data sourced from more than 1 million active telematics connections and eight years of collecting data directly from cars. In addition to this very large and unique data set, we have more than 85 years of insurance data and intelligence, risk modeling expertise, and a deep understanding of drivers, their claims and behaviors, all courtesy of our connection to Allstate.

DENNIS SULLIVAN: We are seeing the term "InsurTech" everywhere in today's literature. Ten years ago it may have been "CRM," or five years ago "Artificial Intelligence." Is it just a new buzzword with multiple interpretations? How would you clarify this latest phenomenon?

GARY HALLGREN: I think there is a lot of room for disruption and benefits inside of our or any industry. As to why people have latched onto “InsureTech” as opposed to aerospace tech…I don’t think of Arity as an InsureTech company. We are trying to make the transportation system smarter, safer, and more useful for everyone. That kind of work will affect the whole mobility and transportation ecosystem, and for us insurance is a vertical of that. The idea of being an InsureTech company versus a mobility services company or whatever, I personally don’t think about it that way.

DENNIS SULLIVAN: Earlier you mentioned funding. When a new venture is NOT generating revenue, you need capital from investors. Obviously, you have Allstate to start, but how do you see this new model being funded from other sources?

GARY HALLGREN: I think that is definitely the case. If you consider the changing pace of transportation, which we covered earlier, and you look at Didi and Uber, two of the most valuable startups today, there is a huge insurance component to that puzzle. Does it change the face of insurance for them? Yes, it certainly does. Just take a moment to think about how complicated it is to provide insurance for all the aspects of rideshare.

As a driver, you need to have a policy that covers you. Then you light up the rideshare app and you instantly need a different sort of coverage that’s activated. Then the moment someone gets in your car, you have a different set of insurance. That (shared mobility) business is transforming how insurance companies think and look at this industry.

When investors are coming in, they’re looking to invest in new forms of transportation that will play a role in how the whole ecosystem is changing. Car companies have told me that this is the biggest time of transformation since the Model T and the assembly line. This is going to fundamentally change their business altogether.

DENNIS SULLIVAN: Allstate initiated this out-of-the-box company (Arity) and felt its potential was significant. They recruited from outside the industry at the top. This obviously poses a risk of turning the insurance industry on its ear. How does Allstate look at this potential new future model? 

GARY HALLGREN: I think you can take one of two approaches. You can put your head in the sand and say, I’m just going to try to keep this old model going as long as possible. Or you could try to think differently. One of the reasons I joined this corporation and one of the reasons why I’m so proud to be a part of the Allstate enterprise is they have never been that way.

When the initial car sharing or ridesharing programs came out, some insurance companies immediately backed off. They were not going to be involved. Allstate was just the opposite. This is good for our customers, it is good for the industry, it is good for efficiency, and Arity is part of it. Allstate is trying to build new strategic platforms that will transform how this enterprise is going to operate in the future. We are focused on societal good, on things that are going to work for our employees that will drive the evolution of the overall enterprise. Some view the transformation of transportation as a big risk. I think it’s just the opposite. This is the future. It’s where it’s going now. We want to lead it. At Arity we will take a leadership role, we will not sit back, waiting for things to happen.

DENNIS SULLIVAN: Clearly you have a head start and momentum in the telematics game. Potentially your new models for pricing and risk selection could leapfrog the competition. Will this "new model" potentially push the small- and mid-market players out of the game and leave them playing with am inferior set of tools?

GARY HALLGREN: I think it’s almost just the opposite and here’s why. Right now, we believe that we have better models than virtually anybody else out there. We know this because we have been collecting a lot of driving data for a long time and we have all the loss information correlated to that driving data. We could have made the choice to keep all of this experience and expertise internally, within Allstate. Instead the company created Arity with the idea that the industry needs this, that we are ahead in this. So, going back to the second part of your question, mid-market companies can knock on the Arity door and use the models that we’ve created. In turn, they contribute their data into the pool of data that is always growing and as a result our models continue to get better.

DENNIS SULLIVAN: Although you see the game changing, do you see the "industry" being the beneficiary — and ultimately the customer — who will get "better rates" and a more accurate evaluation of their insurance needs? Eventually we'll move away from traditional credit scoring and into a new world of evaluation. 

GARY HALLGREN: I certainly see something different and more effective than traditional methods.

People outside of the insurance industry have been creating driving scores for a long period of time. But to be totally honest, they aren’t very reliable, because they do not include the driving data of what actually happened. You may be able to know that this kind of behavior causes crashes. But to really know the impact of bodily injury versus property damage, to date you just haven’t had enough data. The great thing about Arity is that we have been able to pull in all the insurance expertise from Allstate. The companies with the best data will win. But, if you do not have that initial raw material to build from, you are at a very big disadvantage. You have to find somebody to collect a lot of data. Out of the gate Arity had an advantage by having all that information, and we pull all the insurance expertise to go along with it.

My experience is collecting and leveraging data from cars and trucks for more than 20 years to do interesting things with the data. At Arity we brought in a lot of people from in and outside the insurance business to create a first-rate telematics company, with a world class understanding of risk. Add that to the pool of data that we’re sitting on and we’re in an amazing spot. I’m very excited about the position that we’re in.

DENNIS SULLIVAN: The insurance industry has always been chasing the new shiny addition to a traditional business model (QUALITY, CRM, AI, the Cloud, and data analytics). What makes this different and will it be sustainable?

GARY HALLGREN: You need to be fully committed to the mission that your organization is trying to accomplish. In our case, meaning Arity, we know that through our work there will be more accurate pricing and more empowerment for the motoring public. There will be a more efficient transportation system if the public can better understand risk to actual driving; and if we can help advance the car sharing/ridesharing type businesses…that is more than enough of a focus for our company and for the insurance industry.

I think we’ll look back five years from now and nobody will be talking about telematics. This will be the way it is done in the future, when people will say, “Of course you monitor each vehicle, of course you must understand how someone is actually driving the vehicle to set a price. How could you not?!”

Our industry will look back and we’ll be amazed that the best indicator to most accurately price a customer at the time was based upon traditional rating methods, as opposed to how they actually drive the car.

DENNIS SULLIVAN: If that transition begins to take place, there could be a sea of change in how we price, rate, set reserves...

GARY HALLGREN: I think it’s going to hit a tipping point, and we’re going to be there.

I think of it as this mid-market company with this jar of marbles. I always like to tell this story around the holidays, because there’s red marbles and there’s green marbles, and they do not know how many exactly are in there or how much they weigh. They just know that if I price this jar of marbles in a certain way, I can make a reasonable profit. Then when no one is looking, someone steals all your red marbles, but you have no way to notice this massive change. Pretty soon, you’re losing money and you don’t even know why. That’s the benefit of this new variable, that people who are not thinking about it in that way are going to be looking at their jar of marbles and thinking that they are pricing it correctly. But they really won’t be, because all the good marbles are gone. When this happens, and people start to feel that, there will be massive adoption to this.

ROD TRAVERS: Coming into this, you said a couple of times you're not an insurance executive. Coming into Arity — this new environment — what surprised you most and what was unexpected, either on the upside or the downside?

GARY HALLGREN: The level and number of capabilities that we have inside of this enterprise is amazing. What has surprised me is the predictive-ness of the data has been better than I anticipated. The idea that you can consume this much data and be able to truly understand it in ways that I didn’t think was even possible.

The level of depth and sophistication that our amazing data science team has used to pull apart all the different variables and truly understand the delta of the massive task before us has truly amazed me. I did not realize that this kind of multilevel task was even possible in the world of data science.

The way that I think about it is that I’ve been given a remarkable opportunity to build a best of breed technology company with the resources, intelligence, and sophistication of a Fortune 50 company.

DENNIS SULLIVAN: In significant changes to a traditional model, leadership is critical. Obviously, Allstate has the size to take a risk and invest in new ideas. Despite the CEO commitment, you must have faced a few naysayers. Where has the biggest pushback been as you present your data? 

GARY HALLGREN: When you are building a 22nd Century corporation with the resources that we have at Arity, we have the capabilities to do the right thing. We are not playing the short run, startup sprint contest where you have 20 companies brutally competing to be the “One.” This dynamic creates a tremendous amount of consolidation, as everyone gets their $10 million investment, they kill themselves to grow it to $30 million of revenue, get their 10 times multiple, and exit. We are playing a different game with Arity.

As I mentioned before, I came from the telematics world and one day the company I was running was purchased by a larger competitor. After the dust settled, I was asked to lead corporate strategy and M&A. We bought four companies in a relatively short period of time. When I got there, we were generating maybe $20 million in revenue, we ended somewhere north of $140 million and we sold it for $1 billion. That was the game I knew I was playing. When I got there, I used to track 100 different telematics companies that looked and smelled the same on the surface. Now there’s only five that really matter. That’s what’s going to happen in InsureTech and in each of these little sub-verticals.

ROD TRAVERS: Gary, what do you think the time horizon is on that? Because there's no question it's going to consolidate; it's going to normalize. Some of this is just going to be part of the routine, as you said. This is how it's going to be done with regards to data. How long do we have until a pretty significant shakeout happens, in your opinion?

GARY HALLGREN: I don’t know, because I think it would vary. I don’t self-identify with that game. It is not that I sit and try to think, how do I position Arity as a leader in the InsureTech industry. I just don’t spend time thinking about that. If I was thinking about the industry, I would be looking at those different sub-verticals. There are things that Guidewire and Duck Creek are doing trying to get rid of the old policy admin kinds of stuff. Then there’s a whole different group of people that are thinking about drones, and drone technology, and how do you manage the claims process better.

DENNIS SULLIVAN: Before we let you go you said, "I'm not an insurance exec," but you are a senior executive. You manage a staff out there that talks different, looks different, walks different than the underwriters that I first saw when I came to the first insurance company. Talk a little about that — the challenge to get the right talent, a little about who those people are that make up Arity. How do you pick them out? What are their strengths/weaknesses?

GARY HALLGREN: When I started a few years ago, my team was tasked with a transformation: our challenge was to evolve an innovative group within an established insurance leader into an entirely new startup technology company. We knew the aim of our journey — to fix a broken transportation system — but we didn’t yet know how.

From the get-go, I knew that the only way to grow our talented team and find the how of our mission, we needed to engage everyone and attract the best and the brightest to join us. Steve Jobs once said that “we hire smart people, so they can tell us what to do,” and I think a lot about this as Arity has grown.

When I thought about the composition of my leadership team I asked myself an important question, “Do we need to have people that can effectively talk to insurance executives and organizations?” The answer was a clear yes, we needed intelligent people that truly understand the insurance industry and I’ve built my leadership team with that in mind. However, I also believe that if we are going to accomplish our goals it is vital to have the perspective and experience of smart people from outside the insurance world. The team that has been built at Arity is a mixture of both and so far, it’s turned out to be just what we needed and more.

PUBLISHER’S NOTE:  This article was originally published in the Summer 2018 issue of IASA’s Interpreter. All rights reserved. Copyright IASA ©2018