It is both stability and change in the Allianz Risk Barometer 2023. Cyber incidents and business interruption rank as the biggest company concerns for the second year in succession (both with 34% of all responses). However, it is macroeconomic developments such as inflation, financial market volatility and a looming recession (up from #10 to #3 year-on-year), as well as the impact of the energy crisis (a new entry at #4) that are the top risers in this year’s list of global business risks, as the economic and political consequences of the world in the aftermath of COVID-19 and the Ukraine war take hold.

Such pressing concerns call for immediate action from companies, explaining why both natural catastrophes (from #3 to #6) and climate change (#6 to #7) drop in the annual rankings, as does pandemic outbreak (from #4 to #13) as vaccines have brought an end to lockdowns and restrictions. Political risks and violence is another new entry in the top 10 global risks at #10, while shortage of skilled workforce rises to #8. Changes in legislation and regulation remains a key risk at #5, while fire/explosion drops two positions to #9. 

For the U.S., business interruption tops the list, again followed by cyber incidents. For the first time, macroeconomic developments hit the U.S. list in the third spot. View the full global, country and industry risk rankings.

The Allianz Risk Barometer is an annual business risk ranking compiled by Allianz Group’s corporate insurer Allianz Global Corporate & Specialty (AGCS), together with other Allianz entities, which incorporates the views of 2,712 risk management experts in 94 countries and territories, including CEOs, risk managers, brokers and insurance experts. It is being published for the 12th time.

In 2023, the top four risks in the Allianz Risk Barometer are broadly consistent across all company sizes globally – large, medium and small – as well as across core European economies and the U.S. (energy crisis excepted). Risk concerns for businesses in Asia Pacific and African countries show some deviation, reflecting the different impact of the war in Ukraine and its economic and political repercussions. 

See also: Cybersecurity Trends in 2023

Digital and disruption dangers 

Cyber incidents, such as IT outages, ransomware attacks or data breaches, ranks as the most important risk globally for the second year in succession – the first time this has occurred. It also ranks as the top peril in 19 different countries, among them Canada, France, Japan, India and the U.K. It is the risk that small companies (<$250 million annual revenue) are most worried about.

According to the Allianz Cyber Center of Competence, the frequency of ransomware attacks remains elevated in 2023, while the average cost of a data breach is at an all-time high at $4.35 million and expected to surpass $5 million in 2023. The conflict in Ukraine and wider geopolitical tensions are heightening the risk of a large-scale cyber-attack by state-sponsored actors. In addition, there is also a growing shortage of cyber security professionals, which brings challenges when it comes to improving security.

For businesses in many countries, 2023 is likely to be another year of heightened risks for business interruption (BI) because many business models are vulnerable to sudden shocks and change, which in turn affect profits and revenues. Ranking #2 globally, BI is the number one risk in countries such as Brazil, Germany, Mexico, Netherlands, Singapore, South Korea, Sweden and the U.S. 

The scope of disruptive sources is wide. Cyber is the cause of BI that companies fear most (45% of responses); the second most important cause is the energy crisis (35%), followed by natural catastrophes (31%). The skyrocketing cost of energy has forced some energy-intensive industries to use energy more efficiently, move production to alternative locations or even consider temporary shutdowns. The resulting shortages threaten to cause supply disruption across several critical industries in Europe, including food, agriculture, chemicals, pharmaceuticals, construction and manufacturing, although warm winter conditions in Europe and stabilization of the price of gas is helping to ease the energy situation. 

A possible global recession is another likely source of disruption in 2023, with potential for supplier failure and insolvency, which is a particular concern for companies with single or limited critical suppliers. According to Allianz Trade, global business insolvencies are likely to rise significantly in 2023:  up 19%.

Macroeconomic malaise

Macroeconomic developments such as inflation or economic and financial market volatility rank as the third top risk for companies globally in 2023 (25%), up from #10 in 2022 – the first time this risk has appeared in the top three for a decade. All three major economic areas – the U.S., China and Europe – are in a crisis mode at the same time, albeit for different reasons, according to Allianz Research, which forecasts recession in Europe and the U.S. in 2023. Inflation is a particular concern as it is eating into the price structure and profitability margins of many companies. Like the real economy, the financial markets are facing a difficult year, as central banks drain excess system-wide liquidity and trading volumes even in historically liquid markets decline. 

See also: Key D&O Risk Trends for 2023

Risk risers and fallers

The energy crisis is the biggest risk riser in the Allianz Risk Barometer, appearing for the first time at #4 (22%). Some industries, such as chemicals, fertilizers, glass, and aluminum manufacturing, can be reliant on a single source of energy – Russian gas in the case of many European countries – and are therefore vulnerable to disruption to energy supply or price increases. If such base industries struggle, repercussions can be felt further down the value chain in other sectors. According to Allianz Trade, the energy crisis will remain the largest profitability shock for European countries in particular. At current levels, energy prices would wipe out the profits of most non-financial corporates as pricing power is diminishing amid slowing demand.

Driven by 2022 being another year of turmoil with conflict and civil unrest dominating the news, political risks and violence is a new entry at #10 (13%). Aside from war, companies are also concerned about increasing disruption from strikes, riots and civil commotion activity as the cost-of-living crisis affects many countries.

Despite dropping in the ranking year-on-year, natural catastrophes (19%) and climate change (17%) remain major concerns for businesses. In a year that included Hurricane Ian, one of the most powerful storms recorded in the U.S., record-breaking heatwaves, droughts and winter storms around the world and $100 billion-plus of insured losses, natural catastrophes still rank in the top seven global risks. 

To read the full report, please visit Allianz Risk Barometer 2023.

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When it comes to workers’ compensation, the undisputed common quest of insurers and claims managers is to ensure that workers – especially those with serious injuries – receive the most appropriate care for a faster, more optimal recovery. When injured workers are at risk for temporary or permanent disability, there is an additional concern. Without vigilance, their condition can worsen, and they may be unable to return to work. Longer recovery periods can be costly. When employees are permanently disabled, the financial drain of replacement and disability compensation can be exorbitant.

Current research shows that a more patient-focused and supportive approach to injured employees can improve health outcomes and spending. A well-trained, multidisciplinary team offering immediate assistance and patient advocacy allows injured employees to get quality care and compassion when they need it. Companies that have implemented a patient-focused, early intervention claims management model report many key improvements over traditional case management, including: 

• A faster return to work delivers more cost savings and more productive employees. Collaboration between employers and case managers resulted in a 50% decrease in the number of injured workers on one firm’s Total Temporary Disability (TTD) report, leading to a faster return to work and lower medical costs.  
• Lower usage of potentially dangerous prescription drugs. In one instance, narcotics usage dropped from 18% to just 3.7% of claims.
• Cost savings. One company saw case management costs go down $11,000 in one year and savings go up $1.5 million. It also experienced a 39% reduction in average costs paid per claim and a 37% reduction in the total costs incurred year over year. 

In addition to improved outcomes, lower costs and a faster return to work, relationships between the employer and the injured worker are reinforced in this model. By using nurse case managers to coordinate care, the patient and family are freed from the worry of navigating a complex healthcare system on their own. This advocacy assures them that the care plan is always moving forward. The additional coordination, concern and empathy during the recovery process reassures injured workers that their employers are looking out for their well-being. By transforming the sometimes adversarial relationships between employer and employee that can occur when cases are not monitored, the model makes litigation less likely. For example, one CorVel customer reported a 41% drop in litigated claims when case management services were used. 

See also: Claims and Effective Risk Management

Here are the components of a patient-centered approach that works to achieve these positive outcomes: 

• Early intervention and communication. The initial interaction is conducted by an advocacy nurse who can quickly assess the injury. The early intervention directs the patient to the right care providers, at the right time, for optimal care. The stage is set for the creation of a personalized treatment program.
• Close assessment. A dedicated team of nurses and coordinators work closely with adjusters, providers and employees to ensure an effective and timely return to work and maximum medical improvement.
• Advocacy and information sharing. Using a single database that includes claims and care information streamlines claims management. This shared information improves the accuracy of the initial claims report, links all partners and data and can dramatically enhance care efficiencies.
• Technology. Fully implementing a patient-centered model requires different process flows. Innovative technology and communication tools result in better tracking temporary total disability (TTD) claims. Automated alerts can help inform case managers of emerging problems so that they can be quickly rectified to keep the care plan on track.
• Follow-up. Regular follow-up by nurse case managers and the support team helps ensure that appointments are kept, that team members are expediting care and that the appropriate specialists and ancillary benefit services are brought in as needed. This follow-through also ensures that the patient and family know, understand and participate in the care plan.
• Screening. A myriad of complications can hurt an injured worker’s recovery. From depression to drug addiction to family issues, nurse case managers also screen for potential mental health and social determinants of health concerns. By identifying problems that may affect recovery, nurse case managers can identify and procure the appropriate resources to support injured workers in their journey to get well.

Early interventions can reduce claims costs, speed recovery and avoid disability while also building trust between workers and employers and minimizing the risk of litigation. By embracing the vision of a patient-focused approach, employers and claims managers create a claims management process that is not only cost-effective but ensures improved care for injured employees.

With the U.S. possibly facing a recession in 2023, expense control has become a priority for many businesses. Recent layoffs at tech firms such as Meta (formerly Facebook) and Peloton could be a portent of cutbacks to come. 

While payers may have enjoyed decades of robust profits, they are not immune from these financial pressures. Two major payers recently announced layoffs of hundreds of employees. Another major payer-provider system reported a multibillion-dollar loss for the first nine months of 2022. Belt-tightening is likely on the horizon for even more insurers.

Layoffs tend to be the most visible response for large organizations to cut costs during a downturn, as well as cutting benefits or perks and restricting travel for work purposes. While those approaches can and do save money, they come at the risk of sapped employee morale and lost productivity.

There are ways to take a more holistic approach toward expense reduction by increasing the efficiency of the overall organization. For a health insurer, that focus is the tens of millions of claims submitted and processed daily.

Better Management of Payment Review Today

Faulty billing practices are commonplace in the insurance sector. Various studies conclude that hospital billing errors occur anywhere from 7% to 75% of the time. According to the White House Office of Management and Budget, nearly a quarter of Medicare fee-for-service and Medicaid claims were incorrect last year. 

Reviewing provider payments is a critical function of health insurers. However, reviews of claims for errors, overcharges or other issues are almost entirely retrospective, after the claim has been paid. Reviews usually take weeks – if not months or even years – after a claim has been filed. 

Payers and providers regularly face lawsuits and huge federal fines for overbilling. The U.S. Justice Department reported that settlements and judgments related to false healthcare claims totaled $5 billion in the last fiscal year.

Retrospective payment review is encouraged by laws in numerous states that financially penalize insurers if they do not pay claims within a mandated period, usually 45 days. As late payments must include hefty interest, plans often take a “pay now, ask questions later” approach.

Post-payment reviews also tend to drive up costs for insurers and reduce their operational efficiency. Trying to adjust a payment months after it has been made can create friction with the specific provider and even an insurer’s entire provider network. If a provider appeals the decision, it can take months of work for both sides to resolve the problem, diverting resources from more important tasks. 

See also: Payment Processes Must Be Simplified

Prepayment Review’s Advantages

The alternative is to pursue a different strategy: prepayment claims review.

Prepayment reviews are advantageous to payers for a variety of reasons:

• Because requesting payment be returned by a provider is more challenging than denying a claim at the outset, the provider experience is much improved. 
• The number of appeals tends to decline in a prepayment review environment. 
• Providers are less aggressive about appealing claims compared with when they have a payment taken directly out of their pockets. 
• A prepayment review process is often more defensible by insurers during any appeal. 
• Prepayment allows the turnaround time to approve fully vetted claims and accelerate their payment. 
• Prepayment reviews can also spot suspicious billing patterns early, possibly staving off lawsuits and fines from state and federal regulators.

Focusing on prepayment reviews improves the overall efficiency of any health insurer while possibly saving millions of dollars a year in overpayments.

An Alternative to Cutbacks?

With its promise to create efficiencies and cut costs, switching to prepayment review could save insurers from making painful layoffs. However, large corporations tend to be deliberative bodies, requiring both consensus and time to make significant changes. Making such a switch would require obtaining buy-in from senior management and conducting organization-wide assessments to determine how switching the payment review process will affect other operations. However, following such considerations the decision is usually to make the necessary changes and adopt prepayment. 

Prepayment reviews can save money and increase an organization’s efficiency by reducing the workload and friction of concluding retrospective payment reviews. It is a potential way to economize during recessionary times without resorting to layoffs.

From supply chain interruptions and skyrocketing input costs to increasingly extreme and volatile weather, the effects of climate change are already apparent for farmers, the consumers that depend on them and the providers that serve them.

Within the agricultural financial services sector, conventional methods and core assumptions of risk modeling and management are under strain. The simplest factors, from the cost of inputs to the global dispersal of crops, are in question. Even if farmers might have predicted developments like the 300% jump in glyphosate costs or shift of hazelnut crop production from the Mediterranean to Canada, the risk models that underpin the industry did not.

It’s clear that climate change poses new challenges, and no shortage of technology providers are claiming to offer the solution. In the sea of new technologies and science—from robotic equipment to genetic seed adaptations—it’s worth refocusing on what the industry actually needs for confident decision-making in an unpredictable environment. 

At Ceres Imaging, we have spent a decade collecting billions of measurements on tens of million of acres so we could fine tune data models and help customers adapt to change. We’ve learned that these four things make the difference:

1. Greater responsiveness

To maintain actuarial soundness in rapidly changing and widely varied conditions, it’s essential that carriers in the agricultural space develop less rigid, more dynamic risk-based pricing models that reflect conditions on the ground. By definition, that requires faster and more frequent capture, processing and analysis of data. 

Such responsiveness allows for a new dimension to strategic planning for financial services providers, enabling, for example, specific and localized recommendations for the optimal planting and harvesting times, ensuring optimal yields and mitigating grower losses. Policy products that better reflect the real differences in production risk based on grower strategies represent a significant opportunity for the sector—both to encourage desirable practices, such as data-driven crop management, and to buffer itself from increased risk due to the effects of climate change.

See also: Climate Change and Product Liability

2. Precision crop data

Aerial data can accurately detect temperature differences of 0.1 degree Celsius between plants, with an absolute accuracy within 1 degree Celsius. In combination with crop-specific data models, this level of detail allows us to provide crop health insights at the individual plant level to enable in-season adjustments in response to budgetary and sustainability guidelines. Growers using our crop health data average an 8% improvement in yield. 

Scientific precision unlocks immediate practical benefits for carriers, too. In the aftermath of an extreme weather event, for example, insurers no longer need to involve customers in a protracted process of estimation and verification of damage to a crop. Instead, carriers can measure and assess storm impacts more quickly and accurately, expediting the claims process without risk of an indemnity payment miscalculation. 

3. Efficient workflows

Discussion of automation in agriculture and adjacent industries often focuses on headline-grabbing technology like robotic harvesters or self-driving tractors. The enthusiasm for futuristic machines on the farm is understandable—but it belies the hidden potential of data-driven automation to affect day-to-day operations across the entire agribusiness ecosystem.

In building automated solutions for lenders and insurers, Ceres has found that providing precision crop boundary measurements and inventories creates a ripple effect of efficiency savings across the business. Prior to automation, an adjuster might have spent a day haphazardly traversing a territory to perform inspections, then the rest of the week filing repetitive reports. They can now begin with an optimized route, upload and share notes and photographs from the field with outside experts or colleagues and calculate claims automatically. This more streamlined process, powered by automation, saves upwards of 30% of an adjuster's time.

See also: Time to Move Climate Risk Center-Stage

4. Integrated technologies

While tools for fintech are growing more sophisticated, the deluge of variably validated field data can create its own set of challenges. Rotating among many sources of information takes time, adds unnecessary complexity and makes it more difficult to mine meaningful insights.

But it's now possible to create a dashboard that integrates, consolidates and synthesizes data from many sources. The dashboard can even seamlessly integrate insights from insurers' unique proprietary systems, combining precise aerial data, IOT field sensor feeds and satellite images.

While the increasingly visible effects of climate change do pose daunting obstacles to carriers operating in the agricultural space, existing and emerging technology can help the sector to adapt. It can generate crop data insights for efficiency savings at every stage of the business cycle: from product innovation and policy writing to crop monitoring and regulatory compliance. 

One way to think about the application of data science and machine learning is that it’s a tool to aid the conversion of information (data) into action. In this context, machine learning is applied to enable better and more efficient decisions, as well as identifying previously hidden risks and opportunities. Essentially, data science helps an insurer to perform significantly better, whatever their goals.

The application of advanced analytics is already well ingrained in the world of insurance pricing and underwriting. However, it is only more recently that it has begun to exert more influence in claims operations.

In the overall insurance value chain, substantial resources and effort have been applied to better understand a customer’s risk and purchasing behaviors to help charge the most appropriate price. Fresh benefits still to be mined in the pricing and underwriting space are relatively scarce. In contrast, huge untapped value is waiting to be realized by insurers reducing their claims spending or better understanding and optimizing their claims processes.

Low-hanging fruit

Although machine learning is increasingly recognized as a tool to reduce claims costs and deliver significant value to an insurer, this remains an area where many have yet to realize value. This means there is plenty of low-hanging fruit to be picked in the claims space, such as the benefits to be realized from providing a better, more tailored, faster service to the customer. These benefits can, for example, be seen by the speed at which claims are settled and how an insurer’s Net Promoter Score (NPS), the global benchmark for client satisfaction, can be improved. 

Claims processing already uses a lot of external data, including integration into third-party sources such as operators in the automotive sales market for vehicle values, demographics and sociodemographic information, and various other vehicle information to inform repair costs. Machine learning makes it possible to link all these separate threads and help insurance companies more accurately predict future outcomes and identify earlier changing experience.

Internal impact

There is also the positive impact on the internal organization that has the potential to be equally transformational. Machine learning can be thought of as a tool, a superpower to help claims handlers and claims teams make better decisions. Individuals can upskill, and new roles will be created, all helping provide measurable improvements to customers and vastly improved profitability.

At the same time, it is important to understand that machine learning will not give the perfect answer to every question. Each individual algorithm built will have both strengths and weaknesses. That being said, it is still possible to build and improve models based on an understanding of these strengths and weaknesses. More importantly, it is by understanding how best to leverage what an insurer has, as well as how best this can be applied and integrated, that will determine the value gained. 

See also: A Behavioral Science Scandal

Collaborate or fail

This is especially true when it comes to using data science to leverage unstructured data. Using an insurer’s deep domain claims expertise is key to shedding light on unstructured data and translating this into something that actually makes sense. On the application of data science in claims operations, by far the greatest risk in terms of success and failure is the ability of both sides to collaborate effectively. By bringing together an insurer’s in-house claims expertise with their data science and machine learning experts, it becomes far easier to approach problems in a way that leads to a joint successful solution.

Near future

It can be tempting to focus on the short term and doing whatever is needed to make one solution work once. But it is worth keeping in mind the end state, where one insurer’s claims models will be competing against another insurer’s models. In a world where hundreds of models are competing, the ability to move at speed, scale for efficiency and be the most sophisticated will be needed to succeed. 

Data science is not the absolute, all-encompassing, magic solution to every issue an organization will face. Instead, being able to fully leverage machine learning means bringing together a multi-disciplined team that combines an insurer’s existing in-house claims knowledge with cutting-edge analytical and data capabilities to deliver next-generation claims processing that optimizes costs and transforms the customer experience.

In October 2022, the U.S. Department of the Treasury’s Federal Insurance Office (FIO) unveiled a proposal to collect data from certain property and casualty insurance companies to better understand the impacts of climate change on the availability and affordability of homeowners’ insurance in the U.S. The FIO invited the public to respond to this proposal by the end of 2022 with ideas to ensure the data collection surfaces useful information. 

Cervest welcomed the FIO’s effort as a positive step. Better, more consistent information is critical for insurance companies, regulators and consumer groups to understand and prepare for the impacts of climate change on insurance availability and affordability. As a climate tech company committed to putting climate intelligence at the core of business and investment decision-making, the Cervest team took the opportunity to respond to the FIO’s data collection proposal with insights and considerations to strengthen its effectiveness.

As the FIO and other insurance supervisors look to develop strategies to manage and respond to climate risks, regulators should factor in the role of climate intelligence and technologies like Cervest’s as critical inputs in effective climate risk assessment and management. With that in mind, Cervest’s public comment focuses on three insights to support the FIO in its effort.

1. Emerging climate intelligence tools are transforming approaches to climate risk assessment and management

Advances in climate data science, measurement technologies, machine learning and climate risk analytics are making it more feasible than ever to understand future climate impacts at a granular level. The FIO would benefit from an understanding of how Cervest and others have created data-driven analytical tools that help capture the probability and magnitude of a range of climate hazards and risks to organizations, and of how those tools will evolve. 

2. Forward-looking analysis of climate risks is critical in the insurance sector

The FIO proposal comes on the heels of significant climate-related events in the U.S. that have demonstrated the potential for disruption in insurance availability for homeowners in vulnerable areas. Hurricane Ian alone caused damages between $50 billion and $65 billion. 

As disasters like these intensify due to climate change, catastrophe models used in the insurance sector are likely to underestimate their exposure and impact because they are traditionally constructed using historical distributions of climate risk. To form an accurate picture of climate risk, historical data must be analyzed with forward-looking methods, including scenario planning. Given the increasing precision and detail of today’s climate models, they should provide the basis for more accurate pricing of insurance products. This kind of analysis over longer time horizons is also critical to identifying opportunities in the sector to improve resilience in regions and communities particularly vulnerable to climate impacts.

See also: 2023 MAY BE THE HOTTEST ON RECORD

3. Eventually, consistent metrics will be needed to provide useful and comparable information 

As the impacts of climate change accelerate and approaches to assess climate risks become more sophisticated, the sector will need to coalesce around standardized impact metrics that support interpretation and comparability of climate risk. In their comment, the Cervest team discussed the potential of one such metric, Climate-Value-at-Risk (CVaR). While the FIO’s data collection represents a first step toward determining any gaps in its oversight of climate-related risks in the sector, there are opportunities in the months ahead to understand how metrics like CVaR could be used to inform pathways to greater standardization. 

These are the highlights of our response. You can read Cervest’s full public comment here.

Out Front Ideas with Kimberly and Mark kicks off the year with our popular 20 Issues to Watch webinar. While there are certainly more than 20 issues to discuss, we focused on the high-impact matters relating to workers’ compensation, healthcare and risk management that need more attention. These are essential issues for every risk manager and insurance professional to monitor in 2023.

1. 2022 Elections

With a narrow Republican majority in the House, a Democratic majority in the Senate and minimal compromise to be made, there likely will not be significant federal legislation passed in the next two years. Statewide, Democrats gained gubernatorial and legislative branch control in Maryland, Massachusetts, Michigan and Minnesota, making it easier to pursue legislative agendas. Maryland and Massachusetts could face more significant impacts, with both states flipping gubernatorial parties. 

Florida’s recent special legislative session passed a reform bill addressing litigation abuses in their property marketplace that led to carrier insolvencies and significantly limited consumer choice. There will be further litigation over this bill, so the intended savings may or may not be realized. Nonetheless, this was a significant reform bill pursued for many years. 

In California, there is much discussion around workers’ compensation reforms. Their prior reform bill’s cost savings measures have run their course, and costs are rising again. Large employers are requesting cost savings focused on the litigation process, while labor is pushing for higher indemnity benefits.

Finally, legislation allowing PTSD benefits for first responders has been passed in many states over the last few years. For many of these states, this legislation benefits first responders only. With an increasing focus on mental health in the workplace, many more states may take steps to include “mental-mental” injuries as part of their workers’ compensation.

2. Healthcare Industry Challenges

The talent crunch is a primary concern for the healthcare industry, with continuously worsening statistics. The American Medical Association (AMA) reports that 35% of the physician workforce will be within retirement age over the next five years. A recent study from the journal Health Affairs found that the supply of registered nurses (RNs) decreased by more than 100,000 between 2020 and 2021. That is the largest drop observed over the last four decades. 

Technology will be a priority for the industry this year, whether digital patient health management tools, artificial intelligence (AI) or machine learning for treatment protocols. Telehealth continues to expand, providing virtual primary care for managing chronic conditions and growth through mental health services. Startups and venture capitalists aim to further health technology services to tackle the challenge of fragmentation in healthcare. With the vision for more specialist tech-enabled care, AI and machine learning are prime for cancer care, neurology and primary care.

Retail health also continues to expand offerings in local communities to bring healthcare closer to where people live and work. Amazon and Walgreens have announced significant primary care clinic deals while Walmart Health continues to expand locations. CVS is focusing on its retail health hubs within existing sites while continuing to look for a meaningful primary care acquisition.

3. Extreme Weather and Climate Risk

Risk managers and brokers experienced a challenging year for property insurance renewal negotiations, with over 30 $1 billion property insurance events occurring, including droughts, floods, hurricanes, wind storms and severe thunderstorms. Recent winter storms are projected to cost insurers over $5.4 billion, and Hurricane Ian’s losses will be the second costliest insured loss on record, with damages between $50 billion and $65 billion.

Some see climate change as the reason behind these increasingly large natural disasters, but many experts point to the development of more disaster-prone areas as the most significant factor. Cities to the west continue to expand into forested areas, increasing the risk of wildfire damage to the property.

The Federal Emergency Management Agency (FEMA) flood maps are considered to be outdated by many due to risks being based on previous floods and not the impending threats of stronger storms and population shifts. Property insurers and reinsurers are working to develop new models that take these increased risks into account, leading to higher rates for affected individuals and businesses.

4. Inflation and Recession

Inflation hit a 40-year high in 2022, with interest rates surging. Low unemployment rates have supported wage increases, but inflation has drastically increased the prices of food, energy, housing and most goods. The Federal Reserve had seven consecutive rate hikes in 2022, with more expected this year. Expect increases by 25 to 50 basis points through at least June 2023 and for interest rates to hold at 5% to 5.25%. 

Weak growth is anticipated worldwide, at 1.4% to 1.6%, with many economists predicting a mild recession by the end of the year. With expected job losses, households will focus on tightening spending while businesses are evaluating cost control measures. The Federal Reserve’s inflation target is 2%, but with current rates at 5.9%, it will likely take two to three years to meet that goal.

See also: Top 5 Challenges Facing Agents in 2023

5. Social Inflation

With widespread public distrust of large corporations and public entities, jury awards are continuously increasing, heavily affecting businesses and insurers. Insurance pricing models are constantly trying to catch up to these experiences to help forecast the future as social inflation becomes the new normal. 

Litigation financing also contributes to this trend, because this niche industry discourages settlements in an attempt to gain a significant jury award. This increases defense costs, which can exceed hundreds of thousands of dollars in many cases. Unfortunately, this trend shows no signs of changing, with larger jury awards occurring in more jurisdictions each year.

6. Geopolitical Risks

Does your organization understand the potential impact of current geopolitical risks on its operations or brand? With the frequency of national and international threats, risk managers should have a plan to mitigate potential risks and identify how best to approach them. These geopolitical risks should be on your radar for the year:

• Worsening of the European energy crisis
• War in Ukraine
• China’s zero-COVID-19 policy
• China and Taiwan conflict 
• Trade tensions
• Social unrest, worsening with a downturn in the economy
• Climate change, water stress
• Global inflation
• Major cyberattacks

7. Public Entity Challenges

Public entities face various challenges and risks beyond those in the private sector. Between expanded workers’ compensation presumptions for first responders to the impacts of social inflation, public entities are struggling with increasing costs and the difficulty of securing insurance coverage.

Staffing budgets for risk management and industry regulators are not keeping pace with the private sector, making attracting and retaining talent more challenging. Budget constraints also decrease available technology upgrades to prevent cyber-attacks, making it harder to obtain cyber insurance. Additionally, the increase in pension liabilities in many states and large cities is a continuing issue, with billions in unfunded liabilities. 

8. COVID Continues 

Overall, workers’ compensation trends related to COVID-19 have remained consistent. Some of the key findings across 195,000 claims were:

• 95% of claims involve minimal medical treatment and time away from work.
• Fatality claims remain at approximately 0.5%, most of which occurred during the early variants.
• Healthcare remains the industry most affected, accounting for roughly 45% of claims. The following two most affected industries are public entities (22%) and retail (16%).
• Roughly 97% of the claims are closed, with only 3% open.
• The average cost for closed claims is less than $2,000, excluding zero-dollar-paid claims.
• Litigation remains very low, only slightly above 1%.
• Data indicates that long COVID, defined as claims with medical treatment beyond 90 days, represents 1.5% of the claims. These claims are complex and require advanced strategy and support for the claims team via medical directors, pharmacists and behavioral health specialists.

9. Cyber Risk

The frequency and costs associated with cyber risks continue to grow. According to the Cost of a Data Breach 2022 report from IBM, the average price of a data breach in the U.S. is $9.4 million, more than double the global average. The healthcare industry faces the highest costs, averaging $10.1 million per breach, a 42% increase since 2020. The report also indicated the share of breaches caused by ransomware grew by 41% in the last year and took 49 days longer to identify and contain. 

State-sponsored cyberattacks from Russia, North Korea and China are a growing concern. Carriers and reinsurers are attempting to classify these as “acts of war.” Still, courts have not consistently supported these exclusions, leading carriers and reinsurers to try to tighten up the language in their policies. 

10. Technology Transformation

The most innovative companies are discussing automation opportunities, live chat use case scenarios and using customer sentiment to build resilience within the claims team and improve customer service. These companies have also expanded their data science capabilities due to the massive benefits of large data sets and the integration of data science in technology solutions. Organizations must get comfortable with uncomfortable conversations around technology innovation to avoid delays in driving their business forward.

Adjusters and nurses want to focus on helping workers, physicians, employers and claimants and avoid duplicative documentation and repetitive tasks within their claims and case management systems. Digital solutions that expedite policy verification, eligibility, claims intake and reporting, document validation, rules-based decision making and automation of simple, low-dollar claims should all be considered. 

11. Workplace Safety

Workplace safety gaps can result in massive costs, injuries and even loss of life. The continued escalation of workplace violence is heavily affecting businesses, with the Bureau of Labor Statistics reporting that more than 20,000 workers experience physical trauma in the workplace each year. An October report from Zippa indicated that workplace violence causes American businesses to lose $250 billion to $330 billion yearly. 85% of workplace violence deaths are due to robberies, with national crime statistics showing an increase in the frequency of thefts in major cities across the U.S.

According to the National Fraternal Order of Police, in 2022, 331 police officers were shot, and 62 were killed, with deaths representing a 32% increase from 2020. Most workplace violence occurs in the healthcare industry, accounting for roughly 75% of all incidents each year. However, the frequency of workplace violence has been increasing in any industry that interacts with the general public, including teachers, transportation workers, delivery drivers, retail employees and restaurant workers. 

12. Growth Mindset

Mindset matters to innovations — throughout organizations and their business partners. Customers want solutions to drive improved outcomes, and companies must innovate to stay relevant. Companies that are slow to embrace change will not meet customers’ needs, and products will not be aligned with needs within a short period. 

Where might a growth mindset drive innovation? Consider opportunities in these areas:

• Assessing traditional claims administration models
• Advancing case management products and services
• Evaluating the underwriting processes
• Revising adjuster caseloads to work effort and outcomes
• Reviewing and modifying education requirements for select positions
• Eliminating redundant processes
• Exploring and agreeing to new pricing models
• Considering new ways of doing business to deliver a better service to injured workers
• Offering a professional career to claims and clinical professionals
• Improving the outcomes for your customer and company

13. Rising Medical Costs on Catastrophic Claims

Workers’ compensation tends to be shielded from medical inflation due to fee schedules tied to Medicare reimbursement rates, helping to stop surges in fee-for-service items. However, there are rising medical costs in the treatment of catastrophic injuries, due to a few key factors, including:

• Accident survivability – Severely injured individuals are more likely to live due to better care on the scene, air ambulances and the care provided by Level 1 trauma centers. 
• Life expectancy – Catastrophically injured workers are living longer due to the improved medical science used to prevent complications associated with severe burns or quadriplegia.
• Costs not covered by fee schedules – This includes extended intensive care unit (ICU) hospitalizations, extensive durable medical equipment (DME), newer state-of-the-art care and attendant care. The costs of these services are increasing at rates far more significant than average medical inflation. 

Medical care advances vastly improve the quality of life and independence for these injured workers, but these technologies come at a price. Looking at Safety National catastrophic claims data over the last three years, there has been a 30% increase in claims incurred over $10 million and increases in claims incurred of $5 million to 10 million. Although these large claims are infrequent, they cost much more and continue escalating. 

See also: Cybersecurity Trends in 2023

14. Insurance Industry Gig Work

The insurance industry needs to broadly consider gig work opportunities to expand the talent pool and retain experienced workers. Deploying a gig environment allows 24/7 adjusting and case management, expediting claims, clinical decisions and claims processing. While auto or field adjusters work in an environment that allows select assignments, the adjuster and nurse environment would remain a part-time, full-time or agreed hours-per-week scenario. 

Creating a credentialed program for your gig workers can certify their experience and capability through a professional standards framework. Providing opportunities for credentialed gig workers to sign in to a secure assignment app allows them to view and accept work, report availability via a personalized calendar, view quality scores and access links to continued education and training. 

15. Supply Chain Challenges

Continuing supply chain issues are extending beyond operational problems, affeting risk management. Inadequate inventories of supplies are forcing a shift in standard business processes, requiring a review of procedures and safety protocols necessary to accommodate these changes. Vendor changes also require risk managers to track the insurance agreements and contracts associated with these vendors. Excessive inventory is also challenging, with risk managers questioning where to store it and working with operations teams to ensure company assets are appropriately insured against loss.

16. Employee Benefits

Health benefits experts predict medical plan cost increases from 6% to 10% in 2023 due to rising labor costs, healthcare costs, prescription drugs and supply chain issues. Employers are offering holistic leave, flexibility for caregivers, backup childcare services, personalized work schedules and expanded opportunities to meet family obligations. 

Fertility and family planning services are increasingly popular, with employers offering fertility, adoption, foster placement and surrogacy programs to support diversity, equity and inclusion (DEI) goals and meet the needs of their workforce. These programs are increasingly gender-neutral and inclusive of employees’ family planning situations. 

City and statewide-mandated paid leave programs are anticipated to expand. Currently, 12 states mandate paid leave, with the additions of Oregon in 2023, Colorado in 2024, Maryland in 2025 and Delaware in 2026. Additionally, plan administrators must be mindful of surprise billing and comply with the ban on surprise billing for emergency services, air ambulances and specific medical treatments.

17. Employee/Independent Contractor Classification

States and the federal government have debated the definition of employee versus independent contractor for years. The definition within employment and tax laws may be different than it is under workers’ compensation, creating a confusing situation for employers and workers. 

In October 2022, the U.S. Department of Labor announced proposed rules to correctly classify workers, intending to significantly reduce the number of workers classified as independent contractors and reverse a previous Trump administration ruling. The October proposed rules were an extensive, multi-prong test focused on the control of the work, the worker’s skill and whether the work performed was integral to the principal’s business. The final rules are expected to be issued in early 2023.

Regardless of these rules, it will ultimately be the court’s interpretation of them that determines whether someone is classified as an employee or independent contractor. Employers could be subject to litigation that may eventually change their current classifications. Risk managers should continue to pay special attention to the agreements and insurance certificates affiliated with their independent contractors. 

18. Talent 

With more job openings than unemployed workers, the labor market has been a hotbed of opportunities for workers, driving higher pay and better positions. Economists report the job market is likely to slow in 2023, with lower inflation and higher unemployment later in the year. As of the beginning of 2023, four jurisdictions in the U.S. have legislation requiring disclosure of salary in their open job postings, which may pressure organizations to improve pay transparency across their business. 

With job openings surpassing the pool of applicants, now is the time to rethink hiring practices. HR teams should review job descriptions, education and years of required experience to ensure they align with the necessary skillsets. Lived experiences should be considered, as they are critical to understanding empathy and patience, active listening, fact-finding, problem-solving and negotiation. 

Risk and claims managers should be mindful of safety programs and worker training, because some employers are experiencing an uptick in injuries for younger employees and those with less than a year of experience.

19. Forever Chemicals (PFAS/PFOA)

A rapidly emerging risk management challenge revolves around perfluoroalkyl and polyfluoroalkyl substances (PFAS), or forever chemicals. These chemicals have been used in manufacturing hundreds of thousands of products for years and are typically used to make products water-, stain- and heat-resistant. They do not naturally break down, so they are found long-term in the soil, water and body tissues. They are linked to cancer, kidney disease, liver problems, immune disorders, birth defects and other serious health problems.

Litigation over these forever chemicals is only beginning, and recently several states filed lawsuits against 3M for environmental damage caused by these chemicals. In response, 3M has set a 2025 deadline to stop manufacturing the chemicals. Risk managers need to ensure they keep track of older insurance policies because, with the length of this type of litigation, they will likely be referring to them for years. 

20. Workplace Well-Being

Corporate culture, collaborative work environments, communication, inclusivity, reasonable workloads, recognition and employee resource groups all affect workplace well-being. Many organizations include workplace well-being questions in employee surveys to understand their areas of opportunities. Leadership training focused on creating safe and inclusive environments can inspire leaders, helping them to understand the impact an inclusive team has on performance and employee satisfaction.

Listen to the archive of our complete Issues to Watch webinar here. Out Front Ideas with Kimberly and Mark will host two live sessions in 2023, at the Executives in Workers’ Compensation Conference on April 25 in Anaheim, California, and the WCI Conference on August 21 in Orlando, Florida. Follow @outfrontideas on Twitter and Out Front Ideas with Kimberly and Mark on LinkedIn for more information about coming events and webinars.

The American Medical Association has been working with medical schools and awarding grants for the past decade to reinvent medical education. The basic question driving the change: Why make med students spend so many of their brain cycles memorizing minutiae about, say, the exact dosage of a drug to administer to the whole range of possible patients when, in practice, they could simply use their iPhones to search for the precise information based on age, gender, weight and the full range of their health issues and medications? 

For the AMA and med schools, the answer was obvious. As a result, they've deemphasized memorization and increasingly let students consult the sorts of reference material they'd have access to as practicing physicians. 

Insurance agencies and brokerages are heading in the same direction as they onboard new hires. As Aimee Kilpatrick, chief operating officer of Cadence Insurance, explains in this month's interview, the large regional broker is focused on providing online resources for its people so what used to require research is now at their fingertips. She says Cadence is also working with The Institutes to make learning more interactive, including through gamification, and to use technology to check in from time to time to make sure people have mastered key concepts.

But there is still a long way to go. Technology will make it ever easier to break training into bite-size pieces that can be fit into onboarding at the point when they're most relevant and to reinforce them later, rather than having so much of the education be one-and-down in a classroom sort of setting. Technology will also make it increasingly simple to gather information and forms without ever pushing back from the desk, as well as to make sure new hires are meeting compliance requirements. 

Improvements in onboarding are certainly needed. With so many agents and brokers retiring and with new demands by customers in the post-pandemic era, many agencies and brokerages are in heavy-duty hiring mode, and they simply don't have the time to let new people go through the two-year-or-so sort of apprenticeship that used to be the norm. 

With the AMA and medical schools, once they reconceived education as a combination of technology together with those bright, young minds, they created room for other sorts of learning. Many schools have added what they call a third pillar of education. Rather than just teach clinical and basic science, schools also teach the budding doctors how to provide care within a complex medical system -- a crucial skill, but one that they had been largely left to learn on their own while on the job. 

Agencies and brokerages will surely see the same sort of progression. As technology takes some of the load off new hires, they'll not only come up to speed faster but will have room in their minds and their days for learning more specialized information about a market, more about their clients, more about sales techniques and so on. 

Cheers,

Paul 

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P.S. Here are the six articles I'd like to highlight this month for agents and brokers:

TOP 5 CHALLENGES FACING AGENTS IN 2023

One challenge is recognizing this might be the greatest time ever to recruit people, because 70% of employed individuals say they need a second income to make ends meet. 

WHAT PUNDITS MISS ON INDEPENDENT AGENTS

To begin with, we all should rethink the terms independent agency “system,” “channel” and “distribution.”

LIFE INSURERS' LABOR ISSUES

Younger generations want jobs in which technology reduces frustrations, increases productivity and enables quick successes. In insurance, too many obstacles still exist.

IMPROVING THE QUALITY OF YOUR LEADS

Haphazard marketing may result in a decent amount of web traffic. But if those prospects do not convert into customers, you've wasted your time, effort and money. 

IT TAKES AN "INSURANCE VILLAGE"

Drawing on our national franchise, we set up an "insurance village" after Hurricane Ian. Here are three lessons we learned that can help agents make an impact after a natural disaster.

DISSATISFACTION WITH DIGITAL SALES CAPABILITIES

Across the sales value chain, insurer executives generally have low satisfaction with digital capabilities, particularly in early stages of the sales process.

Small commercial insurers are in a unique position. While the personal lines segment often pioneers the latest innovations, small commercial carriers are frequently at the forefront of change in the commercial market before technologies reach mid/large commercial risks. In the past few years, small commercial carriers have progressed significantly in applying straight-through processing (STP), digital self-service capabilities and other capabilities in certain areas of their business, particularly distribution. But the ever-evolving distribution landscape demands technology solutions to support channel partners and optimize business processes. So, where are small commercial insurers focusing their technology investments today? 

A recent survey of executives at small commercial lines insurers reveals some shifts in what is driving distribution investment decisions this year. According to the "Distribution Technologies for Small Commercial Lines: Carrier Plans in 2023 and Beyond" report, nearly all small commercial insurers say improving the customer experience for the agent/broker is one of their top business drivers for tech investments. This is an increase of 20% over 2021 and indicates how the industry is becoming more experienced-focused. 

At the same time, insurers also recognize the importance of balancing partner priorities with their own. It follows that 75% of insurers are driven by efficiencies/enabling more STP. Increasing operational efficiencies allows underwriters to devote more time to servicing customers and reduces friction points for agents and policyholders by allowing them to access quotes, endorsements and billing more seamlessly. However, carriers indicated decreasing satisfaction with their policy inquiry capabilities, suggesting further investments can be made to focus on elevating processes. 

See also: A Frenzy of Activity in Commercial Lines

However, in a shift from 2021, fewer small commercial insurers – slightly over one-third – cite growing their market share as a driver of tech investments in 2023. But that is not to say it is unimportant. The data clearly shows that insurance carriers have different priorities and are in various stages of expanding their distribution landscape but remain committed to customer experience and increasing efficiencies. 

"Distribution Technologies for Small Commercial Lines: Carrier Plans in 2023 and Beyond" is part of SMA's research series based on surveys and interviews of insurers, agencies, brokers, MGAs and others in the distribution channel, including insights from ReSource Pro's extensive footprint of distribution clients.