The industry is leaning into climate change much more than in the past. That's partly because events such as Hurricane Ian dramatize the risks but also because insurers are seeing ways to help clients and, more broadly, society, while also seeing business opportunities. In this month's interview, Alex Wittenberg, a partner with Oliver Wyman with over 20 years of cross-industry experience, said: "I think there's going to be an opportunity for some new products, especially around things like voluntary carbon markets, which are entirely new and will require a new suite of products. If I buy $100 of carbon credits that are going to materialize in 10 years, they need to materialize in 10 years. There's a lot that can happen between then and now, so you have to think through, well, is there a guarantee or an insurance product that someone can offer?" Making progress is especially important in the insurance world, so much so that our focus this month is resilience and sustainability. It is an ever evolving topic, but we face the challenge of keeping up in order to help society and serve our customers.

ITL:

I’m mostly struck by the overwhelming complexity of how insurers have to sort through issues related to resilience and complexity. How would you frame the issue?

Alex Wittenberg:

There's a lot of opportunity in the energy transition, but insurers don't want to become the R&D department of the insureds by paying losses on technology that only works under certain conditions or that doesn't scale. 
It's becoming increasingly difficult even to insure what are considered successful technologies as the size and complexity of the projects increase. Even things like offshore wind and large-scale battery storage are experiencing significant losses. The transition from carbon-intensive to green may look logical on paper, but not if you're an insurer experiencing the loss ratio. 

ESG [environmental, social and governance issues] can also present some complex issues when there is overlap between the S and E. For example, the essential energy project that is carbon-intensive and faces an issue with an indigenous population, or a carbon-intensive project that also provides electricity to an underdeveloped community. Insurers need to weigh actual technical and societal merits of the project against the reputational issues and the optics, which is very difficult to do.

ITL:

How do you then go about advising clients on how to think about underwriting first a specific risk and then assembling a portfolio of risks?

Wittenberg:

I don't think it helps anybody for insurers to simply exclude entire swaths of the energy industry, because, frankly, it’s going to be with us for a long time. Even the IEA [International Energy Agency] scenarios show gas usage growing through 2050 and oil consumption staying relatively flat [under the state policies scenario]. As demand for all forms of energy grows, someone is going to need to provide it.

Other parts of the portfolio will expand more rapidly, but carriers need to have a better understanding of the individual assets they are insuring and be able to tell the story about which subsectors will actually be growing. The energy companies can tell you how much of their current and future capital expenditures will go to renewables or alternative fuels or carbon capture, and insurers need to be able to tell a similar story about their current portfolios and the future trajectory.

ITL:

And everything has to happen while we accommodate huge increases in demand for energy and still keep everyone's lights on.

Wittenberg:

Energy security is interesting because it shines light on both sides of the equation. We need to keep our baseload power going, but green projects need to be accelerated, as well. A lot of things have to come into alignment, including technologies that aren't deployed at scale, keeping in mind that not all new technologies will work as anticipated.

There's a lot of new technology that carriers are going to be expected to underwrite. I talked to some of our banking colleagues at Oliver Wyman, who are rightly debating how these projects will be financed. I said, I think you need to figure out who's going to insure it, because the finance folks are unlikely to show up if it's uninsured.

A good example is ScotWind. Based on the blocks that have been auctioned off in Scotland, you're talking about at least $100 billion of construction of offshore wind capacity, and it could all come online in a fairly confined period. The insurance industry isn't necessarily set up to absorb $100 billion of offshore construction all at once. There's probably going to have to be some thinking around new ways to do it.

ITL:

And some of these issues get complicated by public perceptions. I mean, my dad was the chief spokesman for Westinghouse in the 1970s, so I grew up hearing about his struggles selling the idea of nuclear power.

Wittenberg:

Public reaction doesn't always necessarily lead to the best long-term response.

The other thing I would highlight from an insurance standpoint, something that Hurricane Ian highlighted, is that there will be tightening of availability of catastrophe [cat] insurance capacity in the marketplace over the next few years. It's already a challenge to get carriers to participate in the Florida insurance industry, and Ian was a significant loss, on a historical scale. Now layer in these newer projects, like a wind farm in the Atlantic or the Taiwanese Strait, that are susceptible to various cat perils and that require limits of a billion or a billion and a half dollars. You're talking about a significant cat limit, especially during construction, and in an operational setting that is not as well understood as, say, Gulf of Mexico offshore platforms.

ITL:

How quickly do you think insurers will adjust to the complexities of resilience and climate change?

Wittenberg:

There isn't much agreement on timeframe. There are carriers that believe they have until 2050. Other carriers believe they have to get this figured out in the next two to three years. So, the issue creates a lot of dislocation in insurance markets and a lot of choppiness, which in turn creates a lot of uncertainty for the insureds.

ITL:

Any final points you’d like to make?

Wittenberg:

I think there are some good things…

ITL:

I was hoping you’d say that.

Wittenberg:

I honestly believe that some of these complexities will normalize, but it's going to take time.

I think there's also going to be an opportunity for some new products, especially around things like voluntary carbon markets, which are entirely new and will require a new suite of products. If a company buys $100 of carbon credits, it is essential that they are real and that they are not reversed in the future. There's a lot that can happen between then and now, so you have to consider if there is a guarantee or an insurance product that can be created. Many of these new market mechanisms will require products that go beyond what is currently available in the insurance marketplace today.

There will also be modifications to encourage people to build back green after a catastrophe like Ian. Carriers are already making some accommodations in property policies, so an individual or firm that suffers a loss doesn’t have to rebuild with the same materials of the same quality but instead has the flexibility to make the property more resilient.

ITL:

I'll be watching closely to see how Florida rebuilds after Ian. I hope you're right that they can prepare better for the next storm, which is surely coming.

Thanks for the time and the insights.

When I remodeled a house years ago, I decided that the most expensive words known to man were, "While we're at it...." Then a co-author and I spent two years having a team of researchers look at 2,500 corporate disasters and realized the most expensive words are actually, "We have to do something...." 

Those words spring to mind because several columnists in recent days have opined that, sure, Mark Zuckerberg is overspending by billions of dollars a year on a misguided vision of the metaverse, contributing to the expected layoffs of thousands of employees this week, but HE HAS TO DO SOMETHING to revive growth--and right now. Or, look at Elon Musk, who HAS TO DO SOMETHING about Twitter so quickly that he is doing and undoing initiatives almost as fast as he can tweet and is driving away users and advertisers in the process.  

Actually, rather than lunging toward the metaverse before he has it figured out, Zuckerberg could return the billions to shareholders and let them find other innovations to invest in, or he could simply keep his powder dry until he understands more about what more prudent investors, such as venture capital firm Andreessen Horowitz, are calling Web 3.0. Musk, after taking his initial, likely needed, cut at costs could put together an actual plan and stress test it rather than just announcing and quickly amending plans online.

The rest of us don't HAVE TO DO SOMETHING, either, even though inflation, geopolitical turmoil and a bunch of other forces are creating extreme stresses that may tempt us to do something rash with our businesses.

Instead, we should be even more careful in tough times. In addition to following our normal methods for making strategic decisions, we should add a "devil's advocate" process to make sure we understand all the ways a strategy can go wrong. A strategic bet can't just be the best available from a set of bad choices but must actually make sense analytically. 

I'll explain. 

Zuckerberg's and Musk's desperate logic is clearly tempting. These are very smart guys. But Chunka Mui and I learned the dangers when we researched 2,500 corporate disasters for our 2008 book, "Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Corporate Failures of the Last 25 Years." We learned that management teams can talk themselves into all sorts of corporate strategies even when it should be obvious that the idea is a nonstarter -- we decided that 47% of the failed strategies could easily have been identified as losers ahead of time. For instance, one of the world's biggest cement companies decided that, because its cement was used in so many homes, it was really in the home products business and should start selling lawn mowers. It didn't take a genius to see that the home products strategy was a huge reach, but the company went ahead and, sure enough, filed for bankruptcy soon enough. 

The propensity for major error increases when companies are under pressure--as so many feel they are these days or expect to be in coming quarters. Management teams feel the need for quick, dramatic action and are more likely to rush to judgment. That's especially true when the CEO lines up behind an idea early, as Zuckerberg has at Meta and as Musk is doing (much more chaotically) at Twitter. The dynamic shifts from testing an idea to trying to make the CEO's idea work, no matter how improbable.

Chunka and I also learned, though, through consulting work based on the book that a management team almost always sees all the flaws in a strategy. The key is to give those people a chance to point out the flaws before the company commits to a bad idea. 

The process we recommend is to use a devil's advocate. We mostly modeled our approach on what President Kennedy did so successfully during the Cuban Missile Crisis. JFK, having bungled the Bay of Pigs because he too readily accepted his advisers' assurances, appointed his brother Bobby to challenge all the claims and advice offered by political and military leaders. So, when Gen. Curtis Lemay told JFK that he could bomb Cuba without fear of prompting an attack by the Soviets, RFK spoke up, eventually got Lemay to admit that he had no evidence for his claim and maybe saved the world from nuclear holocaust. 

In a corporate environment, a CEO can anoint someone as the devil's advocate--perhaps a senior executive, perhaps a board member, perhaps an outsider, depending on the internal dynamics. That person would then be given license to identify all the potential problems, mostly through interviews with the senior team, and would present the case against a strategy. The negatives could then be weighed against the positives and a decision made, free of the pressure to do SOMETHING even if all the alternatives are bad.

Some version of Zuckerberg's metaverse may well play out. Virtual reality keeps improving, and we're clearly still in the early days of realizing the potential of digital forms of communication. Andreessen Horowitz, one of the smartest VC firms around, obviously has investment theses for each of its Web 3.0 companies that go well beyond any hype. (I'm less optimistic that Musk can figure out a magic solution at Twitter.)

But Zuckerberg, Musk and others are nonetheless adding to the very long list of corporate errors that the rest of us can learn from. 

Cheers,

Paul  

The insurance industry has a full plate these days – dealing with everything from economic and political instability, climate change, a hardening market and increased claims expenses, to finding skilled workers and operating in a fiercely competitive environment where digital transformation is a must. However, according to a recent survey we conducted with global IT decision-makers, C-suite executives across the industry think cybersecurity is the largest challenge of all. 65% of insurance technologists cited cyber-attacks/threats as a greater concern than inflation (45%) and retaining and hiring talent (40%), and cloud evolution/migration is a big part of the story.

The consequences of cyberattacks can be devastating to insurers that are unprepared. 63% cited operational downtime as a leading concern, while 51% percent reported concerns over intellectual property loft and theft, and smaller percentages say they are concerned about damage to brand reputation (47%) or revenue loss (33%).

See also: Cyber Trends That Will Change 2023

Good News 

There is some good news in the survey. Insurers have increased their investment in cybersecurity, and that shows no sign of changing. Despite the economic challenges brought about by the pandemic, 81% of insurers report that their cybersecurity budgets have increased over the past three years. Respondents also note that the issue receives an increasing share of board visibility. They also cite increased collaboration between the security team and the C-suite to address cyber risks. More than ever, security teams, boards and C-suite executives at insurance companies are working together to ensure risks are appropriately controlled:

• 72% note an increase in board visibility for cybersecurity over the past five years 
• 73% cite increased investment in cybersecurity due to better collaboration between the security team and members of the C-suite.

…and Some Bad News 

At the same time, carriers are moving their infrastructure away from proprietary data centers through multi-year cloud transformation initiatives. Maintaining a security posture that meets compliance challenges and addresses top risks while these structural IT changes are taking place is emerging as a challenge. With IT infrastructure spread across public and private clouds, and a significant installed base of legacy IT infrastructure still not on the cloud, holistically managing cybersecurity becomes more challenging, especially in a world where IT talent and cyber talent are at a premium.

It is not surprising that the leading targets for new cybersecurity investment among insurers are cloud native security (69%), data security (51%), consultative security services (51%) and application security (42%). According to the survey, cloud native security is the area where organizations are most likely to rely on an outside partner for expertise. 

These investments align with the top areas insurers perceive as their greatest concentration risk, led by network security (55%), closely followed by web application attacks (54%) and cloud architecture attacks (64%).

The consequence of these converging dynamics is that fewer than half (42%) of insurance IT professionals said they are “fully prepared” to respond to cybersecurity attacks and threats. In addition, a majority report being either “unprepared” or only “somewhat prepared” to respond to major threats like identifying and mitigating threats and areas of concern (50%), recovering from cyberattacks (53%) or preventing lapses and breaches (66%). 

For all the industry’s efforts to put cybersecurity at the top of the agenda and the increased spending on new technologies, there are still too few insurers adding cloud-native security functionality or third-party SaaS security tools that are built specifically for cloud-based workloads. As threat actors continue to target cloud workloads and access points, and as IT architectures grow in complexity, there will clearly be a need for carriers to use outside security assistance to identify and mitigate their threats. 

With massive shifts in the workforce, economic uncertainty and the majority of employees routinely feeling disengaged from their work, the need for strong leadership today is dire.

A lot has been said about leadership and change. Some people believe that leaders are born, not made. Others believe anyone can become a leader with the proper training and experience.

But what does it take to be a successful leader?

How can you lead change effectively in your organization?

Here are 10 tips that can help you lead change in the insurance industry.

1. Be visionary

“Chase the vision, not the money.” Tony Hsieh

Leaders need to have a clear vision for the future and be able to articulate it in a way that inspires others. For a leader to be visionary, they must be clear about the impact they want their organization to make in their community or industry. Without a vision, it’s difficult to set goals and create a roadmap for change.

77% of employees who feel they are aligned with the company’s purpose or vision are engaged, compared with only 20% of employees who are not aligned with the vision.

2. Be decisive

“The way to develop decisiveness is to start right where you are, with the very next question you face.” Napoleon Hill

Leaders need to be able to make tough decisions, even when there is no clear right or wrong answer. They also need to be able to make decisions quickly and efficiently, without dragging their feet.

Indecisive leadership can cost your organization as revenue opportunities can vanish if you don’t act quickly. Effective leaders can overcome emotional impulses and take a step back, assess a situation and decide the course of action. Conversely, leaders who can’t control their emotions often make rash decisions that can lead to catastrophic consequences.

Making the wrong decision is inevitable; it happens to everyone. The key is to trust yourself, focus on how your decision affects your company’s vision and be ready to adjust if things do not go as planned.

3. Be communicative

“The most important thing in communication is hearing what isn’t said.” Peter Drucker

Communication is critical for any leader. You need to be able to share your vision and goals with others and rally people to your cause. According to Vimeo, one out of eight business professionals say their companies never communicate strategy updates.

To do this, you must communicate confidently and frequently with your employees, sharing good and, if necessary, bad news. This will inspire trust. Use these opportunities to take ownership and share your insights with the team.

Leaders also need to be able to listen to feedback and take it on board. Try practicing active listening on all levels of the company. Give employees a space to share their ideas, perspectives and opinions on company matters.

See also: The Evolution of Leadership Intelligence

4. Be motivating

Leaders must create a positive and inspiring work environment to motivate others to achieve collective goals.

Granting autonomy to skilled employees helps motivate them to bring their best effort each day. When employees feel valued and cherished for their skills, perspectives and personalities, they’re more likely to find fulfillment in their work.

In addition, it’s imperative to provide recognition and rewards for people who excel within the organization. Rules and punishments don’t inspire.

5. Be adaptable

Leaders must be able to adjust tactics and strategies to the ever-changing landscape. Leaders also need to be able to embrace change themselves and be role models for others.

Having a diverse workforce and culture is a great place to start. Diverse workforces have many different ways of thinking, allowing leaders and organizations to stay open to different perspectives and change.

In addition, get in the habit of seeking out opportunities and trends. For example, look at how different industries are experimenting with new technology and listen to podcasts on topics you’re unfamiliar with. Continuously learning new trends and global perspectives can build an adaptable mindset and help you become more open to change.

6. Be authentic

People need to trust their leaders, and one of the best ways to build trust is by being authentic. Leaders must be true to themselves and display the same values through their actions and words that they expect from the rest of their team.

Authentic leaders must also be comfortable in their skin, have strong self-awareness and understand their weaknesses, strengths and values. By displaying your strengths and weaknesses to your team, you can show that you have nothing to hide. This way, you build trust among your team, and when an employee makes a mistake, they’ll feel more comfortable sharing their errors with you.

7. Be passionate

Passion is contagious, and leaders must be passionate about their vision for the future. This passion will inspire others and help them stay motivated through tough times.

Give your team some praise and congratulations to reignite their passion, and yours. Try taking your team out for lunch or organize a fun team activity like ziplining. When you celebrate achievements, you show that you’re getting closer to your vision.

8. Be coachable

No leader is perfect, and the best leaders are always learning and growing. They are open to feedback and willing to learn from their mistakes.

To be a coachable leader, you must be curious about your strengths and weaknesses, be hungry for feedback and have an open mind. You can’t focus on being right all the time, but rather focus on learning new things and listening to different perspectives.

Moreover, listen to the advice of your support group and advisers and apply that advice to your business just like an athlete would use it in their game. In business, just like sports, coaching and advising are meant to take you out of your comfort zone and push you toward greater success.

Leaders should also be willing to invest consistently in their own development and that of their team members. Whether this takes the form of courses and programs or a difficult conversation to encourage professional development, you must prioritize learning and growth for yourself and your team.

See also: 7 Things Sailing Taught Me on Leadership

9. Be collaborative

Leadership is not a one-person show. The best leaders know how to build and work with teams. They can delegate tasks and give others the credit they deserve. Leaders should also create an environment where different ideas can be shared and debated openly.

You must also give credit where it’s due and recognize the contributions of employees and teams. According to HubSpot, 69% of employees say they’d work harder if they were better appreciated. For example, if an employee comes up with an idea that brings in revenue opportunities, openly share credit with them.

10. Be humble

The best leaders do not have big egos. They know they cannot do everything independently and are not afraid to ask for help. They are humble and always looking to improve.

To be a humble leader, you must respect your employees’ time, ideas and feedback and treat your team how you want to be treated. Try to respond quickly to your team’s questions and requests, ask questions, show up on time for meetings and listen to their opinions. In addition, be accessible to your team and don’t let someone’s rank or pay grade affect how you act around them.

Leadership is not easy, but it is essential for anyone looking to effect change in their organization. By following these tips, you can develop the skills you need to be a successful leader.

Ransomware remains a top cyber risk for organizations globally while business email compromise incidents are on the rise and will increase further in the "deep fake" era. At the same time, the war in Ukraine and wider geopolitical tensions are a major concern as hostilities could spill over into cyber space and cause targeted attacks against companies, infrastructure or supply chains, according to a new report from Allianz Global Corporate & Specialty (AGCS). 

The cyber risk landscape doesn’t allow for any resting on laurels. Ransomware and phishing scams are as active as ever, and on top of that there is the prospect of a hybrid cyber war. Most companies will not be able to evade a cyber threat. However, organizations with good cyber maturity are better equipped to deal with incidents. Even when they are attacked, losses are typically less severe due to established identification and response mechanisms. 

Although we see good progress, our experience also shows that many companies still need to strengthen their cyber controls, particularly around IT security trainings, better network segmentation for critical environments and cyber incident response plans and security governance. As a cyber insurer, we are willing to go beyond pure risk transfer, helping clients to adapt to a changing risk landscape and raising their protection levels.

Around the world, the frequency of ransomware attacks remains high, as do related claims costs. There were a record 623 million attacks in 2021, double that of 2020.  Although frequency reduced by 23% globally during the first half of 2022, the year-to-date total still exceeds that of the full years of 2017, 2018 and 2019, and Europe saw attacks surge in the first half. Ransomware is forecast to cause $30 billion in damages to organizations globally by 2023. From an AGCS perspective, the value of ransomware claims the company was involved in, together with other insurers, accounted for well over 50% of all cyber claims costs during 2020 and 2021.

See also: Cyber Risk and Insurance in 2022

Double and triple extortion now the norm 

The cost of ransomware attacks has increased as criminals have targeted larger companies, critical infrastructure and supply chains. Criminals have honed their tactics to extort more money. Double and triple extortion attacks are now the norm – besides the encryption of systems, sensitive data is increasingly stolen and used as a leverage for extortion demands to business partners, suppliers or customers. Ransomware severity is likely to remain a key threat for businesses, fueled by the growing sophistication of gangs and rising inflation, which is reflected in the increased cost of IT and cyber security specialists.

Increasingly, smaller and mid-sized companies, which often lack controls and resources to invest in cyber security, are being targeted by gangs as larger businesses invest more heavily in security. Gangs are also using a wide range of harassment techniques, are tailoring their ransom demands to specific companies and are using expert negotiators to maximize returns.

Sophisticated scams

Business email compromise (BEC) attacks continue to rise, facilitated by growing digitalization and availability of data, the shift to remote working and, increasingly, "deep fake" technology and virtual conferencing. BEC scams totaled $43 billion globally from 2016 to 2021 according to the FBI, with a 65% surge in scams between July 2019 and December 2021 alone. Attacks are becoming more sophisticated and targeted, with criminals now using virtual meeting platforms to trick employees to transfer funds or share sensitive information. Increasingly, these attacks are enabled by artificial intelligence enabling "deep fake" audio or videos that mimic senior executives. Last year, a bank employee from the United Arab Emirates made a $35 million transfer after being misled by the cloned voice of a company director.

The threat of cyber war 

The war in Ukraine and wider geopolitical tensions are a major factor reshaping the cyber threat landscape as they increase the risk of espionage, sabotage and destructive cyber attacks against companies with ties to Russia and Ukraine, as well as allies and those in neighboring countries. State-sponsored cyber acts could target critical infrastructure, supply chains or corporations.

As yet the war between Russia and Ukraine has not led to a notable uptick in cyber insurance claims, but it does point to a potentially increased risk from nation-states. Although acts of war are typically excluded from traditional insurance products, the risk of a hybrid cyber war has accelerated efforts in the insurance market to address the issue of war and state-sponsored cyber attacks in wordings and provide clarity of cover for customers.

See also: 6 Cybersecurity Threats for Insurers

Improving Risk Controls

In response to a more complex risk environment and increasing cyber claims activity, the insurance industry is more diligently assessing companies’ cyber risk profiles in a bid to encourage companies to improve their security and risk management controls. 

The good news is that we are now seeing a very different conversation on the quality of cyber risk than a few years ago. We are gaining much better insights and appreciate clients going the extra mile to provide comprehensive data to us. This also helps us to provide more value and offer useful information and advice to customers, such as which controls are most effective or where to further improve risk management and response approaches.

The net result should be fewer – or less significant – cyber events for our customers and fewer claims for us. Such collaboration will also help in creating a long-term sustainable cyber insurance market that not only relies on traditional coverages but, increasingly, on integrating cyber risks into captive programs and other alternative risk transfer concepts.

Floridians whose properties were destroyed or damaged by Hurricane Ian are expected to file between $53 billion and $74 billion in insurance claims. The federal government will disburse billions more in disaster assistance through tax relief, subsidies and direct grants. While the vast majority of the claims are legitimate and will be settled, criminals always see opportunities in the misfortunes of others. 

According to the FBI, insurance fraud may have accounted for as much as $6 billion in losses to insurance companies and government agencies after Hurricane Katrina in 2005. Fraud now accounts for about $40 billion in losses per year to U.S. insurance companies, costing the average family $400 to $700 per year in increased premiums. 

But losses to fraudulent claims can be minimized by insurance companies. Identify verification (IDV) solutions have come a long way since Hurricane Katrina. Today’s most robust solutions use artificial intelligence and machine learning technology to verify identities anywhere in the world in a few seconds. 

Fraud flows through false information and identities

After a disaster, the most common frauds include false or exaggerated claims by policyholders, as well as bid-rigging by contractors who inflate the cost of repairs, and charity fraud scams designed to misappropriate disaster relief funds.

Money earned through an insurance fraud scheme rarely flows directly to the perpetrators. Instead, fraudsters tend to move the money through online accounts using individuals who have a legitimate U.S. bank account. This not only allows scammers to conceal their identities but also makes it difficult for regulatory authorities to detect fraud and recoup the funds. 

Additionally, digital wallets, mobile banking and other money transfer apps have opened the gateway to new avenues for moving illegal funds around. These channels allow users to access accounts without appearing in person. As a result, the scammers avoid cameras at ATMs, bypass manual security checks and conceal their true identities

To file for false unemployment insurance claims, criminals usually take over existing identities or fabricate identities using stolen details or forgeries. Identity theft is just the beginning. Once fraudsters have successfully created an account using the stolen personal information, other forms of fraud quickly follow. 

See also: How to Prepare for Catastrophe Claims

Mitigating insurance fraud with state-of-the-art IDV solutions 

Digital payment options make it easier for scammers to commit identity fraud - but government agencies and insurance companies can easily detect fraudulent players and suspicious identity details with the right technology. Using robust identity-proofing mechanisms during onboarding can prevent fraud.

Digital identity verification leverages state-of-the-art technology and artificial intelligence models to carry out multiple identity checks. Integrating identity-verification software can spot thieves - along with false insurance claims. 

Here’s how it works: The claimants provide personally identifiable information for identity verification. They are then asked to present themselves online to provide proof of identity, using valid ID documents. The AI-powered identity verification software verifies the documents and checks for any signs of tampering or forgery. The image on the ID document is also matched against the face of the claimant to ensure they are who they claim to be. If the verification process is successful, the insurers can proceed to process the claims within seconds.

During the initial identity verification process, the claimant is verified by authenticating not just official identity documents but also by collecting biometric data. Because biometric data is virtually impossible to replicate, it serves as a better defense mechanism. This way, even if a fraudster is filing for a fraudulent claim through an online channel, their identity can still be identified and reported to authorities.

The bottom line: Today’s most robust IDV solutions can authenticate claimants during the application stage, filter out fraudsters and minimize the threat of fraud. It’s a win-win for both the insurers and the policyholders who desperately need to file claims after a disaster.

For more than a century, carmakers and automobile insurers have largely kept to their own lanes. That was before data ruled. In 2022, data and technology have inspired the automobile industry to get more involved in the insurance side of the ledger, prompting an increase in the number of inter-industry partnerships and more.

For auto insurers, partnerships and other steps car manufacturers have taken to edge their way into the insurance industry offer a way to gain and maintain market share in the highly competitive personal auto space, AM Best Senior Director Richard Attanasio said. Offering products directly and at the point of a vehicle sale brings carriers an avenue of distribution with potentially lower expense levels and additional insight that can help set rates, he said.

Insurers working closely with manufacturers agree that they benefit from access to new data on driving behaviors, and seeing how they affect losses as automation advances and interest in electric vehicles surges. And carmakers that establish their own insurance operations can acquire a “natural feedback loop on driving patterns, effectiveness of safety features, etc., which allows them to further hone their product to meet customer expectations,” Attanasio said.

Points of entry vary by manufacturer and even by country. For instance, Tesla progressed from broker to fronting agency partner to insurance subsidiary. Swiss Re and BMW collaborated to craft a vehicle-specific insurance rating parameter for primary carriers globally to calculate premiums. Some carmakers, such as Toyota, are building out insurance brokerages. Others teamed up with carriers on embedded products.

Toyota overtook Ford as the leading car brand in the U.S. last year, based on 1.9 million vehicle sales, according to market and consumer data company Statista. Ford had 1.8 million, followed by Chevrolet's 1.5 million. Nationwide has partnered with the top two, as well as startup electric “adventure” vehicle Rivian.

Nationwide gains knowledge and strengthens trust by expanding original equipment manufacturer partnerships, said Senior Vice President of Corporate Development Angie Klett, creating “a relationship within their ecosystem that builds upon the customer having the say, the power and determining the path of an experience.” Carmakers and insurance partners today take a customer-first approach that varies from company to company, Klett said. Choose a manufacturing partner carefully, she advised, with an eye on aligning values and strategies.

Each side decides direction for the insurance product, such as if, how and when to embed insurance in the buying process. Klett said embedding is most strategic for manufacturers with a niche market, where customers think a company like Tesla or Rivian has a better handle on the needs of their vehicles' owners. “They're direct-to-consumer OEMs. The buying, the servicing is different. It's not the same as a Ford or Toyota,” Klett said.

Specialized manufacturers, such as Rivian, are notably invested in streamlining the entire car-owning experience, said Sarah Jacobs, Nationwide vice president of personal lines product development, and will lean into the process.

See also: 3 Tips for Improving Customer Loyalty

Toyota Financial Services is an owner of independent property/casualty insurance agency Toyota Insurance Management Solutions (TIMS), which distributes product from multiple carriers. Will Nicklas, president of Toyota Insurance, acknowledged manufacturers' earlier reluctance to enter the highly competitive auto insurance market in the U.S.

“But I think when we decided that cars were going to be connected, and there were going to be a lot more services that we could provide to customers, it made a lot of sense,” he said. “When you think about how insurance plays a role in car ownership, every six months, maybe every 12 months, a customer is renewing an insurance policy. We saw a gap in the ownership experience.”

Nicklas thinks of TIMS as “this new, connected tissue, or this glue that's bringing these two industries together” for a “really powerful collaboration.”

According to the TIMS website, working with Toyota companies and external partners allows the broker to harness data and technology to “improve safety and convenience and save customers time and money.”

The Counterpoint

Some insurance industry experts think the partnerships are helping carriers and manufacturers, but they doubt Tesla will inspire other carmakers to become underwriters. They cite the complexity of regulatory approvals, particularly in the U.S., and profit and loss swings in auto, even among large, legacy insurers.

Risk Information Inc. Editor Brian Sullivan put it bluntly: “There is no advantage at all to a traditional auto manufacturer owning a traditional insurance company.”

Jacobs said regulatory work can't be underestimated. Insurance is “very challenging to break into.”

Barriers are a little easier to clear in some global countries, particularly with a carrier partner. Volkswagen Autoversicherung AG was founded in 2013 as a joint venture between Allianz Versicherungs-AG and Volkswagen Financial Services AG. Volkswagen Autoversicherung AG offers auto insurance in Germany as a primary insurer. In about 30 other countries or markets, VW is an insurance broker, the company said.

“The technology of the cars, especially the car data, gain an increasing importance for the development of our motor insurance products,” a Volkswagen spokesperson said. “For example, in Germany, the safety features of the cars have a direct influence on the motor insurance pricing.” The company hopes to gain telematics experience and integrate insurance offers into VW on-board systems.

Brandy Mayfield, senior vice president and managing director, digital economy for Aon, said partnerships between manufacturers and insurers offer an attractive middle ground.

“As manufacturers build differentiated products, they want to make sure carriers have capacity to insure newer/different technology. Manufacturers also want to minimize friction in the insurance purchase journey and create continued revenue streams from their buyers,” she said.

On the other hand, she said, “shifting from acting as a broker to an insurer presents a significant leap in terms of regulatory complexity, capital intensity and moving the brand into a new category with mixed views from consumers.”

“For original equipment manufacturers to make that investment, there will have to be a clear opportunity to differentiate from traditional insurers or meet truly unmet needs in the marketplace,” she added. “Carmakers must determine what they're solving for by setting up their own insurance structure: more clients, a differentiated insurance product, etc. Many also want to capitalize on profits from the insurance space.”

Carriers can grow a book for certain auto types more rapidly than in the traditional market, she said. Customers may get improved access to parts and repair services, increasing satisfaction with insurers and carmakers. Doubly important for newer vehicles with limited production is “a network to quickly obtain parts and repair,” Mayfield said.

Tesla's push into insurance was reported to be motivated by reducing the cost of ownership. Repair costs ran higher because fewer technicians are familiar with the connected, electric vehicle. Tesla was known for supply chain challenges even before the pandemic, extending repair times.

“Other manufacturers could take a similar approach and offer insurance directly,” Attanasio said, although it would require a significant amount of industry knowledge and infrastructure, including a high level of product/pricing sophistication and policy administration and claims capabilities.

Entrepreneur Elon Musk drew distinctions between how automaker Tesla Motors' insurance operations cover auto risk compared with the traditional insurance industry, which he said suffers from too many players extracting part of the premium along the insurance value chain. “Insurance is quite significant,” Musk, Tesla's chief executive officer, said recently. “The car insurance thing is a bigger deal than it may seem. A lot of people are paying 30%, 40% as much as their lease payment for the car, in car insurance.” Tesla said its real-time insurance is based on measurable driving behavior.

Technology Roots

Twenty-one years ago, when OnStar was collecting vehicle usage data in 34 of General Motors' then-54 models, a spokesman said the onboard automobile information system was working on partnering with insurers. OnStar's inducement included cost savings because insurers wouldn't need to develop data-gathering equipment and then get it into vehicles.

That was three years before Progressive Corp.—which has since become the third-largest private passenger writer in the U.S., according to AM Best data—piloted a usage-based insurance program to research driving habits. In 2008, Progressive started offering customers the option of tying driving data to premiums.

Telematics adoption lagged through the years even as the ease improved from the early days, when consumers were required to install dongles to access UBI. Now that smartphones are common, telematics options from multiple carriers are just an app away. The amount of information an insurer can gather comes close to carmaker-installed monitoring systems, Sullivan said.

Mayfield, however, raised a prime consumer concern: data privacy. “Dealership agents should be prepared to answer a similar line of questioning from consumers: What information from their vehicles will manufacturers plan to share with insurance companies?”

That's a problem for carmakers because the distribution system encourages salespeople to sell vehicles as quickly and with as little friction as possible, Sullivan said. “All a salesperson wants is to get the car off the lot. Anything that might get in the way of closing the sale immediately will be ignored by sales and finance people in dealerships. Insurance is far more complicated than selling rust protection add-ons.”

See also; 5 Trends to Watch in Commercial Auto

Connected carmakers are already collecting enormous amounts of data on how vehicles are driven and maintained. That can give them an edge, albeit a minor one, as telematics becomes more widely accepted, according to Sullivan, even as many car buyers opt to retain a degree of privacy, or at least the right to decide when and who has access to their personal movements and habits.

Ford affiliate American Road Services Co. offers Ford Insure, underwritten by Nationwide Mutual Insurance Co. and its affiliates. Ford Insure customers employ FordPass App (compatible with smartphones) and FordPass Connect (an optional feature on some of the carmaker's models) on newer vehicles to transmit data on miles driven, hard braking and accelerating and stop-and-go and night driving.

Ford's insurance messaging mirrors that of partner Nationwide's for the general public. “While that discount is being calculated, you automatically get a 10% discount just for signing up,” Ford Insure notes on its website, promoting auto insurance discounts as high as 40% and potential additional savings by bundling other vehicles, home or pet insurance with the auto coverage.

Jacobs thinks 70% of new customers will opt in to UBI plans within five years, based on current trends.

Sullivan isn't surprised, seeing the day when drivers who decline to use telematics are presumed to be high-mileage or high-risk policyholders. Even if they're not, they will pay more for the privilege of privacy, he predicted.

This article initially appeared at AM Best. 

Inflation has been top-of-mind since early 2021, and for good reason. For most Americans, the impacts have been inescapable - from the grocery store to the gas pump to the car dealership. Inflation is the highest we’ve seen in 40 years. Auto insurers are struggling to maintain profitability given increases in labor, materials and vehicle replacement costs. And those challenges are only expected to deepen as medical bill inflation accelerates.

History Repeats Itself?

This isn’t the first time that medical care inflation has reacted during periods of high overall inflation. For historical perspective, we need to go all the way back to the recessionary periods of the mid-1970s and early 1980s. Though the specific economic conditions may have been different, we can still draw a few key insights: In general, overall CPI (Consumer Price Index) inflation spikes were followed by similar medical inflation spikes within one to two years (Figure 1), and (Figure 2) the medical increases also stayed elevated for longer periods than overall inflation, which dropped off steeply after peaks.

Figure 1: Consumer Price Index Trend for All Items and Medical Care in the U.S.

Now, let’s examine this trend in the context of the current landscape. Similar to the historical trend, medical care inflation has trailed overall CPI inflation, mainly because contracts between medical providers and major payers (i.e. Medicare/Medicaid, private health Insurers) are typically negotiated years in advance. This disconnect has placed major financial strains on medical providers locked into reimbursement contracts negotiated prior to the recent inflation increases. But, while medical care inflation reacts slowly compared with volatile items such as food and energy, make no mistake, it is catching up (Figure 2). As of August 2022, U.S. medical care inflation was 5.4% compared with 2021, with a steeply increasing trajectory.

See also: What to Do About Rising Inflation?

Figure 2: Consumer Price Index Trend for All Items and Medical Care Jan 2021 -— Present

These medical care price increases land heaviest on auto casualty billing because pricing and reimbursement are not tied to major payer contracts. Case in point: We have observed notable billing severity acceleration in Q3 2022 within both our first- and third-party medical bill review data, with first-party average bill severity up 4.2% and third-party average bill severity up 11% compared with Q3 2021 (Figures 3 and 4).

Figure 3: 1st Party Casualty Average Billed per Line

Figure 4: 3rd Party Casualty Average Considered (Billed less Duplicates) Per Line

Benchmarking to Level the Playing Field

Given the accelerating medical care inflation challenges, it is now more important than ever for auto insurers to leverage benchmarks when evaluating reasonableness of charges, as well as to have them readily accessible to the adjuster. This is easiest in states regulated via mandatory fee schedules, such as Pennsylvania or Oregon, but most states do not use a fee schedule. One option is the use of Fair Health, which maintains a large database of all charged amounts by procedure and geo ZIP code. While effective, a drawback of using methodology based on charge amount is that rapidly rising prices in a region will also drive up associated benchmark values.

Another excellent benchmarking option is the use of Medicare reimbursement schedules. As the single largest payer of medical bills in the U.S., Medicare is well-known to medical providers. It is extremely useful to reference the amount Medicare has agreed to pay for any given procedure by state venue. Because this benchmarking methodology is based on reimbursement versus charge, it is less affected by rapid charge increases.  

To better understand these differences in methodology, let’s use CCC billing data to examine the charge and recommendation values for some typical procedures that have already seen notable cost inflation (Figure 5). With a Fair Health benchmark configured at the 80th percentile for the procedure in the applicable ZIP code, the average reimbursement recommendation lands at 52% of the submitted amount. The Medicare benchmark value lands at just 6% of that same submitted amount. Even at 5x the Medicare reimbursement, the benchmark value lands at 32% of the submitted amount.

See also: Social Inflation: A Claims Perspective (Part 4)

Figure 5:  CCC Charge vs Benchmark Recommendations

These benchmark values are most useful for third-party liability negotiations when integrated into medical bill review applications and supported by robust configuration options. With CCC’s 3rd Party Bill Review Application Injury Evaluation Solutions (IES), insurers can cascade and display multiple benchmark methodologies while also setting rule configurations such as Medicare multipliers by venue or bill type. The adjusters can review all available benchmarks and adjust as a batch or all the way down to bill line level as needed based on the right fit for the claim (Figure 6)

Figure 6: Sample Bill Ingested via IES with Fair Health and Medicare Recommendation Values

Medical inflation is here, escalating quickly, and likely to persist for an extended period based on historical indicators. Insurers who have integrated a comprehensive, consistent, easy-to-use benchmarking strategy into their workflow will be best-equipped to indemnify their casualty claims.

With more than 33 million small businesses in the U.S., their insurance needs become more complex and competitive each year. Small-business owners require various insurance policies – from commercial auto and property to employee liability.

While the personal-lines insurance market started digital transformation years ago, commercial insurance was much slower to automate due to the complexity of the transactions and the reliance on independent-agent distribution models.

Overreliance on more manual processes can result in a poor customer experience, inefficient operations and a lack of usable data for underwriting and pricing. Moreover, TransUnion research shows that 82% of business insurance customers are open to obtaining a policy quote through online channels without agent assistance.

Cutting-edge technology and advanced data capabilities offer commercial insurers an unprecedented opportunity to boost profitability, elevate product sophistication, enhance customer experience and reduce costs.

Insurers that don't embrace digital transformation may risk losing market share to competitors using automation to gain an advantage in the small-business market and add to their bottom lines significantly. To realize higher profits and performance, small-business insurers must prioritize the many digital technology options available and have a clear strategy for automation.

Algorithm-Based Underwriting

When shopping for insurance policies, small businesses oftentimes seek providers offering them the most affordable policy quickly and efficiently. Any delay in receiving the quote will likely result in the customer going to a competitor instead. 

Automated underwriting relies on robotic process automation (RPA), artificial intelligence (AI) and machine learning to find new information sources, glean new insights from existing data, establish consistency in evaluating risks and achieve greater efficiency.

Using externally available data to prefill necessary information at quote facilitates algorithm-based underwriting processes, enabling customers to see a price quote within minutes instead of days. Additionally, data is captured and validated in online forms, significantly reducing the probability of human error and policy mispricing.

Historically, commercial insurance underwriters have reviewed and evaluated most risks because legacy data systems could not process complex small-business transactions and data sources were fragmented, causing significant delays in the quoting process. Additionally, due to the high policy volume, underwriting departments were large, which can drive up costs.

On the other hand, with the proliferation of available data and improved data accuracy, algorithms analyze risks quickly and effectively, enabling insurers to optimize underwriter workloads to focus on more complicated policies and use their time more efficiently. Also, automation can lead to greater worker satisfaction by enabling underwriters to focus on more challenging work.

See also: How to Use Social Media Data in Underwriting

Range of Discretionary Pricing Is Shrinking 

Because algorithms and data were not as readily available and accurate as today, underwriters have historically had more latitude to change prices. For example, they could lower the price from what the algorithm produced by 20-40 points in percentage terms or even raise it by a similar amount, if necessary. 

As the result of improvements in commercially available and scalable third-party data, small business insurance rate plans are increasingly capable of pricing the risk more accurately, and the need for discretionary adjustments to price is shrinking.

For example, previously, a rating algorithm might price a premium at $1,000, but an underwriter could raise or lower it by $500. However, with more precise data, algorithms are more capable of pricing risks, and there's more confidence in the ability to set the price. As a result, the underwriter might still need to change the price, but only plus or minus 10%, rather than 50%. In many cases, underwriter discretion may be eliminated entirely.

For certain less complex small-business risk segments, most insurance companies have a great deal of data. For example, residential plumbers present a common risk. In the past, underwriters may have reviewed these policies and made pricing adjustments, which is a disruptive and time-consuming process. But now, an algorithm can access the risk more precisely and in a much shorter time. As a result, what may have once taken several hours to evaluate can now be completed in a matter of minutes.

Online Transactions

With digital transformation, more small-business insurance policies are transacted online instead of through an agent, reducing costs and improving the cycle times considerably. For example, instead of waiting three days for a quote, customers can receive it in 10 minutes.

When small-business owners evaluate policies, they likely request quotes from several insurance providers. Assuming their policy needs are typical and not complex, the process takes less time because they enter the policy information online instead of visiting an agent's office, which generally takes a significant amount of time and can therefore lead to an unsatisfactory customer experience.

For example, a landscaper looking for insurance coverage has relatively standard risks. The customer is self-employed, so they may only need a policy for the vehicle and a general liability policy. Instead of spending all day in an agent's office, the landscaper can spend 20 minutes online and receive quotes from 10 different insurers of his or her choosing. 

If the customer has a large, complex or medium-sized business, an automated process might not be appropriate; but, for small businesses with standard risks operating in higher-volume business segments, transacting online streamlines the underwriting process and maximizes efficiencies.

See also: 3 Must-Haves for a Self-Service Portal

Transformation Is the Key to Profitability

Small business insurance profitability has been a challenge for providers due to a multitude of reasons including operational inefficiencies, high expenses and inaccurate pricing. 

However, with a substantial increase in data availability, small commercial insurers are realizing the benefits that automation brings to the underwriting and pricing processes, including algorithms, precision pricing and online transactions.

Today's customers expect to receive all types of information immediately and want insurance companies to follow suit. If small business insurers don't join the digital transformation across the industry, they risk being left behind or becoming obsolete.