As a reader of this newsletter, you may have seen me refer from time to time to what I call the Laws of Zero, which are driving certain costs toward zero at an exponential rate and which will have profound implications for insurers. The "law" most relevant for insurers says that, in the foreseeable future, all information about everything will be available instantly and at zero cost. 

I admit that there's considerable hand-waving going on there. I'm really saying that almost all information about almost everything will be available almost instantly and at almost zero cost when compared with today. That last qualification refers to the fact that having, say, computer memory prices plunge from $300,000 per gigabyte in the 1980s to a fraction of a penny makes today's prices look awfully close to free from that earlier vantage point — and shows how free(ish) future prices will look by comparison with today.

Now, a prominent futurist, Peter Diamandis, has issued a report with some eye-popping nuggets about how rapidly costs are heading toward zero for computers, communication devices and sensors and are driving us toward nearly infinite information at nearly zero cost. 

Diamandis — the founder of the X Prize Foundation, cofounder of Singularity University and coauthor of best-seller "Abundance: The Future Is Better Than You Think" — has made his full report available here. But I'll call out some of the high points:

• "In the realm of ground-based cellular networks, by 2025 there will be 2.8 billion humans connected on ubiquitous 5G [which can be 100x faster than 4G]. At the same time, 6G is also under development, which will be 100x faster" than 5G.
• "A number of multi-thousand-satellite networks (Starlink, E-Space, Kuiper, etc.) are being deployed that will ultimately cover every square meter of the Earth. Thus far, Starlink is the largest orbiting network with 3,000+ operational satellites, heading toward a goal of [42.000]. Starlink today offers speeds over 100 megabits/second" and is developing laser technology that would increase that speed by a factor of 100.
• "We are birthing a 'trillion-sensor economy' in which everything is being monitored, imaged and listened to at all times." That economy will involve: "sensors in orbit above Earth imaging the planet... sensors on fleets of drones in our skies... sensors on our autonomous cars and eVTOLs [electric planes capable of vertical takeoffs and landings], visualizing our cities... sensors on our bodies and in our bodies measuring our physiology 24x7... sensors in your home listening/watching, providing security and support... [and] industrial sensors monitoring and optimizing manufacturing."

Diamandis says there are already 260 million smart homes worldwide and expects that number to soar. He also quotes a survey by Deloitte that found that "86% of manufacturers believe that smart factory initiatives will be the main driver of manufacturing competitiveness in the next five years."

I'd add that sensors and cameras can actually be just about anywhere someone chooses to put one. Not only have the sensors and cameras become incredibly tiny and cheap, but improvements in solar power and batteries liberate them from having to be connected to the electric grid, and the ubiquity of Wi-Fi and cellular and satellite networks means there is always a communications network to hook into. Just combine a tiny antenna and a bit of solar power to a sensor or camera and put it wherever you want. 

As Diamandis says, if you want to spot fashion trends, you can just put a few cameras on city streets you see as trend-setters and have AI alert you to changes (having anonymized all data, including by blurring faces, of course). If you're a farmer, you can "know the moisture content in both the sky and the soil [and] pinpoint water for healthier crops and bigger yields—while reducing water waste. Drones and robots [will] image crops for disease and inform the robots when the crops are ripe for picking."

Based on what he sees as the connection of 8 billion people and trillions of sensors, he predicts "a world of ubiquitous and abundant knowledge" where "you’ll be able to connect to anyone and anything, any time, anywhere."

Perhaps most inspiring: "Because innovation is a function of the number of humans connected to each other, enabled by tools and powered by knowledge, as these numbers all steadily increase, we’re about to witness perhaps the most historic acceleration of technological innovation ever experienced by humanity."

Like all companies, insurers will benefit from the opportunities to increase communication and collaboration, as well as the ability to tap into new talent pools around the world. But the insurance industry should gain even more than others, because we're in the business of understanding the world's risks, and in a hyper-wired world all that information will be available at essentially no cost. It was also be available (almost) instantly, which will allow for new business models.

Why focus on crunching years- or decades-old data to see what auto or life claims used to be, when you can know what's happening now? And why wait to pay for a claim after the fact when you know so much in real time that you can alert a client and maybe prevent that car crash or stop that water leak before it can do any damage?

Cheers,

Paul

P.S. The points about connectivity and sensors are just two of 20 megatrends that Diamandis describes in his report, so I encourage you to check out the whole piece. And, if you're interested in learning more about what my colleagues Chunka Mui and Tim Andrews and I have written about the Laws of Zero, you can read an excerpt from our recent book (or, of course, order one) here.

Let's start with the surprises from Lemonade's investor day, before they released their Q3 results. You have heard my frequent ranting about the combined operating ratio (COR) being the insurtech kryptonite. During the investor day, Lemonade's CEO mentioned it not one time, but two times!

However, they have not found the time to represent the value of their COR in the first nine months of 2022. It's 160%.

For each dollar of premium sold, $1.60 is paid out. (AGAIN!)

Let's move to the second thing we learned. In the Q&A at the end of the day, a participant asked to comment on the current churn rate of between 30% and 40%. CEO Daniel Schreiber pushed back, claiming the rate is lower, but in a filing in California, at least, it is above 40%.

Schreiber adds that when a customer churns, you have not lost a customer; instead you created an ALUMNUS.

Steve Anderson and I acknowledged Lemonade's unique Art of Communication in the article: Finally, An Insurance Company Proud of Its Human Agents. One more time, they have demonstrated their mastery.

In one of the past editions of this newsletter, I discussed the nonsense of the "seasoned policies" narrative. In this last release of the earning call, Lemonade moved on and didn't mention it. However, Daniel has not moved on; he still believes (or wants his investors to believe) that a policyholder has some claims to submit as soon as he buys a policy but that claims diminish as the policies "season." 

The harsh reality is that a portfolio gets better with pruning: you underwrote a portfolio, then you realize part of it is worse than you supposed … and you start to reprice / twist terms and conditions / cancel policies.

It seems that in California a third of the churn on homeowner insurance policies has been "Canceled by Lemonade." And, as the chief business officer explained, there has been repricing!

Last surprise: the charity giveback, the flagship feature used to win the hearts of many insurance insurance executives and analysts back in 2016 and that was five cents on each dollar of premiums written in 2021. The giveback received 60 seconds at the investor day. (I have already shared my thoughts on the giveback in the first edition of this newsletter: "The insurance professionals who fell in love with their disruptive storytelling over the past six years should feel a little betrayed.") 

The European markets that Lemonade entered some time ago (Germany, France and the Netherlands) were not even mentioned during the day.

See also: Lemonade: No Sign of Disruption Yet

Facts & figures about their business

The shareholder letter opens with pretty enthusiastic words: "We're very happy to report on another strong quarter, with both top and bottom lines coming in ahead of our expectations."

Lemonade's top line was 2.4 times what it was in Q3 '20 -- but net losses were three times the Q3 '20 figure. Moreover, the loss ratio was 94%.

During the investor day, the CFO shared the evolution of the loss ratio by business line, including guidance for the next quarter:

The actual data looks pretty bad. Let's see if they produce this renter improvement expected in Q4.

There were no facts, no figures specific to the auto business, where the Metromile portfolio has a three-digit loss ratio. It does seem Lemonade has understood that telematics-based proactive first notification of loss is good, and I agree with them. (There! I said it!)

Here, you can see my recent speech in London about the use of telematics for reinventing the auto claim process.

Ambitions

The CFO also shared their ambitions for the next five years:

• Profitable from the half of 2026
• Growing by 20% a year

He also shared a "what if" scenario that basically massages the numbers to send Lemonade to the moon.

As of mid-November, 7,329 wildfires have been recorded in the U.S. this year, totaling 362,403 acres, destroying 772 structures and damaging 104. With the American Southwest seeing rising temperatures and drier conditions as climate change takes its toll, all but three of the 20 largest fires on record in California have occurred since 2000, with most of those happening in the last three years. This increase in destruction has led to skyrocketing insurance premiums, and many Americans feel they can no longer afford insurance protection.

Currently, 54% of Californians cannot afford disaster debt, and the state needs a solution. In response to this protection gap, Gov. Gavin Newsom has signed a bill requiring insurers to provide premium discounts for consumers who mitigate against wildfire risks.

These new insurance pricing regulations are the first in the nation to give homeowners incentives to take action against wildfire risks. Carriers are legally bound to provide discounts to consumers who follow the Safer from Wildfires framework, developed by the California Department of Insurance, alongside other state disaster prevention agencies.

However, the legislation leaves many insurers wondering how safety measures at the individual level can help them manage risk. Fortunately, the technology is out there to help insurers keep tabs on the safety measures their customers are taking and be better-positioned to mitigate risk and retain profitable underwriting despite mandatory discounts on premiums.

See also: Property Underwriting for Extreme Weather

Combining artificial intelligence with aerial imagery can allow for the creation of 3D property insights and make risk identification quicker and more efficient. With accurate, rich and reliable data, insurers can gain a competitive advantage by accurately assessing wildfire risks and reducing their claim losses by double-digit percentages across the board. These carriers also can more easily work out replacement costs if a loss does occur.

The new legislation will focus on the buffer zones between trees and a property, which are critical for halting the spread of wildfires, and the distance between vegetation and a property can be identified using artificial intelligence and aerial imagery. A property intelligence data supplier can provide up-to-date information about the evolution of risks, with a quarterly update about a property’s risk score. Underwriting profitably will become easier, and premiums can be more personalized and fair.

Customers will not only be compensated for taking safety measures, as stipulated by the new laws, but can be provided specific recommendations about how to protect themselves from wildfires. This could not only make insurers more competitive but could save significant costs. For example, an insurer can know whether a property has vegetation within 15 feet of its walls and automatically contact the owner to inform them of their increased wildfire risk and offer suggestions to reduce it. When the carrier and the customer work in tandem, both benefit from the lower chance of getting stung financially.

The customer will feel that their relationship goes beyond transaction, creating an emotional bond that is a powerful retention tool. 

Insurers are already starting to provide cheaper premiums to low-risk customers. This provides a welcome outlier as premiums increase on average. 

With around 3,700 new third-party sellers emerging every day on Amazon alone, e-commerce continues to make significant gains, even as the pandemic wanes. But while the phenomenon may be impressive, the lifespans of individual e-commerce businesses can often be anything but: 20% of e-commerce start-ups end in failure within their first year, often due to the razor-thin operating margins that regularly hinder digital businesses.

In such businesses, insurance can be the difference between a manageable setback and total collapse. There's just one underlying problem: Traditional insurance companies do not offer the coverage options e-commerce retailers need to protect themselves against emerging risks.

An insurer's main objective is to analyze the nature of a business, identify the risks it faces and provide coverage accordingly. But when it comes to offering coverage plans for e-commerce retailers, the tools carriers have to assess the risk are often insufficient. Instead, many continue to sport outdated classification models and rarely consider the ever-changing digital landscape these businesses occupy. Retailers may have to pay unnecessarily high fees yet have insufficient coverage, while insurance carriers may face unexpected losses due to unanticipated risks or be incapable of offering coverage at all.

For the $10 trillion [and growing] global e-commerce industry, insurers have nothing to lose and everything to gain by leveraging market data to better address the specific risks digital businesses face on a daily basis.

Risky Business

Existing insurance protections such as general liability, product liability and transit insurance, to name a few, have evolved to cover most digital retailer needs, but not at the pace e-commerce-specific risks are proliferating.

Digital retailers don't need to anticipate the same slip-and-fall accidents or damages to property that most brick-and-mortars do, but that doesn't mean they are immune to other perils.

The ever-changing digital economy brings its own unique set of risks -- liabilities such as third-party bodily injuries, physical damages from products, cyber-attacks, shipping delays, account suspensions, IP infringements, unexpected refunds, list hijacking and downtime events. With e-commerce businesses often enjoying only the tiniest financial wiggle room, any one of these risks can at best create significant headaches and, at worst, be insurmountable.

See also: Underwriting Enters a New Age of Data

Missing Data

Insurance coverage is conventionally based on tangible factors like a retailer's size, operating history and sales volume, and is completed following an assessment of risk exposure. Naturally, the greater the risk, the more comprehensive the insurance will need to be, and the pricier the policy.

Yet many traditional insurers lack the requisite data and tools to accurately assess the emergent risks tied to e-commerce -- a data gap that is widening. Many retailers end up paying for overpriced, static coverage that ultimately underserves them. In fact, approximately 30% of e-commerce businesses are unable to acquire the coverage they need.

Such coverage gaps will only multiply as the evolution of risks continues to outpace mitigation solutions. Take suspension, a nightmare scenario for digital businesses. Solutions that can minimize the risk of unjustified account termination while providing financial stability as they're reinstated can have huge impacts on businesses, especially SMBs.

Seize the Opportunity

Offering online businesses insurance options that cover any combination of current or emerging risks is complicated. Regardless of the type of insurance, costs hinge on the severity and frequency of the risks in question.

That said, in this digital age, e-commerce businesses should not have to struggle to find appropriate, comprehensive coverage that addresses the risks that so often plague them.

Aligning e-commerce needs with financial services and traditional insurance offerings may be an enormous challenge for insurers, but it is certainly also an opportunity. As the e-commerce market continues to boom, the insurance providers that recognize and capitalize on its largely untapped potential first will be the primary beneficiaries.

We have all been living through a period of intense uncertainty for almost three years, and the pace of disruption shows few signs of slowing; instead, it is morphing.  

The degree to which the post-COVID world in which the property & casualty insurance industry operates has changed, and how quickly, cannot be overstated. The impact has been pervasive and has affected the entire social, economic and political world in which we live and work. Nothing and no one have been spared.

Inflation, both social and economic, emerged suddenly this year and has driven up insurance claim costs and severity with no end in sight, causing insurers to play “catch up” through double-digit premium increases and extreme overhead reductions, including downsizing of both physical facilities and workforce while simultaneously struggling to find talent for open positions.

Workforce Transformation

The American workplace is also in extreme flux. Work from home (WFH), originally a rational response to COVID lockdowns, permanently changed perceptions of how work can get done. For many workers, that necessity has become a preference and a whole new lifestyle. Even today, workplace occupancy is approximately 50% of pre-pandemic level. Between 2019 and 2021, the number of Americans primarily working from home tripled from 5.7% (roughly 9 million) to 18% (27.6 million), according to a 2021 American Community Survey (ACS) estimate released by the U.S. Census Bureau.

Add to this the impact of the Great Resignation, in which employees have voluntarily resigned from their jobs en masse, beginning in early 2021 in the wake of the COVID-19 pandemic. Among the most cited reasons for resigning are wage stagnation amid rising cost of living, limited opportunities for career advancement, hostile work environments, lack of benefits, inflexible remote-work policies and long-lasting job dissatisfaction. The reduced need for relocation removes a barrier, adding to the list of reasons for job switching.

At least half of the U.S. workforce is “quiet quitting,” according to Gallup. These workers are still fulfilling their basic job duties—but they’re no longer willing to put in extra (unpaid) hours, take on new duties or “step up" for the team.

Insurance claims organizations are facing high turnover rates while losing seasoned talent as the workforce ages. This talent drain is affecting claims across the board and has had a disproportionate impact on more complex claims, such as injury and attorney-represented cases. Insurers are prioritizing meaningful loss cost containment to offset these major headwinds.

See also: 5 Key Trends at ITC

Outsourcing 2.0 to the Rescue

Property & casualty insurers are reassessing their operational strategies, especially around cost management and workforce reductions and shortages, both voluntary and involuntary. Digitization and automation of claims processes is somewhat a modality of outsourcing, where customer self-services replace claim adjuster functions. Photo inspection and estimating with AI is just one, albeit significant, example. 

While technology and automation efforts are showing progress, there has not been enough to address increasing service demand. Outsourcing is a viable operational solution, but not in the way that we may remember it. Outsourcing is nothing new in the insurance industry. In fact, insurance has led the way in many respects, adopting and relying on vendor partners to address a wide variety of business tasks, processes and claim-related customer services over the past 20 years or more. These have included professional, IT, project, process and operational outsourcing, as well.

Whether you call it contracting or parceling out, subcontracting, consigning, relegating or handing over, a new paradigm, “Outsourcing 2.0” has suddenly become opportune for P&C carriers seeking to address the impact of all of these “new world” realities. Outsourcing 2.0 is deeper and broader reliance on a combination of technology and vendor partners spanning more sophisticated incumbents, newer and start-up companies alike. Today’s insurance ecosystem has advanced to deliver capabilities such as shared responsibility for managing loss costs via partnerships, which has traditionally been considered off limits or only performed with significant oversight by carriers. Outsourcing 2.0 is inspired by:

• The push toward automation of underwriting and claims processes, touchless, straight-through-processing
• Insurtech influences, in which insurance models are birthed digitally and thus offer digital native claims experiences but also rely on outsourced support
• A shift from protect-and-pay insurance to avoid, detect and resolve models, which are increasing demand for outsourced services
• The overall recognition of a need to make simpler, minor claims as easy as possible and a conscious choice to trade indemnity spending to curtail loss-adjustment expenses

Furthermore, insurance organizations that possess specific expertise in specific operational areas and that have learned the “secret” of attracting and retaining highly skilled talent in the face of the workforce transformation have realized the opportunity to offer these services to the marketplace as a new revenue center in an outsourcing model.

Leading Areas of Outsourcing Opportunity 

There are several specific areas of interest from carriers seeking to quickly lower operating costs while improving claim outcomes, including policyholder satisfaction across the entire claim process:

• Loss Intake; Apps, on-line tools, external contact centers, partner vendors (detect and report)
• Investigation; External SIU, records and clinical management, forensic data providers
• Evaluation; Virtual inspection tools, photo analysis, medical management, geospatial data and imagery, managed repair providers
• Negotiation; Litigation support services, vendor partner granted authority
• Finalization; Digital payments, external subrogation firms

Other forms of outsourcing include training and upskilling typically sourced and managed internally by carriers. And, on the cutting edge are examples such as digital claim platform providers, essentially managing all or most of the claim on behalf of carriers. While outsourcing of these core areas is not entirely new, the degree, scope and external reliance is expanding rapidly and is reshaping claim adjusting, especially in personal lines.

See also: What Drives Claims Outsourcing

Vendor Partner Selection

Selecting and managing vendors has always been an important decision for any carrier. Today, vendors are often viewed as partners, especially when it comes to security and privacy management or developing future-forward road maps. It’s no longer a buy-and-supply relationship for many providers and carriers alike. Forging partnerships have become a critically important strategy in business in general and specifically in effective cost containment, making partner selection more critical than ever.   

Changing Vendor Partner Marketplace

In addition to the shift from a vendor to partner relationship, the vendor space is changing, as well.  Venture capital-backed consolidation, advances in technology investments and growth due to carrier outsourcing are most pronounced.

Within the injury claim investigation and evaluation space there is consolidation among records management, investigation firms and medical management companies while many remain regional and state-specific.

Meanwhile, carriers are increasing their appetite to outsource, automate and provide more tools to adjusters. This coincides with the claim adjuster talent war and acceleration of retirements during the Great Resignation. However, insurers demand efficiency without sacrifice to claims management quality, namely the ability to manage loss costs effectively. Vendors capable of offering national or multi-regional coverage is a must have when competing for a carrier’s attendant geographic claim footprint. Procurement experts are focused on partnering with firms that match these priorities.

With advances in technology come the need for tighter controls, security and privacy. Vendors manage an array of private, personal identifiable information and sensitive data when it comes to legal, medical and claim investigation materials. The vendor partner of today must meet stringent compliance, cyber risk protection and business recovery requirements to compete. With new vendors, this stage of compliance can take months to review and satisfy.

Outsourcing has moved front and center as the industry transforms to manage today’s new realities. Partnerships with fully integrated national service and technology providers possessing deep expertise in claims management, training, contact center operations, medical, record and investigation management bolstered by powerful new technologies will be the hallmark of the insurance market leaders of the future.

Flooding is a global issue made worse continuously by climate change. Even areas that are seeing increased droughts caused by rising temperatures can see more flood risk because of reduced ground permeability.

Urbanization exacerbates the problem because the vast amounts of concrete used for roads, parking lots and developments greatly reduce permeable surface area, putting drainage infrastructure under significant strain.

Flooding is one of the most difficult natural disasters when it comes to making damage predictions, and damages are typically very high. Global flood losses reached $20 billion in 2021.

With just one inch of floodwater potentially causing up to $25,000 in damage, flood damages are generally not included in homeowners' insurance plans. Unfortunately, rather than an increase in the number of specialized flood insurance policies, there has been a 9% decline in FEMA policies over the last year from 5 million. This is due to an increase in the cost of insurance premiums for the millions living in potential flood zones, despite FEMA providing what was previously considered the low-cost alternative. 

With such significant opt-out rates for FEMA insurance policies, insurance companies are faced with a large number of uninsured potential customers, but they must be able to calculate risk accurately so that some properties can have reduced premiums.

An effective approach is to use AI to extract high-definition 3D property data from aerial imagery.

In the last decade, AI has become vital in the insurance sector. AI models are becoming increasingly effective in analyzing and processing insurance claims, especially in the case of natural catastrophes. 3D modeling of high-resolution aerial imagery gives the insurer rich and accurate data at scale. Visual data can accelerate the process of inspection, underwriting and claims, while simultaneously helping with risk prediction and preparedness. In some cases, due to the speed of automated analysis, it may be possible to identify risks and pre-emptively warn property owners so damage can be avoided entirely.

See also: Top Causes of Business Insurance Loss

Many insurers are using aerial imagery to support the underwriting process, especially when determining the condition of the roof, scanning for any potentially hazardous debris nearby or measuring the elevation of the ground around the property. In this way, they become more efficient, trim costs and are more able to offer affordable flood premiums.

Finding individual images of a specific property and analyzing them in person takes time and can limit the number of properties that can accurately be insured with up-to-date information. Therefore, implementing AI recognition with aerial imagery can significantly reduce the time required to create insurance products and vastly increase the number of properties that can be surveyed. With computer vision and machine learning, insurers can identify risk factors in all the images across a database and automatically categorize properties by their risk level. This is particularly useful given the high number of properties that are insured and reinsured for flood insurance. 

With AI taking the industry by storm, new aerial imaging capabilities are constantly being developed in the P&C space, meaning predicting and preventing loss is more accessible than ever. By using 3D property intelligence derived from aerial imagery, insurers can obtain more data points for more commercial and residential properties nationwide – for example by pinpointing impermeable urban areas in flood risk zones. Considering the complexity of the underwriting process, any company that still relies solely on governmental property records instead of using AI-derived property databases is significantly increasing the risk of using outdated information and making incorrect risk management decisions. From a cost-saving and a risk-averse perspective, using AI-derived  databases of aerial imagery is one of the best options for insurance companies to stay strong in high-risk markets like flood.

With the steeply increasing environmental pressures, insurers need to better protect their customers, improve business performance and differentiate by adding value beyond product. With the industry experiencing a rapid digital transformation, innovation is now cherished by insurers. Climate change may be outside the industry's control, but failure to respond to climate challenges and subsequent catastrophes like flooding is partly a result of the current insurance model. The solution is clear: The insurance industry needs to keep pace with the digitization of other industries. Additionally, insurance providers should take full advantage of the technologies that enable them to pinpoint complex risks, reducing the number of causalities and inevitably strengthening business performance.

The costs of long-term care (LTC) have skyrocketed in recent years, leaving much of the aging population unprepared to fund care or age at home. The average annual cost of a semi-private nursing home room is now over $93,000, and home health aides are upward of $50,000. When planning for retirement and aging, in general, it’s critical to expect the unexpected and factor in these costs or ways around it, like LTC insurance. 

When we think about aging at home, most people think about their kids being around to help or acting as caregivers. Except now, those kids aren’t having kids – 56% of Americans aged 18 to 49 don’t want to have children. As a result, as these generations age, there will be fewer caregiver options. It’s estimated that 50% of older adults will need long-term care at some point in their lives, yet only 7% of adults over 50 have an LTC policy. By investing in LTC insurance at a younger age, people have security available - no matter what level of support they may have as they age. That being said, finding an accessible insurance solution is not always easy.

Insurance is complex, and LTC insurance is no exception. Many pre-existing conditions like anxiety can disqualify people from consideration even if a person is otherwise healthy, so it’s important to look into programs that can help those individuals qualify for coverage down the road via preventative care. We have far more knowledge today about the significance of wellness as we age – knowledge that can paint a more accurate picture of the state of someone’s overall health beyond just one pre-existing condition.

For example, we now know that hearing loss can affect the chances of a person suffering from dementia later in life. We also better understand the importance of mobility, nutrition and cognition support as we age. What deems a person healthy and “low risk” has changed on the clinical side, but we have yet to find a way to properly incorporate that new information into insurance policies.

See also: We Need to Care for the Caregivers

On the carrier side, there is a wealth of unused data on aging populations that would make LTC coverage less risky and expensive to provide. Too often, the aging population is treated as a monolith; insurers don't look at the needs of different aging cohorts. The needs of a 90-year-old person in 2022 are vastly different from the needs of a 70-year-old, and the risk signals are, too. This perspective has contributed to a cycle that has made LTC extremely undesirable for carriers; there is not enough information about the populations being insured, so every policy issued has more risk than it needs to. 

Traditional risk signals such as death of a spouse and change of address combined with supplementary data like a person’s level of familial support, ability to use grocery or meal delivery services, access to online banking and more would help insurers better understand true risk. Having that holistic, 360-degree picture of health is important, especially as we age; those factors are often highly predictive of the likelihood someone will file a claim and the general success they would have aging in place. Giving carriers better insight into the changing needs of their policyholders means everyone wins. 

Aging has become financially unsustainable for all parties; life expectancy is getting higher, but care is getting more expensive. In an industry where everyone is currently losing, there’s a clear need for solutions that get to the root of the problem. Prioritizing wellness and properly using data offer myriad benefits for individuals and insurance providers. With the right tools, more people can enjoy the benefits of healthy aging.

It’s rumored that Facebook has approximately 52,000 data points for every user. That’s 52,000 different pieces of information that can be used to completely customize the user experience, from serving the right types of content to showing advertisements for products they’re most likely to buy. This data allows for a positive outcome for all stakeholders. The good news is, insurance companies don’t need nearly that many data points to benefit from the power of data.

The insurance industry is in the midst of a digital revolution. Words like "data" and "insurtech" seem to arise at every turn, but many of these solutions are complex and expensive to implement, leading to low adoption rates and huge missed opportunities for insurance companies. Unless you understand the benefits of data, these barriers don’t seem worth the battle to overcome.

While insurtech solutions can streamline insurance sales and claim management, they can also provide vast amounts of data that insurers can leverage in countless ways: to improve the customer experience, build brand loyalty and decrease loss adjustment expenses, to name a few.

Improving the customer experience

Imagine receiving a personalized message from your insurance company before an impending catastrophe advising you of the event, the best evacuation routes, where gasoline will be readily available and what the projected severity of damage to your property is? That would probably be something you’d tell your friends and neighbors about.

Policyholders want to feel like their insurance provider has their best interests in mind. While insurance refers to the contractual agreement of indemnification upon loss, the word "insurance" also refers to a means of guaranteeing protection and safety. 

With insurtech becoming more advanced by the day, there are solutions that can predict where damage will occur and how severe it will be with great accuracy. Insurers can partner with these insurtech firms to provide their policyholders with peace of mind before the storm and ensure their claim is handled successfully afterward.

See also: Underwriting Enters a New Age of Data

Building brand loyalty

Gone are the days of a birthday postcard from your dentist; you most likely get a nice ‘happy birthday’ email now. But did you ever consider that your birthday is a data point being leveraged by companies to improve your customer experience, increase conversion rates and promote brand loyalty?

While it may seem trivial, those small efforts go a long way toward building brand loyalty in consumers, and considering that 65% of consumers have cut ties with a brand after one bad customer experience, brand loyalty is extremely important. (SOURCE: Digiday)

Decreasing loss adjustment expense

Verisk found that P&C insurers experienced a 10% increase in loss adjustment expense (LAE) in the first quarter of 2022 alone. There are a lot of moving parts and stakeholders involved in the servicing of an insurance claim, and insurers are always working to keep loss adjustment expenses down. 

Unfortunately, that can be at a detriment to the policyholder at times. By collecting and leveraging the right data, insurers can reduce their LAE and increase their customer experience.

See also: Data-Driven Transformation

The future of insurance claims

Using geospatial technology and historical claim data, claim servicing firms can predict desk adjustments with high accuracy, reducing LAE and increasing speed to indemnification.

Some firms are benchmarking parametric insurance and looking to leverage data to instantly remit payments to policyholders who experience a loss and, depending on the surety of the data, before the loss even occurs under traditional insurance contract. By knowing where the catastrophe will occur and how severe the damage will be, insurance providers can help their customers start to rebuild faster than ever.

Not only do these technologies predict events, they can also learn from past storms and provide data that can be leveraged to provide accurate peril coverage to policyholders.

By looking at historical data, insurers can identify the location and frequency of perils such as tornado, hail and flood and review existing policies to ensure that their customers have the appropriate coverage before they experience a loss.

Data doesn’t have to be complex. Something as simple as the policyholder’s first name or birthday can be an extremely useful data point that insurers can leverage to increase conversions and build brand loyalty. In fact, personalization of the subject line in emails can yield an open rate of up to 50% (the average being less than 18%). 

Qualitative data is often overlooked by both insurance and insurtech companies alike, as it is more difficult to measure and interpret. But it can be just as valuable as quantitative data and sometimes even more so. A customer satisfaction survey sent after a claim can help insurers identify opportunities for improvement, find weak spots in their claim workflow and even spotlight exceptional employee behavior. This can be a great starting point for insurers looking to start using the power of data.

Contingent business interruption (CBI) claims reached a new level over the past year, with the number of claims far in excess of recent years. The sharp increase exemplified the growing interdependence and complexity of corporate supply chains, which were hit by a combination of pandemic-related disruptions, extreme weather and, more recently, Russia’s invasion of Ukraine. The automotive industry alone saw several CBI events during this period.

In February 2021, the Texas Big Freeze in the U.S. caused massive disruption to infrastructure, with many companies forced into temporary shutdowns by widespread power outages. Record freezing temperatures caused by Winter Storm Uri had cascading effects on companies and services reliant on power, including water, transport and medical services. The event is estimated to have caused economic losses up to $155 billion, while Uri caused $15 billion in insured losses nationwide.

Less than a month later, a fire at a semiconductor plant in Japan added to the growing global shortage of microprocessors, sending a ripple effect through global supply chains, hitting production in the automotive and electronics industries. The automotive sector was again hit with supply chain problems from the conflict in Ukraine, with the country being an important supplier of parts.

Opaque and complex exposures

Global supply chains have created opaque and complex exposures in recent years, with many companies having been reliant on a small number of key suppliers for materials, parts and services. The connectivity of supply chains results in more CBI exposures and can have a substantial impact on various industries, sometimes in excess of $1 billion.

Fires, natural catastrophes, cyber-attacks and conflicts have added to existing strains on supply chains caused by the COVID-19 pandemic, with shutdowns at manufacturing plants and ports in China, delays to shipping and labor shortages. The Texas Big Freeze, in particular, led to a number of large CBI claims that AGCS was involved with, as companies took several months to ramp up production following initial power outages.

The number of claims from this event and the large loss in the semiconductor manufacturing sector more than tripled the number of CBI claims in the previous three years – overall CBI claims have increased in number year-on-year for the past five years.

The corporate world is now so connected and complex, businesses rely on each other for goods, services and infrastructure. Underwriters need to understand accumulations of exposures within corporate distribution and value chains, as well as the impact of disruption and actions taken to mitigate them.

See also: Top Causes of Business Insurance Loss

Average BI claim value rising

Costs associated with the impact of business interruption (BI) following the aftermath of a loss event can significantly add to the final bill from any incident. The average BI property insurance claim now totals in excess of €3.8 million based on analysis of 2,379 relevant insurance industry claims notified between Jan. 1, 2017 and Dec. 31, 2021. This is compared with €3.1 million over a previous five-year analysis period ending in 2017.

For large claims (>€5 million), the average property insurance claim that includes a BI component is more than double that of the average property damage claim. Many expect property and BI claims to become even more expensive in the future given the consequences of recent sharp increases in inflation around the world. The rising cost of rebuilds, repairs and labor, together with potential shortages of materials and longer delivery times and waiting periods, could all further inflate BI values.

On Nov. 1, CMS (the federal Centers for Medicare and Medicaid Services) released its heavily anticipated 2023 Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center (ASC) Payment System Final Rule, after receipt of extensive public comment received by the agency in response to its draft proposal, which was issued back in July.  Although the final rule will become effective on Jan. 1, the agency will continue to receive public comment on the finalized draft for 60 days following its Nov. 1 publication date.  A detailed fact sheet is available from CMS for review. The entire 1,764-page finalized rule text (with instructions for providing public comment) is also available for review. 

Although many of the provisions contained in the November Final Rule mimic the proposals outlined in the July Proposed Rule, there are several significant modifications. The following sections provide an overview of some of the more salient provisions, as well as discuss their potential impacts on the workers’ compensation sector.

Outpatient Hospitals Will Receive a Net 3.8% Overall Rate Increase 

In the July Proposed Rule, CMS indicated its intention to put forth a proposed overall rate increase of 2.7%, reflecting a 3.1% projected hospital market basket percentage increase, reduced by a 0.4 percentage point productivity adjustment. The final rule outlines a much steeper overall increase rate of 3.8%, reflecting a projected hospital market basket percentage increase of 4.1%, reduced by 0.3 percentage point for the productivity adjustment. With workers’ compensation systems in 18 states at least partially relying on Medicare/CMS for reimbursement rates, coupled with an additional four states plus the District of Columbia (as of March 4, 2021) that essentially rely solely on Medicare as a basis for reimbursement, this 3.8% net overall increase will be felt in the workers’ compensation sector. However, considering that the U.S. overall inflation rate stood at 8.2% for the 12 months ending September 2022, it is unsurprising that the American Hospital Association (AHA) referred to the 3.8% overall increase as “insufficient given the extraordinary cost pressures hospitals face.”

A New Facility Type of 'Rural Emergency Hospitals' Will Be Established 

The 2023 Final Rule will now designate “Rural Emergency Hospitals” (REHs) as a new provider type for eligible critical access hospitals and small rural hospitals. The payment model was originally introduced conceptually in 2021 in the Consolidated Appropriations Act. The OPPS 2023 Final Rule solidified the proposed payment model, covered services, conditions of participation and quality measurements for REHs. Creation of the provider type was designed to help Critical Access Hospitals (CAHs) and small rural hospitals to avoid closures and preserve care access in underserved and rural areas. Details on the new REH provider type can be viewed in the CMS REH fact sheet. 

See also: The Key to Cutting Workers' Comp Costs

Facility-to-Outpatient Behavioral Health Services Will Continue Indefinitely 

On Oct. 13, the U.S. Department of Health & Human Services (HHS) opted to extend the Public Health Emergency (PHE) that has been in place since Jan. 31, 2020, for an additional (and widely anticipated, FINAL) 90-day period, to Jan. 11, 2023. Since the onset of the pandemic, several emergency public policies have been in place, including several provisions expanding the availability of telehealth services. One PHE provision, relevant to outpatient facilities, provides Medicare reimbursement coverage for behavioral health services furnished from an outpatient facility to beneficiaries in their homes.   

On March 15, President Biden signed the $1.5 trillion Omnibus Spending Bill, which contained a provision that extends the PHE telehealth flexibilities to 151 days (approximately five months) after the expiration of the PHE. With the current looming PHE expiration date of Jan. 11, that would mean that all PHE-related telehealth provisions (including the outpatient clinician-to-home-based-patient extension), would suddenly end on June 11, reverting back to Medicare’s original, 2019 restrictive rules for the delivery of healthcare by telemedicine. Telemedicine advocates have referred to this sudden expiration as the “telehealth cliff.”

Telehealth Cliff Timeline

In an attempt to mitigate the “telehealth cliff,” the OPPS 2023 Final Rule contains language that extends the coverage for outpatient facility-to-home-based beneficiaries indefinitely for behavioral health services, with a few important restrictions. First, the facility must have seen the beneficiary in person sometime in the six months preceding the telemedicine behavioral health visit (for new behavioral health relationships). Secondly, there must be an in-person service without the use of communications technology within 12 months of each behavioral health service furnished remotely by hospital clinical staff (for continuing behavioral health relationships). An exception is built in for situations where both the outpatient clinician and the beneficiary agree that the benefits of an in-person visit are outweighed by the risks.  

Furthermore, the rule clarifies that if a clinical relationship existed between the beneficiary and the outpatient facility at the time the PHE ends, only the 12-month, "continuing" in-person requirement applies, and not the six-month “new” restriction. Finally, the rule addresses audio-only services, permitting their use “…where the beneficiary is unable to use, does not wish to use, or does not have access to two-way, audio/video technology.” The audio-only flexibility has been included to help “…advance equity, since many rural and underserved communities lack stable access to broadband services, making two-way, audio/visual communication difficult.”

From a workers’ compensation perspective, states that have strictly adopted Medicare payment policies will theoretically apply these same restrictions to behavioral health telehealth services furnished to injured workers. Careful coordination between providers and injured workers will be necessary to document consent to waive in-person visits, as well as agreements to use audio-only visits, to help facilitate reimbursement.

See also: Will Medical Inflation Hit Workers' Comp?

Prior Authorization Required for Facet Joint Interventions 

Of particular interest to workers’ compensation stakeholders is a new requirement in the OPPS 2023 Final Rule for facet joint interventions to require specific pre-authorization to be reimbursable. In recent years, HHS and CMS have sought to endorse non-opioid-based treatment regimens for chronic and acute pain management. An HHS report released in December 2020 noted, “Given concerns regarding opioids, non-opioid pharmacologic and non-pharmacologic therapies hold promise and have become increasingly accepted as first-line therapies…[and] interventional approaches [are] an important nonpharmacologic option. Data indicates that interventional procedures are frequently used in this population (~5 million procedures annually in Medicare fee-for-service).”

The 2023 Final OPPS Rule has adopted an entirely new service category to encompass these interventional pain management services, named the “Facet Joint Interventions Service Category.” Facet joint injections, medial branch blocks and facet joint nerve destruction procedures are all covered by the new service category. The decision by CMS to require prior authorization for services has been driven by an explosive growth in the number of services billed in this category. For example, a 47% growth rate overall was observed for facet joint interventions from 2012 to 2021, reflecting a 4% average annual increase, contrasted with a 0.6% annual increase observed in overall outpatient services. As outlined in the Final Rule, “for the facet joint injection and medial branch block services… [CMS] observed an increase of 27% between 2012 and 2021, reflecting a 2.5% average annual increase. For the nerve destruction services…we observed an increase in volume of 102% between 2012 and 2021, which was an average annual increase of 7%. Both the facet joint injections/medial branch block Current Procedural Terminology (CPT) codes and nerve destruction CPT codes, with 2.5 and 7 percent annual increases, respectively, demonstrated higher average annual increases in claim submissions between 2012 and 2021 than the 0.6 percent annual increase for all Outpatient Department (OPD) services over the same time period.” 

Unfortunately, along with the explosive growth in appropriate use and billing of these procedures, a sharp uptick in fraudulent usage and billing has also been observed. The OPPS Final Rule cited several HHS Office of Inspector General (OIG) reports finding “questionable billing practices, improper Medicare payments and questionable utilization of facet joint interventions.” OIG noted that the improper payments occurred because of inadequate oversight on the part of CMS for these procedures. For example, in March 2022, the Department of Justice reported on a $250 million healthcare fraud scheme that took place from 2007 to 2018 involving physicians from multiple states who allegedly subjected their patients to medically unnecessary facet joint injections to obtain illegal prescriptions for opioids. The physicians required the patients to receive facet joint injections due to their high reimbursement rates [from CMS].  

In the July 2023 OPPS Proposed Rule, CMS indicated that it would begin requiring pre-authorization for all services in the Facet Joint Interventions Category for dates of service beginning March 1, 2023. After receipt of significant public comment, in the final rule, the pre-authorization requirement start date was moved back to July 1, 2023.  

As with the telemedicine policies outlined above, states that strictly adopt Medicare payment policies for workers’ compensation may now enforce pre-authorization requirements for facet joint intervention procedures. Use of procedures in this category is not uncommon in the workers’ compensation space, although medical opinions as to their efficacy vary.  

2023 Changes to the Inpatient-Only List; ASC Covered Procedure List 

The OPPS “Inpatient-Only List” (IPO) is a list of procedures that CMS has determined are only appropriately performed in an inpatient setting (and will not be reimbursable if performed in an outpatient setting). When CMS resumed use of the inpatient-only list after a brief hiatus in 2021, the agency decided to reevaluate procedures on an annual basis to determine which CPTs, if any, could appropriately be performed in an outpatient setting, using the following criteria:

1. Most outpatient departments are equipped to provide the services to the Medicare population. 
2. The simplest procedure described by the code may be performed in most outpatient departments. 
3. The procedure is related to codes that we have already removed from the IPO list. 
4. A determination is made that the procedure is being performed in numerous hospitals on an outpatient basis. 
5. A determination is made that the procedure can be appropriately and safely performed in an ASC and is on the list of approved ASC procedures or has been proposed by us for addition to the ASC list.

CMS does not require that a proposed procedure meet all five criteria to qualify for removal – in fact, meeting only one of the criteria may suffice. However, the greater the number of criteria met, the greater the chance that CMS will consider the CPT appropriate for removal.

In the 2023 OPPS Proposed Rule, CMS had originally identified 10 CPTs for consideration for removal from the IPO List (16036, 22632, 21141, 21142, 21143, 21194, 21196, 21347, 21366 and 21422). The majority of these codes were maxillofacial orthopedic procedures (which may have applicability to workers’ compensation).  

After additional consideration and receipt of public comment, CMS settled on the following in the 2023 Final Rule:

CPT 16036 (relating to local treatment of burns) was originally characterized as an “add on” code (used with another primary procedure 16035, which was removed from the IPO in 2007) and was originally proposed to be moved to a status code of “N” (bundled/not separately payable). On reflection, CMS decided NOT to move it off the IPO.

Similarly, CPT 22632 (relating to additional interspace treatments in a spinal fusion) was also characterized as an “add on” code (usually billed with 22630, removed from the IPO in 2021) and was originally proposed to be moved to a status code of “N." CMS finalized that recommendation.

By contrast, all of the originally proposed maxillofacial procedures have been finalized for removal from the IPO list (CPT codes 21141, 21142, 21143, 21194, 21196, 21347, 21366 and 21422). All these have been moved to Status Indicator “J1,” which indicates that they are reimbursable in an outpatient setting. From a workers’ compensation perspective, these codes are not commonly seen but are occasionally used. All of them are listed under the heading of “Orthopedics” in the general category of “Repair, Revision and Reconstruction,” except the latter three, which are in the “Fracture and/or Dislocation” subcategory.

Two additional changes were made in the OPPS 2023 Final Rule that were not included in the July Proposed Rule: 

1. CPT code 47550 (Endoscopy) has been moved to status indicator “N” for 2023 after receipt of public comment that it is a typical add-on code to a code in the range of CPT 47553 through 47541, all of which have already been removed from the IPO.
2. CPT code 21255 (an additional maxillofacial code) was moved to status indicator “J1” after receipt of public comment and is now payable in an outpatient setting.

Lastly, as medicine advances, the American Medical Association (AMA) continues to propose additional CPT codes to describe emerging technologies. Eight such new codes will be added to the IPO effective Jan. 1, 2023 (CPT codes 15778, 22860, 49596, 49616, 49617, 49618, 49621 and 49622).  

With respect to the ASCs, CMS originally proposed to add only one procedure to the ASC Covered Procedures list in its July 2023 OPPS Proposed Rule – CPT 38531. However, after receipt of significant public comment, where 64 different procedures had been submitted by various commentators for consideration to be added to the list, CMS settled on adding four additional CPTs to the list (19307, 37193, 38531 and 43774) from the OPPS Final Rule. None of the codes are commonly used in workers’ compensation.