The flash flooding in Texas over the weekend and into Monday crystallizes a concern that has increasingly troubled climate scientists, something that might be called "super rain." 

The issue is partly the sheer amount of rain that can fall in a single storm because global warming lets summer air carry much more moisture. Even more, the issue is how fast that rain can fall. The flooding in Texas, for instance, occurred not just because more than 15 inches of rain fell in parts of Dallas in a 24-hour period on Sunday and Monday (more than two summers' worth of rain) but because three inches of that rain fell in a single hour on Sunday -- almost half a summer's worth of rain, just like that.

Hotter weather exacerbates the problem by baking the ground, creating conditions where more water runs off rather than being absorbed. Wildfires increasingly expose more ground to the effects of that hotter weather. And, as cities grow, they pave over more ground that could absorb rain, yet sewer systems haven't been upgraded.  

Sounds like a job for insurance, right? By pricing the growing risk accurately, insurers can send important signals to policyholders, and risk managers can counsel cities, business and individuals about how to better protect their properties against "super rain." 

“The infrastructure we have is really built for a climate we are not living in anymore,” said Andreas Prein, a scientist at the National Center for Atmospheric Research (NCAR) who studies extreme precipitation.

The Washington Post article that quoted Prein also said that "an analysis of weather data by the nonprofit group Climate Central found that nearly three-quarters of locations the group examined around the country have experienced an increase in the amount of rain falling on their annual wettest day since 1950 — particularly along the Gulf Coast and Mid-Atlantic. The numbers show that 2021 was a record-setting year for extreme rainfall events, with dozens of places logging their wettest day in generations."

"Super rain" exacerbated the flash flooding late last month in eastern Kentucky and St. Louis. The Washington Post reported:

“'What happened was way more than the system — any system — can handle,' Sean Hadley, spokesman for the Metropolitan St. Louis Sewer District, said of the recent storms that dumped more than 9 inches of rain there in a matter of hours, shattering the previous daily record from 1915.

"The record-crushing rain in St. Louis inundated storm drains and creeks. Sewage backed up into homes. The River des Peres swelled beyond its banks. The area’s sprawling drainage systems, parts of which date to the 19th century, were quickly overwhelmed.

“'It was just too much water,' Hadley said."

The article added:

"The problem of more frequent and extreme precipitation is not only national but also global. Europe saw deadly flooding after severe rains last summer. Parts of Australia have endured tremendous rainfall in recent days, putting Sydney on track for its wettest year on record. Parts of China have experienced devastating floods this summer, fueled by rainfall that, at least in one area, dumped 3.3 inches in a single hour."

A CNN article says the flooding in Texas occurred partly because of what it calls "flash drought." The state had suffered from its second-longest drought since weather records began to be kept in the late 1800s, then, whoosh, the rock-hard ground gets hammered by a massive rain storm.

Even Texas' cherished football fields fell victim. The picture below is from the SMU stadium, where that artificial turf is going to need some work.

The CNN article adds: "A larger share of precipitation in recent years has come during 'intense single-day events,' and the likelihood of sudden shifts from severe drought to heavy rain will become more common on a warming planet, scientists say. Indeed, nine of the top 10 years for extreme one-day precipitation events have occurred since 1996."

A problem as large and complex as "super rain" won't be easy to address. Cities will have to update their sewer systems and rethink how water runs off after a storm -- some cities have begun removing pavement in certain areas and are experimenting with other ways to have land soak up water in a storm. Weather forecasting will need to continue to improve, so businesses and people get more warning and can get valuable assets -- including themselves -- out of harm's way. 

But insurers can play a leading role. They can identify areas that are becoming increasingly vulnerable and, through pricing, signal the dangers to those who work or live there or are considering doing so. Insurers can also continue the steady -- but too slow -- progress on flood models to identify dangers. Many areas that haven't been designated as in flood plains are, we're learning, actually vulnerable, and models can incorporate much more information about elevation than they have historically -- if your house and mine are both in a high-risk area, but your house is built on ground just 15 feet higher than mine, you're in much better shape. 

Insurers, sometimes in concert with governments, can also counsel businesses and individuals about how to harden their properties against flooding threats, including those from "super rain." In addition, insurers can set up systems to warn clients of approaching weather dangers, as some auto insurers have begun to do when hail is possible. 

In a small first step, FM Global said recently that it will provide a 5% reduction in annual premium to policyholders to encourage them to better protect their property against wildfire, floods, hurricanes and other risks. The company estimates that the credits will total $300 million.

Others will, I hope, also experiment with ways to encourage prevention and protection. It'll always be a losing proposition when two summers' worth of rain hits you in a 24-hour period, a fifth of that in a single hour, but the problem figures to just keep getting worse, so we need to start tackling it.

Cheers,

Paul 

Climate change poses the most significant set of risks ever facing humanity. Here are a few facts to consider:

• The hottest decade in 125,000 years was 2010-2020.
• Atmospheric CO2 is at the highest level in 2 million years.
• 1.2 trillion tons of sea ice are melting annually, and the melting is accelerating.
• As temperatures rise, we are approaching a tipping point where the oceans, which have been absorbing CO2 emissions for over a century, will begin to release CO2, accelerating the impacts of climate change. 
• The impacts of climate change are resulting in serial multibillion-dollar catastrophe losses.  

Although there is a lot of discussion about the industry’s heroic response to the threats associated with climate change, we argue that the aggregate industry response is underwhelming. Some facts that support this point of view:

• There is a $1.4 trillion protection gap that is growing. I.e., the industry is competing for the easy risks and relying on individuals and the public sector to underwrite the difficult risks. 
• Finance and insurance together represent about 8% of U.S. GDP but only 1.7% of U.S. domestic R&D. 
• Although insurtech investment has increased dramatically in recent decades, only 10% of it is going toward product development, and only a small percentage of that is going toward building climate risk-relevant products. According to McKinsey, the result is that “[Premium] growth is coming from price increases rather than from volume or new risks covered, highlighting a risk that the industry might lose its relevance over time.”

It is undeniable that the industry in aggregate is retreating from risk, at a time when society needs it to run toward the most severe risks that threaten us. That is the definition of a market failure. The industry has a unique set of capabilities that could and must be fully deployed. 

The industry can and should invest in developing climate risk relevant products and services that enable it to meet the needs of customers. Specifically, the industry should invest in insurance products and services that will accelerate the transition to a low-carbon economy, encourage investments into resilient infrastructure and close the protection gap.

Paradigm Shifts

Running toward risk requires new capabilities and a new mindset. We think the following six areas provide opportunities for the sector to fundamentally change its approach and assumptions. We also think that these paradigm shifts present opportunities to both be successful from a business perspective and do good for society. 

Better Analyze and Communicate Risks

The industry needs better analytic tools for projecting risk-related costs three to 20-plus years into the future, factoring in changes in climate and resilience. These tools need to be applied in ways that benefit policyholders, not just to manage risk to carrier balance sheets. This approach must include providing climate risk-related insights to smaller, less sophisticated policyholders and to vulnerable populations.     

Although the industry needs new capabilities, the industry already has extensive risk-modeling capabilities that could better support the critical decisions policyholders are making today. The industry underestimates the value that policyholders, especially smaller and less sophisticated policyholders, can get from already available analytical approaches that are largely not made available to policyholders.  

Increase Price Transparency

Insurance pricing quantifies and signals how climate risks cascade down to individual policyholders. Unfortunately, insurance pricing is affected as much by other forces like market cycles and individual company competitive postures, which dilute the risk-signaling role that insurance prices should have. The biggest obstacle to price transparency is the combination of one-year policy terms, an overreliance on engineering policy language to avoid risks and marketing campaigns that focus on price but ignore risk.  This combination of tactics distorts policyholder understanding of their own risk and breeds distrust with the public when their losses end up not being covered. 

Increased price transparency will enable policyholders to better understand their risk and make better risk management decisions, including the buying of insurance. Customers will make better decisions if they start with a clear understanding of their total cost of risk over a long time horizon. The insurance industry is in the best position to communicate and help policyholders understand their risk. Efforts to do so will create true and trusted partner relationships with policyholders. 

See also: Time to Move Climate Risk Center-Stage

Expand Appetite for and Understanding of Complex and Cascading Risks

The scope and nature of risk is increasingly complex and connected, creating cascading loss events that are difficult to understand and underwrite. That doesn’t make them any less significant to policyholders. The industry needs to invest in better understanding complex systems. This will require moving beyond traditional actuarial modeling toward more significant investments into scenario planning using highly sophisticated digital twin technologies that capture second- and third-order interdependencies. 

Support Community-based Solutions

Asset-specific risk assessment and underwriting ignores the complex connection issues and also puts the most vulnerable communities at risk of being left behind when it comes to getting insurance. The industry should be working with the public sector to figure out how to deliver solutions to whole communities in a way that leaves no stakeholders behind. Insurance carriers need to be building these capabilities now on their own terms, before governments and regulators force it upon them.

Promote Loss Prevention and Mitigation

The size and scope of climate risk is not transferable without investments in prevention and mitigation. All of the above paradigm shifts are designed to position the industry to better support loss prevention and mitigation. We believe that climate risk will require more carriers to make loss prevention and mitigation a strategic capability. Companies like FM Global and a number of technology-driven startups are leading the way. 

Companies will also need to more seriously consider how asset-side investments into resilient infrastructure can deliver indirect returns through better insurance underwriting results. It is not enough to just lobby the public sector to invest more into resilient infrastructure.  

Increase Outside Capital

The growth of ILS, catastrophe bonds and other forms of alternative risk capital have been tremendous over the past few decades. Regardless, the scope and nature of climate risks will require much more and different capital going forward. Mission-driven and non-risk-correlated capital providers, including public sector grant funding, can tolerate risks that are less palatable to traditional insurance providers. High-risk-correlated capital providers such as associations of carbon-intensive industries could invest capital that provides multiple return streams by mitigating losses to the collective. Traditional capital providers that are innovative will create opportunities for their own business models by helping non-traditional players to better understand risk and deploy capital more efficiently.  

Running Toward Risk

The industry has a long history of boldly leading the response to emerging risks, including the introduction of trans-global shipping in the 1600s, industrialization in the mid-1800s and electrification and the aerospace industry in the early 1900s. It’s time for the industry to step up on climate change. 

There is no doubt that climate risks may challenge the solvency of companies and maybe even the sector. It will also challenge the very fabric of society and potentially the existence of the planet as we know it.  Remaining solvent and generating profits, although important, are neither sufficient nor praiseworthy ambitions for a sector that exists solely to respond to risk. The industry should take bold steps to close the protection gap, accelerate the transition to a low-carbon economy and deliver security to the communities that are most vulnerable and least capable to respond to the impacts of climate change. Doing this will require significantly higher levels of R&D than most of the industry is used to. 

The companies that rise to meet these challenges will be greatly rewarded with less competition, customer recognition and regulatory favor. The winners of future market share will not be focused on how to avoid risk, they will be running toward risk with skill and confidence. 

As a driven entrepreneur, you will encounter challenges and rewards far beyond the average employee’s. Navigating these ups and downs can be as challenging as steering a ship through a storm on the high seas, but I’ve done both—and lived to tell it can be done.

Most entrepreneurs don’t just want to be entrepreneurs—they have to be entrepreneurs.

The lessons I learned sailing the seas have served me just as well on land. Here are seven tips about entrepreneurship that sailing has taught me:

1. Know the terminology

In sailing, understanding boating terms like aft, starboard and leeward is vital to working with your crew and operating your vessel. The same is true in business. If you can’t speak the language of your clients and your competition, your next deal may get lost in translation.

Attending conferences and taking courses are both great ways to learn new terms and highlight that there’s a reason why you’re the expert.

2. Know the destination

The captain and crew must know the final destination when sailing. Without a final destination and key waypoints, the team won’t know where the ship is going, and you’ll risk getting lost at sea. Scan the sailing route to port, starboard and ahead. Look for rocks, wrecks and lobster pots. There are always obstacles!

Similarly, a business leader must have a vision of what their business is all about: what it does, how it serves its stakeholders and where it is going. Moreover, a business leader must articulate this vision to inspire the team to work together toward a common goal.

3. Use trends like the wind

When sailing, jibing and tacking help you manipulate the winds to steer your vessel in the right direction. In business, trends are your winds, and you need to understand which direction they’re heading. Take a few minutes daily and bring yourself up to speed on the latest global and local trends.

Aggregators like Feedly or SmartNews, along with social media feeds, keep you on the cutting edge and aware of which way the wind is blowing.

4. Learn when to tighten or ease the sheet

The sheet is a line or rope used to adjust a sail against a force of wind. In business, you need to consider when to tighten or loosen your budget and your business’ growth in line with your sales cycle and market forces.

Markets ebb and flow, and your business will, too. Tracking these fluctuations over time will help inform the ideal time to launch marketing campaigns and hire employees or tighten the purse strings.

See also: The Evolution of Leadership Intelligence

5. Adjust quickly and wisely to a changing climate

The weather can change instantly when you’re sailing, and you need to know how to use the sails to compensate, navigate under harsh conditions and capitalize on whatever is thrown at you. It’s not much different when you’re a business leader.

Like the weather, business is constantly moving and changing. Whether you’re steering your ship at sea or driving your business on land, it takes experience and, at times, raw courage to weather the storm. So, see each storm as a chance to gain experience for the next one and know that sometimes you simply need to batten down the hatches – and wait it out.

6. Take care of your crew

As captain, you must take care of your crew and ensure there’s adequate food, water, sunscreen and other resources. Additionally, it’s the captain’s responsibility to intervene if crew members create a toxic environment or make others feel uncomfortable. When we win, we win together, and we always celebrate our successes.

Just like in business, leaders must maintain a safe and secure work environment, treat everyone with respect and dignity, create an atmosphere of empowerment and creativity to build confidence and self-esteem and permit them to grow in a way that gives meaning and purpose to their lives.

Whether in business or sailing, leaders must value each member as someone who keeps the boat sailing toward its intended objective.

7. Be decisive

It can take an entire crew to run a sailboat, but they won’t work effectively without a captain calling the shots. The crew relies on your vision, tenacity and experience to guide their actions. Without this direction, no one will know which way to travel.

As the captain of a ship or a business, you spend your days adjusting your sails, guiding the crew and navigating dangerous waters.

8.  Surprise

Yes, I said seven things… but as a sailor you always have a surprise or two thrown in. In February 2020, I was part of a multi-hull race crew, and we were practicing a few miles off St. Maarten when our catamaran de-masted. Fortunately, no one was injured, but we had a critical situation that none of us had experienced before. We made sure all were safe, came together, dragged the mast and the sails back on board and limped back to port to sail another day. When I got home, the following month we learned of COVID and the pandemic and had to change how we did business.

Be prepared for surprises. Keep your life jackets handy.

If you’re on the verge of starting a business or taking it in a new direction – always keep your hands on the helm and remember:

The pessimist complains about the wind.

The optimist expects it to change.

The leader trims the sails and sets a new course.

Extreme weather and a challenging insurance market are taking a toll on homeowners. 

The potential for fires, hurricanes and floods makes them feel very vulnerable when it comes to safeguarding their homes and to getting and retaining insurance at a reasonable premium, according to the Private Risk Management Association 2022 Outlook Survey (PRMA). The survey analyzed responses from 145 PRMA insurance agents and brokers representing 30,000 high-net-worth clients. The results give us insight into the mindset of clients and the stressors keeping them awake at night.  

Breaking Down the Data

Based on the data, there may be many more sleepless nights ahead. Extreme weather and climate-related events are becoming more prevalent and more costly. During the last five years, there were 89 weather and climate disasters in the U.S., causing $788 billion in damage, according to the National Oceanic and Atmospheric Administration. In 2022 so far, there have been nine events with losses exceeding $1 billion each. These extreme scenarios have had a devastating financial impact on insurers and homeowners. In some regions, the cost of coverage has increased by double digits. In markets such as Florida and California, concerns about whether coverage will be affordable and available weigh heavily on homeowners’ minds. According to the PRMA Outlook survey: 

• 78% of PRMA agents nationwide believe their clients are worried about the ability to get and retain coverage at a reasonable premium. 
• Nearly 62% say that the potential for catastrophic weather (hurricanes, floods, fires) makes their clients feel vulnerable.

See also: Extreme Weather, COVID, Home Claims

Ensuring Insurability: What Homeowners Can Do

As troubled as homeowners are by the thought of losing coverage, retaining it may rest in their hands. Risk management professionals must diligently work with their clients to educate them about steps to protect their homes better and ensure their homes’ insurability. Many factors can go into fortifying a home and protecting our families, but let’s focus on several practical steps.

1. Manage Risk. While so much is out of our control with weather, there is still so much within our control when it comes to safeguarding our homes. Regardless of location, all homeowners should consider:

• Creating a personal preparedness plan to secure their homes and protect their families. 
• Installing a leak detection system within the home to avoid water damage, which is one of the most common causes of claims. 
• Making sure there’s a properly installed and working sump pump, regardless of whether homeowners are in a flood zone.
• Taking other measures that depend on the homeowner’s location, such as landscaping maintenance. Trimming branches that hang over the home can prevent damage during a big storm or even help prevent the spread of fire.
• Upgrading windows and doors to impact-resistant or fire-resistant material.   

2. Work With an Insurance Professional. An insurance professional can advise homeowners by asking the right questions to ensure adequate coverage. We recommend meeting with your insurance adviser at least once a year. Be prepared to answer questions such as: 

• If your home suffered a total loss, how would you like it rebuilt?
• What recent renovations have been done to your home?
• With the increase in supplies and inflation, how much are you willing to pay out of pocket to repair your home?

3. Bring the Right People to the Table. Over half of risk managers believe clients do not have a good understanding of the importance of having the right people at the table, especially during a major construction project. However, insurance agents and carriers have learned a lot through the number of claims they have seen. The benefit of having them collaborate with a contractor before a construction project is critical to help minimize risks related to several factors such as security, water damage and fire safety. These mitigation techniques are easier to implement during the building process rather than after construction. 
4. Awareness of Other Exposures. With our PRMA membership seeing about a third of clients venturing into sharing economy activities, such as renting their swimming pools, cars, tennis courts or land, clients are often unaware of their unique exposures. This is another opportunity for families to communicate with their children and insurance adviser on how participating in such activities can affect their insurability. 

Homeowners do not have to become experts on any of these steps, but the more they communicate with an insurance professional they trust, the more likely they are to be prepared. And while insurers are there to guide them, it’s up to every homeowner to implement measures that reduce their risk and the possibility of losing coverage. 

Although insurers have been dealing with fraud since the dawn of the industry, digital transformation has led to new fraud-fighting challenges — with authentication often at the top of the list. How do insurers confirm that people using electronic payment platforms or digital claims management tools are really who they say they are? 

Criminals’ increasingly easy access to consumers’ personal information, thanks to near-constant data breaches and widespread social media use, has led many organizations to move from relying exclusively on traditional knowledge-based authentication (such as user names and passwords for online channels, or challenge questions in the call center) to multifactor authentication that includes sending a one-time passcode (OTP) via SMS to the user’s mobile phone.

But security experts warn that the growing number of increasingly sophisticated attacks against consumer phones — via malware, man-in-the-middle schemes, phishing, SMS rerouting, SIM card swaps, call forwarding and other techniques — are reducing the reliability of OTPs as a means of protecting against fraud. 

Mobile fraud on the rise

A recent Forrester survey of 300 North American fraud prevention decision-makers indicates that phone-related fraud is pervasive, with virtually every respondent confirming that their organization had experienced some type of mobile fraud in the past year. SMS OTP hijacking was recognized as one of the most common types of mobile fraud, but many organizations also stated that they lack the tools to effectively detect these attacks, suggesting that the real scale of the problem is significantly underreported. 

OTP fraud gives criminals access to the customer accounts of insurers, which in addition to compromising a customer’s personal information (a particularly serious infraction in the case of health information) can lead to account takeovers and submission of fraudulent claims.

It’s a serious concern, but the insurance industry hasn’t adopted a convincing substitute. Common alternatives to mobile OTP authentication, including sending OTPs to email addresses or soliciting phone numbers from customers, degrade the customer experience and create additional fraud vulnerabilities, according to the Forrester survey.

Consumer email addresses are susceptible to poor password hygiene, and bad actors may simply provide their own alternative phone numbers when given the opportunity. Adopting more stringent authentication measures presents their own challenges, making it difficult for customers to file claims and receive support from an insurer when they need it most. The additional vetting required from agents and the frustration caused to customers hurts both the brand reputation and the bottom line.

That’s why most companies still rely on OTP authentication; more than 70% of survey respondents said that the technology is user-friendly and that customers perceive it to be secure. Any additional security measures must meet these criteria to avoid damaging the customer experience. 

The majority of survey participants are therefore looking for technologies that can work unobtrusively to flag potential fraudsters before an OTP is sent to a customer device. They rate the following capabilities as either mission-critical or important: identifying high-risk phone numbers, detecting if a scam is active before sending the OTP, and using a decision engine to determine the lowest-risk channel available (e.g., email, mobile app or SMS) and then sending the OTP to that channel.

See also: Cyber Risk and Insurance in 2022

Complementing OTP authentication 

It’s clear that OTPs aren’t going anywhere despite their increasing vulnerability. So, to keep themselves and customers protected, savvy insurers are embracing greater authentication intelligence. These methods work in tandem with OTPs to unobtrusively enhance the customer experience without compromising the safety of their accounts or information. 

For example, phone takeover risk solutions provide companies with real-time intelligence that helps enable them to determine whether sending an OTP to a given phone number presents a high risk. These solutions ask, for example, whether there have been recent changes to the phone’s SIM card, whether the phone number has been reassigned or whether calls are being forwarded. Identifying devices or interactions that are at high risk for fraud allows OTPs to be safely sent to recipients who are legitimate customers with legitimate phones — the vast majority of cases. The organization can then focus its fraud-fighting resources on a much smaller pool of high-risk interactions without creating increased friction for everyone.

Integrating inbound caller intelligence with the organization’s customer relationship management system can help enable pre-answer caller authentication, helping agents to spend less time interrogating low-risk callers (again, the vast majority) on their identity and more time helping them, thus improving the customer experience and boosting call center efficiency.

Intelligence services can be applied to provide an automated and optimized approach to managing constantly changing customer contact data. These services gather intelligence in the background from a variety of vetted, continuously updated third-party sources to confirm the authenticity of customer numbers. Intelligence that incorporates email and text gives the organization additional ways to initiate contact with a customer and additional data points for authentication – helping insurers to better connect with customers while mitigating compliance risks. 

Reducing risk without sacrificing the customer experience

Virtually every organization in every industry — insurance included — is looking for ways to block fraudsters while allowing legitimate interactions to proceed smoothly. For years, OTPs have been a useful means to help achieve this goal, and, although mobile fraud is rising, it is not time to abandon this user-friendly and widely adopted tool. Adding a layer of phone number and device intelligence can significantly help to reduce the risk of fraud, giving both the organization and its customers greater security while maintaining a positive authentication experience.

Having heard tech evangelists promise imminent disintermediation of some group or other for more than 25 years now. I've learned to be skeptical. 

There are still some 40,000 travel agents in the U.S., decades after Expedia and other travel sites were supposed to put them on permanent vacation. Some 80,000 bank branches still occupy street corners and strip malls around the country even though ATMs were supposed to have rendered them obsolete 40 years ago and even though wave after wave of online banks have made dire threats since the mid-1990s. Amazon was supposed to have swallowed all commerce by now, but, instead of putting all physical stores out of business, Amazon established a massive, nationwide presence by buying Whole Foods and has experimented with opening other types of stores.

With that history as backdrop, I never bought into the idea that insurtech would somehow put agents out of business. But that history also shows that roles have had to evolve. Travel agents tend to specialize in, say, putting the pieces together for fly-fishing vacations. Bank branch employees dispense advice, and not nearly so much cash. Whole Foods, in addition to being a store in its own right, now serves as a sort of warehouse for groceries that Amazon can deliver and as a drop-off point for those returning items they bought via Amazon.

So, even though agents aren't going away, their roles will evolve. The question is: How?

To explore that topic, I sat down (via Zoom, of course) with Mark Breading, who is a partner with Strategy Meets Action, a Resource Pro company, and who has been one of the smartest analysts I've come to know in my nine years involved with the insurance industry. He had published a piece with us at ITL titled, "From Agents First to Agents Last?" (which I've borrowed as the headline for this piece). The article made a lot of sense to me, so I asked Mark to elaborate.

While I encourage you to read the whole interview, I'll summarize briefly. He says agents will still have a key role in providing insurance, but it may no longer be at the front end of the buying process. People increasingly do a fair amount of research online before even approaching an agent. They also often are more educated about their insurance needs than in years past. They may even initiate an insurance purchase as part of the purchase of something else, such as a car or a home. 

Whatever the "digital on ramp" -- to use Mark's term -- that brings them to an agent, they likely arrive later in the process than in the past, and agents will have to adapt. 

They'll have to find new ways to get noticed, going beyond traditional networking in communities. Leads will be less and less likely to walk in the door. Instead, agents will have to position themselves to be found via whatever digital path a potential customer is following. 

Agents will also have to specialize more -- a la the travel agent who knows just which guide to pair you with on your trip to the Little Big Horn in Montana. Agents will also have to focus more on advice and less on processing transactions. 

Anyone who still thinks disintermediation is in the cards doesn't even have to look at history. Just look at how valuations for agencies have continued to strengthen in recent years, while they were supposed to be disappearing.

But that doesn't mean anybody can stand still. Customers are evolving, and agents have to adapt along with them.

Cheers,

Paul
 

---

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

From Agents First to Agents Last?

Even though agents are thriving, direct distribution will significantly increase, insurtech will play a big role in reshaping distribution and big tech companies will enter the space.

A Guide to Legacy Modernization

78% of digital transformation efforts fail to drive desired results due to poor planning. Here are some steps that will ensure success.

Policy Admin Systems Are Evolving

Modern solutions, including cloud-based options and lower-cost implementations, are redefining what constitutes a policy administration system.

Achieving Digital Balance in an Agency

Agencies are torn between the temptation to use too much technology and the tendency to stick too long with old, familiar processes.

Agencies Turn to Networks for Growth

Networks of agencies understand how important it is to provide expert guidance and resources throughout the digital journey.

3 Ways for Agencies to Improve Cybersecurity

By preparing agents to be the first line of defense against cybercrime, insurance agencies can change employees from risks to guardians.

 

It will surprise many in the industry to find that there are multiple large gaps in weather radar coverage around the U.S. By virtue of how radars work, when storms are viewed on mobile apps or television, the weather that is depicted is often many miles above the surface of the earth, not down at ground level where we live and work. Not having accurate weather data in these areas can have serious consequences. And this has been a big issue for insurance companies, as they serve customers in many regions with unpredictable weather conditions.

Well, we at Climavision are building a private network of high-resolution radars that aims to fill those gaps. The radars will cover the lowest levels of the atmosphere, and many will be in critically underserved areas. The company will combine this radar information with space-based GPS Radio Occultation (GPS-RO) data, which captures details of the upper atmosphere. This newly available data will be ingested into weather models to improve forecasting for carriers, reinsurance companies and even insurance linked securities (ILS). 

See also: Unusual Weather We're Having, Right?

For carriers, accurate weather forecasts are important in every market, but many regions lack highly precise forecasts, making it difficult for carriers to set adjuster protocols and effectively plan for weather events. Post-event analysis and future mitigation planning is equally difficult in those blind spots.

For reinsurers, understanding the potential for loss in each region is crucial. Knowing the type and frequency of weather impacts in each region is a necessity for planning insurance risks. This new information will not only provide insights on where storms are in the near term but will also help predict potential mid-term and longer-term threats. 

Fund managers will have a better understanding of potential loss due to weather, which should make trading of ILS positions more effective. This additional visibility should contribute to expert-level awareness and allow for more effective communication of the expected impact of weather events to all internal and external stakeholders. For ILS management, constantly calibrating exposure to downside risks is important to trading and projecting confidence in catastrophic events and secondary perils. The ability to accurately forecast hurricanes, blizzards and tornadoes days in advance will be enhanced. The new high-resolution, low-level weather surveillance from the radar network will also improve with real-time response to rapidly unfolding events.

Parametric-based contracts should see similar improvements. The Climavision network’s increased acuity will furnish improved peril validation, supporting efficiencies in this new underwriting approach that can help shape the risk transfer ecosystem. Initiators, reinsurance, and ILS can more confidently assume risk at an earlier stage, knowing validation and triggers can be settled with improved accuracy and within time constraints. 

This network is designed to reduce the frequency of false alarms, which have long been a serious problem. Carriers should experience better cost containment when planning the positioning and placement of field adjusters, especially valuable for carriers with limited staff. Reduced costs can be reflected in policy fees. 

Access to improved weather data and forecasts will benefit the insurance industry by removing uncertainty and better allowing for pricing risk; providing for improved planning; and allowing for more detailed forensic analysis post-event.

There has been no shortage of events from various sources this year observing the 50th anniversary of the Report of the National Commission on State Workmen’s Compensation Laws. It remains elevated among the many reports on state workers’ compensation systems that have been issued by the federal government and other public and private sources in the years subsequent to its publication. Perhaps this is in large part due to lack of clarity of what workers’ compensation is supposed to be in the 21st century and where it fits within an increasingly complex employment, healthcare and technology environment. 

It is simply not enough to call workers’ compensation a social benefit program of enduring duration. Workers’ compensation is a multibillion-dollar “industry” where those who provide innovation, services, and support have as much say on public policy (and operational) decisions as the so-called true stakeholders in the system.  But, particularly over the past decade, there has been little policy discussion about the way in which benefits are delivered. Instead, we are locked into the eternal conflict of how much, when and who gets to decide.  

Nearly 45 years after the report was delivered, the U.S. Department of Labor (DOL) issued its own report: Does the Workers’ Compensation System Fulfill its Obligations to Injured Workers? (2016).  As you might imagine from the title, the answer was “no”:

“The political focus on reducing costs for employers grew, and, by the early 1990s, benefits came under attack. Various new legislative changes were championed as ‘reforms.’ It was a race to the bottom: as each state compared its statute with those of neighboring states, found areas of greater generosity and moved to change those provisions of its law. The political conversation shifted, and the ability of workers and their allies to hold back this tide waned as union membership and strength declined.

"The resulting legislation has, in many states, diminished this already weak safety net for workers. Changes have focused on worker behavior and ‘fraud,’ rules governing eligibility that result in exclusion of claims from the programs, restrictions on provision of medical care and substantial limitations on benefits for injured workers. Although not every state has followed each trend, the trend lines are clear: The number of states that cut access to benefits significantly outnumbers those that have increased or maintained benefit availability in the period 2002 to 2014.” (p. 13)

This assessment was echoed in a number of publications during the same period. (See Rutgers University Law Review, Volume 69, Spring 2017, Issue 3. See also the American Public Health Association, The Critical Need to Reform Workers' Compensation.) The DOL report builds on a prior DOL report from the Occupational Safety and Health Administration (OSHA): Adding inequality to injury: The costs of failing to protect workers on the job (2015).

On July 11 of this year, the DOL hosted a panel discussion titled, “50 Years after the National Commission: Is the Workers’ Compensation System Serving Injured Workers?” The department said the event was an opportunity to highlight the question of whether the workers’ compensation system is actually providing economic security for injured workers and their families, especially for the most vulnerable workers.

In response to the question, Office of Workers’ Compensation Programs Director Chris Godfrey stated:

“In the 50 years after the National Commission, we’ve seen a period of initial expansion, then a race to the bottom in most state workers’ compensation systems, [ … ] Millions of working people injured in the workplace are at great risk of falling into poverty because of the failure of state workers’ compensation systems to provide them with adequate benefits.”

Things Have Changed

However, these assessments miss the mark. A more important examination would be to integrate these comments with the work being done by researchers and payers of other disability and healthcare systems.  It would also help if people would begin to appreciate how the workers’ compensation system responds based on type of injury and the size of the employer. 

We are indeed living in a tale of multiple systems. Making broad-based conclusions without regard to reducing barriers to allow employers to manage workers’ compensation liabilities as part of an integrated employee benefit program, including Employee Retirement Income Security Act of 1974 (ERISA) and voluntary benefit plans, sticks stakeholders in a 1970s paradigm from which they cannot emerge. In other words, how does workers’ compensation fit in a broader employer benefit structure? 

This is not a question that could have been answered in the early 20th century. It is a question that perhaps was worth raising in 1972, but the report predates ERISA.  

This is also not a question about “opt-out” plans. The point is coordinating plans, not replacing one with another. The DOL has, however, continued its invectives against these proposals, effectively helping to  isolate that alleged vehicle for the race to the bottom to a parking lot in Texas. As noted in their 2016 polemic:

“Some state legislatures continue to attempt to reduce workers’ compensation costs, and proposals for statutory amendments that restrict workers’ benefits or access have become increasingly bold. Notably, there have been legislative efforts to restrict benefits and increase employer control over benefits and claim processing, most dramatically exemplified by the opt-out legislation enacted, and recently struck down by the state supreme court, in Oklahoma and considered in Tennessee and South Carolina, among other states.”

Sometimes, however, employers and workers may actually benefit from disrupting the workers’ compensation status quo. Consider laws in Alabama and Colorado that have labor and management support to address the issues of cancer and heart disease among firefighters. In the case of Colorado, it comes with the tacit acknowledgement that the device of choice – presumptions – to force more claims into the workers’ compensation system was not worth the friction it created:

“Nine years of experience has shown that the rebuttable presumption established by House Bill 07-1008 has produced no demonstrable benefit to firefighters but has led to significantly greater costs to employers of firefighters.” Colorado Legislature, Senate Bill 214 (2017) 

The result of this legislation was the establishment of the Colorado Firefighter Heart and Cancer Benefits Trust.  As noted by the Internal Association of Firefighters (IAFF):

“The Trust was established with input from the CPFF (Colorado Professional Fire Fighters), the Colorado State Fire Chiefs and the Colorado State Division of Insurance and representatives from local state and special district fire agencies. Each entity, including the CPFF, has a representative on a board of directors managing the Trust, which is funded by contributions by state and local employers. However, fire fighters who choose to join the Trust are no longer part of the state workers’ compensation program.

"CPFF President Mike Frainier, who sits on the Trust’s board, says the Trust has been hugely successful and popular among Colorado fire fighters, providing essential benefits in a more efficient manner than with the state’s cumbersome workers’ compensation process.”

As noted by the Trust:

“In 2007, statutory changes in Colorado presumed cancer to be a workers’ compensation issue for firefighters. The intent was to ensure quality care for the state’s fire service professionals. But for firefighters affected by cancer, this often meant long legal battles and invasive medical inquiries to obtain benefits.”

Yes, it is an “alternative” program. No, it is not one of the vehicles participating in the “race to the bottom.” 

In California, so-called alternative dispute resolution (ADR) programs can allow labor and management to, “… negotiate any aspect of the delivery of medical benefits and the delivery of disability compensation to employees of the employer or group of employers that are eligible for group health benefits and nonoccupational disability benefits through their employer.” [Labor Code § 3201.7(b)(2)]

Should not the DOL and others encourage this type of behavior and not continue a decades-long diatribe that has as its essence trying to figure out how workers’ compensation can alleviate financial stress on Medicare, Social Security and healthcare plans under the Affordable Care Act?

See also: The Future Isn’t What It Used to Be

Return to Work

The report also predates, by almost two decades, the Americans With Disabilities Act (ADA) (1990) and was published over 30 years prior to the Americans with Disabilities Act Amendments Act of 2008 (ADAAA). These subsequent acts could reasonably call into question the report’s unqualified endorsement of second injury funds – or, as it is known in California, the Subsequent Injury Benefits Trust Fund (SIBTF). 

Then there are the various initiatives trying to place more people in the workforce. Per the DOL – the same DOL characterizing workers’ compensation reforms over the past few decades as being a “race to the bottom” – the most recent of this was when:

"The Workforce Innovation and Opportunity Act (WIOA) was signed into law on July 22, 2014. WIOA is designed to help job seekers access employment, education, training and support services to succeed in the labor market and to match employers with the skilled workers they need to compete in the global economy. Congress passed the Act with a wide bipartisan majority; it is the first legislative reform of the public workforce system since 1998.”

Why is it that state workers’ compensation systems too often fail to link the reemployment needs of injured workers to broader programs intended to give people the opportunity to reenter the workforce? This is not about accommodating disabled workers; it is about workers’ compensation systems taking so long to resolve cases that employers cannot always afford to retain workers – a problem particularly acute for small employers. 

Are we really saying, citing California as an example, that the $73 million spent on the Supplemental Job Displacement Benefit (SJDB) is money well spent? And in deference to the authors of the report, while vocational rehabilitation is very important in an effective workers’ compensation system, it is an obligation that needs to be recast, not reinstated. California’s experience culminating in Assembly Bill 227 (Vargas) in 2003 suggests that, when left to its own devices, rehabilitation becomes something less than an optimal part of the Grand Bargain, at least for employers and workers.  

There are billions of dollars of public and private capital devoted to lessening the economic burden of those who have suffered a disabling injury. Some of that capital is consigned to occupational injury or illness (workers’ compensation). Some of it is used for public programs such as Social Security Disability Income (SSDI). And more is also devoted to employer-sponsored and voluntary ERISA plans covering short- and long-term disability, supplemental health care, cancer payments and other programs where money is provided directly to individuals. Then there is health insurance. 

Each of these programs is administered differently, financed differently and regulated differently. In the case of workers’ compensation, this benefit program is unique because it imposes a non-transferable obligation on the employer at injury for lifetime benefits.

So, before talking about a “race to the bottom.” maybe we should create an environment where each of these benefit vehicles can at least run on the same course. 

ITL: 

You intrigued me with a recent blog post, under the headline, “From Agents First to Agents Last,” and I was hoping to explore that idea with you.

Mark Breading:

There's a revolution going on in P&C distribution across all segments, not just in personal lines but in commercial lines, as well. As part of that, the role of the agent is changing, right?

It’s just the natural evolution of our digital world. Customers are coming to insurance through these different digital on ramps that are on the internet and on their mobile devices. There are still situations where people are going to say, “Hey, I know my local agent down the street. They sponsor our kid’s baseball team.” But that’s less and less of the reality.

I’m very pro-agent. I think there’s absolutely a role for agents, even in commodity-type businesses in personal lines. But I don’t think we’re necessarily going to go to our agent first. People are savvier, right? They understand a little bit more about what their expectations are and what their needs are and may have done some of their own research. They're also on these other digital sites that offer insurance as an adjacent service.

So, the agent won’t be a transaction processor. The agent’s role will be to provide advice and counsel, and they probably have to up their game in terms of being risk experts and trusted advisers.

ITL:

If I'm an agent, how do I position myself for this transition, on the front end? If somebody isn’t going to see me because I sponsor a team and isn’t going to walk into my office, I'm going to have to somehow position myself to be found by people in a way that I haven't had to before, right?

Breading:

I think there are a couple of things. You have to raise your level of expertise and be more of an adviser. That’s especially true because of smart homes and telematics and connected vehicles and so on. Agents have to be aware of all those things and how they play into risk.

Agents also have to be more digital and more connected. One of the reasons there's such an M&A wave across the distribution world is that agents need more scale. It’s getting harder to compete as a mom-and-pop agency if you don’t have the kind of digital platform, the digital tools, the analytics to understand customers that everybody else has.

You also need partners to connect to these different digital on ramps. People don’t just do a Google search for insurance. They’re on TikTok or Amazon or some other place and getting advice. Agencies need to make those connections.

ITL:

If you were to draw up a blueprint for a prototypical agency five years from now, what would Agency 2027 look like?

Breading:

I would say the first thing is to diversify the book, if it's not already diversified. Anybody, for instance, who is predominantly writing personal auto or maybe auto and homeowners will find that the Teslas and others are getting into the game. So, you should diversify into a mix of commercial and personal lines.

Then you should build a digital enterprise. It’s hard to talk about being an enterprise for a 10- or 15-person shop, but the concept is there, right? You have to do business digitally and be able to connect to carrier partners or wholesalers or MGAs.

Agencies need to have the right APIs [application programming interfaces] and everything else to also plug into intermediary distribution platforms like the Bold Penguins. These companies are gaining traction and are especially interesting on the commercial side. They’re becoming important players.

If I’m the agency, I think it'd be confusing. How many of these platforms do I need to connect into? Who should I connect into to do my comparative rating and help me with data prefill and other things to make my life easier?

A very large broker or agency can hedge their bets and connect to a whole bunch of them. If I'm smaller, it's a tougher choice, right? You can't connect to everybody, and there are going to be winners and losers.

I call it “the mess in the middle.” Too many players are trying to connect distributors to carriers. If I just look at small commercial, there are over 20 of them that are visible and prominent. So, there’s going to be consolidation. There will be some failures.

It's a complicated and evolving picture, but we're really spending a lot of time focusing on that area.

ITL:

Thanks, Mark.

---

Mark Breading Mark Breading is a partner at Strategy Meets Action, a Resource Pro company that helps insurers develop and validate their IT strategies and plans, better understand how their investments measure up in today's highly competitive environment and gain clarity on solution options and vendor selection.

 

Change management is a term people have thrown around a lot over the last few years. As companies transform, or try to transform, they face new and often unexpected challenges that force them to rethink the way they've done almost everything to that point: hence, the need for change, and for change management.

As insurance carriers modernize their core platforms and other technical underpinnings, they would be remiss to ignore how industries like banking have approached change--what they've done right and wrong, and how they've miscalculated or overstepped.

There are certain things every successful (and unsuccessful) core transformation has in common, no matter the industry, and these things certainly apply to the insurance world.

Let's take a look at what core transformation for insurance looks like, starting with the most common mistakes to avoid.

Core transformation missteps

Core transformation mistakes almost always involve some lack of foresight. This usually manifests itself in underestimating the change to people, processes and technology.

• People: Issues can stem from communication breakdowns and poor personnel change management
• Processes: It's typically about lackluster adoption of new ways of working
• Technology: Companies often lack adequate understanding of how a given solution will affect, or is already affecting, the business

When you mix in the complex dependencies of insurance underwriting, policy administration, claims management and other core functions unique to the industry, the potential for failure is relatively high.

The three most critical mistakes associated with insurance core transformations are:

1. Failure to align: Specifically, companies fail to define a clear destination that includes benefits for every employee
2. Forced culture change: Culture can and must change--but you can't force it faster than employees can accept
3. Weak internal ownership: Companies that expect vendors to lead the deployment of the new system are at a high risk of failure

Each of these pitfalls naturally affects the others in a kind of domino effect. In the case of forced culture change, for example, new processes come up against opposition, which results in a reevaluation of the tech solution, which then results in reduced trust in the vendor or implementation team. Before you know it, you have a failed core transformation project that you need to rebuild from the ground up.

Ultimately, avoiding mistakes comes down to effective change management in the key areas of people, processes and technology.

Here's how to successfully transform your insurance core:

See also: Core Systems: Starting a Whole New Game?

Implement people practices that drive successful change

Organizations must understand that people drive any organizational change.

Proper alignment and expectation-setting tend to start strong but break down during the scoping and building process as challenges emerge. This tends to happen in companies viewing the project through a waterfall lens--i.e., with a neatly defined scope, budget and timeline upfront.

But the thing is: You can't plan for every event. If you're driving across the country, would you plan for your car to break down? No. But if it does, then you need to change your plans quickly and on the fly to address that issue and prevent it from derailing your trip entirely.

Anticipate and answer natural questions

The specifics of getting from point A to point B are important, but they must fall in line after proper internal alignment.

For example, key stakeholders should understand:

• "What's in it for me and my team?" Beyond digital transformation for its own sake, how will this project benefit claims, underwriting, distribution, etc. and help the team achieve their goals?
• "What are the project milestones?" Breaking the project down into broad, iterative phases will help you avoid the trap of rigid thinking. It will also illustrate how the timeline may be affected if one milestone is shifted or prolonged
• "What role am I playing?" Stakeholders will benefit from knowing what hard and soft skills are required of them, with an emphasis on the latter. When role change is imminent within an organization, visionary and compassionate leadership helps departments shift gears

With a shared, high-level understanding of the project destination and the anticipated milestones on the way, implementation teams have more power to contribute in meaningful ways.

Having a team that's adaptive is essential. Transformation needs to be top-down and bottoms-up. Everyone involved understands why we're going somewhere.

Form your implementation dream team

Successful implementation teams are truly cross-functional and include reps from all sides of the business that the transformation will touch. The best teams include future-forward decisionmakers from within each department. These people may not be your longest-tenured, but they're the ones who understand the most about the future that's needed, and they have a burning desire to change.

Successful implementation team members are collaborative and action-biased. The best teammates I've ever had were great communicators. I don't mean they were great orators--I mean they could listen. They could understand the challenges and make decisions based on that understanding.

Focus on roles, not titles

Members of your implementation dream team must have substantial knowledge of and experience in:

• Enterprise architecture, for evaluating the structure of existing and new solutions and ensuring it all fits together
• Change management, for managing people, processes and tech changes
• Program or project management, for roadblock removal and staying on target
• Business analysis, for ensuring the solution aligns with business goals
• Engineering leadership, for helping the business, architects and systems integrator/tech partners think critically and communicate around technical challenges effectively

One person may be able to fulfill several roles on the same team, but, more often, teams will have more than one person fulfilling each function. It is also beneficial if a team member has a good historical understanding of how the company got to the place it is now.  This can help in choosing how hard to push and which processes are culturally based vs system-focused.

Use reasonable processes that fit your organization's pace

Some companies expect to change their processes only after the new core policy platform is about to go live. This can result in a variety of undesirable outcomes:

• Fast, forced culture change
• Unnecessarily prolonged launch
• Development and oversight process mismatch

Process transformation needs to start at kick-off and happen at a reasonable pace for your company and the way it operates.

If your company wants to deliver in five weeks, is your culture going to allow that? If not, how do you get out in front of that culture early to accelerate change?

The same principle applies to your development team, including vendor-driven processes, if applicable. While some form of agile development is likely practiced within insurance businesses, it may not be at the level that agile tech requires. Plus, true agile has weaknesses of its own, and a complete shift may not be needed.

At the beginning of your project, run an agile session or training. Ask: What are the things that we can implement today? What are things that the company is going to push back on and why? Okay, let's put that in the change management plan and start greasing the wheels.

The outcome should be an empowered team that can make decisions and implement them.

Maintain ultimate ownership

Vendor selection is a lengthy and eye-opening process. After weeks of reviewing technical data sheets and eyeing high price tags, insurance companies are vulnerable to either granting or demanding too much project ownership from the technical experts. But tech is only part of the formula for a workable tech update.

Insurance companies hire vendors to provide best practices but are still the experts on their own company and culture. Insurers must guide their partners on that cultural aspect, including where they see the project coming up against opposition.

Keep in mind that vendors are always changing their products and processes in response to customer demands. There's anxiety that helps you learn and anxiety that makes you freeze. The anxiety that makes you freeze is the one that contributes to implementation failure.

Adopt technology that makes sense in the modern world

Finally, successful insurance core transformation comes down to adopting the right technologies. In a competitive tech ecosystem, it's easy to forget that the tech exists for you--for your customers, employees and business--not the other way around. Just as keeping the end in mind is critical when it comes to effective people management, it's true in vendor and tech selection, as well.

Keeping the end in mind looks like:

• Understanding today's software engineering best practices and the costs of supporting them
• Knowing how a given solution would connect with existing applications and potential future applications. Remember that you have already invested in other applications; new systems should help capitalize on those investments
• Refusing to select a vendor based on price and opting instead to select based on industry experience and product vision and quality

There's a saying: "Buy cheap, buy twice." This is all too common with software vendors. Choosing inexpensive vendors can lead to complexity and over-customization, which ultimately leads to scope creep and significant drainage of internal resources.

In contrast, vendors offering industry-proven products that are complete (workable without heavy customization) and flexible (light lift to integrate with existing systems) allow insurance companies to meet basic project goals quickly and iterate from there.

See also: Data-Driven Transformation

What insurance core transformation success really looks like

Carriers that emphasize the core in core transformation will succeed. View updating your outdated core systems not as a cost of doing business but an opportunity to stay true to your company's vision and values.

Every successful core transformation looks slightly different, but they all include:

• Alignment on the why, including a companywide understanding of the desired destination and what it means for the business
• Empowered, cross-functional implementation teams that drive the project with a top-down, bottom-up mentality (as opposed to the vendor driving)
• Process transformation that starts at kick-off and at a reasonable pace for your company
• A solid technical foundation that's comprehensive yet flexible