Which are the main factors driving the possibility that a company and its board of directors may be sued by investors or other stakeholder groups in 2023? A poor financial performance or even insolvency amid economic uncertainty and the prospect of a global recession, a lack of robust cyber security and governance processes or an inadequate or non-compliant response to environmental, social and governance (ESG) issues are among the key risk trends in the Directors and Officers (D&O) insurance space, according to Allianz Global Corporate & Specialty (AGCS). Despite a downward trend in new filings, U.S. class action securities litigation remains a key concern, particularly around mergers, while cryptocurrency companies and exchanges are subject to increasing activity, the insurer’s annual D&O report also notes.

The recent decline in the number of filed securities and class actions in the U.S., coupled with an influx of new entrants, has created a more favorable market for corporate buyers of D&O insurance after double-digit percentage premium increases across key markets in 2021. However, there is still a lot of risk facing insurers as macroeconomic issues and a potential slowdown loom, conditions that typically lead to an uptick in D&O claims. Inflation is likely to influence future claims through larger settlements. Cyber risk remains at an elevated level and is now seen as a core duty of D&Os, with increasing scrutiny on how they respond. Meanwhile, ESG-related liabilities – whether it is inadequate action on climate change or diversity and inclusion issues – can potentially become significant exposures for D&O insurance, as well.

For many countries, the economic outlook for 2023 is doom-laden, with recession risk rising. Plunging growth rates, surging inflation, the energy crisis, continuing stock market volatility and continuing supply chain issues are monitored closely by D&O underwriters, as they could cause liquidity and profitability squeezes in many sectors and fuel rising insolvencies.

Half of the countries analyzed by Allianz Research recorded double-digit increases in business insolvencies during the first half of 2022, with the SME sectors in the U.K,. France, Spain, the Netherlands, Belgium and Switzerland accounting for two-thirds of the rise. Overall, insolvencies are expected to increase 19% in 2023 globally, and an economic downturn typically brings a higher risk of D&O claims. A study by broker Marsh found that between 2005 and 2007 the firm received an average of 200 to 300 D&O claims in the U.K. With the onset of the financial crisis, claims notifications rose by 75% to around 500 in 2008, peaking at in excess of 1,600 in 2012. In the U.S., filings and enforcement actions – a proxy for claims frequency – doubled to over 2,000 at their 2011 peak, compared with around 1,000 in 2006, according to Advisen.

Cyber risk management as a board responsibility and ESG exposures

Issues such as data security and information protection are now core areas to watch for directors. Investors increasingly view cyber security risk management as a critical component of a company’s board risk oversight responsibilities. As fiduciaries, board members are expected to develop and maintain accountabilities for IT security before, during and after any cyber incident. Alleged failures can be seen as a breach of duty.

Regulatory action or litigation risks due to ESG-related issues are another major concern for boards, driven by increasing reporting and disclosure requirements, which could trigger claims in case of an inadequate response or non-compliance. In addition, companies and their boards also face the prospect of increasing litigation from environmental or climate groups, activist investors or even their own employees. Climate change litigation is increasing, with over 1,200 cases filed internationally in the last eight years, compared with just over 800 cases between 1986 and 2014. Most of these were filed in the U.S,. but there are increasing filings at international courts or tribunals: 2021 saw the highest annual number of recorded cases outside the US. Another risk is misrepresenting ESG credentials or achievements – so-called greenwashing – which can also lead to regulatory action, litigation and shareholder suits.

ESG-related information is increasingly becoming a key checkpoint for insurers when it comes to the risk assessment of a company. Those companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity.

See also: Adding ESG to Investment Practices

Litigation in the U.S. 

Litigation exposures are especially high for companies domiciled or doing business in the U.S., and merger objection suits persist. While the frequency of U.S. filings has declined since 2019 and while 2022 is expected to continue this downward trend, the aggregate quantum of damages potentially at issue has skyrocketed. While there has been no general rise in alleged investor loss valuation for all cases, a few very large losses in 2022 have represented a disproportionately higher share of aggregate alleged shareholder losses than the historical averages over the past 20 years. According to Cornerstone Research, lawsuits filed against only three communications industry companies account for as much alleged investor loss as the aggregate of all securities class action lawsuits filed in 2021.

Cryptocurrency sees increasing litigation

Another new trend includes the increasing targeting of cryptocurrency companies and exchanges (10 suits filed in the first half of 2022 as compared with 11 for all of 2021, 13 in 2020 and four in 2019). This may not be surprising, given the recent roiling fluctuations in the valuation of digital currencies, which continued in November 2022 with the collapse of the world’s second-largest cryptocurrency exchange, FTX – authorities around the world are investigating for potential breaches of securities laws – and the fact that regulatory oversight has increased.

To read the full AGCS D&O Risk Trends report, please visit: https://www.agcs.allianz.com/content/dam/onemarketing/agcs/agcs/reports/agcs-directors-and-officers-insurance-insights-2023.pdf 

Hurricane Ian might be the costliest storm in Florida’s history. Preliminary estimates suggest roughly $67 billion in insured losses – nearly double what Ida caused last year.

My husband and I lived through the storm, and we saw the damage first hand. As co-CEOs of a national insurance franchise, we knew we had to do something.

As soon as we could – less than a week after Ian hit – we rallied our Florida franchise owners to form an independent crisis assessment team (CAT).

Our CAT set up shop at a FEMA-sponsored “insurance village” in Port Charlotte, about 40 miles south of Sarasota. Our goal: to distribute emergency supplies to hurricane survivors, help them file insurance claims and answer insurance-related questions.

Here, I’ll share three lessons we learned from our experience that can help agents make an impact after a natural disaster.

See also: We're Flying Blind on Climate Risk

Lesson 1: Empathy Can Jumpstart the Healing Process

Hurricane Ian left many survivors with absolutely nothing. Our insurance village offered people resources that could help them begin to rebuild.

Right off the bat, we started handing out basic necessities, like food, water, propane tanks, gas and even underwear. We quickly learned that being an empathetic listener went a long way. After such a traumatic event, many people just wanted someone to talk to.

Many stories stuck with us. For example, one survivor told us that she’d completely lost power – and even some of her roof. That really hit home with our people. At a moment’s notice, a few folks on our team dropped everything to go tarp her roof and set up a generator at her house.

In a crisis, empathy is an invaluable resource agents can offer. Be a sympathetic ear, and you’ll help survivors feel cared for. Listening to, empathizing with and helping any survivor in need – insured or not – doesn’t just build community goodwill for your agency. It’s the right thing to do.

Lesson 2: Basic Guidance and Education Help People Rebuild

Many hurricane survivors rely on homeowner’s insurance payouts to help them get back on their feet. But in Florida, the insurance industry is on the brink of collapse.

Some insurance carriers have paused writing new policies or plan to issue nonrenewals and cancellations. Others have pulled out of the state. And six have been declared insolvent this year. After Ian, experts fear more insolvencies – leaving even more homeowners in limbo.

The good news is that Florida insurance carriers couldn’t cancel policies until Nov. 28. Ahead of that date, we needed to answer survivors’ policy questions and educate them about the insurance landscape.

Our corporate team and franchise owners were on the scene – and they did just that. When it came to insurance knowledge, many survivors were starting from scratch. We taught them things like how to read their policy, where to find their premium and how to understand their deductible.

We also provided guidance as to what to do next. We walked them through the claims process so they could quickly receive payouts. And we helped them understand how Florida’s industry chaos might affect future coverage. We wanted folks to know which insurance carriers were at risk, where to look for a new policy and what to expect in terms of premium hikes.

The agent takeaway? After a natural disaster, offer insurance guidance and education that meets survivors’ specific needs. And don’t discriminate. Even if they aren’t one of your customers, they’ll need your industry expertise to help them recover faster.

See also: How to Prepare for Catastrophe Claims

Lesson 3: Helping Survivors Can Be Emotional – and Inspire Hope

Working with hurricane survivors who’ve lost everything is a highly emotional experience. You’re listening to story after story about completely upended lives. And you want to empathize with everyone you talk to. It’s important that you prepare for the emotional toll that can take.

In our experience, we’ve found it helpful to have counselors onsite or available virtually. This way, your team members can process their emotions with a mental health professional.

Amid the sadness, though, there’s also room for hope. At our company, we had all hands on deck to deliver immediate assistance.

Our customer service reps fielded calls for agencies that were themselves affected by the storm, in turn helping their customers get the answers and assistance they needed. Our data team identified our worst-hit customers so we could communicate about local resources and the insurance village. Our HR team reached out to every hurricane-affected employee to make sure they were okay. And our corporate team members and franchise owners were on the ground, cooking hot meals and providing fresh clothes out of pocket.

When you drop everything to help your community, that speaks volumes. Your community will take note, and so will your team. They’ll be proud to be part of an agency where leaders and team members alike roll up their sleeves to help the communities where they live and work.

When Disaster Strikes, Show Up for Your Community

When you take part in an insurance village, you can do more than insure your community. You can make a real, on-the-ground impact that helps people get back on their feet faster.

Preparation, however, is key. So don’t wait for a natural disaster to take action. Start now by gathering supplies and building a team so you’re ready for on-the-spot deployment. This way, you can quickly reach affected communities when the next disaster strikes.

In recent years, the mid/large commercial lines segment has worked extensively to evolve the distribution ecosystem through new partnerships and expansion strategies. Additionally, carriers in the segment have been deploying new technologies for distribution to not only enhance internal operations and processes but to further support the success of distributors, whether retail agencies, brokers, wholesalers or MGAs. However, according to new SMA research, not all solutions meet the expectations of carrier executives today. 

SMA's recently published report, "Distribution Technologies for Mid/Large Commercial Lines: Carrier Plans in 2023 and Beyond," covers the current state of digital capabilities that carriers offer distribution partners, an assessment of the barriers to deploying new capabilities, and carriers' plans to provide new solutions. The insights are based on a survey of executives at carriers focused on the mid/large commercial market. 

Across the sales value chain, insurer executives generally have low satisfaction with digital capabilities, particularly in early stages of the sales process. There is significant dissatisfaction regarding digital appetite solutions, which is not entirely surprising given how little automation exists in the area. The reality is that distributors often misunderstand a carrier's appetite – a challenge that has existed for years. Market conditions can result in the ebb and flow of a carrier's appetite, and at times they may pull back in writing certain risks. Other times, they may have increased appetite in a specific class. Although improved communication can help alleviate pain points, tech solutions that support appetite matching between carriers and distributors will be essential for the continued success of carrier/distributor relationships. 

In contrast, insurers' satisfaction levels with their digital offerings for servicing are notably higher than sales, with claims inquiry capabilities rating the highest among executives. Insurers continue to pour investments into claims operations, as it is one of the highest touchpoint areas for policyholders. However, a recent SMA survey of agents reveals a need for carrier partners to enhance claims capabilities, with about half of agents and brokers in mid/large commercial lines desiring carriers to prioritize projects in claims download and filing capabilities. 

See also: Designing a Digital Insurance Ecosystem

These insights from the report highlight the imperative for carriers to continue to evolve how they interact with and serve distribution partners. Insurers that focus on strategies that enable distributors to place coverage efficiently and competitively with minimal friction and excellent customer experience will be the ones to contend with in the future. 

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

While half the U.S. population gets health insurance through an employer, more than one-third of the labor force works in the gig economy full or part-time. A trend that exploded during the pandemic, gig work is here to stay.

For gig workers and freelancers, independent work offers flexibility and earning power but leaves these workers without the comprehensive employee benefits expected in traditional employment.

Of course, these individuals can arrange their own individual coverage, but many don’t, and this demographic is showing signs of being underinsured across multiple lines of business.

Embedded insurance provides an opportunity for employee benefits insurers to capture this market. With embedded insurance, carriers can bundle products, enable direct mobile sales channel distribution and offer relevant, affordable and flexible coverage to this underserved market.

An Upwork study finds that 60% of people who had recently taken up freelancing or gig work say that a salary increase would not convince them to return to a traditional job.

Embedded insurance is becoming common in P&C lines. For example, in 2020, Nationwide Insurance partnered with Toyota to offer embedded usage-based insurance (UBI) exclusively to Toyota drivers using telematics technology.

The rise of embedded insurance is linked to technological advances from digital ecosystems and application programming interfaces (APIs) that tie them together. Today, carriers can provide seamless connections to digital platforms for any business through cost-effective microservices.

This technology trend is supporting massive gains in insurance customer self-service and greatly simplifies the customer journey (you’re buying two products at once). As a result, insurance distribution strategies are being designed to offer insurance in as many contexts as possible, as simply as possible.

Embedded Insurance Within Online Gig Platforms

Gig workers are often tech-savvy and independent people who schedule their daily lives and jobs through online marketplaces and mobile task-based platforms. In fact, one study finds that over 70% of freelancers find their next gig through online platforms.

Partnering with online markets and task-based platform companies presents a sizeable opportunity for group benefits insurers to provide coverage to large groups of freelance users at scale.

For instance, Stride Health, a web-based insurance recommendation platform for independent workers, launched a partnership with Fiverr, an online marketplace for freelancers. The partnership enabled Stride Health to capture new markets while providing Fiverr's users with personalized recommendations for healthcare plans.

Embedding insurance into digital task-based platforms and online markets can help benefits insurers acquire customers at the point of sale rather than spending money on expensive marketing campaigns for individual freelancers.

In addition, when effectively embedded in digital platforms, insurance products can offer a strategic competitive advantage to insurers and their partners. It can create trust and loyalty among online markets' user base by providing more benefits to users, which keeps them returning to their platform.

Optimizing Coverage to Fit Gig Workers' Needs

To capture new gig worker market segments, carriers must adapt their coverage options and distribution strategies to appeal to the needs of gig workers.

For example, Goose, a Canadian insurtech, is working with AIG Insurance to help offer affordable income protection insurance and hospital cash policies for self-employed and gig workers.

Enabled by open APIs and Goose's self-service distribution app, small business owners, gig workers and freelancers can purchase protection independently on their mobile devices in minutes.

Many gig workers want products that protect them for shorter periods, such as day-to-day, month-to-month, hour-to-hour or contract-to-contract. Therefore, creating more flexibility in coverage options and how gig workers use insurance products could hugely affect how this generation views the benefits of insurance policies.

Employee benefits insurers must make buying insurance coverage as seamless and effortless as it is for them to schedule another gig. As a result, more employee benefits carriers offer portable benefits for gig workers that provide swift and straightforward application and enrollment processes.

Bunker, an online instant business insurance platform for independent contractors and businesses, allows workers to purchase insurance for just the term of their work contracts, enabling more flexible and meaningful coverage for gig workers. The company offers products such as occupational accident insurance, which covers on-the-job accidents that might not be covered by traditional policies.

Cover Genius, another insurtech, has embedded policies within several gig worker platforms and marketplaces, integrating insurance in the sign-up process and providing the ability to turn coverage on and off.

Additionally, small businesses and companies that rely on contractors because they cannot afford full-time employees can use embedded, usage-based insurance to secure a more reliable talent pool and increase contractor retention.

See also: Embedded Insurance Is Everywhere

Embedded Insurance Can Help Capture the Gig Work Economy

Gig workers, side hustlers and freelancers are increasingly fueling the broader economy. Employee benefits insurers have a major role to play in building a safety net for these workers, and we are only just getting started.

Embedded insurance will continue to be an effective form of digital distribution, as the embedded insurance market is projected to reach $3 trillion by 2023. According to Denise Garth, chief strategy officer at Majesco, 40% of insurance will be embedded in the next 10 to 20 years.

Insurance companies can remain highly competitive over the next decade by leveraging APIs, partnerships with insurtechs and online gig platforms and designing seamlessly embedded digital insurance journeys for customers.

We talk a better game about digitizing than we play.

Insurers have been talking about going digital for a good decade now, and seemingly everyone says the pandemic greatly accelerated the trend over the past three years by forcing us all to interact remotely. Yet ACORD says it found in a recent survey of the 200 largest insurers worldwide that "fewer than 25% have truly digitized the value chain, while more than 10% are not appreciably leveraging digital technologies within their current business processes. Further, more than half of the insurers in the study are still exploring how digitization can be applied against their business model."

Bill Pieroni, president and CEO of ACORD, says: "The gap between those who have been prioritizing digitization, and those who have systematically underinvested, is now impossible to ignore."

And the report found "an unambiguous correlation between digital maturity and increased financial performance, as measured by both Total Shareholder Return and Indexed Relative Profit. The study also found that the performance gap between highly digitized insurers and laggards has continued to grow year-over-year, accelerated by the global pandemic."

Why so little action after so much talk?

As ACORD's Insurance Digital Maturity Study notes, some of the explanation is straightforward: Going digital is expensive, and many companies lack the scale to do so quickly. 

Having watched any number of industries go digital since I started covering technology for the Wall Street Journal back in the mid-'80s, I'll add that the process is confusing. Where do you start? What should your priorities be?

Those are hard questions. Many industries tend to start based on where they are, and try to improve, rather than taking out a clean sheet of paper, designing a digital future and then working backward from that ideal to figure out how to get there. I'd say many insurers fell into that trap and had false starts as a result. They focused on issues such as updating core systems, which, while important, didn't do much to change the process of buying insurance or handling claims--the issues that matter most to customers.

The good news is that insurers have gotten the customer experience religion over the past couple of years and are moving past the false starts, to focus on what really matters. Many are even starting to probe the possibilities of a new business model: switching from the traditional "repair and replace" approach to one that uses the industry's vast stores of data and risk-management expertise to offer "predict and prevent" services that reduce or even end the need for indemnification. 

The work will never be done, of course. Technology keeps improving, customer expectations always increase and competitors never stop threatening. 

But I hope the ACORD study serves as a wake-up call. The New Year is coming, and I think some resolutions for 2023 are in order.

Cheers,

Paul 

Inflation remains stubbornly high, causing cost per claim to climb. In turn, premiums are forced to rise. Customers struggle to afford coverage, and insurers struggle to turn a profit. Forecasts for commercial auto suggest underwriting losses for 2022 through 2024 due to inflation. Something has to change, and it’s at times like these that innovation and technology come to the fore. 

One innovation saving money and putting relevant insurance directly in front of customers is embedded insurance. With increased adoption of APIs (application programming interfaces), insurance products can seamlessly integrate into third-party buying processes. 

Traditionally, insurers spent a significant portion of their budget on marketing. Embedded insurance removes that need as insurance is available for purchase at the exact moment a customer needs it. For example, Jetty offers insurance to renters at the time of lease through property management platforms. Customers are reminded to protect themselves and given an immediate opportunity to do so. Transactional proximity is convenient. It ensures the offering is relevant and ultimately increases uptake. 

Nudging customers toward protection

Amid premium inflation and customers going without protection, embedded insurance reminds consumers to insure themselves. They are most aware of the value of an item (and the cost to lose it) at the purchase, so it is the opportune time to offer insurance.

For instance, the majority of travel insurance is purchased when travelers buy their airline ticket. In 2022, 73% of surveyed airlines offered embedded travel insurance. Giving customers an option to reduce risk with minimal effort reduces financial loss in the long term. 

Traditionally, insurance applications contained a multitude of questions. However, insurers have found that minimizing questions and reducing friction increases their submission rates. Partnerships between insurers and consumer brands simplify the quoting process to just a few clicks. Information sharing between the insurer and third-party brands also makes it easier for each to improve customer experience. Insights into products bought, price point and customer behavior help insurers refine the purchasing journey, tailor coverages and ultimately reduce protection gaps. 

When embedded insurance reaches maturity, it’s predicted to become a $3 trillion market. The insurance industry still has a way to go. Many products still lack embedded insurance offerings. There are huge opportunities for innovative insurers to grow market share, raising the question: How do insurers break into the embedded space? 

See also: How to Lift Profitability in Tough Times

Where to start?

Unfortunately, there is no one-size-fits-all formula for new embedded insurance offerings. Bringing point-of-sale car insurance to the market will be vastly different than introducing point-of-sale home insurance. The strength of embedded insurance lies in its flexibility and personalization, making understanding customer needs vital. 

Insurers first need to do their homework around price points, companies selling product or services that need protection and gaps in the market that embedded distribution can fill. With market research and self-examination, insurers can pinpoint market opportunities.

Once a gap in the market has been identified, insurers need to find a partner that services that segment. Suppose they’ve identified a lack of coverage for jewelry. The insurer might reach out to a jeweler like Signet or Tiffany to discuss integrating an insurance offering into the brand’s shopping journey. 

Once the terms of a partnership are settled, the technical work of executing the integration begins. The insurers currently dominating embedded insurance are agile and fast-moving, often due to no-code insurance platforms tailor-made for the latest innovations. 

Many major carriers still use legacy systems lacking agility and API integration points. These systems generally incur technical debt with every update. With a digital insurance platform, bringing embedded insurance products to market is rapid, and flexible data models mean that all data can be captured, analyzed and leveraged. 

Bundling insurance with the product it protects makes sense for both customers and carriers. Insurers can enter new markets with more efficient distribution. Customers are reminded of risk to their purchase at the most important moment so the protection gap is closed. With the right digital architecture, embedded insurance can bring the next big bang to the industry, making it easier to bring insurance exactly where customers need it.

As the world winds down for the holidays and eases into the New Year, I thought I'd give us all a break and look beyond all the challenges that the world faces today and that will continue to dog us in 2023, to focus on the good things that occurred in 2022. And there were many. 

I'll start with a few on the geopolitical front, because they were the most dramatic, then get to some developments in our world of insurance:

No. 1 for me is embodied in the epic line from Ukrainian President Volodymyr Zelenskyy, who was offered a chance to be airlifted out of the country in the early days of the Russian invasion and responded: "I need ammunition, not a ride."

That's the kind of line a scriptwriter might have put in the mouth of Dirty Harry, not what you expect out of the untested leader of a country in Russia's shadow, and the remarkable performance by Ukraine's military gives me hope both that the mythology built around Putin will crumble and that China might even rethink what seem to be its plans to invade Taiwan.

(If you, like me, want to geek out on the technological underpinnings for Ukraine's surprising successes against Russia, I recommend this column by David Ignatius in the Washington Post. His on-the-ground reporting out of Kyiv shows that Ukraine is benefiting from Western technology and can wage "algorithmic warfare." Ukraine is amalgamating information from a vast array of satellites, drones and other sources on a single screen that lets its armed forces pinpoint targets rapidly and direct fire there, while Russia can't gather or process information nearly as quickly. If nothing else, the column by the always-interesting Ignatius dramatizes the power of real-time data analytics.)

No. 2 for me are two developments that push the frontiers of science far, far out into the universe and deep into molecular physics. 

The new tool for understanding the universe is the $10 billion James Webb Telescope, which was launched a year ago and which began sending images back to us in July like the one below. It shows a formation known as the Pillars of Creation in the Eagle Nebula that is more than 6,500 light years from Earth and that gets its name because the clouds are giving birth to stars.

How cool is that?!

The Webb telescope has six times the light-collection area as the Hubble telescope, itself a remarkable achievement when it was launched in 1990. The Webb telescope has been placed in an orbit around the sun nearly 1 million miles from Earth (vs. 340 miles away for the Hubble telescope) and collects light in a different frequency, one that will provide a whole new look at the universe around us.

The development in molecular physics was the recent announcement that the Lawrence Livermore National Laboratory had achieved "ignition" in fusion — releasing more energy than was used in the lasers that blasted a pellet of hydrogen and produced a self-sustaining thermonuclear reaction like what happens in our sun. I've followed developments in fusion for decades and had subscribed to the line that our ability to produce energy from fusion was "30 years away... and always will be." The recent announcement marks the first time I've thought that the "and always will be" can be removed from that projection. 

Making fusion practical will still take a very long time. Setting up a huge apparatus to create a reaction in one pellet is a far cry from being able to handle a steady stream of millions and millions of pellets, especially because thermonuclear reactions are notoriously unstable. But the announcement still marks a milestone on the march to what could be unlimited, clean energy. In the meantime, the development shows that the U.S. has a way to thoroughly test and maintain its arsenal of nuclear weapons even though the U.S. hasn't set one off in 30 years, as part of international efforts to ban "explosive tests." 

No. 3 for me will be a bit controversial, because a lot of people got hurt, but I believe that the bursting of the cryptocurrency bubble has chased a lot of the craziness out of the market and set up the possibility for rational progress from here. I'm still not convinced that Web3, as many are calling the next iteration of the internet, requires cryptocurrency, rather than a radically more efficient way of handling fiat currencies such as the dollar, but at least we can now evaluate the alternative paths without the burden of all the speculative fervor.

No. 4 is the remarkable progress in what's called generative artificial intelligence — AI that can produce new content rather than simply analyze data and other existing content. I've written occasionally about the topic, including a piece back in May on capabilities for generating images based on brief text descriptions. But the progress didn't stop there. In particular, ChatGPT — a so-called large language model — has raised all sorts of possibilities for gathering and synthesizing information. Why get a bunch of Google hits about individual pieces of data when you can pose a question like I did — "Why is 'The Brothers Karamazov' the greatest novel ever written?" — and get this response, which I reproduce verbatim:

"The Brothers Karamazov is a classic novel written by the Russian author Fyodor Dostoevsky in the late 1800s. It is considered by many to be one of the greatest novels ever written and is often studied in literature classes around the world. The novel tells the story of the three Karamazov brothers and their tumultuous relationship with their father, as well as the impact of their relationships on their lives and the lives of those around them. The Brothers Karamazov is noted for its complex characters, philosophical themes, and exploration of deep, universal questions about faith, morality, and the human condition. It is a thought-provoking and moving work that has stood the test of time and continues to be widely read and admired by readers around the world. However, as with all art, opinions on the novel will vary and it is ultimately up to individual readers to decide whether they believe it is the 'best' novel ever written."

If you like, you can try your own questions here. You can then ponder, among other things, why many think college essays will soon go by the boards. I generally did well on college essays, but how do you top that for a summary?

Turning to insurance, my favorite development of the year is how advances in technology and innovative thinking by insurers has moved us more toward a "predict and prevent" model and beyond the traditional "repair and replace" approach. How much better off will we be if insurers can use their data, including that gathered from sensors in real time, and combine it with the industry's immense analytical power to keep many losses from ever occurring? 

Here is an interview I did with Sean Ringsted, chief digital business officer at Chubb, that explores the possibilities. And you'll be hearing much more from me, and others at The Institutes, on the topic in the New Year. 

Second for me is what I see as the more mature use of AI. Some day, AI may well make it possible to underwrite risks nearly perfectly and in real time. In the meantime, an awful lot was done this year by using AI to tackle more mundane issues: speeding the handling of claims, making underwriters far more efficient by gathering all relevant information and flagging issues before they even open a file, helping agents manage their schedules, letting workers' comp carriers triage cases and spot potential complications from the get-go, etc. That feels like real progress to me. 

Finally, I'll applaud the progress on embedded insurance. It has always felt like a natural approach to me. Why make clients come to us to buy a product they often don't understand and maybe even resent having to buy, when we can make insurance a natural part of another purchase — of a car, a house, a piece of jewelry, etc.? We've published quite a bit on the topic, including this column, and you can be sure you'll see much more on the topic in 2023. 

Yes, there are loads of challenges in front of us — still-high inflation, a possible recession, geopolitical uncertainty and on and on. But let's set those worries aside for now and try to appreciate the progress we made in 2022 despite plenty of similar obstacles that appeared in our way.

Enjoy the holidays!

Paul

P.S. Please share thoughts on what I missed in terms of progress in 2022, especially on the insurance front.  

Inefficiency and ineffectiveness in an insurance claims department are a bit like a boat at sea that has a hole in the hull and is taking on water. The skipper is trying to move forward, but the leak keeps slowing it down.

An insurance claim may get off to a great start, but time constraints and complex processes can bog down the most experienced claims adjuster. Timing is of the essence. When adjusters cannot be agile, claims take longer and get more expensive. Before you know it, the costs of a claim are much larger than anticipated, resulting in claims leakage.

Technology can reduce claims leakage, saving insurance companies billions of dollars each year with the help of what we call digital coworkers. 

When a claim comes in, a claims adjuster’s first task is to gather all relevant information. Then, they need to project how much the insurance company will need to pay for the claim. When the final numbers come in, the insurance company compares the initial projection of costs to the amount ultimately paid. 

Claims leakage occurs when the actual cost is higher than the projected cost – hurting, sometimes disastrously, a company’s bottom line. Claims leakage represents roughly 6% of total claim payments across the industry, costing $67 billion a year for U.S.-based insurance companies alone.

Based on data from 2021-2022, claims costs are increasing by $18 billion year-on-year. This figure suggests the hole in the hull of the boat will only be getting larger.

There are two main reasons claims leakage occurs within claims departments – inefficiency and ineffectiveness.

Inefficiencies are often created when a claims adjuster knows they need to take action on a pressing matter but cannot address it quickly enough.

Think of a workers’ compensation claim where an injured worker’s doctor is asking for an independent medical examination. The doctor has requested approval for the procedure from the claims adjuster and said they will proceed with the examination in five days if they don’t hear otherwise. The adjuster was wrapped up in a series of complex litigation events on other claims and missed this request, so the Insurance company is on the hook for paying for a procedure that might be unwarranted.

Ineffectiveness is also all too common in the claims process. In a perfect world, an insurance adjuster would have all the information they need to process a claim on the first call. In reality, data dribbles in during multiple interactions. Not having all the right information up front can cause a claims department to underestimate how much it will cost to resolve a claim.

For example, say a homeowner stated they had water backing up into the basement. Because this is a common loss, the claim was assigned to a junior adjuster, who went through the usual steps. As it turned out, the actual cause of loss was surface water that seeped into the basement following days of rain. This is considered flooding and is not a covered loss under the policy. The time the junior adjuster spent working on the claim was lost.

In both examples, the company suffered claims leakage.

See also: Premium Leakage Due to Legacy Systems

Narrowing Down the Problem of Claims Leakage

The examples show that there are two distinct problems with claims leakage – people and processes.

There is a 10% vacancy rate for hiring in the insurance industry. There are around 430,000 more jobs than workers to fill them. Many of those jobs are in claims departments. When insurers cannot fill positions, claims adjusters have to increase their pending claims counts and potentially slow the resolution of claims.

The lack of time and staff contributes to errors and slow processing. Both issues highlight the need for coaching and training, but there is no time available for that, either.

The second problem with claims leakage has to do with how technology works to manage the flow of a claim.

A claims department that runs like a well-oiled machine has the right people working on claims at the right moments. While technology has come a long way, only a human has the expertise to handle certain tasks.

What insurance companies could do better is restructure their processes so a single claims adjuster is not wholly responsible for a claim. Rather, a team of claims professionals works together to solve problems. As part of the team, each has a part to play, and the group is collectively responsible for the outcome. Digital coworkers can be a part of the team that improves efficiency and effectiveness.

Overall, the problem with people has to do with having enough staffing capacity. The problem with processes is in having better technology to streamline the claims process. Digital coworkers tackle both problems. 

Digital Coworkers: A Better Solution

A digital coworker works behind the scenes to take on all those tasks that do not require the heavy degree of intellect that humans have. They are effective in large part because, when it comes to insurance processes, thinking can be highly predictable in many situations.

Things could have worked out differently if a digital coworker had been deployed in the two claims examples described above.

In the case of the workers’ compensation claim, the digital coworker would have asked a few more automated questions to determine if an independent medical examination was warranted. Depending on the answers, the digital coworker would have flagged the matter to a claims adjuster for immediate attention. Armed with more facts, the adjuster could more quickly approve or deny the request. 

Regarding the water backup claim, a digital coworker might have asked more questions at the time the claim was filed and determined at that point that it was a noncovered flooding issue rather than a covered water backup claim. 

Digital coworkers can also manage basic communications, while learning from the data and making even better decisions going forward. It all works like clockwork. The end result is greater efficiency, improved effectiveness and a reduction in claims leakage for insurance companies.

Digital coworkers are revolutionizing the insurance industry. Just one can do the work of four to eight human employees, improving the capacity of a claims department and enabling an insurer to process claims better and faster. 

In April 2021, UIPath went public, and robotic process automation (RPA) was ushered in as the next great class of business software. At the time, NASDAQ: PATH was the third-largest IPO in software history (behind Snowflake and Qualtrace). Eighteen months later, what have we learned?

Four observations:

• RPA wins tend to be tactical, not strategic. RPA automates rote tasks in primarily finance, HR and legal: support functions, not areas of differentiation for your business--unless your business is finance, HR or legal
• RPA tends to add--not remove--cost. Bots tend to run alongside humans rather than replacing them, and license and support costs are not inconsiderable
• Automation centers of excellence (CoEs) tend to plateau at +/- 200 bots. There are several reasons for the plateau, including stakeholder misalignment on goals and measures of success, inability to demonstrate ROI and validate outcomes, lack of process understanding and standardization and, last but not least, difficulty identifying the right root causes of the business problem(s) being addressed
• “Automate first” is a suboptimal approach to automation. You buy the software, find the low-hanging fruit (or what appears as such) in, for example, source to pay and quickly spin up some bots. The problem with this approach is that tasks appearing simple and discrete are often linked to, or nested within, larger processes that are more dynamic, nuanced and complex 

None of this is a knock on UIPath or RPA software as a class. To the contrary, these are powerful tools that get better and smarter with every product release. 

The challenges to date have been mainly with human software. Line workers are understandably reluctant to embrace technologies threatening to make their jobs redundant, and, as a result, leaders and managers have been reluctant to pursue automation as a strategic imperative. 

See also: Future of Digital Insurance Claims

In the aftermath of COVID, with labor shortages and global inflation, out of necessity leadership minds are changing fast. There is a growing sense of urgency. Looking ahead, we see three guiding trends: 

• Tactical automations are being aggregated. Startups such as Thoughtful+ and Goodlegal (founded by UIPath’s lead counsel) are offering purpose-built automations in finance, HR and legal, with an eye toward building out end-to-end (E2E) automation platforms in these areas. The classic build v. buy debate emerges: Why invest resources today in tactical bots when E2E automation platforms will likely be available tomorrow?
•  “Automate last” is the way. There are three non-negotiable steps in strategic automation: 1) process discovery, 2) process standardization and 3) automation deployment and control. Working through the three steps in sequence not only yields better automation results, it also imposes new organizational rigor, yielding efficiency gains funding the larger automation effort  
• Automation is itself automating. To date, the critical first step in strategic automation--process discovery--has been a manual exercise composed of humans interviewing humans and documenting work activity. A new class of process intelligence tools (e.g., skan.AI) automate this step. Such tools go so far as to financially value and triage key processes and recommend process fixes and automation paths   

Given the rapid innovation in all three steps of the automation lifecycle, procrastination may not seem like a bad strategy, like waiting three months to buy a TV.  

But what’s happened in telematics offers a cautionary tale. Progressive embraced telematics early on, investing in capabilities and expertise ahead of the market. GEICO, by contrast, waited. The result? Per Ajit Jain, GEICO’s vice chairman, “There’s no question that recently Progressive has done a much better job than GEICO, both in terms of margins and in terms of growth. There are a number of causes for that, but I think the biggest culprit as far as GEICO is concerned is telematics.” 

Jain said he expects it will take GEICO “one to two years to catch up” to Progressive in telematics, and GEICO’s financial results will “suffer comparatively” in the meantime. 

What is telematics but the strategic automation of underwriting and rating? If “following fast” is your strategy as it relates to automation, be aware that, as GEICO teaches us, “fast” is measured in years. You can’t buy your way quickly up to speed.   

Strategic automation isn’t a magic pill or fad diet, it’s a lifestyle change. Automated operations delivering speed, precision and stability, reducing customer churn and acquisition costs, require several quarters of prudent, patient investment to build. A new mindset, working customer-back and not technology-forward, can and should prevail today. 

Fortune favors the bold. Firms that are clear and candid about their automation ambitions will do better than those that hedge. The older and more established the firm, the stronger the downward gravitational pull of the status quo. If automating half of your underwriting function is, for example, the goal, then say it in no uncertain terms, making automation part of the mission, including automation targets in employee evaluations and financial compensation.

This year, Haven Life conducted its second annual Q4 Survey, focusing on consumer understanding of employer-sponsored life insurance, as well as consumer thoughts about discussing life insurance during the holiday season. Amid growing concerns about a recession, Haven Life found that consumers are focused on saving, with 55% of survey respondents indicating they do not want an expensive gift from their partner this year but would prefer that money be put into their savings account or their child’s 529 account.

However, despite the looming recession making consumers extra thoughtful about their finances, this year’s findings highlight a large gap in knowledge surrounding life insurance and its role in building a financially secure household. Life insurance can be an important element of feeling financially prepared in today’s economy, highlighting the necessity for coverage providers to bridge this gap.

Financially Insecure Individuals May Avoid Life Insurance Conversations

According to our survey, 30% of working individuals revealed they have only “somewhat” or “no” understanding of the life insurance benefits their company provides. This result echoes the 2022 Insurance Barometer Study by Life Insurance Marketing and Research Association (LIMRA) and Life Happens, showing that of those respondents who did not feel knowledgeable about life insurance, only 17% actually had coverage in place. Consumers who feel uncomfortable or uninformed about life insurance are likely to avoid the subject altogether, missing a crucial building block in establishing their household’s financial security. A lack of preparation by consumers is not always their fault; employers typically do not offer detailed assistance, financial advisers are not always accessible and people are simply too busy to find time to sit and weigh their options.

This is a ripe opportunity for providers to pivot from usual messaging and lead generation to instead meet consumers where they are. Performing extra legwork to find underserved consumers is especially important in a period as urgent as open enrollment, which comes frustratingly close to the holidays, where time and energy may be promised elsewhere. If individuals must decide on coverage in a short time while still focusing on their daily lives, information must be made simple and accessible.

See also: Selling the Urgency of Life Insurance

Addressing Emotional Topics Head-On Will Empower More People

The “elephant in the room” inherent to any life insurance discussion is that considering one’s own death is an emotional topic that often clouds people’s capacity to gauge what their loved ones will want or need when they’re gone. However, the 2022 Insurance Barometer found that 44% of U.S. households would feel financial insecurity within six months of their primary wage earner’s death. 

The average employee-sponsored policy payout is typically one year of salary, yet 85% of respondents to the Haven Life survey want a payout beyond that. While our survey’s largest respondent group indicated they would like three to five years of payout, nearly 20% indicated they would want 15 years or more. This reveals a serious disconnect between what consumers want from their coverage and what they would actually get.

Last year, our survey found that 75% of individuals believe they would be unable to sustain their standard of living if they were unable to work, demonstrating how important it is to have life insurance to help mitigate the loss of a person’s income should they die. Life insurance can also be used to shield loved ones from debt upon passing, to provide a down payment on a house or to leave a legacy for the next generation. 

Regardless of how it is used, a common thread resonates: Sufficient life insurance delivers peace of mind that loved ones will be protected. From employers’ perspective, reducing stress and financial concerns among their employees will always improve productivity and overall emotional satisfaction. Taking one step further to guide employees to life insurance options such as gap coverage will further cement company loyalty.

This Year’s Holiday Conversations Can Be Different Than Last Year’s 

The holidays provide an especially opportune moment for consumers to have meaningful, in-person conversations with their loved ones about their future. According to this year’s Haven Life Q4 survey, “family milestones” and “travel plans” are again the conversation topics people are most excited to have, with more than half of survey respondents placing these conversation topics at the top of their list. However, unlike last year, when “health and wellness” took the third spot, this year the pandemic is in the rear-view mirror, with 2022 respondents eager to discuss employment opportunities; “career” is cited as the third most popular topic.

The holidays are a great time to get together with family and to share love and joy. But it’s also time to have conversations around financial planning and end-of-life care. After all, thinking well is wise; planning well is wiser. As concern about the pandemic wanes, this year’s respondents also seem to have a reduced sense of urgency. Only 30% of those surveyed have spoken to their loved ones about necessary life insurance and financial planning needs in the last six months, compared with 57% of respondents in 2021. A surprising 15% of respondents have never spoken to their loved ones about this topic at all.

Nevertheless, when respondents were asked how they would feel if given a life insurance policy over the holidays, the top three responses were “surprising,” “thoughtful” and “well-intentioned” – also the top three results from 2021. With 85% of respondents to this year’s survey indicating they are “very” or “somewhat” concerned about an impending recession, consumers continue to recognize the value of planning for the future.

Spotlight on Accessibility and Simplicity

With 17% of this year’s respondents admitting they do not fully understand the difference between life insurance and health insurance, we believe it is more important than ever to provide accessible, easy-to-understand options for the majority of Americans who do not work with a financial adviser. We believe that when providers make the options simple and easy to understand, consumers can make decisions with confidence.