The death toll in the earthquake in Turkey is staggering -- more than 37,000 people are known to have died, as I write this, and the UN says the actual total  could be twice that. But the number who died didn't need to be nearly so high, even though the earthquake and its aftershocks were massive. Tens of thousands of people should still be walking this Earth -- shaken up but very much alive. 

The blame falls squarely on contractors who constructed shoddy buildings and on all those who falsely sold companies and individuals on the earthquake-resistant qualities of the spaces they were buying or renting. Blame also belongs to those government officials who failed to spot and publicize the problems that caused entire blocks to collapse even though buildings were supposedly built to modern standards in an area known to be vulnerable to earthquakes. 

But I do think insurers can help prevent future disasters. It won't be easy. It will require finding a way to share the industry's evaluation of risks in ways that go beyond the narrow confines of a policy and that range beyond the one-year time frame of the normal insurance contract. But it's worth a try. 

I've had occasion to think about earthquakes and building standards ever since I was searching for a new office as the bureau chief in Mexico City for the Wall Street Journal in 1994. Memories were still fresh from the 1985 earthquake that had collapsed buildings throughout the city and killed at least 5,000 (the official count) and probably more like 10,000 people. So, I wasn't just trying to find more space as I hoped to consolidate Dow Jones operations in Mexico but was looking for resilience in the face of earthquakes, and I got quite an education on just how much force buildings could be constructed to withstand. 

My problem as a buyer boiled down to two issues: information and incentives. And those two issues not only confront other buyers as they think about where to locate in earthquake zones but create hurdles for the broader, societal desire to keep earthquakes from causing billions of dollars of damage and killing tens of thousands of people.

The information issue was simple: Others had it, and I didn't. Those who constructed the buildings I visited certainly knew what standards they had or hadn't met. Government inspectors did, too. But I was operating at a severe information disadvantage. I could look at the brochures I was presented and maybe dig into government reports, but I still wasn't going to really know just how a building would perform once the shockwaves of a major quake starting rolling through the drained lakebed that Mexico City is built on.

The agents for those builders also didn't have any incentive to be open with me about the resilience of an office. They just wanted to make a sale. I'm not saying there were necessarily dishonest. I'm merely acknowledging the realities of capitalism. They had every reason to gloss over any imperfections, just as the builders had incentives to keep costs as low as possible during construction. 

Government inspectors also didn't have incentives that lined up very well with mine or with those of society writ large. They produce their reports for decision makers in the bureaucracy, not for the public, so they use obscure language and don't even have a very good way of informing the public about the relative safety of buildings. And -- let's be frank -- inspectors aren't always as pure as the driven snow in a political culture like Mexico's in the mid-1990s. Bribes were known to happen. 

Here's where insurers come in. They have both the right information and the right incentives. They can not only help an individual like me circa 1994 but can also educate a whole populace about risks in ways that could greatly limit the devastation from future earthquakes. 

As I said, it won't be easy. Yes, underwriters have all the data they need on the general risk of an area such as Mexico City or on the recently devastated area along the Turkish-Syrian border, where three tectonic plates come together. Insurers also have accurate data on all the buildings whose owners or renters they underwrite. And insurers have reason to want to help clients avoid losses, especially as we move more toward a "predict and prevent" model and away from the traditional "repair and replace" approach to insurance. 

The biggest problem is that the decision to rent or buy tends to happen before insurance enters the equation. In addition, the cost of insurance is typically reflected in one-year increments, as policies come up for renewal. 

But what if insurers in Turkey had warned prospective occupants a decade ago that certain buildings weren't, in fact, built to modern standards for withstanding earthquakes, despite what the owners' agents claimed? What if insurers had also said that risks (and premiums) would increase each year because pressure continually builds where tectonic plates cross, until an earthquake releases that tension? What if the insurers had put a hefty price tag on those increasing risks, showing prospective occupants that they wouldn't save nearly as much as they'd hoped by moving into a building constructed to a sub-par standard? And what if those insurance conversations had happened before the lease or mortgage was signed, rather than afterward?

How many occupants would have been dissuaded (and lived)? How many builders would have retrofitted offices or at least adhered to high standards in future construction?

I saw such broad conversations about cost have an impact in the personal computer industry in the late 1980s and through the 1990s. Many budget brands lost credibility when consultants began rating the total cost of ownership over the lifetime of a PC, and buyers could see what they'd likely spend on maintenance, software that wasn't included in the base model, etc. These days, makers of electric vehicles are changing the conversation along similar lines. Yes, EVs cost more up front than those with internal combustion engines (even with government incentives, in many cases), but they require much less maintenance and, of course, don't require gasoline. 

So, while I realize a lot has to happen between my noodling on earthquakes and broad societal impact, I'm hoping that we can change the timing and nature of conversations about insurance and blunt at least some of the effects of earthquakes in years to come.

Cheers,

Paul 

Looking back at 2022, insurance providers mostly had a quiet year that ended in turmoil. The $132 billion in insured losses from natural catastrophes in 2022 was 57% above the 21st century average. On the other hand, health insurance claims related to COVID-19 tapered off, and there were fewer storms affecting P&C policies. Life insurance payouts occurred less frequently, as well, following the record highs of the pandemic. 

But 2022 was an intense year for insurance providers. Hurricane Ian devastated Florida in September, and, at $65 billion insured losses and counting, it was the costliest natural disaster of the year. The year’s relative quietness also meant demands for most lines of coverage were lower, and consumers, rather than buying policies, cautiously waited for economic conditions to unfold. Inflation and recessionary fears cooled interest in life insurance products, lowered investment income and contributed to increased prices when paying claims. Supply chain issues even hurt the insurance industry; building materials, car parts and everything in between are much more expensive, and insurers are covering that cost directly. Life insurers were able to manage more of these pressures than most; they have flexibility to match premiums to market conditions and take advantage of rising interest rates. 

What does this mean for insurers in the year ahead? Luckily, they started 2022 in a position of strength, and still are in a good spot to drive down costs and increase demand, unless rising claims costs and market volatility continue. 

Leverage technology to adapt for disruptions

Insurance, like all industries, is dealing with a tough labor market. Investing in people to keep them trained and equipped to handle all necessary processes can be a lot, but it’s crucial. Insurance companies also need to find ways to do more with even fewer people. The best way to do so is to augment employees with automation. Automation can eliminate mundane and time-consuming tasks to create a more rewarding workplace. As insurance companies step into the future, this will be key.

As a side effect of insurance work, many insurers have more data than they know what to do with. They need to capitalize on their analytics in more ways than one. Data analytics should drive investment decisions, product development and pricing and help with fraud detection. With deep analysis of data, insurers can manage uncertainty and better model predictions and strategies. Data analytics can allow insurers to be prepared to answer “What if?” to figure out what’s coming. Assumptions, instinct and Excel models aren’t enough. 

Moreover, insurers have to anticipate disruption to their models and to the world economy and prepare for it. Uncertainty is rampant, and so are cybersecurity threats, geopolitical tensions, changes to tax law globally, compliance burdens and rising competition from insurtechs. Insurers have to adapt much more quickly than before, and automation and using the data they’re generating will allow them to be nimble and anticipate market pressures before they become issues. With good data and augmented workforces, insurers can be more resilient and agile to face coming challenges. 

See also: Risk Barometer for 2023

Create a better customer experience

In 2023, insurers will have to balance improving their internal processes and improving their customer experience. Consumers are demanding simpler processes to buy and use insurance, and traditional insurance companies are often left in the dust by digital-first companies that aren’t hindered by legacy systems or traditional ways of doing business. To stay relevant, insurance companies will need to adopt digital capabilities to stay apace with nascent competitors. By doing so, they can help customers much more quickly when disaster strikes and reach their policyholders effectively on their own terms. If the customer journey isn’t fully mapped out, it won’t have technology in place to communicate with policyholders when they need assistance quickly. On top of that, customers are expecting insurers to be socially and environmentally conscious, not just paying lip service to their causes, with true ESG strategies. Insurers that are aggressive about ESG can differentiate themselves in the market for both consumers and for employees.  

These fundamentals of adopting new technologies, using data effectively, augmenting workforces, simplifying customers’ experience and fully integrating ESG strategies need to be instituted if insurers are going to stay competitive in 2023.

After a global pandemic and a war in Europe that no one saw coming, maybe we should get out of the business of making predictions. But there’s still value in trying to pinpoint big trends. After all, it’s not about being spot on. It’s about helping industry players orient themselves, compete more effectively and better serve customers in an increasingly volatile global market. So, here are our seven key trends to look out for in the insurance industry in the year ahead:

1. Insurance products will be reimagined in the cloud 

In 2023, pressure on renewals, premiums, cycle times and customer retention will pose a significant challenge to carriers. Those that use cloud infrastructure to do more than just sign up customers and settle claims will succeed. While many have already made the move to cloud and invested heavily in digital transformation, insurance still lags behind other industries in terms of the imaginative use of advanced digital technologies to deliver the new products that customers want and the market needs.

That will begin to change this year. Some carriers will use cloud to make the typically opaque claims process more transparent and easier to understand for their customers. Others will use application programming interfaces and straight-through processing to reduce cycle times by improving the flow of data between parties. And innovative cloud-based products will push through based on demand. For example, in auto insurance, there will be greater refinement and sharpening of payment options such as per-mile or per-journey, supported by better use of telematics. The most imaginative insurers of 2023 will turn claims processes into shopping experiences to enhance customer experience and reduce cycle times.

2. The graying of the industry will prompt digital transformation 

Grow old or grow up? That’s the choice facing insurers in 2023. Talent in the industry has long been on the older side. As baby boomers retire, carriers are finding that up to a quarter of positions are unfilled in some functions. So, carriers will be looking to bring in third parties at scale. They’ll do this not to replace bodies and outsource day-to-day processes but to help codify institutional knowledge and build rules-based digital systems that deliver a more reliable and sustainable operational model over the long term. 

3. Analytics will offer quick ROI

Now that the basic operational transition to the cloud is complete for many insurers, competitive differentiation will come from accelerating its benefits; namely, speeding the process of insuring and improving customer and broker experience. Data will further increase in strategic importance in 2023. But don’t expect to see lots of multi-year, long-term investments in enterprise resource planning or customer relationship software. Rather, expect to see quick investments in digital and analytics solutions to achieve rapid returns on investment – such as predictive analytics that help insurers anticipate and triage customer need and application program interfaces for no-key, no-touch data ingestion. The coming year will see fewer deep transformation initiatives and more light-touch applications of digital and analytics for specific, immediately attainable goals. 

4. Embedded insurance will bring new opportunities

Value, not price, will be a key area of focus for both carriers and brokers. Instead of ratcheting premiums up, insurers will pair prudent underwriting with innovative product design that leverages more personalized data. They’ll deliver these products through partners and digitally enabled distribution channels. 

Embedded insurance — which allows any third-party, non-insurance brand to seamlessly integrate insurance products into its customer’s purchase journey — will create opportunities for carriers and insurtechs alike. In property and casualty and general insurance alone, the embedded insurance market is forecast to grow to $722 billion in gross written premiums by 2030, more than six times its current size and 25% of the total market size.

“Embedded insurance has opened access to new addressable market segments,” says Davide Palanza, research manager, IDC Financial Insights, “The size of this opportunity means the business model is giving birth to a new, vibrant ecosystem of insurance providers, embedded insurance enablers, and distribution partners. It will allow the industry to reframe its digital purpose individually and collectively, bringing benefits not only to insurers but also other organizations and customers with more relevant and affordable insurance.”

For example, this year will see auto insurance bundled at the point of vehicle sale and offered by original equipment manufacturers (OEMs) under the car brand -- with the risk underwritten by traditional carriers. Because of broader price pressures on OEMs (such as the microchip shortage), carriers will have to do more with less when delivering the services they provide as part of the underlying policy. One example? Claims Manager - a configurable servicing platform that uses computer vision and artificial intelligence to assess damage to vehicles during the claims process. 

See also: Cybersecurity Trends in 2023

5. Insurers and insurtechs will be friends, not foes

Insurance players will spend 2023 treading a path already well-worn by their banking counterparts. Over the last few years, fintechs have been playing nicely in the sandbox with banks as their partners rather than their competitors. A symbiosis of skillsets has been the key to their mutual success. This year, insurers and insurtechs will make the same move. 

Insurers will no longer bear the sunk cost of massive investments in technologies that can quickly become outdated. Instead, they will partner with insurtechs that offer focused and targeted solutions, which solve a specific piece of the puzzle within the insurance value chain. Already, insurtechs are becoming a huge investment opportunity for insurers. For example, in October 2022, insurance holding company Tokio Marine announced that it would invest $50 million in the series B funding of bolttech, a Singapore-based insurtech that seamlessly connects insurance providers, distributors and customers in the world’s largest technology-enabled insurance exchange. We expect to see more such tie-ups in the future.

According to Ryan Mascarenhas, group chief customer and operations officer at bolttech, “Creating tangible, lasting value for a customer often requires an insurer to form multiple partnerships with best-of-breed industry experts and embrace co-opetition. Traditionally, insurance carriers have wanted to manage the entire value chain themselves. So, embracing an ecosystem approach requires a big mindset shift. But it opens up so many additional possibilities, especially where the goal is to make the end customer experience as seamless as possible.” 

As the market slowly moves away from traditional channels, insurers will continually evaluate which insurtechs are the best fit for them and look for the right third parties to help orchestrate those solutions. 

6. Macroeconomic conditions will be a mixed bag for industry players

High inflation and high interest rates are hammering consumers and have tipped many global economies into the early stages of recession. But should insurers fear the dip? Overall, not necessarily. 

Certainly, carriers will feel pressure on profit in some areas. For example, because of continued supply chain disruption, competition for (and the price of) parts and materials remain high. For property and auto insurers, this is increasing servicing costs and cycle times. If these carriers decide to hold down premiums to encourage financially stretched customers to renew their policies, they may end up taking greater losses on those products. 

But those increased losses will be offset by high interest rates. Carriers make most, if not all, of their profit from investments -- especially in the bond market. So, high interest rates mean higher rates of return, which may cushion any drop-off in demand for policies and the increased cost of servicing them.

Shawn Homand, head of product at Liberty Mutual, sums up the tradeoff neatly: “With respect to property, we don’t expect any market softening in 2023 -- we expect continued hardening. There are capital constraints — caused by catastrophe losses, the current interest rate environment and inflation — which impact the supply side. But even with a reduction in the demand side due to a global recession, this will not tip the scale down in any meaningful way.” 

Homand also expects that “increased focus on analytical tools that provide better risk selection and accurate valuation analysis” will help keep internal costs down and premiums stable, too. 

Not everyone in the industry will benefit, though. Now that the initial pandemic terror has abated, life and annuity insurers may see a dip in simple life insurance policies. Insurance brokers, too, will have a tougher time convincing cash-strapped customers to renew discretionary policies. And those smaller carriers looking for a merger or growth acquisition may find themselves waiting for the cost of capital to fall before they act. Conversely, carriers with deeper pockets could decide that now’s the time to gobble up small fry. And, as always with a recession, expect policy fraud to increase. 

7. Insurers will need to get specific about ESG 

How to respond to the climate crisis has become a defining challenge for the insurance industry. Without insurance, most new fossil fuel projects cannot move forward, and existing ones must close. So, while not immediately urgent from a bottom-line perspective, forward-looking insurers will also spend time on climate change and other environmental, social and governance (ESG) priorities in 2023. 

Carriers continue to field questions from their boards and Wall Street on their commitment to a sustainable future. And industry analysts expect big changes by around 2027/8. According to Insure Our Future, an international campaign calling on insurance companies to exit fossil fuels in line with a pathway limiting global warming to 1.5°C, 13 insurers have committed to end or restrict underwriting for new oil or gas projects, 41 have done the same for coal and 22 for tar sands, as of October 2022. 

While this cleaner future may seem far away, in the short term, carriers need to seek more clarity and definition in their ESG strategies for products and markets. The complexity of the industry dictates that a long on-ramp is required to make the necessary changes. Insurers can expect investors to be asking questions and demanding more specific answers. 

Ultimately, 2023 will see a more competitive insurance market. While continued economic disruption makes prices and policy servicing tricky, high interest rates and the industry’s prior investment in cloud bodes well for those willing to be inventive and make quick investments in areas where better data can make a big difference. Bring it on.

2022 saw Hurricane Ian causing an estimated $80 billion in damages, California forest fires, employers wrestling with “back to workplace” policies, company issues stemming from the overturning of Roe v. Wade and numerous cyberattacks. This assortment of events has undoubtedly made insurance more desirable for buyers and insurers more nervous.

What areas are the main exposure points for organizations as we accelerate into the new year, and how can businesses act now to protect themselves? 

Employee Benefit Plan Sponsors Under a Legal Heat Lamp

Under the Employee Retirement Income Security Act of 1974 (ERISA), persons charged with decision-making responsibility are deemed “personally liable.” For the past decade or so, plaintiff lawyers have found that a careful investigation of fee arrangements between employers and outside contractors providing employee benefit plan services reveals little oversight of outsourcing fees. As one might expect, “excessive fee” cases have abounded in the U.S., and this won't slow down. 

Plan sponsors should address this exposure through fiduciary liability insurance to arm sponsors with legal defense and coverage for penalties, expert-led responses and necessary associated notifications.

The Cyber Exposure Saga Continues 

No discussion of exposures would be complete without paying attention to cyber-related exposures, especially ransomware. Clever computer hackers invade a network or computer system, then encrypt it, demanding ransom payment – almost always in cryptocurrency – before releasing it back to the owner/operators. SMBs are especially vulnerable and, worse yet, the consequences of an attack on a small business are catastrophic. It can lead to a tarnished reputation, customer dissatisfaction and, even worse, closures.

See also: 20 Issues to Watch in 2023

Businesses need to strategically rethink their current and often outdated operations and put the proper guardrails in place to help against cyberattacks. Cyber insurance is a security blanket businesses should implement. Insurance is generally available, although annual renewal pricing increases have been in the double digits in 2021 and 2022. Therefore, the quality of the insurance is important. Additionally, commercial insurance buyers must be wary of specific exclusions for cyber exposure on policies under which insurers did not specifically intend to provide the coverage. While this may not appear as a big issue on the surface, there is often insurance coverage found by the courts in the absence of policy exclusions.

Breach of Privacy-Related Allegations

When considering cyber-related incidents, one cannot forget allegations of breach of privacy. Increasing dependence on social media and “culture wars” make potential allegations much more possible and practical. For the knowledgeable insurance buyer, having solid insurance protection to defend against allegations of breach of privacy, as well as pay claim settlements, is increasingly important. Most cyber insurance policies specifically cover breach of privacy, but SMBs are less likely to understand the details of insurance purchased and may even be reluctant to accept the cyber exposure with proper concern. This is a major flaw as SMBs, generally, are targets for data breach efforts. Other traditional insurance products may also address breach of privacy allegations, so a good review of all insurance plans and associated details is a must to determine multiple sources of possible insurance coverage.

Retirement of “Baby Boomers” and Younger Workplace Leadership Can Stir the Pot 

With millennials moving up the ranks in leadership roles and Gen Z entering the workforce, businesses need to take into consideration all the employee protections instituted since the early 1990s around age discrimination and corresponding allegations to ensure they are not perceived to be favoring or overstepping workers' rights on a generational level. This will continue to be bothersome for employers from the standpoint of insurance claims. 

Additionally, with many employers still struggling to implement “return to the workplace” rules and employees trying to hold onto “remote working,” insurance claims are bound to unfold. This makes employment practices liability insurance all the more important as it is a powerful tool to cover businesses against claims by workers suggesting their rights as an employee have been breached – this includes failure to employ or promote and wrongful termination. 

General Increase in Crime Exposure

Last year, mega-retailer Walmart announced that it fell victim to a significant increase in criminal activity. As a likely result, this can lead to corresponding increases in retail costs to customers. A down economy can also cause increases in employee theft, although it may take some time to fully realize this exposure. In 2023, insurance company underwriters will likely want both pricing and deductible increases in many commercial crime insurance policies. NRF’s Retail Security Survey suggests that, on average, retailers saw a 27% increase in organized retail crime incidents in 2021. This number would be expected to rise, based on activity and experience in 2022.

See also: Risk Barometer for 2023

Insurance protection is important, and insurance policy details are critical.

Buffeted by accelerating technological change and feverish competition, mid-tier property-casualty insurers are entering a period of unprecedented challenges and opportunities.

The challenges come from giant insurers with far more resources and from small, feisty insurtechs whose speed and agility mid-tier insurers cannot match.

But opportunities for mid-tier insurers also come from rapidly developing technologies. Cloud, AI, APIs and microservices, among other innovations, are allowing them to develop new products and services with greater efficiency, speed and variety than ever before. And at lower cost.

As a result, new technologies aren't just allowing mid-sized insurers to better compete with bigger and smaller rivals. Technologies are forcing them to do so.

Here are challenges and opportunities in technology that will change the world of mid-tier property-casualty insurers in 2023 and the years to come:

Telematics. A key battleground for mid-sized insurers competing with larger and smaller rivals involves telematics - a technology that allows insurers to personalize their products based on each customer's driving habits. Data transmitted by sensors in an automobile give the insurer a far more refined and accurate sense of how much, where and how safely customers drive. Comparable products are becoming available for homes.

While telematic products permit some drivers to lower their premiums, more importantly for carriers, the technology allows the insurer to begin a two-way conversation with customers, helping them save money and avoid accidents. It is still early days for this technology, with only about 10% of consumers currently participating and over 50% saying that they are open to the idea of sharing their data to receive discounts. Potentially, this conversation could fundamentally alter the relationship of an insurance company with its customers, reducing traditional tensions and increasing customer loyalty.

Ecosystems. Carriers are recognizing that they can't rely on a single provider of technology solutions. The idea of using a single provider is becoming as outdated in the insurance industry as is the idea of consumers buying all of their software from Microsoft.

While the insurance industry has come to this realization slowly (in the banking industry, for instance, this is old news), it has profound implications for the way every insurance company uses technology. In the coming years, insurers will increasingly depend on ecosystems of providers, seamlessly connected by open APIs, that work well with each other. These ecosystems will help free companies from being locked in to one vendor and its products.

See also; Has the Remote-Work Trend Peaked?

Direct-to-consumer offerings. Demand for the direct-to-consumer experience has exploded since the onset of the pandemic. A recent study by the Boston Consulting Group found that 75% of potential insurance customers say they will only contract with a company that offers a simple, digital process for obtaining insurance products.

Spurred by new technologies and the COVID pandemic, many car insurance companies have dedicated websites and applications to reach potential customers. However, insurance agents remain an important part of the distribution channel for most mid-tier insurers because these products are often complicated and consumers like having a trusted expert's advice. Insurers must acknowledge that their products will be sold in a multi-channel environment and must invest in all of them.

Automation. Outdated P&C insurance technology infrastructure is the bane of many players in the industry. Legacy systems obstruct an insurer's growth and ability to regulate operational cost, business demands and customer requirements. And as the prospect of harder economic times grows, insurers will be looking with greater urgency to cut costs and increase efficiency.

With advanced analytics, robotic process automation and other emerging applications, insurers today have opportunities to streamline core operational processes such as sales and underwriting. What stands in the way for mid-tier insurers is that the costs of integrating major new systems appear prohibitive in terms of both time and dollars.

Creating products at a lower cost. As the insurance giants and insurtechs offer an ever-wider variety of technically savvy new products, some mid-sized insurers will turn to new technologies to allow them to compete without expensive and time-consuming system integrations.

One such technology is the Platform as a Service (PaaS), a cloud computing model that allows a third-party provider to deliver hardware and software tools to users over the internet. The PaaS provider hosts the hardware and software on its own infrastructure. This frees developers from having to install in-house hardware and software to develop or run a new application.

Take KOBA, an Australian insurtech MGA pioneering pay-per-kilometer personal auto insurance. It has migrated its insurance program onto Socotra, a third-party provider's policy core platform that allows it to scale and introduce products quickly and inexpensively without major system integrations. The platform provides cloud-native capabilities and the flexibility to plug in multiple raters, claims systems and a single platform to launch any insurance product for any geography or distribution channel.

KOBA's vision is to enable mid-sized carriers around the world to sell white-labeled versions of its innovative and tech-driven products, including boat, motorcycle and ride-sharing products, without having to spend the time, money and effort to create these products themselves.

The moment that matters for mid-tier insurers

For decades, large insurers had advantages over their mid-tier rivals due to the cost and complexity of new technologies. Today, we see a democratization of new technologies that can provide them with a competitive advantage. Combine this with their greater agility to introduce products and serve smaller niche markets, and a new environment emerges that gives these organizations a leg up. No doubt, the next few years will see an increasingly competitive insurance market.

That's the headline on a recent New York Times article: "My Watch Thinks I'm Dead." It seems that the Apple Watch's recent addition of a feature designed to detect low-speed car collisions and to send help if the wearer is incapacitated interprets lots of events as collisions and automatically dials 911. The problem is especially acute among skiers, who not only get bounced around on the slopes and frequently stop suddenly but may be wearing so much clothing that they don't hear the alarm from their watches in time to head off the emergency calls. 

The calls not only create obvious problems for emergency services, many of which report being overwhelmed, but point to a broader problem with false positives that I frequently see distorting thinking about innovation. 

There can be something a bit amusing about technological screwups. All that brain power behind this fancy technology, and they did what?

The Times article does have plenty of "huh?" moments. It also points, though, to even more serious issues with false positives. We often see something described as a breakthrough because it's 90% accurate at something — but that means it's 10% inaccurate. And many "breakthroughs" are more like 65% accurate. 

The issue with false positives is especially serious in healthcare, where they can lead to overdiagnosis and overtreatment that is not only expensive but can endanger patients. Al Lewis, co-founder and CEO of Quizzify, which offers employers programs that educate their employees on healthcare issues, calculates that testing an entire employee population to spot someone at near-term risk for a heart attack would cost at least $1,000 per employee — even if you make the highly optimistic assumption that the test would be 90% accurate. The reason is all the false positives. 

If you have 1,000 employees, your 90%-accurate test will likely find the one person at high risk of heart attack this year who wouldn't otherwise be found, but it will also flag some 99 other people and send them to their doctors for extensive testing and, for many, unnecessary treatment, perhaps including stents. Lewis figures the total cost of what wellness vendors may suggest as an inexpensive test to be at least $1 million for the whole, 1,000-employee population. (He goes into much more detail here about the expense and dangers of overtesting, because of all the false positives that result.) 

You see this error all the time in the enthusiasm that tech companies express for "agents" of all sorts. Remember the "internet refrigerator"? It would track the food you had inside and reorder as needed — but what about the false positives? What happens when your football player son, who drinks a gallon of whole milk a day, goes back to college in the fall? What are you supposed to do with those gallons that show up before you intervene? 

Those agents that were supposed to sort through all the news in the world and prepare a sort of newspaper for me each morning were a great idea — but only if they got everything right. What about all the material I didn't want, yet had to wade through? I remember when phones first started to have GPS; companies waxed poetic about the possibility of spotting me outside a Starbucks and being able to send me a coupon for a latte. What if I wasn't in the mood for one? Then, you're just pestering me.

While the insurance industry doesn't indulge in techno-phoria like the Silicon Valley types do, there can still be blind spots about false positives. I see lots of optimism about the accuracy of AI in spotting claims that are likely to head to expensive litigation or clients who are seriously contemplating leaving for another carrier. Lots of life insurers talk about the high accuracy they can achieve in estimating life expectancy based on just a few questions, Yet I don't see much consideration of what happens when the AI returns a false positive. 

In some cases, there's no particular downside. You do the best you can with the new technology and figure that whatever you don't spot in the way of, say, claims headed to litigation would have been missed anyway. Still, every innovation should be viewed with the idea that there may be unintended consequences — maybe that action you take when you worry that a claim may become litigious will set off someone who never considered hiring a lawyer. 

The need to watch for unintended consequences will increase as the industry continues to move toward what we're calling "predict and prevent" and away from the traditional "repair and replace" model of indemnifying people after a loss. If we're asking people to take actions, we have to be sure we aren't steering them into any danger. A colleague shared a story from his wife about how a telematics-based system was trying to turn her into a bad driver. We can't have that.

As I said, some failures of technology can be darkly amusing. I sometimes think back to a piece a colleague at the Wall Street Journal, the late, great Jeff Zaslow, wrote 20 years ago about the foibles of technology. He included an anecdote about the early versions of TiVo, which tracked what you recorded and then recorded other shows that its algorithms decided you might like. He quoted someone as saying, "My TiVo thinks I'm gay" (which the person mentioned to a TV writer friend, who turned the idea into an episode of "The King of Queens.") 

So, I hope you got a chuckle out of the Times piece and from Jeff's. Still, the problems that they chronicled in droll fashion can create serious issues if we aren't careful. I hope we're careful.

If false positives can trip up the legendary designers at Apple, they can surely ensnare the rest of us. 

Cheers,

Paul

In the heartland of America, far from the coastal regions traditionally associated with innovation and entrepreneurship, business is booming for financial service companies with bright ideas and the ambition to succeed.In Ohio, historically America’s cauldron of industry, only manufacturing contributes more than financial services to the economy in terms of percentage of GDP. The capital Columbus is #14 in the North America 2021 Findexable rankings for best-developed fintech ecosystems and 39th in the world, having made a steep climb of 70 places over 2020.

The growth of the state’s financial sector in the past decade is due in no small part to the efforts of a unique private economic development corporation, called JobsOhio, a state-authorised, not-for-profit that has lately been turning its attention to insurtech as a specific focus of opportunity. JobOhio’s insurance/insurtech initiatives are headed by Ron Rock, who has a strong background in financial services, spanning 20 years. Rock has been heavily involved in business development, giving him the credentials to lead innovation and investment programmes in the insurance sector.

“Banking and insurance are key contributors to our economy,” says Rock, “and Ohio ranks as the fifth largest economy in North America. We’re home to progressive financial brands such as Klarna, and we have nine large insurance companies in the state. Insurers are constantly thinking about business development, how to become more efficient, and how to reach customers in their preferred channels with new offerings. This is the driving force behind the insurtech initiative within JobsOhio.”

Ohio provides many advantages for startups and established businesses alike, says Rock. It has thriving metropolitan and commercial areas such as Cincinnati, Cleveland and Columbus, there is a favourable state regulatory environment, and the cost of living is far lower than in popular business locations such as New York City and San Francisco. There are also excellent inter- and intra-state transport links, venture capital is plentiful, and more than 200 colleges and universities nurture a growing talent pool for tech-driven companies.

Rock explains that JobsOhio has far more depth than the name implies. Although the Jobs prefix suggests an employment development agency, that’s only part of the story; it works to attract capital investment, encourage startups and strengthen established brands, which creates work opportunities. So, when companies choose Ohio, part of Rock’s role is make sure they access the strong local community of business partners, customers and talent that can help to grow a business and put it on the map. JobsOhio brings all the parts together and channels creative energy into successful collaborations.

“We have a diverse ecosystem that can cultivate and support the insurance sector,” says Rock, “and insurtechs are an important part of the mix. We work arm in arm with the state to encourage world-class corporations, entrepreneurs, and talented individuals to build their businesses and careers here.”
There’s certainly no shortage of financial help for them. Incentive programmes include economic development grants, growth funds, and research and development grants. There are the heavily-funded ‘Innovation Districts’ in Cincinnati, Cleveland and Columbus, to help generate ideas and develop the infrastructure to attract more companies.

And there is a JobsOhio Workforce Grant as well as its Talent Acquisition Services that offer customised sourcing, screening, and training solutions. As well as collaborating with regional economic development organisations, and federal authorities, creating structured programmes and investment initiatives to encourage and support insurtechs, JobsOhio has struck partnerships with universities and training organisations to ensure a highly skilled funnel of employees. The state turns out more than 35,000 college grads qualified to work in financial services every year.

“The region’s impressive technology talent ecosystem has proven to be vital for our expansion and was a core reason behind our decision to scale here,” says Alex Frommeyer, co-founder and CEO of Beam Benefits. “We love the people, the culture, the lifestyle.”

From an employee’s perspective, it’s good to know that Ohio’s composite cost of living index is significantly lower than the national and regional average; it ranked #1 for affordability in 2020 in the U.S.News Opportunity Rankings. It’s no wonder that companies stay loyal to it. Ilya Bodner, who founded Bold Penguin to build software for the small business insurance sector, got started in Columbus in 2016 and was anxious to stay close to its roots when it went looking for a buyer to fund its expansion.

When Bold Penguin was acquired by another mid-West firm with similar values – American Family Insurance Mutual Holding Co (AmFam), the country’s 13th largest P/C insurance group – in January 2021, he was delighted that it meant he could keep his local team together.The deal, which attracted a huge amount of attention in the insurtech space, meant he could ‘put a pin on the map’, as he described it, confirming Columbus as what he believes is ‘the mecca of insurance’ in the States.

Despite the economic impact of COVID-19 and the current recession, Ohio, says Rock, remains an attractive place to do business and he is optimistic about future growth. But with every company and new venture, he underlines the importance of getting the fundamentals right and offering something that the market truly needs. He cites the example of Root, a home-grown insurtech initiative.

“Root was a company on the way up,” he says. “Although it has a great telematics product, it’s not ground-breaking technology in the insurtech space. Many insurers have been doing telematics for a while. I could see what Root needed to address to become more viable and successful. It was very upside-down in terms of premiums written and the amount of reserves it had to hold and the amount of claims it paid out. So there is often a learning curve, and sometimes an insurtech needs to come down to earth, take stock, and make adjustments.”

In contrast, another home-grown company called Branch Financial, launched in 2017 and headquartered in Columbus, took a different approach to its business model. Branch uses data and technology to make home and auto insurance easier to buy and more cost-effective.

“I’ve had many conversations with Branch’s CEO, and I was interested in how he approaches the market,” says Rock. “Branch only wants to grow as fast as its loss ratio allows, which is very wise.”
Another success story is Beam Benefits, which, unlike Branch and Root, came from out of state. The digitally-native employee benefits company uses machine learning to give brokers and employers tailor-made quotes in seconds. It has raised more than $160million in funding and is now available in 44 US states. Both Beam and Root have benefited from support from Drive Capital – a Columbus-based VC fund that has amassed a $2billion war chest in assets under management, specifically to invest in technology companies outside of Silicon Valley.

Speaking in summer 2022, Drive’s co-founder Chris Olsen, formerly at Sequoia Capital, said he sought out promising founders in regions overlooked by other investors. He firmly believes that if venture capitalists widened their scope, the American economy would be more competitive internationally. JobsOhio certainly makes a virtue of the state’s entrepreneurial spirit – and how economical it is to do business there. “One of our campaigns is called ‘Ohio is for leaders’,” says Rock. “And If you’re travelling across North America, you might see us get a bit cheeky with our advertisements. For example, we compare the cost of doing business in New York versus Ohio; it’s cheaper to head west and run a business from here.”

According to Crunchbase data, venture capitalists injected more than $3billion into Columbus alone over the past 20 years, particularly into healthcare and insurance startups. While acknowledging that investment in the global insurtech market has taken a knock over the past 12 months, Rock believes you shouldn’t read too much into one year’s figures.

“We’re actually on course to do more venture capital investment in 2022 than we did in 2021,” he says. But there’s a lot of noise in the marketplace and it’s important to separate the wood from the trees when looking for viable ideas and investment potential. “I’m combing the landscape as a member of different investment committees”, he says. “When I look at what the VCs are investing in, they certainly have a lot of choices. If you’re reviewing 100 different companies, you might come across 20 that do the same thing, another 20 that do something in another vertical, and they all look similar.
Ohio’So you have to dig beneath the surface to make sure you pick a winner, something with a great business differentiator.” Many of the larger insurance companies Rock works with are setting up their own innovation departments and labs.

“We do a lot of different programmes with these companies. Although they’re trying to build from within, they also need external partnerships and guidance,” he says. A key area in which it can help is ensuring the right cultural fit between insurer and insurtech. While insurtechs may have the technology and the bright ideas, plus enthusiasm in abundance, they don’t always have an insurance mindset and can sometimes move too quickly for traditional insurers with a more cautious outlook.

“We’ve found that a poor cultural fit is one of the reasons why a company value falls,” says Rock. “If there is a disconnect between partners, it’s going to hit the numbers. You have to work hard to get the right focus and a shared vision.” One way to facilitate that is by promoting old-fashioned networking. “One of my ambitions is to create a large state-sponsored event under the JobsOhio banner,” says Rock. “Think of events like Insurtech Insights or InsurTech Connect. Because Ohio is a growing base for insurtech in America and is drawing interest from across the world, it’s a natural meeting place for the insurance community.”

This article was originally written and published by 'The Insurtech Magazine.'

Sponsored by ITL Partner: JobsOhio

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Top articles surrounding our January focus, Claims. Plus: an insightful interview with Snapsheet's Andy Cohen.

FROM THE EDITOR  The thought that keeps rattling around in my head as I think about underwriting these days is: How can you make accurate predictions about risk based on historical experience... when the world has decided to throw so much of that experience out the window? COVID-19 changed all sorts of assumptions about life expectancy, at least in the short run and perhaps in the long run; we just don't know yet. The pandemic also reset our patterns of work, changing the risks associated with buildings and with those who work in offices and factories -- or maybe not, as more companies insist on a return to the office.   Inflation came out of nowhere for the first time in decades and made just about every sort of claim more expensive, especially in auto, where supply chain issues sent car prices through the roof. Now, inflation is subsiding... we think... but how fast?  And don't get me started on the Russian invasion of Ukraine, a stunner that not only created tons of business risks but that greatly stepped up the general geopolitical uncertainty, including on the possibility that China will invade Taiwan. I wish I had an answer for underwriters. Instead, as usual, I have a story. It's one that was told to me in 2000 by Gary Loveman, a Harvard Business School professor who rather unexpectedly found himself being asked to be COO at Harrah's and who reinvented loyalty programs, initially for Harrah's and eventually for the whole gambling industry.  The analogy is far from perfect. Regulations will prevent insurers from implementing many of the ideas. That's why I used the word "dream" in the headline, rather than offering a concrete proposal. But there may be aspects of his ideas that can help with underwriting -- and it's a good story.... Loveman was a popular but untenured professor at HBS, doing some consulting on the side, when he met the CEO of Harrah's at a continuing education program that Harvard put on. Loveman later sent him an unsolicited letter with some ideas about how Harrah's could break out in what had become a commodity market, where every casino's games were basically the same as everyone else's. Next thing he knew, in 1998, the CEO had offered Loveman the job of COO. Loveman, who had never managed more than his admin and some research assistants, was going to be managing 15 casinos with more than 10,000 hotel rooms and more than 35,000 employees.   Among the many smart things he did, he reversed the sequence of the loyalty program. Rather than wait for customers to earn loyalty points, he used technology to guess what kind of customer someone would be based on the first interaction, or at most the first few, and started treating them as part of that tier. If he was wrong, he had only cost himself the occasional steak or free hotel room (that would have been unoccupied anyway). But if he was right -- and he was right a lot -- he had a good chance of winning the loyalty of someone before they wandered down the street to another casino.    I had personally seen the attraction of that sort of loyalty-on-the-come approach. When I left the Wall Street Journal to become a partner at a consulting firm, Diamond, a few years before, I was suddenly going to be traveling a ton and didn't want to have to wait a year for the airlines to start rewarding me. I wrote letters to the major airlines asking for status and promising that I'd spend a bunch of money with them if they agreed. American and United did, on the understanding that they'd check up on me after a few months, and I spent thousands of dollars a month with them for years.    So, that loyalty inversion idea stuck with me, and it would do a lot to improve underwriting -- if regulators would allow it. Imagine if you could shorten the duration of policies or make the premium variable, so that you weren't having to make a one-year prediction on all those fast-changing variables. Instead, you'd be issuing a one- or two-month policy for, say, an auto based on your best understanding on general inflation, on the prices of used cars, on general driving trends and even on the particular behavior of the insured, as measured by a telematics device.    You could handle far more uncertainty and surprises because you'd learn on the fly, as Loveman and Harrah's did, while minimizing the cost of your mistakes.    No, regulators won't allow the sort of flexibility that would be ideal for underwriters. Nor should they. Regulators need to protect consumers, and allowing for such variability in premiums would create the potential for all sorts of mischief by insurers, which could lure people with low initial offers and then quickly jack up rates. Regulators want to provide customers with as much certainty as possible about coverage and rates.   But I do think the notion of underwriting by prediction and experimentation is still a powerful idea and could point underwriting in some useful directions. Let's call it a dream.    Cheers, Paul   P.S. In any case, you might want to look at Loveman's story just for the sophistication of the data analysis. He learned, for instance, that while industry consensus was about courting the high rollers (the "whales"), Harrah's best customers were actually a group of decidedly low rollers who dropped in for an hour or two at a time, often to relax on their way home from work. He also demonstrated the power of what has come to be known as "omni-channel." Staff often recognized regular customers at their casino and provided special treatment but had no way to recognize good customers from a different Harrah's property -- until Loveman set up a program that captured and shared data from all the games, all the restaurants, all the bars, etc. from the group's 15 casinos, plus the dozens more they went on to acquire before Loveman stepped down in 2015.    If you're interested in learning more, you might check out this piece Loveman wrote for Harvard Business Review or this piece about him produced by Stanford Business School.  Ideally, underwriting is based on precise data about risk, gathered over years or even decades, but what happens when the world isn’t ideal? It certainly hasn’t been, as all sorts of anomalies have arisen: COVID, the Russian invasion of Ukraine, supply chain disruptions, inflation and more. To get a better handle on how insurers can underwrite risk in such an uncertain world, ITL talked this month with Henry Kowal, director, outbound product management, insurance solutions, at Arity, an Allstate subsidiary company that tackles underwriting uncertainty with data, data and more data about driving behavior gathered via telematics. Read the Full Interview "In terms of underwriting, we want to go beyond where most are now. Those using telematics have a customer drive for three to six months, then determine how good a driver the person is. We want insurers to have that data at the point of sale, not six months later."  —Henry Kowal Read the Full Interview READ MORE 3 Signs Your Underwriters Are in Trouble Fortunately, technology is maturing just in time to respond to common challenges, allowing underwriters to refocus their time on what they do best. Read More Why Underwriters Don’t Underwrite Much The average underwriter spends 40% of their time on administrative tasks, 30% on negotiation and sales support and only 30% on actual underwriting. Read More Dramatic Shift in Underwriting Ahead With the world changing, commercial underwriting is going to be called on to minimize the impact of complex risk on an ever-riskier world. Read More Empowering the Underwriter of the Future I asked an audience how long it takes a new underwriter to go from zero to productive: The majority voted for 24 to 36 months. This is a ludicrous proposition in the age of AI. Read More The Need for Transparency in Underwriting Open the black box and combine analytics with underwriter expertise to evaluate the computer’s conclusions and where the information comes from. Read More Simulator Gamifies Underwriter Training An “underwriter simulator” program of gamified learning and 3D interactive scenarios redefines what's possible for workforce training. Read More FEATURED THOUGHT LEADERS Chris Mullan Tim Crowe Michael Reilly Denise Garth Megan Bock Zarnoch Prakash Vasant Huw Newton-Hill

Ideally, underwriting is based on precise data about risk, gathered over years or even decades, but what happens when the world isn’t ideal? It certainly hasn’t been, as all sorts of anomalies have arisen: COVID, the Russian invasion of Ukraine, supply chain disruptions, inflation and more. To get a better handle on how insurers can underwrite risk in such an uncertain world, ITL talked this month with Henry Kowal, director, outbound product management, insurance solutions, at Arity, an Allstate subsidiary company that tackles underwriting uncertainty with data, data and more data about driving behavior gathered via telematics.

ITL:

Auto seems to be a space where there’s even more uncertainty these days than in others. What are gas prices going to be?  What's driver behavior going to be like?  Will people return to offices and commute like they did before? And so forth? How do you underwrite when things are changing so much?

Henry Kowal:

It's really challenging. A few years ago, I'd never really heard of chip shortages, or supply chain disruptions, at least when it came to auto insurance. Now, the issue is front and center.

But we have lots of data. We just celebrated a milestone this past November, where Arity surpassed 1 trillion miles of driving data. And that driving data is available across the U.S., across states and even down to the ZIP code level. What we see is that total miles driven has returned to where it was before the pandemic, but the risky driving behaviors that we saw during the pandemic -- specifically, driving at high speeds and distracted driving -- have persisted.

In terms of underwriting, we want to go beyond where most are now. Those using telematics have a customer drive for three to six months, then determine how good a driver the person is. We want insurers to have that data at the point of sale, not six months later.

ITL:

How do you gather the data so you know what kind of driver I am when I show up on the doorstep of, say Allstate, to buy insurance?

Kowal:

Only about 16% of Americans are currently in a telematics program, but over 80% of Americans have a smartphone through which they're already sharing their location data. They’re doing it with everyday consumer apps for finding good gasoline prices, checking the weather, etc. So, Arity has forged relationships with these mobile app publishers, who gain permission from users to monitor their driving behaviors. We power some of the features that consumers can benefit from, such as crash detection that could lead to the deployment of emergency services or roadside assistance. In exchange, consumers consent to share driving data with us.

We have over 45 million active connections across the U.S., and insurers can tap into the database. When John Smith is shopping for auto insurance, they’ll ping us to learn about his driving behavior and use the data to price the insurance.

ITL:

A decade ago, assessment of risk via telematics largely focused on speed and hard braking. Are there other behaviors you’re monitoring now, as well?

Kowal:

Those are core behaviors that are still highly predictive, but the technology has expanded. We can also monitor phone distraction as a predictor of risk. As you know, distracted driving is almost an epidemic in the U.S.

We're also looking at driving behaviors that are contextualized. By that, I mean it's not just about speeding – is this person driving over 80 mph? It’s, is this person speeding versus the posted speed limit?

We’re also looking at daily usage patterns. How frequently does somebody drive and for how long? What’s the driving environment? That's taking into account the types of roadways that an individual is driving on, which could even factor in dangerous intersections. Some roads and intersections are more dangerous than others.

ITL:

So, you’re not just looking at me as the driver. You're looking at where I'm driving and when I'm driving and layering those risks on top of my behavior.

What kind of pushback do you get on what you're measuring?

Kowal:

People might say, I was driving, but I wasn't the one using my phone, so I shouldn't be getting dinged for phone distraction. Or, I wasn't the driver. I was the passenger. If that’s the case, the user can easily update that in the app

Another issue is the Big Brother effect. People may say, I just don't want my insurance company tracking me.

But, more and more with smartphones, people see this as an exchange. Am I willing to provide my data in exchange for the potential to save on auto insurance? Because if you think about it, driving behavior is an actual measure of driving risk. It's not a proxy, like a credit score or your age or your education. We did a survey back in 2021, and the majority of folks said, “Yeah, I would rather be priced and assessed based on my driving behavior and my driving record, versus who I am and where I live.” So, I think that Big Brother concern is becoming more and more the minority.

ITL:

Do I have the opportunity to see what your driving data is, and do I get an opportunity to protest or correct it. I'm thinking of the credit bureaus, such as TransUnion, which these days have to let me know what my score is and protest items if I want to.

Kowal:

That’s a really good insight. Arity treats our ArityIQ product, which is pulled at point of underwriting, as a FCRA (Fair Credit Reporting Act) product.

 So, it's a consumer report, similar to  credit data, and Arity abides by FCRA rules, which include consumer disclosure. Individuals have the right to request their consumer disclosure which would include information that was shared with an insurer for quoting or underwriting purposes. They also have the option to dispute information if they believe it is inaccurate.

ITL:

Where do you go from here?

Kowal:

A big thing is to continue to grow our database of connections. We're at over 45 million active connections right now. That represents just under 20% of the U.S. population. We want driving behavior on the majority of the population. So, we need to continue to grow our connections with mobile app publishers, but at the same time also continue to add connected car data from OEMs [original equipment manufacturers].

The other thing is that, right now, our product is based on providing an insurer with a score. That insurer uses that score to determine whether the customer shopping for insurance should get a discount. Our next evolution is providing what we call back attributes, the actual driving behaviors that go into the score. Based on our interactions and market research, that approach really resonates with, I'll say, the top 10 auto insurance carriers. As you know, all of them have their own telematics program, and they all have their own secret sauce, so they want the ingredients, those driving attributes. They’ll take those ingredients and score them themselves.

ITL:

What’s next in terms of the analysis you’re trying to do?

Kowal:

We’re looking at other more predictive attributes. An example is what I'll call contextual braking. What were you doing when you hit the brakes hard? How fast were you traveling? Was it during the daytime or at night? Was it during a rush-hour period? Using more of these contextual attributes helps provide even more predictive lift in terms of risk assessment.