Two million people work in the U.S. insurance industry. According to the U.S. Census Bureau, 300,000 of these workers will retire in the next three years, and 50% will retire by the end of this decade. 

As it is, there are 200,000 unfilled positions in insurance, and, according to a recent study from the Hartford, only 4% of Millennials and Generation Z are considering insurance as a career option. They want work that’s more creative, expressive, meaningful.     

Throw in COVID and the highest inflation rate the U.S. has experienced in over 40 years and we’re already seeing signs of what this means as last week American Family Insurance, based in modestly priced Madison, WI, raised their minimum wage to $23 an hour. Though we wholeheartedly support claim processors and contact center workers earning fifty grand a year, we also know insurance is a price-driven business, and those same workers will likely scour the market for the best-priced coverage they can find in response to relentless advertising from GEICO, Progressive and State Farm urging them to click and save.   

The time to start automating knowledge work at scale is now. Results are not immediate. The transition to automation - and an automation-first mindset and culture - takes time. 

Work automation is not about technology. It’s about process. A process that is best led by the line of business (LOB) or function head and not corporate IT. The LOB/function knows their business best, they’re closest to the action as things change, and they’ll want to "own" the automation as it rolls out. Thinking of bots as human workers, you want them rolling up to the LOB/function and not the IT organization. Corporate IT does play a vital role in work automation, but it’s a support role, like finance.  

See also: Insurers Turn to Automation

We use a five-step process that’s remarkably low-tech. The five steps are as follows:

1. Map workflows from standard operating procedure (SOP) documents. The only tools required are MS Excel and Vizio (which you already own).
2. Identify and quantify specific activities, work products and work product volumes. In the world of knowledge work, there are only 20 possible activities in five categories: receive, review, perform, attend, send. You’ll also want to capture the IT systems required per activity. 
3. Eliminate waste and wasteful variability exposed by step 2. Workers tend to add their own spin to rote tasks, claiming their approach is unique. Force-fitting work processes into the 20 activities in step 2 exposes this fallacy. You want hard standardization of the best practices within each process/capability.
4. Identify automation use cases and pilots. Look vertically within specific capabilities, e.g., claims, for enthusiastic stakeholders. Horizontal automation across capabilities (e.g., claims and policy administration) is more technically (and politically) fraught and comes later. Useful guiding metrics include: automation potential percentage and labor-intensive score. That said, be mindful that the ultimate goal is not to automate work per se but to increase operational efficiency and reduce digital customer friction toward higher revenues and retention rates. You’re looking for cost-out, yes, but also "customer-in."  
5. Build a directional automation business case. Include structure and strategy for scale, security and compliance, disaster recovery and risk management, change management and, last but certainly not least: the recruitment, upskilling and compensation of humans. It’s a truism that the more automation you have the more your humans matter. 

Three observations about the five steps as they apply to most situations.

The first three steps function as a LEAN-like exercise, and as such unearth opportunities for productivity gains and cost-out. This is intentional, as the goal is to find self-funding, budget-neutral automation opportunities especially early on as automation resistance and skepticism are high. Think big, start small, success on a shoestring.   

No major software investments are required. Though software will be necessarily tapped to build bots and string them together, most such tools are available for rent in the cloud and reasonably priced with license costs trending down. There is indeed a lot of large-scale digital transformation going on in insurance, by which we mean multi-year, capital-intensive, platform replacements. The approach outlined above is about rapid evolution over the T-word, working with legacy as-is, data where-at. 

See also: How to Automate Your Automation 

It’s natural to insist on a grand strategy up front, in step 1, before doing anything, but strategy is generated here at the end, in step 5. Work automation starts with the people and culture and internal systems that get work done today. Best to get started, working gradually, organically and, yes, aggressively (you can work through the five steps in as little as eight weeks). The resulting strategy document will feel more rock-solid and informed, with successful pilots to prove the concept. 

Where to start? A recent analysis by McKinsey, with which we agree, says the most "automatable" lines of business in P&C are, in descending order: 1) workers comp, 2) auto, 3) fire, 4) property, 5) inland marine, 6) crop, and 7) general liability. Taking it by function, per the ACORD capability model, we recommend customer service, channel management, claims, contract administration and sales. 

Wherever you choose to start, just break out the SOPs, dust them off and get mapping. Good luck.

A global pandemic, supply chain challenges, climate change leading to CAT events and cyber risk have come together to increase claims and raise insurance prices across industries. Not only are these risks not evaporating any time soon, but they’re also likely to increase risk in 2022 for many businesses. 

As a result, the insurance market is moving away from transactional coverage and more toward co-management of risk.  

Understanding these trends — and, more importantly, the risk management solutions that position business owners in the face of underwriters — will be key to securing the optimal insurance coverage in 2022. 

Here are four “mega-risks” we will see play out in 2022 — and how they are already affecting the P&C market:

1. Increased reliance on tech has led to massive improvements across industries. It’s also increased cyber risk for all. 

Attempted online fraud in the hospitality sector is rising 156% year-over-year. In an industry in which 60% of businesses say they’re not ready for cybercrime, cannabis businesses are a major target for bad actors. And, cyberattacks against large food manufacturers halted production at several processing facilities last year. As cyberattacks become more common, cyber insurance rates will rise 20% to 30% this year. 

What can you do? Brokers are partnering with vendors and insurance carriers to address this through risk management solutions, including improved network defenses, multi-factor authentication, employee training and third-party vendor security audits. 

See also: Cognitive Biases and Risk Management

2. Natural catastrophes are raising the stakes. CAT modeling may be the answer. 

In 2021, the U.S. had 19 weather disasters that costs $1 billion or more. 

From wildfires to floods, tornadoes and hurricanes, farms and food manufacturers saw reduced yields from damaged crops. Real estate owners say it’s nearly impossible to find locations that aren’t exposed to flood, fire or storms. Hospitality is losing business as weather disrupts operations. As a result, P&C rates for both restaurants and lodging establishments will rise as much as 20% in 2022. Property rates for other types of commercial real estate will rise 10% or more, as well. 

What can you do? Consider enhanced warning and predictive systems such as catastrophe (CAT) modeling and fire- and water-resistant construction materials when possible. While storms are more foreseeable, they are still out of human control; therefore, a strong risk management solution includes a thorough post-loss response plan for recovery and resuming operations.

3. Attracting and retaining quality employees is a key challenge in 2022. A strong stock market + an aging population is pushing intellectual capital into retirement. 

Vaccine hesitancy is also squeezing labor markets, while leading to a rise of workers’ compensation claims in the healthcare sector. Although WC premiums are expected to remain flat in 2022, the challenge will be at the worker level, as remaining staff will have to work longer hours to make up for their fellow employees. 

What can you do? Brokers can offer employers improved pay and expand extended benefits programs with perks such as paid apprenticeship training programs, vocational skills training programs and mental health services. 

4. Supply chain disruptions are commonplace. Labor shortages and consumer habits have made it hard for businesses to deliver goods and materials. 

In the construction industry, material shortages interrupted cash flow, leading to cost spikes, ruined schedules for projects and busted budgets. Expect construction coverage costs to rise between 5% and 35%, with large, risk-prone projects at the higher end. 

For short-haul drivers, simply leaving port with cargo is an administrative and bureaucratic nightmare. Coverage for courier and delivery fleet will increase by 25% or more.  

What can you do? Resilience is the key to mitigation, as businesses that can should build up materials reserves and develop new relationships with potential backup suppliers domestically. Think both local and regional suppliers. 

See also: 20 Insurance Issues to Watch in 2022

Securing the right partner is critical to reducing risk in 2022

The COVID-19 pandemic has exploded risks and insurance coverage costs, creating a complex environment for business owners and employers of all types.

These conditions make it essential to partner with a broker that specializes in your market, understands your risk level and knows the market inside and out. In doing so, you can build a strong risk management and insurance program that positions your business for a successful year.

We are in a new era of workplace models, and the freedom and flexibility of remote work is incredible in many ways. But there is a second side to this coin. Daily, I interact with organizations that provide in-person services for their communities – services that cannot be performed remotely. Service-based jobs require people to be present to provide those services and include jobs in city government, hospitals, schools and grocery stores, as well as positions in all the trades. Even when there is a way to supplement those roles with remote work, the bulk of it must be performed in person. 

The fact is that physical workspaces are still – and will always be – important, and, at the moment, many organizations are concluding that both on-site and remote work environments will be necessary indefinitely. 

The following tips will help you reduce corporate risk and support employees in both remote and on-site environments. 

For remote workers

Establish work and break guidelines: To maintain productivity and prevent burnout, establish employee guidelines for working hours and breaks. Some remote employees will overwork while others are prone to underwork. Guidelines set clear expectations and help everyone to find balance.

Establish ergonomic guidelines: To reduce physical risk, including the risk of carpal tunnel and repetitive action injuries, put ergonomic guidelines in place for at-home workstations and offer ergonomic training to employees. Dining room tables are often at a different heights than desks and are not appropriate workspaces. Provide guidance on the right height for monitors, desks and surface areas, as well as proper posture. 

See also: Smart Home Devices: the Security Risks

Develop communication standards: To ensure connection during emergencies, put an adequate communications system in place, such as Microsoft Teams or a Slack. Provide employees steps on what to do if they have daily technology challenges and explain how and on what channels the company will communicate in case of an emergency. 

Build teams and trust: To encourage fluid communication throughout the year and a unified direction, focus on team building. AP Keenan puts a significant amount of effort into team building, which allows quality communication and opens the doors to educate and coach employees. In addition, with strong team camaraderie, we can more easily check in with our employees and make sure their mental health is good. We’ve hired people over the past year, and the feedback we get is: “Wow! You really keep in contact.”  

Foster a work-life balance: Help employees create a work-life balance by encouraging them to take time off, just as they did when they were in an office – even if their laptop is within five feet of them. You can especially help employees who are “workaholics” or those who feel guilty not working 24/7 to set boundaries. In addition, make sure your remote employees are not isolating themselves excessively. Happy, balanced employees who interact with others and have a network of support have more to offer at work.

Consider workers' compensation claims: With hybrid models, today’s employers must consider what the workers' compensation situation is in an employee’s home and the liability to the employer versus the employee in that space. As an employer, what is your control over the work environment and your ability to affect safety? Is there enough room for your employee to get around, or are they tripping over drawers or cabinets when they are getting up to go to the restroom?  

Consider your financial liability: To ensure you maintain connection with your employees, consider providing compensation for your remote employees’ phone and internet access. At AP Keenan, across the board, we add a dollar amount to all hourly employees’ paychecks to assist with their phone and utility bills. 

In addition, make conscious decisions about the physical supplies your employees need. When the pandemic began, many companies were able to quickly switch to remote work. They had emergency response plans that allowed them to know where there data centers where, how they were going to provide employees continued connection and how they would get supplies to their people. The reality is that most employees don’t stock office paper or light bulbs at home, and their internet might not support all the work functions or provide the right security. As you decide what employees must provide versus what you will provide, have clear conversations about shifting costs to employees. In particular, consider if you are shifting costs to those who already experience a wage gap.

For in-person employees, you’ll need to provide adequate resources to support the spaces in which they work to reduce your risk and increase their health and productivity. These tips apply: 

Reassess the budget: As employers aim to accommodate the hybrid concept, they risk spreading dollars thin over new costs. Have clear budgeting discussions that highlight the transfer of funds to support remote work as well as the risks of defunding the physical workspace. Will you be removing resources that avoid the severity and frequency of claims? 

Invest in safe work environments: Look around -- does your brick-and-mortar workspace look like a storage unit or a moving facility since the pandemic started?  Are boxes stacked in the hallway?  Are you still ADA-compliant? As the corporate physical space is reduced in favor of remote work, there is often an uptick in claims, such as “slip, trip and fall” scenarios. It’s important for in-person facilities staff to remove obstacles and keep the physical space up to standard. 

Continue safety trainings: Keep employees’ physical safety at the top of the priority list. Dedicate a healthy portion of your budget to maintaining in-person safety and prevention programs to avoid problems. Whether you have one or 10,000 employees in the office, it only takes one injury to result in a claim.  

See also: Cyber Tips for Work From Home

Stay on top of workers' compensation laws: One of the most complex factors employers face when deciding on a hybrid work model is workers' compensation. In California, it’s one of the largest drivers in the workplace and often an incredibly complex expense. Laws change regularly and are bound to change as a result of the shifting workforce. Work with a consultant to stay up-to-date on evolving workers' compensation laws – especially those in your particular state.

Work with your insurer: One of the best ways to control costs and keep people safe is to avoid claims in the first place. To reduce the severity and frequently of claims, make sure your insurer is not just managing claims and providing coverage, but helping you think through these important issues. In the end, your insurer can help you improve your rates, improve your experience, retain your employees and realize a successful future.

Ukraine (UKR) is one of the largest insured risks for political risk insurance (PRI) and trade credit insurance (TCI). This predates the current situation in Ukraine and started immediately after the country's accession to sovereignty in 1991.

Based on data from the Berne Union, the trade association representing credit and political risk insurers, PRI carriers issued $19 billion of new coverage globally in 2021, of which $2 billion went to cover risks in Europe and $1.6 billion to cover risks in Russia. Based on these figures and other published data, we estimate that PRI insurers have insured between $1 billion and $7 billion in Ukraine risks over the last five years.

New PRI losses in Ukraine due to Russia's invasion will likely be material but well within the ability of private carriers to perform on their obligations. Several factors are contributing to reducing private PRI insurers' exposure in Ukraine:

• Some PRI and TCI carriers stopped writing Ukraine risk in 2014
• Carriers with existing Ukraine risk have likely taken reserves against future losses in Ukraine
• 80% of PRI coverage is provided directly or indirectly by government agencies such as OPIC in the U.S. and by multilateral agencies such as the World Bank's MIGA.

Insured Losses in Ukraine

In Ukraine, PRI and TCI tend to be primarily purchased by foreign companies with cross-border trade or investments in the following industries:

• Energy
• Manufacturing
• Infrastructure/Project Finance
• Natural Resources

Losses due to Russia's invasion of Ukraine fall under comprehensive political violence, and more specifically under war and civil war and strikes, riots and civil commotion. The full range of PRI and TCI coverages includes:

• PRI: political violence, expropriation and breach of contract
• TCI: Short-term credit, medium-/long-term credit and other cross-border credit

PRI coverage protects primarily against loss of assets and profits. PRI's political violence protects against losses due to strikes, riots and civil commotion (SRCC) and war and civil war. TCI's credit default coverage protects primarily against loss of profits due to force majeure; failure to perform on letters of credit due to force majeure; and loss of profits and cost of penalties due to force majeure. PRI and TCI tend to also provide compensation for the cost to the insured of its failure to perform on obligations to third parties, such as penalties for non-delivery of goods or services due to covered risks.

PRI political violence's war and civil war coverage excludes declared war between the permanent members of the U.N. Security Council, which includes Russia.

Loss of profits due to sanctions may be covered by PRI and TCI policies. However, the coverage is structured to cover sanctions by the host (ex: Ukraine) or third-party countries (ex: Russia), not the insured's home country. For example, a U.S. company investing in Ukraine may or may not be covered for sanctions imposed by the U.S.

See also: How to Achieve Cyber Resilience

Markets and Policies

The majority of private carriers providing PRI insurance are based in the U.S., at Lloyd's and in Bermuda. PRI providers include AIG, AXA XL, Chubb, Sovereign, Caitlin and Zurich. The largest providers of TCI coverage are Coface, Heuler Hermes and Atradius. Government or multilateral agencies providing either PRI or TCI or both include OPIC (U.S.), EXIM Bank (U.S.), EDC (Canada), UKEF (U.K.) and MIGA (World Bank).

PRI insurance policies coverages tend to range between $100 million and $4 billion. TCI coverage can range from $250,000 to $2 billion. The main buyers of PRI come primarily from the extraction sector, manufacturing and infrastructure. Those industries are also significant buyers of TCI, in additional to import-export businesses in soft and hard commodities. Rates for PRI tend to range between 0.5% and 2% and for TCI between 0.1% and 1.5%. Above such rates, the products tend to be become either less attractive to buyers or unavailable due to the risk profile of risks. When coverage is available, rates for Ukraine would be at the higher end of these ranges.

Domestic U.S. Cyber Risk

The main risk associated with Russia's attack on Ukraine for business in the U.S. and the E.U. is state-sponsored Russian cyber attacks on U.S. business and critical infrastructure. This is regardless of whether they have operations and investments or do business in Russia or Ukraine. Indeed, Russia has a well-documented history of unofficial cyber attacks on Western assets. The impact of declared or undeclared Russian cyber attacks on U.S. businesses would be covered by a company's cyber risk policy. A PRI policy is not necessary to cover Russian cyber attacks against U.S. businesses in the U.S. Because some cyber policies exclude state-sponsored actions, insureds should contact their insurers to confirm whether state actions are excluded from their coverage.

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Breakthrough Technologies for 2022 Paul Carroll, Editor-in-Chief of ITL The MIT Technology Review's annual list of breakthrough technologies came out last week, and, as always, it's worth a look, both because of the general framing it offers about technology trends and because of some specific implications for insurance. From an insurance standpoint, the two most directly relevant are what TR refers to as "the end of passwords" (yay!) and the growing availability of "synthetic" data to train AI in situations where there isn't enough real data available. But the other eight on the list of 10 are intriguing, too, especially for what they suggest about how we might be able to build on the technologies behind the mRNA vaccines against COVID to make additional, huge advances in healthcare. continue reading > New Research Don't miss Majesco's annual consumer report to better understand how the insurance buyer sweet spot has shifted to Millennials and Gen Z and what emerging insurance trends are driving new opportunities. Download Report SIX THINGS Lemonade: No Sign of Disruption Yet by Matteo Carbone For each dollar of premium, claims cost Lemonade 90 cents, marketing cost it 60 cents and other costs added 40 cents. Feel a little betrayed? Read More Insurtech's Lasting Role in Insurance by David Fontain Thousands of lines of insurance haven't been innovated in 30 years. With so much opportunity, it's time to think about insurtech as a permanent fixture in the larger ecosystem.  Read More How IT Savings Can Fund Innovation Sponsored by Rimini Street While IT infrastructure is a business necessity, aging IT systems can inflate expenses and limit the ability to spend on initiatives that will really move the needle for a business. In this webinar, we discuss how insurers can optimize their data centers and generate savings that can fund innovation, while improving security. Read More Auto Insurance in 2022: What to Expect by Rochelle Thielen 2022 will look a lot like the second half of 2021, but opportunities are emerging for auto insurers to differentiate themselves, especially through telematics.  Read More Setting Record Straight on Auto Claims Severity by John Kanet While the assumption has been that higher repair costs for advanced driver assistance systems features offset ADAS loss-cost benefits, a new study finds significant benefits. Read More A Patient-Centered Approach to Claims by Dwight Robertson Properly applied, AI produces better medical outcomes, gets employees back to work faster, reduces litigation risk and lowers the costs associated with claims. Read More How to Achieve Cyber Resilience by Rajeev Gupta If an organization does not have a well-thought-out incident response plan with trusted and tested backups in place, a cyber attack can be devastating. Read More InsurTech Ohio Spotlight with Ron Rock Sponsored by JobsOhio  Ron Rock discusses how the insurance industry is rapidly evolving, and the importance of recruiting and retaining top software and programming talent.  Read Now MORE FROM ITL February Focus: Blockchain Sponsored by Gigaforce While blockchain has been an intriguing topic for some time now, interest has skyrocketed in recent months.  Facebook said late last year that it believes so much in the "metaverse" that it was changing its name to Meta. Microsoft followed quickly with its own vision of how technology could enable a whole new sort of world, where our selves are disembodied and our interactions occur via virtual reality. Venture capital firms such as Andreessen Horowitz are all over the investment opportunities in the metaverse, sometimes referred to as Web 3.0. And pundits are making bold proclamations about how life as we know it is about to change forever.  Read More Reconfiguring Your Approach to Underwriting  Sponsored by Intellect SEEC Learn how you can vastly increase the speed at which you deliver capabilities and new systems - cutting deployment times to hours or days, from weeks or months, while delivering a clear ROI. Read Now   Partner with ITL to create expert thought leadership content. Custom Content Promoted Content Display Advertising Custom Webinars Monthly Topic Sponsorships ITL Partner Packages and more Learn more and get the 2022 Media Kit

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FROM THE EDITOR For an industry that has long been considered sleepy, life insurance has a lot going on.  The efforts getting the most attention have probably been those related to improving the customer experience, largely by speeding underwriting by reducing or doing away with the need for medical exams and the providing of blood and urine samples.  But other big changes are afoot, too.  Artificial intelligence is being deployed in ways that range all the way from the mundane to the potentially profound. The mundane should still have a big effect, because AI will allow underwriters to capture and manage information much faster and more efficiently than they now can -- for instance, by having the AI take data in a wide variety of formats, including doctors' infamously bad handwriting, and present it in a standardized, easily accessible format. And the sky is the limit on the most ambitious AI initiatives, which could let underwriters do a much better job of assessing risks and could even help insurers reduce clients' risks. (For a great example, check out the article below on the potential for genomics.) Private equity, always a major change agent, has its sights on life insurance, if only as a source for "permanent capital." This McKinsey article explains in detail. And I continue to believe that there are many opportunities to embed life insurance in other offerings, such as for mortgages or commercial loans, and for financial advisers to include various forms of life insurance and annuities in their services. If all that isn't enough, please consider the interview I did with Ronnie Klein, attached below, on the aging crisis that cries out for aggressive action by the life insurance industry. Cheers, Paul   INTERVIEW WITH RONNIE KLEIN As part of this month's ITL Focus on life and health, we spoke with Ronnie Klein, a senior adviser at Afiniti and founder of Obtutus Advisory, who has a long history in life insurance, with a focus on aging. He describes what he sees as a full-blown crisis--one that life insurers are uniquely positioned to address.  ""We've seen populations aging and fertility rates dropping for decades. Actuaries, economists and demographers have been predicting this crisis for a long time."" -Ronnie Klein Read the Full Interview READ MORE World in Flux: Can Insurance Fill the Gap in 2022? The level of change has never been greater, and insurance’s opportunities have never been more numerous. Read More Predictive Modeling’s New Mantra With the power of predictive modeling and its resulting efficiencies, life insurers can simplify underwriting, reducing both time and complexity. Read More The Need to Offer Better Perinatal Plans Comprehensive perinatal education helps employers address at least five related opportunities. Read More How AI Can Solve Prior Authorization Physicians spend nearly two full business days per week on prior authorization requests as part of an antiquated, manual process Read More 2022 Will Challenge Health Insurers COVID has transformed health insurance and what it means for coverage, pricing and patient care for years to come. Read More Genomics Revolution in Life Insurance Here’s where blockchain stands today — plus how to see the inherent risks and opportunities of using this exciting technology in insurance. Read More FEATURED THOUGHT LEADERS David Zhu Denise Garth Jenny Morrow Calvin Beyer Mark Scott Michael Giusti View all ITL FOCUS topics Share Share Tweet

ITL:

To start, could you provide a little perspective and frame the aging crisis?

Ronnie Klein:

Prominent colleagues of mine call it a predictable surprise, and I like that term. We've seen populations aging and fertility rates dropping for decades.  Actuaries, economists and demographers have been predicting this crisis for a long time.

The total population of the world is projected to increase through the end of the century, then it's supposed to plateau and come down. However, a lot of that population growth is coming from the non-mature countries. In a lot of the mature markets, we’re seeing population decline or slowing population growth.

It's a major concern because Pillar I [such as U.S. Social Security] pension systems will have a difficult time keeping up with aging populations. There’s going to be a lot of stress on these systems as contributions from fewer workers have to support a growing number of retired people. At some point, benefits will have to change, and people will have less income to live on, unless they have their own personal insurance, including annuities.

It’s a big issue.

ITL:

We’ve heard a lot about aging in Japan. Would Japan, in fact, already be facing the aging crisis, and what countries, including the U.S., would you see following reasonably close on after Japan?

Klein:

Japan tried a program where it was trying to keep up with Pillar I contributions in an actuarial manner as if it was like a private pension plan, but what was considered to be the normal retirement age was getting to be so old. It becomes difficult to sell the public, who have 65 years old in their minds, on the idea that the normal retirement age is now 72. What are you supposed to do: Work from 65 to 72?

That doesn't work for much of the population, whom we might term the blue-collar population. Sure, a white-collar person could possibly work to age 72, but what about someone who's in construction or a bus driver? These people perform important services for the world and deserve a comfortable retirement.

In terms of countries, you have to look at Malaysia, South Korea, Japan and Italy. Spain has real problems, as well, with few people having children. People are just living longer, too, in the southern European nations. It must be those Italian or Spanish wines.

In addition, mass urbanization of the world is contributing to both climate change and global aging. When you move to a big city, you usually live in smaller quarters, which provide less room for families. It’s also very expensive to live there, and, when people have less money, they typically have fewer kids.

ITL:

You’ve certainly painted a picture of a daunting problem. How can the life insurance industry start addressing it?

Klein:

The place to start is education. I should probably get off of my soap box about this, but I think the insurance associations of the world should get together and lobby for teaching financial literacy in schools.

When I moved to Switzerland years ago, the youngest of my four kids was seven, and she told me about how her class went into the forest and learned how to use their Swiss Army knife to whittle wood and make a fire and all that kind of stuff. While learning how to survive in the forest is certainly an important skill, so is financial literacy. School should teach about saving for retirement, the power of compound interest, how life insurance works, auto insurance, homeowners insurance, etc.  It's really important.

ITL:

Beyond education, is there any way for life insurers to work with government?

Klein:

Government is actually our biggest competitor. What I mean by that is, it seems like whenever there's a major disaster, the government steps in and helps people out to the point where they say, “Why do I have to take care of myself? The government will help me if there is a disaster.

After 9/11, I saw an interview with a young widow with two kids whose husband was a senior executive at a firm whose offices were at the top of one of the towers. They lived in one of the most exclusive parts of Long Island. She was crying as she explained that, as the firm allocated funds to the families of victims, she was receiving only $500,000. I thought, “You’re telling me you and your husband didn’t have a $20 million policy on his life?” For that matter, why didn’t the firm have a group policy on all its senior executives?

A $20 million policy is what an adviser would have recommended on someone with his salary. But there’s a sense of entitlement that keeps people from thinking they need to take care of themselves.

The industry has to get together on some sort of a campaign and stop worrying about whether it will somehow stir up trouble. The life insurance industry has always worried about speaking up. Most industry associations just get together for meetings and issue papers, but there has to be a concerted effort by the insurance industry to get out there.

The first thing to do is to recognize the problem and to make the world recognize that we have an aging crisis. Lobby for financial literacy to be on the syllabus for schools. And then explain to the government how life insurance will help. The more people who have adequate life insurance, including annuities, the less there is for the government to cover.  

There should also be changes in Pillar Two [private contributions by individuals and employers for retirement savings]. In an ideal world, things like 401Ks in the U.S. would be mandatory. Pensions should also be portable, as they are in Europe, so you carry your pension with you from company to company. I have three different pensions for the three companies I worked for in the U.S.

The pension problem is only going to get worse, with all these gig workers. These kids are not saving for the future. There's no retirement savings pool for gig workers, and they're not putting money into an IRA.

There are models that work in different countries that can be copied.

ITL:

Thanks. This has been super challenging but also enlightening.

When the pandemic hit in 2020, many property and casualty commercial insurers had to pause, stabilize and reprioritize their digital transformation plans amid lower business volumes, economic lockdowns and an uncertain financial environment. But that all changed in 2021 as commercial insurers pressed the pedal to the metal. Now, a new study from SMA indicates that commercial insurers will continue to advance with their transformation strategies in 2022. However, their focus will look a little different than it did a year ago.

SMA's recent research report, "2022 Strategic Initiatives: P&C Commercial Lines," features market insights from an annual survey of insurance executives about the state of their strategic plans. Over the past two years, the insurance industry has shifted its priorities in response to changing consumer demands, altered business patterns and the workforce revolution. This year, 100% of commercial lines carriers are at some stage in their digital transformations. But, as insurers move past the plans implemented during COVID-19, many realize that they are not as far along in their transformations as they initially believed, and there is still a significant opportunity to transform their businesses. 

When looking at differences between insurers focused on small commercial versus mid/large commercial lines, there is significant variance in the business drivers pushing technology investments forward in 2022. In the small commercial segment, growing existing lines, markets and geographies is the number one driver this year. As insurtechs and new entrants increase market competition, small commercial insurers are more likely to focus on growth than their mid-market/large commercial peers. Increased competition is also why more than half of small commercial insurers are also focusing on cost containment.

See also: Climate Change and Product Liability

On the other hand, most mid-market/large commercial insurers are aiming for business optimization and transformation with their technology investments to reduce complex manual processes. Currently, there is a wealth of opportunity for them to automate operations and leverage insights for greater efficiency.

What is clear in 2022 is that commercial insurers seem to have solid road maps for their digital transformation, even if many are still in the early phases. As the year unfolds, technology investments will be necessary to build a platform for innovation and growth. Rethinking talent strategies will also be critical now that employees' expectations have forever changed due to the pandemic. A major change is underway, driven by key strategic initiatives evolving traditional and transformational aspects of the business, and insurers will need to be bold and embrace change to be successful in 2022 and beyond.

For more information on specific strategic initiatives of commercial lines insurers, including the strategies of the small commercial and mid/large markets, read SMA's recently published research report, "2022 Strategic Initiatives: P&C Commercial Lines."

The discourse around algorithm fairness has garnered increasing attention throughout the insurance industry. As the use of machine learning has become more common, from marketing and underwriting to claims management, regulators and consumer rights organisations have raised questions about the ethical risks posed by such technology.

A catalyst of this social discourse was an article titled Machine Bias published by the investigative news organization ProPublica. The paper focused criticism on a law case management and decision support tool used in the U.S. judicial system called Correctional Offender Management Profiling for Alternative Sanctions, or COMPAS.

A conclusion of the academic research surrounding this debate is that there are competing definitions of fairness, and these definitions may be incompatible with one another. The concepts of fairness at the center of the discussion are calibration (a.k.a. predictive parity) and classification parity (a,k,a, error rate balance). There is also the concept of anti-classification, which calls for sensitive (a.k.a. protected) attributes not to be explicitly used in decision-making.

A stylized example, designed for educational purposes, illustrates the intrinsic incompatibility of predictive parity and error rate balance. The example uses the Adult dataset, which figures prominently in studies on machine learning. Gender is the sensitive attribute of choice. It is demonstrated that a classification model that satisfies predictive parity across two groups cannot satisfy error rate balance if the baseline rate of prevalence differs between the groups.

The dataset, which is publicly available, comprises 48,842 anonymized records of annual income and personal information (such as age, gender, years of education, etc.) extracted from the 1994 U.S. Census database. The prediction task is to determine whether a person makes more than $50,000 a year.

In the dataset, 24% of individuals are high earners. This baseline rate is higher for males (30%) than for females (11%). The dataset has been an object of research for its imbalance on gender, as females make up only 15% of high earners but 33% of the entire data set.

The algorithm satisfies predictive parity at a chosen threshold of predicted probability of being a high earner if in the category of predicted high earners the empirical probability of being a high earner is independent of group membership, where group membership is defined by the sensitive attribute. In plain English, the Positive Predictive Value (PPV), defined as the ratio of true positive count to the sum of true positive count and false positive count, must be equal across groups within an acceptable margin of statistical error. As shown in the box plot below, for a threshold of 32% of predicted probability of being a high earner, the (mean and median of the) PPV of the high-earner category equals 61% for both groups. In the box plot, the median is represented by a horizontal bar within the box, and the box marks the range between the first and third quartile.

Turning to the concept of error rate balance, the algorithm satisfies this concept of fairness at a chosen threshold of predicted probability of being a high earner if the false positive and false negative error rates, respectively, are equal across groups. A direct consequence of a scoring model satisfying predictive parity is that it violates error rate balance if the baseline prevalence differs across groups. Thus, despite satisfying the concept of predictive parity, the algorithm has a disparate impact on the two groups.

See also: The Challenges of 'Data Wrangling'

In the stylized example, the group of female earners has a lower rate of high income. Thus, in the presence of predictive parity, the group of female earners experiences a lower rate of false positives (see box plot below). Compared with a false positive rate of 23% for the group of male earners (median, displayed as horizontal bar within box in right panel), this rate equals 5.1% for the group of female earners (left panel).

Correspondingly, the group of male earners experiences a lower rate of false negatives (see box plot below). Compared with a false negative rate of 36% for the group of female earners (median, displayed as horizontal bar within box in left panel), this rate equals 20% for the group of male earners (right panel).

In applying algorithms, it is important to recognize the trade-offs between different concepts of fairness and the presence of disparate impacts. Fairness is ultimately a societal, not a statistical concept. Insurers have an opportunity to shape the discussion on algorithmic fairness by demonstrating awareness of potential societal implications of their algorithmic decision-making.

This article first appeared at GenRe.com. 

The widespread digitization of the economy has created a wealth of data on risk exposures for insurance companies. But how insurers exploit what has become known as big data has prompted widespread discussion around data ethics, especially in regard to transparency and fairness where consumer data is used to market and to price risk.

Insurers are already familiar with the concept of adverse selection. Now they are getting to grips with the new concept of inverse selection that arises with big data.

It’s useful to look at a basic risk spectrum to explore how big data can fundamentally change the information balance of insurers and insureds, and the latter’s perception of risk.

Usually, the consumer has private information about where s/he is located on the risk spectrum, exposing the insurer to the risk of adverse selection. Using big data combined with machine learning, the insurer might be able to uncover the location and eliminate the information asymmetry. Where the consumer’s risk perception is poorly calibrated, the insurer might be able to reverse the information asymmetry in its own favor by having a more precise read of the risk than the consumer has, and even determine the consumer’s perceived location.

With this reversal in information asymmetry in mind, how should the insurer price risk – on the basis of actual risk or the consumer’s perception of risk? And should the insurer make big data available to the consumer or to society?

Consider the basic consumer risk spectrum (see below). The insurer has a read of the average risk on this spectrum but doesn’t know the locations of the individual consumers. The consumers on the other hand know their locations.

Knowing only the average risk, the insurer prices the policy to the center of the spectrum. All higher-risk consumers will purchase insurance and all lower-risk consumers will not. In consequence, the insurer won’t break even. It’s a simple representation of adverse selection.

When the insurer is equipped with big data, this situation changes, however. The insurer now has granular consumer information, potentially observed at high frequency, and can gauge the consumers’ true locations on the risk spectrum – and differentiate premiums accordingly.

In this case, every consumer will purchase insurance. The lower-risk consumers now have access to insurance at premiums commensurate with their actual risks. The higher-risk consumers will purchase insurance also, albeit at higher premiums, no longer collecting an information rent. And the insurer will break even. Clearly, a socially desirable outcome.

See also: Why Exactly Does Big Data Matter?

What happens if the consumer’s perception of risk is not well-calibrated? Let’s look at consumers 4 and 8 (see below). Consumer 4 erroneously believes him/herself to be lower-risk, whereas consumer 8 errs in the opposite direction. If the insurer prices to the actual location on the risk spectrum, then consumer 4 will not purchase a policy; consumer 8 on the other hand will still purchase a policy, at a premium that s/he perceives as a bargain.

Inverse selection arises if the insurer sets the premium to the maximum of the actual risk and the consumer’s perceived risk. Then the insurer will collect an information rent on consumer 8.

If consumer 4 knew that s/he is higher risk, then s/he would purchase insurance at the quoted premium, and s/he would be better off. This situation of the consumer’s misperception of risk raises the question of whether the insurer should make its information available to the consumer.

Objectively, big data has the potential to broaden access to insurance by removing information asymmetry – the elimination of the consumer’s information rent comes at no loss to society.

However, there is the potential for shifting the information balance in favor of the insurer, which would allow the insurer to earn an information rent – the broader availability of insurance remains.

Consumers with poorly calibrated risk perception would benefit from having as equally a precise read of their risks as the insurer. That’s why some have called for making the insurers’ big data available to the consumer or, more generally, to society.

This article appeared originally at GenRe.com.