Exhibitioners at the Century of Progress International Exposition held in Chicago from 1933-1934 touted washing machines and air conditioners as capable of bringing vast changes to our everyday lives. This optimism for future generations is inherent within the human psyche. As such, we often speak of artificial intelligence (“AI”) as a lofty, almost dream-like reality that awaits us in the not-so-distant future. 

But AI proliferates today and extends beyond the entertainment-based efficiencies embedded within Netflix and TikTok that we read about; attorneys apply AI to document review projects; vehicle manufacturers use AI to control a vehicle’s acceleration, speed and steering; hospitals and doctors are using AI to triage and diagnose patients; and biotech companies increasingly rely on AI to model the potential success of newly developed therapies and vaccines. 

Insurance carriers remain optimistic about the efficiencies to be gained by implementing AI-based applications into their workflows. The same is true for cyber insurance carriers, who over the last eight to 10 years entered the market to meet the needs of customers who seek protection from potential financial and operational ruin due to the rise of ransomware and other malicious activity perpetrated by cyber criminals. And, while AI is sure to benefit society when wielded properly, cyber carriers remain conscious that AI’s proliferation is a double-edged sword. Thus, cyber insurance will have an even greater role to play in an AI-dominated world.

The reasons are twofold:

First, harm from cyber attacks will be more widespread because of the threat posed by more sophisticated AI-based attacks. By using an AI-based attack, malicious actors will be able to operate in ways that are both highly efficient and highly scalable. For example, rather than disguising malware as an email attachment in a message from “your boss,” or hawking magic pills, a sophisticated AI-based attack may be capable of personalizing, instantaneously, the malicious email (or other vehicle) received by each target victim. 

Second, increasingly intelligent cyber attacks are likely to bring greater cost and consequences. Cyber-attacks today inflict financial harm and disrupt the productivity of the victim but generally do not alter people’s livelihood or society at large. We will see that blast radius grow exponentially in the future when malicious actors deploy cyber attacks against those AI-based systems that society increasingly relies on for day-to-day operations.

Look at the recent attack on the Colonial Pipeline and what it's done to gasoline prices in the eastern U.S. Citizens’ freedom of movement may be jeopardized when a future cyber attack against a vehicle manufacturer not only disrupts assembly line production but also paralyzes entire fleets of autonomous vehicles operating on the vehicle manufacturer’s software. Or, in a more dire situation, if there is malicious disruption of the AI-based systems at the core of a vehicle’s control system. Disrupted AI-based hiring systems could also result in significantly slower access to available low-wage jobs. And patients may suffer or die when a hospital loses its ability to intelligently triage and provide treatment. In sum, the outcomes from a cyber attack could be devastating.

See also: Surging Costs of Cyber Claims

But the future is not entirely bleak. Cybersecurity firms and professionals continue to improve on threat detection and elimination tools by harnessing AI. These types of tools and software are capable of intelligently digesting data points gathered from both past and current attacks across a massive scale. Decreasing response time via the real-time adjustment of threat detection applications is among the myriad ways AI is changing the cybersecurity landscape. 

The adoption of AI by the insurance industry is also bringing about a paradigm shift. The most prominent example is Lemonade, a property and casualty insurer that makes decisions about policy underwriting and claims processing based entirely on AI. Lemonade went public via IPO in summer 2020; it raised $319 million in a single day. Opportunities for innovation abound.

As society absorbs AI into the framework of industry and people’s lives it should expect to reap enormous benefits but also protect those benefits by preparing for and managing attendant risks.

Our industry is diversifying, and that diversity has been a force for growth and innovation. Decades of work and progress have yielded more women in leadership roles, a more diverse workforce and a greater emphasis on recruiting talent from varied backgrounds and geographies. Though calls for diversity are not new, organizations are taking the movement more seriously now than ever before, and it is having a positive impact in the operation and growth of businesses.

According to a 2018 study from the Boston Consulting Group, companies that have higher than average diversity in their workforce had 19% higher revenue from enhanced or new products than less diverse organizations. 

As the insurance industry continues to evolve, it will be important to continue to support D&I programs and the opportunities they create for businesses and the workforce. These efforts should also include a willingness to consider recruiting candidates from a diverse array of experiences, trainings, socio-economic backgrounds and more. 

A Personal Journey

In my previous life in television production, working for shows like “One Tree Hill” and “Friday Night Lights,” I learned many of the skills that eventually led to my career in business development, and later as president and chief operating officer with AmRisc.

A degree in broadcast journalism and an early career in TV and film production are definitely rare qualifications for someone in insurance leadership. That said, for me, that background manifested the skills and mindset I needed to operate in a fast-paced environment and think creatively to support business growth. 

How did I find my way into the insurance industry? I was looking to change my career, and my resume serendipitously found its way into the hands of former AmRisc CEO Dan Peed. They were looking for someone who could come in and roll with whatever was thrown at them. That happens to be my strong suit. I was immediately energized and motivated by the work as I grasped more than insurance concepts. I began to understand the legal, accounting, managerial, compliance and operational aspects of the business, as well. 

See also: Diversity and Respect: Best Insurance Policy

My time in television production allowed me to explore my passion for problem-solving and crafting stories. That experience served me well in insurance, where I’ve had an even greater opportunity to flex those same creative and problem-solving muscles. At the same time, as someone who came to insurance from a very different space, I was able to offer a unique perspective the company didn’t have available previously.

A Creative Edge

With our company being founded by engineers – also from non-traditional backgrounds for insurance – it’s fitting that one of our core values is innovation. Imagine the innovation that could come from a team of employees with a variety of diverse backgrounds, cultures, experiences and beliefs. Then, add to that the new perspectives and fresh thinking we get from those with different socio-economic backgrounds. These may be individuals whose talents have yet to be discovered as they leave high school or college and enter the workforce. A team like that could have the versatility to not only adapt to unique problems; they would have a plethora of experiences and perceptions to offer the business and contribute uniquely to the growth of their team and organization.

At AmRisc, we’ve started to harness the knowledge and experience of this talent. We began to recruit others outside of insurance, like me, over a decade ago. For example, we have a number of former schoolteachers who have joined the team and have been remarkably successful translating the detail-oriented skillsets they honed in the classroom to our underwriting and analyst teams.  We’ve also recently launched an Innovation Hub, our own version of Shark Tank, to encourage people from all parts of the organization to be seen and heard.

This is just one step. Engaging a range of professionals with varying work experience, cultures, religions and more allows you to build a well-rounded team that can take a company to the next level. Employees who are comfortable in their own skin at work, happy, driven and inspired – who also reflect your consumer base – will thrive, fuel productivity and drive growth.  

Building for the Future

Many in the industry have developed novel programs to foster D&I within their walls. Industry leaders recognize there is tremendous value in empowering and investing in people. At AmRisc, we've deployed a Corporate Citizenship Program and DEI Council with our parent company, Truist. We’ve also hosted an incredibly popular Day of Understanding for employees to voice their opinions and concerns and implemented unconscious bias training in an effort to enhance our corporate culture. We even revised our logo to a display of color that demonstrates our commitment to a diversified team and one that values involvement from employees of all genders, races, religions or backgrounds.

As a company and as an industry, we also find opportunities to develop and mold our D&I initiatives through unifying organizations like the Insurance Industry Charitable Foundation. IICF’s International Inclusion in Insurance Forum presents a wonderful opportunity for the industry to get together, hear from the top minds in D&I and receive actionable, fresh approaches to incorporate into our own workplaces.

Recruiting for Tomorrow

Anyone who has worked in insurance knows the historic difficulties surrounding the recruitment of new, aspiring talent. The COVID-19 pandemic has only exacerbated this problem, but the lasting impacts of remote work may prove to be the push our industry needs to recruit geographically diverse talent from different socio-economic and experience backgrounds.

Thus, many industry leaders are taking a closer look at our hiring methodologies and prerequisites. At AmRisc, we are endeavoring to do more. We’re partnering with major universities to recruit talented, diverse candidates with specializations in risk management and beyond. We are looking to secure talent who might not have been considered for a career in insurance due to work history or educational background but who have the drive and energy to help us grow. We’re also exploring flexible work arrangements so those with family, eldercare or other personal responsibilities can better manage their work-life balance.

See also: State of Diversity, Inclusion in Insurance

Right now is the perfect time to consider recruiting with a focus on diverse experiences in addition to unique backgrounds and cultures. As people return to the workforce, a range of candidates with the potential to revolutionize our industry and become the next generation of insurance professionals may present themselves. We have to remain open to recognizing them and embracing the uniqueness they bring to our organizations.

Our industry is built on resilience and serving others when they are most in need. As employers, we must ensure we consider the whole candidate or employee and find ways to encourage them to bring their diverse skills and talents to the office for the good of the company, the industry and society as a whole.

Time-consuming deals or claims-related interactions with agents are getting replaced by self-service insurance portals and sometimes even by bots. The growth of IoT, artificial intelligence (AI) and machine learning (ML) technology and the prevalence of sensors in wearables, cars, houses, agriculture, transportation and other areas are making risk profiling and precautionary measures much better and faster.

However, the sharing economy brought about by Uber, Airbnb, etc. is making insurance tricky. The pandemic is also forcing insurance companies to evolve to survive the current climate and prepare for an uncertain future. 

For many, part of this development has been adopting new technologies and digitizing services.

Insurance companies must rely heavily on their data to embrace these new trends. Unfortunately, many depend on older enterprise data architectures composed of legacy tools and methodologies. Business stakeholders need immediate information for real-time decisions, but this is just not possible when data is scattered across multiple data sources. Relying on rigid technologies such as ETL (extract, transform, load), makes it almost impossible for insurers to make real-time decisions on a claim or engage in predictive analytics with the most current data to underwrite the right insurance product for the right client.

These legacy technologies are resource-intensive, time-consuming and costly. ETL processes deliver data in scheduled batches, meaning there is always lag, which forces business users to wait for the data to be delivered. Depending on the configuration and schedule, batches can be delivered very quickly but never on an instantaneous, as-needed basis. In fact, many ETL processes are still done overnight. 

This leaves insurers with no choice but to initiate complex, expensive and time-consuming engagements with IT just to answer basic questions. On top of that, M&A and other forms of corporate restructuring are constant in the insurance industry, and legacy data architecture poses a huge threat to post-merger data architecture consolidation. As in other industries, cloud adoption and data lake implementation are becoming more prevalent, yet these cloud-first initiatives, application modernization projects and big data analytics are either fraught with downtime, implementation challenges or, in the best case scenarios, only partially successful. 

Data Fabric to Logical Data Fabric: The Modern Way to Keeping Businesses Covered

With volume, variety and velocity of data today, users need a unified view of all the data available to them in near real-time. Insurers are looking to capture the ever-changing data from streaming, data lakes and other newer data sources or data repositories and take advantage of all the data types available.

Technologists have attempted to meet the needs of their organizations in many ways. First, they used larger and larger databases. Then they set up data warehouses. Most recently, they have turned to data lakes, cloud repositories and big data implementations. Unfortunately, these latest solutions have only compounded the problem, as different sources of data are still stored in functional silos, separate from other sources of data. Even data lakes continue to contain multiple data silos, which many business users and analysts only realize when they attempt to run a single query across the entire data lake. 

To manage the complexity of today’s environments, companies are adopting newer architectural approaches such as data fabric to augment and automate data management. This modern data management approach streamlines data discovery, access and governance by automating much of the labor that would normally be performed at multiple individual junctures using older methods. Forrester analyst Noel Yuhanna defined enterprise data fabric as a set of processes that automate “integration, transformation, preparation, curation, security, governance and orchestration" of data, which are some of the most traditionally labor-intensive aspects of business intelligence, due to the highly diverse, heterogeneous nature of today’s data landscape.  

Most recently, research firms began to evolve their notion of data fabric to that of a “logical data fabric.” Analysts devised this concept based on the idea that even if technology vendors were to automate key aspects of the data pipeline - or turn these processes into services - the resulting data fabric will eventually be limited by certain physical realities; namely, the need to replicate data. To ensure the business continues to gain significant efficiencies, organizations need to change the paradigm from a physical data fabric to a logical data fabric. TDWI analyst David Stodder outlined some of the features of logical data fabric, saying that it had the capacity to “knit together disparate data sources in their broad, hybrid universe of data platforms.” 

Why Data Virtualization Is the Key to Stitching Together a Logical Data Fabric

Data virtualization (DV) is a data integration solution, but one that uses a completely different approach than most methods, making it a perfect fit for logical data fabric application. The technology is an approach to data management that allows an application to retrieve and manipulate data without requiring technical details about the data, such as how it is formatted at source, or where it is physically located. Rather than physically moving the data to a new, consolidated location via an ETL process, data virtualization provides a real-time view of the consolidated data, leaving the source data exactly where it is and containing the necessary metadata for accessing the various sources, making it straightforward to implement. 

Performing many of the same transformation and data-quality-control functions as traditional data integration solutions, DV differs because it can also provide real-time data integration at a lower cost. As a result, it can either replace traditional data integration processes and their associated data marts and data warehouses, or simply augment them, by extending their capabilities. Sophisticated data virtualization solutions go one step further by establishing an enterprise data-access layer that provides universal access to all of an organization’s critical data. When insurers need to obtain data, they query the data virtualization layer, which, in turn, gets the data from the applicable data sources. Because the data virtualization layer takes care of the data-access component, it abstracts business users from complexities such as where the data is stored or what format it is in. Depending on how a data virtualization layer is implemented, business users can ask questions and receive answers easily, because the underlying data virtualization layer handles all the complexity. 

See also: Stop Being Scared of Artificial Intelligence

Additionally, modern DV solutions offer dynamic data catalogs that not only list all of an organization’s available data sources but provide access to the data from right there in the catalog. They also leverage their unified metadata capabilities to enable stakeholders to implement data quality, data governance and security protocols across an organization’s disparate data sources, from a single point of control. That is particularly important for insurance companies, which are expected to understand and protect their customers personally identified information (PII), such as credit cards, healthcare and Social Security numbers, credit scores and banking information. That helps organizations comply with regulations such as GDPR, CCPA and U.K. Data Protection Act, to name a few. Finally, some of the best DV solutions offer premium features such as query acceleration through aggregation awareness, AI/ML driven dataset recommendation and auto-scaling architecture in the cloud. 

Supported by data virtualization, a logical data fabric can enable a wide range of benefits, including: 

1. Real-time data integration across disparate systems. Logical data fabric enables real-time access to data across vastly different kinds of sources, including cloud and on-premises systems; streaming and historical data systems; legacy and modern systems; structured, semi-structured and completely unstructured sources; and cloud systems provided by different vendors. It can handle flat files, social media feeds, IoT data and more. 
2. Enterprise data catalogs. Logical data fabric enables comprehensive data catalogs across the entire enterprise and provides seamless access to the data itself. Business users can use the catalog to understand what data is available and any conditions under which it can be used. They can also capture the full lineage of any dataset as well as all applicable associations.   
3. Seamless governance and security. Because data in a logical data fabric is accessed through a unified data access layer, organizations can easily control who is allowed to view or edit which data.    
4. Powerful AI/ML capabilities. With a unified, logical framework, a logical data fabric enables AI/ML capabilities at a variety of different points within the offered solution, including query optimization, data delivery and automated recommendations within the data catalog.   
5. Simplified maintenance. Logical data fabric protects users and administrators from the complexities of accessing each individual source and operates with each data source “as it is.” Unlike ETL scripts -- which need to be re-written, re-tested and re-deployed whenever a source is removed or changed -- logical data fabric accommodates these changes, greatly simplifying the overall administrative burden. 

The data landscape is only going to get more complex for insurers, and business users will only want broader, faster access to all of the data available without unnecessary risk or liability. Implementing a logical data fabric built on data virtualization has proven to deliver information immediately to meet business demands and does so without the cost of a monolithic hardware upgrade. More importantly, it promises to reduce the total costs of the data infrastructure by leaving the source data exactly where it is. Put simply, the logical data fabric can act as an indemnity to data management and to leveraging your precious data assets.

Revered economist Thomas Sowell once observed, “Some things are believed because they are demonstrably true, but many other things are believed simply because they have been asserted repeatedly, and repetition has been accepted as a substitute for evidence.”

Sowell’s thinking may have bearing on why taxpayers and property owners have lost hundreds of billions of dollars as Congress has attempted to manage America’s flood risk over the past 43 years. It may also explain why taxpayers and property owners will continue to lose hundreds of billions more, at least until the tragically inaccurate, but-oft repeated idea that flood insurance rates should be artificially low is replaced by what evidence-based science and common sense have revealed during the last decade.

Government-controlled programs operating in what would otherwise be the domain of private enterprise have repeatedly led to unintended market distortions and financial distress; the National Flood Insurance Program (NFIP) is a prime example. While Congress and federal administrative staff have known empirically for many years that the NFIP has, and continues to, encourage behaviors that produce upside-down outcomes on a massive scale, overcoming intrenched misperceptions has proven very difficult. Unless the NFIP raises their rates and begins giving refunds to folks who buy private market flood coverage prior to the last day of their NFIP coverage, we will continue to see varying tragic outcomes that could have easily been avoided.

Congressional hearings have illuminated numerous acute problems surrounding the NFIP, such as insolvency, contributing to increased risk of flooding across the country, and insufficient and inaccurate flood mapping, to mention just a few. During these hearings, those who testified, as well as members of Congress, identified a correlation between the NFIP’s problems and the artificially low rates they charge – a reality that would likely not be the case if the NFIP followed congressional directives to meaningfully raise rates at a reasonable pace annually. Ironically and perhaps predictably, the unintended negative outcomes generated by the NFIP continue to grow – now spreading to GSEs (government-sponsored enterprises) Fannie Mae and Freddie Mac. 

The Trouble With Fannie and Freddie

Though publicly traded companies, Fannie Mae and Freddie Mac operate under a congressional charter that provides a financial backstop from the government – one that was invoked during the financial crisis of 2008 to the tune of $187 billion, according to The Shadow Open Market Committee. Fannie Mae and Freddie Mac were designed by Congress to expand the secondary market for mortgage debt and ultimately boost homeownership among buyers from a variety of demographics. While the GSEs have succeeded in boosting homeownership, they’ve been allowed by Congress to become “too big to fail.”

A recent article in POLITICO noted that Fannie Mae and Freddie Mac hold more than 60% of the mortgages in flood-prone areas across the U.S. Because these homes are technically located outside NFIP-designated “special flood hazard areas”  but inside the actual “100-year flood plain,”  these homeowners are not required by their lenders to purchase flood insurance. As a result, Fannie Mae and Freddie Mac are exposed to potentially existential risk from the peril of flood. Only owners of properties that are within an NFIP flood zone are required to buy flood insurance. That said, their equally flood-exposed neighbors are not forced to buy flood insurance, and as a result do not.

If a significant number of these uninsured, flood-exposed homes were to be seriously damaged by a flood, the owners might not have the resources to repair their homes and may have no incentive to do so if the cost of repairs is equal to or greater than the equity they have in the home. If climate change translates to more frequent or more severe floods, the implications for Fannie and Freddie are ominous.

In their article, POLITICO observes that taxpayers could be on the hook for more than $1 trillion in home mortgages as Fannie and Freddie fail to consider climate risk when purchasing mortgages from lenders. This practice could lead the country into recession even in the absence of a crescendo of floods. More and more savvy homebuyers and lenders are now using new technology to assess the climate risk on properties before they buy a home or originate a loan. This may translate to a downward spiral in flood-prone property values across broad sections of the country. Additionally, Fannie and Freddie may see an even greater concentration of flood-prone mortgages within their portfolios.

Reforming the NFIP will be both a political and a public policy problem until the practice of offering artificially low flood insurance premiums to some and overcharging others, as well as denying policyholders the option to easily switch to competing products, is discontinued. 

See also: Insurance Outlook for 2021

Reworking the NFIP

Congress created the NFIP as a way to shift the U.S. flood insurance market to private insurers. Unfortunately, in 1978, regulators used a loophole in the law that enabled them to remove private flood insurers from the market. This was not the original intent of Congress nor the desire of private flood insurers. Operating as what is essentially a nationalized flood insurance system, the NFIP has cost taxpayers about $1 billion per year since its inception.

What if the private market had continued to be involved in the nation’s flood insurance paradigm? I would venture to say that pricing would have at least kept up with losses. Likely, prices would have been high enough to discourage rampant building in dangerous locations. As a result, more coastal and riverine land would have been left to nature and thereby would have served to reduce the severity of flood events. And importantly, with fewer houses built in hazardous locations, we would have avoided the present-day financial risk to our nation’s economy faced by Fannie and Freddie.

When it comes to responding appropriately to climate risk, the NFIP experience has demonstrated that a government-controlled system is the wrong approach. The NFIP is now a political football, used as a favor for folks located close to sources of flooding at the expense of those located in less-flood-prone areas. This kind of unintended outcome is what often happens when the government takes over where the free market was willing to participate. Now, we are seeing manifold pernicious effects manifesting themselves in the mortgage finance market with staggering implications. 

Congress must focus on reforms that allow buyers to change flood insurance carriers at the time of their choosing and encourage the private sector to assume flood risk over the long term by assuring that the NFIP does as Congress has already instructed them to do – to raise rates to actuarially sound levels and serve as the flood insurer of last resort.

Hydrogen is of growing importance for the substitution of fossil fuels in the fields of energy, supply, mobility and industry. Hydrogen has the potential to morph from a niche power source into big business, with countries committing billions to scale up their infrastructure and with projects being introduced around the globe. But there are challenges to overcome for hydrogen, such as the cost of production, supply chain complexity and a need for new safety standards.  

Allianz Global Corporate & Specialty (AGCS) just released a risk bulletin that highlights some of the opportunities and challenges of a trend at the forefront of the energy industry and assesses the risk environment of technologies associated with the production, storage and transportation of green hydrogen.

Backed by governments: Over 30 countries have produced hydrogen road maps

The global shift toward decarbonization has triggered strong momentum in the hydrogen industry. Hydrogen offers several options for the transition toward a low-carbon economy: as an energy carrier and storage medium for conversion back to electricity, as a fuel for all means of transport and mobility and as a potential substitute for fossil hydrocarbons in industries such as steel production or petrochemicals. 

Around the world, there is strong governmental commitment for hydrogen initiatives, backed by financial support and regulation: As of the beginning of 2021, over 30 countries have produced hydrogen road maps, and governments worldwide have committed more than $70 billion in public funding, according to McKinsey. There are more than 200 large-scale production projects in the pipeline. 

In the U.S., more than 30 states have already adopted plans to promote hydrogen technology. The goal is to build a broad-based hydrogen industry that will generate $140 billion in annual income and employ 700,000 people by 2030. China is also planning to invest several billion yuan in the promotion of fuel cell technology over the next four years, which should result in innovative hydrogen production facilities throughout the country. 

Assessing the risk environment 

Many of the technologies used for the generation of hydrogen or energy from hydrogen are well-known in principle. AGCS risk consultants have considerable experience with handling hydrogen projects in a number of different areas. From a technology perspective, the operational risks include:

Fire and explosion hazards

The main risk when handling hydrogen is of explosion when mixed with air. In addition, leaks are hard to identify without dedicated detectors because hydrogen is colorless and odorless. A hydrogen flame is almost invisible in daylight. Industry loss investigation statistics show approximately one in four hydrogen fires can be attributed to leaks, with around 40% being undetected prior to the loss.

Fire and explosion protection needs to be considered on three different levels. Preventing the escape of inflammable gases as much as possible. Ensuring safe design of electrical and other installations in areas where ignition sources cannot be excluded. Constructing buildings and facilities to withstand an explosion with limited damage.

Proper handling of hydrogen gas is critical, and any emergency requires appropriate fire safety equipment.

An AGCS analysis of more than 470,000 claims across all industry sectors over five years shows how costly the risk of fire and explosion can be. Fire and explosions caused considerable damage and destroyed values of more than €14 billion ($16.7 billion) over the period under review. Excluding natural disasters, more than half (11) of the 20 largest insurance losses analyzed were due to this cause, making it the #1 cause of loss for businesses worldwide.

Material embrittlement

Diffusion of hydrogen can cause metal and steel (especially high-yield steels) to become brittle, and a wide range of components could be affected, for example, piping, containers or machinery components. In conjunction with embrittlement, hydrogen-assisted cracking (HAC) can occur. For the safety of hydrogen systems, it is important that problems such as the risk of embrittlement and HAC are taken into account in the design phase. This is ensured by selecting materials that are suitable under the expected loads as well as considering appropriate operating conditions (gas pressure, temperature, mechanical loading). High-yield strength steels are particularly at risk of hydrogen-related damage. 

Business interruption exposures

Hydrogen production or transport typically involves high-tech equipment, and failure to critical parts could result in severe business interruption (BI) and significant financial losses. For example, in case of damage to electrolysis cells (used in water electrolysis) or heat exchangers in liquefaction plants it could take weeks, if not months, to replace such essential equipment, resulting in production delays. In addition, business interruption costs following a fire can add significantly to the final loss total. For example, AGCS analysis shows that, across all industry sectors, the average BI loss from a fire incident is around 45% higher than the average direct property loss – and in many cases the BI share of the overall claim is much higher, especially in volatile segments such as oil and gas. 

See also: How Insurers Can Step Up on Climate Change

Significant increase in demand for insurance expected 

While standalone hydrogen projects have been rare in the insurance market to date, hydrogen production as part of integrated refining and petrochemical facilities, and as a part of AGCS’ coverage of industrial gas programs in its property book, has long been a staple of AGCS’ insurance portfolio. Given the numerous projects planned around the world, insurers can expect to see a significant increase in demand for coverage to construct and operate electrolysis plants or pipelines for hydrogen transportation.  

As with any energy risk, fire and explosion is a key peril. Business interruption and liability exposures are also key, as are transit, installation and mechanical failure risks. We are developing a more detailed underwriting approach for hydrogen projects, ensuring that we can serve clients globally. There is rightly great enthusiasm around hydrogen solutions as a key driver toward a low-carbon economy, but we shouldn’t overlook that these projects involve complex industrial and energy risks and require high levels of engineering expertise and insurance know-how to be able to provide coverage. We will apply the same rigor in risk selection and underwriting for hydrogen projects that we do on our existing energy construction and operational business.

For the full overview of loss prevention measures for the hydrogen economy, download the new risk bulletin here.

The ransomware attack that shut down the 5,500-mile Colonial Pipeline, the largest fuel pipeline in the U.S., contains two important seeds of opportunity.

First, the federal government looks like it may get much more involved in preventing or at least prosecuting cyber attacks, specifically for important infrastructure like pipelines and electric grids, but perhaps more broadly, too.

Second, the attack raises the profile of the ransomware problem to the point that insurance clients may no longer be able to ignore it -- which they mostly have even as ransomware activity quintupled globally between the first quarter of 2018 and the fourth quarter of 2020, according to Aon. This higher profile will create the opportunity for insurers to work with clients to finally step up their defenses.

Let me be clear, lest I come across as Polyannaish: This was a serious assault on a major piece of infrastructure and will likely result in higher gasoline prices, at least in the eastern half of the U.S. The attack also raises the prospect of devastating assaults on other pieces of key infrastructure, both in the U.S. and around the world. In addition, because the ransomware attack was arranged by a criminal ring in Russia, the attack brings into play all sorts of geopolitical issues that go well beyond what happens when some lone criminal hacks his way into a single corporation.

I'm merely suggesting that good things could also come out of the attack by the DarkSide group in Russia, because it underscores two problems that have long been obvious but that have somehow been ignored. The actions spurred by the attack won't be perfect solutions by any means, but they should help.

The main action looks to be an aggressive response by the federal government, which has struck me as too passive as criminal gangs have greatly stepped up their ransomware attacks. There are limits to what the government can do against international gangs like DarkSide -- it's not as though President Biden can just call Vladimir Putin to complain and have him say, "Oh, sure, I'll get right on it" -- but having the Feds in the game should help a lot.

The other main action -- the big opportunity for insurers -- will occur because companies will increasingly see their vulnerability (finally!) and request help from the experts: the insurance companies that deal with cyber issues every day.

Thought leaders have been warning about ransomware for ages here at ITL -- look at "5 Questions That Thwart Ransomware," "A Dangerous New Form of Ransomware" and "Ransomware Becomes More Pernicious."

Look, in particular, at this recent article: "How to Combat the Surge in Ransomware," from Tokio Marine HCC's Cyber and Professional Lines Group. It describes what I think is the ideal approach for insurers assisting their clients, not just by selling insurance but by helping them reduce their risks -- steering clients toward state-of-the-art tools (priced based on the insurer's bulk discount) that monitor vulnerabilities, toward using multi-factor authentication, toward training, etc.

As long as the bad guys have shown they can work together and take down big targets like the Colonial Pipeline, the good guys need to work together, too. That surely means more help from the federal government on what is a national and, increasingly, international problem but also means insurers need to step up and deliver the sort of expertise and counsel that they possess uniquely and that define the industry's noble purpose.

Cheers,

Paul

P.S. Here are the six articles I'd like to highlight from the past week:

Workers Comp Trends for Technology in 2021

An efficient workflow passes 60% to 70% of medical bills straight through; workers' comp has a long way to go.

Are Your Healthcare Vendor’s Claims Valid?

This article, the first in a series, looks at how regression to the mean is often misused to justify false claims about the success of wellness programs.

4 Ways to Seize the Latent Demand

Consumers recognize now more than ever the importance of adequate insurance coverage. Now is the time to seize on this opportunity.

Time to Reimagine the Finance Function

What’s possible for finance has been redefined: Comprehensive data makes it easier to connect performance across the business.

Tapping Into Life, Health Innovation

Those who welcome outsider participation in innovation can unlock new solutions without needing to reinvent their current businesses.

Insurance and Financial Protection

If the life insurance crisis is hard to understand, we must make it easy to comprehend. The insurance industry must lead us through this crisis.

As our research has consistently shown, value-added services are increasingly one of the top areas of interest among customers, and one area of growing interest is integrated absence management for disability insurance. (We discussed this growing trend in a webinar with the Standard, a leading insurer that has provided integrated disability and absence management to their customers for a long time. You can watch a replay of the webinar here.)

Because apps and interfaces are now designed through a customer-first approach, not a product-first approach, there is a profound shift in how disability claims can be filed and leaves of absence requested, making the process straightforward despite all the regulatory nuances.

Employers are looking to their insurance companies or third-party administrators (TPAs) who manage their disability programs to provide an intuitive, digital platform where they can easily submit a leave request, view their time remaining and upload or download any necessary documentation to have their leave or claim approved.

Insurance companies and TPAs with a digital solution that provides integrated disability and absence management are well-positioned to address this significant market need, while providing customers with a single point of contact for their benefits, avoiding duplication and simplifying the employee experience.

See also: Long-Term Disability in the Time of COVID-19

Simplifying the Increasing Complexity of the Leave Landscape

It’s hard to talk about the leave of absence landscape without using the word "complexity." It’s increasingly difficult to stay on top of federal and state paid and unpaid leave laws, and there’s no sign of the complexity diminishing, with new regulations in the works.

The transition to remote working is adding an additional layer of complexity, with employees scattered across the country working from home, expanding the number of state regulations that must be managed.

As Lincoln Dirks, a senior compliance analyst for absence management at the Standard, put it during the webinar, “You take the already complex aspect of dealing with federal, state and municipal leaves in a given state, and then you multiply that by 50. The issue becomes that no two of these states run their programs in even close to a similar manner. Rules, regulations, processes, procedures all vary by state.”

This complex landscape, though, has created a significant market demand for absence management – making it the big trend for 2021! Employer customers need it because spreadsheets and sticky notes aren’t getting it done. And, increasingly, insurance companies are expanding their offerings to include it as an integrated value-added service, differentiating them in the market.

The Value-Added Service Opportunity for Insurers

These trends offer a significant opportunity for insurers to expand their offerings with an integrated disability insurance and absence management solution that their customers are seeking.

Watch the entire webinar and hear from the Standard on how they’ve elevated corporate programs with their integrated disability and management offering on the Majesco website.

Inaccurate marketing claims and outcomes reports are proliferating. The Validation Institute has staked out a position as the leader in assisting/promoting vendors and consultants in the “Integrity Segment” of the healthcare services market.

How can you tell if your adviser is in the Integrity Segment? The easiest way: Did they send you to this series, or did you have to find it on your own?

Part One in this series will cover regression to the mean (RTM). That is the tendency of outliers on the high or low side, over time, to come closer to the average. For instance, every season several baseball teams will win or lose all of their first four or five games. Yet, over the course of a full season, no team has ever won more or lost more than 75% of its games. And, over the history of Major League Baseball, no team has won or lost more than 58% of its total lifetime games.

What makes employee healthcare services RTM different from that baseball example (besides being more interesting) is that, while it is very easy to identify and ”count” outliers on the high side who decline in risk or cost, only a handful of consultants and buyers consistently also measure outliers on the low side. As you will see at the end of this article, a small number of vendors will also measure this way. The Validation Institute welcomes vendors who are willing to do that. We also welcome vendors who genuinely believed they were measuring validly, but after reading this article realize that they are inadvertently overstating impact.

Without measuring outliers on the low side, a one-way regression to the mean creates a built-in bias toward showing savings where none exist. Let us first examine this in theory, and then we will present examples of vendors doing this in practice.

Suppose your company, Vandalay Industries, has two asthmatic employees, George and Jerry. A vendor/carrier proposes an asthma program. George has an asthma attack generating a $2,000 ER visit in the baseline year. Jerry doesn’t; he isn't known to be asthmatic. George qualifies for the program. During the contract year, Jerry has a $2,000 asthma attack. George doesn’t.

Obviously, no asthma attacks were avoided, and Vandalay Industries saved no money. But that’s not the way wellness/disease management math works.

Here’s why. The vendor doesn’t have to measure Jerry because Jerry didn’t have any asthma-related claims even though he has asthma. Non-validated vendors either don’t know -- or know but won’t admit -- that people like Jerry, who need help but don’t show up in most data extractions, even exist.

Therefore, the vendor only reports on the observed, high-cost George…and
inadvertently or deliberately fabricates improved outcomes and savings for the “population” as a whole -- meaning just George.

Now consider a similar chart, but over four years. Instead of asthma, this is smoking. Instead of disease management, this is a wellness vendor’s smoking cessation program. And instead of asthma attacks, George and Jerry routinely quit smoking and then start smoking again, like many smokers do. In this example, assume they quit/resume every other year. Also assume that, to qualify for a smoking cessation program, you have to be a current smoker, of course.

A vendor can keep reporting 100% reductions in smoking every year, even as the number of smokers remains unchanged!

Not just a curious anomaly, this statistical sleight-of-hand has helped to fuel the rise of the wellness, diabetes and other “point solutions” industry.

Let’s consider several examples of vendors and carriers doing this in practice.

So far in this article, we have been careful to acknowledge that some genuinely honest vendors, consultants and actuaries simply don’t understand this fallacy, not having taken our course. The vendors cited below, on the other hand, are quite aware of what they are doing, as is obvious from their own displays, data and statements.

Here is an example of a vendor that “guarantees” a reduction in high-risk members. They don’t say anything about low-risk members increasing in risk.

Oversight? We think not.

If you examine their “bar chart” carefully, you’ll see that they’ve deliberately put the two-thirds of employees who are low-risk into the lowest one-third of the graph, to not draw attention to the fact that the large majority of employees are low-risk. In case you are wondering how they justify this sleight-of-hand arithmetically, count the bubbles. Each bubble represents 10 people.

This is exactly the same fallacy as above, with more realistic assumptions. Just like smokers quit and resume, people gain and lose weight. Blood pressure can go up or down. Bottom line: People change risk levels naturally, wellness program or not.

See also: Bring Certainty to Remote Injury Claims

Take a few minutes (and it will take a few minutes) to digest this “natural flow of risk” chart, developed by Dee Edington. (Scroll to Slide #4.) As you can see, absent any intervention, people do fairly predictably change.

Here is how Interactive Health presented this fallacy before the company went bankrupt. The company divided the population into four risk categories and showed how people migrated between the two periods from one risk category to another.

Green improved between the two periods, yellow stayed the same and red got worse. The change between the two periods was mostly regression to the mean, according to their own chart.

You might say: “Well, at least they were being honest.” Haha, good one. Obviously, you are new to the industry. No, here’s what they claimed this chart showed. They said 49% of high-risk members improved, while only 8.8% of low-risk members got worse. True enough. Of the 10% high-risk to begin with, 4.9% improved, and only 5.1% stayed the same. Likewise, their percentages are correct for low-risk members getting worse.

But now consider what really matters—the number of employees, not the percentage. Because very few were high-risk to begin with, that 49% who improved constituted 259 employees. On the other hand, so many employees -- 3,007 -- were low-risk to begin with that the 8.8% who got worse equaled 264 employees. That’s five more than the number who
improved. You would never guess it from those percentages presented.

The Ultimate Perp…Apprehended!

One vendor, Wellsteps, actually admitted to milking regression to the mean, to fabricate savings. As a result, the company and a customer, Boise Schools, won the wellness industry’s highest honor, the C. Everett Koop Award. This was predictable because the award is generally given to people connected to the awards committee. (Boise Schools' CEO had been on it.)

Their many fabricated claims included this one:

In other words, they cherry-picked the worst employees and showed an improvement in them. Along with the unaddressed curiosity factor of how they conclude that chain-smokers only smoke four or five days a week, this is as pure a regression-to-the-mean play as exists anywhere. Their CEO, Steve Aldana, did admit that, to STATNews, as part of an exposé on their program:

“In just one year, many employees will move from one [risk] group to the other,”[Mr. Aldana] explained,“even though they did not participate in any wellness programs or any intervention whatsoever.”

That movement, he continued,“reflects changes in health risks that occur naturally,” making it possible that some high-risk people become low-risk “even though your program didn’t do anything.”

This program may have fooled the Koop Award committee, but it didn’t fool STATNews. Nor did it fool the Boston Globe, which devoted a full-page spread to Wellsteps actually making Boise School employees worse while pretending to improve them:

And now this program shouldn’t fool you.

See also: Gateway to Claims Transformation

The Take-Aways

Lessons from this first installment include the following:

First, any vendor whose pitch includes: “We manage your highest…” should immediately be told to go get validated by the Validation Institute (VI) for that claim and then come back later. The honest ones will follow up. The others? This will be the last you hear of them. If a vendor includes anything like this pitch in their outcomes report, demand a refund. Those vendors are fully aware of the fallacy.

Second, dismiss any claim that compares percentage of improvers to percentages who get worse. It’s all about the absolute numbers.

Third, every VI-validated vendor offers a metric that controls for regression to the mean. (This isn’t to say this control is required as part of validation. It is merely required to be offered. You may not have the data to take the vendor up on the offer.)

For instance, U.S. Preventive Medicine specifically measures its risk reduction against that which would happen naturally. Cecelia and Virta are the only diabetes vendors that will allow you to contract for a simple comparison of the number of uncontrolled diabetics year over year across your population. These vendors avoid both regression bias and
participation bias. The latter is another huge fallacy to be covered in our next installment.

Finally, please enroll in both our Critical Outcomes Report Analysis (CORA and CORA Pro) courses, which cover these and other fallacies. It is especially important to urge your consultants and brokers to enroll, as you are paying them to protect your interests, but the proliferation – even the continued existence -- of these fallacies strongly suggests they aren’t.

In brief

• There’s never been a better time for the finance function to transform and become an active leader and value creator for the entire business.
• Advances in technology and data have redefined what’s possible for finance – comprehensive data makes it easier to connect performance across the business.
• The goal is not simply to automate for efficiency but also to rethink the services that finance offers and how it can add value to the business.

Changing customer expectations, continuous technological advances and the explosion in the availability of data present compelling performance improvement and growth opportunities for insurers that can transform key parts of their operations, including finance. A fundamental new accounting framework will shift how the industry measures performance – another prompt for significant change.

Against this backdrop, we believe now is absolutely the right time for insurers to rethink, redefine and – yes – transform the broader finance function. Everything should be under consideration – from the purpose of finance and the services it provides to operating models and integration with the business, to the necessary tools and talent. Finance leaders must take a broader – and bolder – view and to assume a more active and strategic role in advising the business.

These are among the issues and opportunities we explore in our latest report, Insurance finance reimagined: the why what, and how of transformation (pdf).

Thinking bigger and bolder about finance means integrating the multiple groups and functions involved in calculating, projecting and managing financials. Beyond the traditional finance unit, actuarial, investment teams and certain risk disciplines need to work together to provide accurate information and clear insight. EY’s vision for the future of finance includes all of these groups collaborating seamlessly and accessing the same timely data sets. Tax and treasury teams must also be more closely linked to the broader finance ecosystem than in the past.

Key drivers of change

Our report covers five critical drivers of change:

1. Shifting business needs: Changes in customer expectations, the competitive landscape, regulatory requirements, underwriting, technology and data have led insurers to make significant investments in new digital platforms, process automation and improved customer service capabilities. However, if decision support, insight generation, capital planning and enterprise protection capabilities – key roles for finance functions – can’t keep up, half of the value from initial investments will remain on the table. As the business evolves its operations, the broader finance organization must evolve how it evaluates investments, allocates resources, measures returns and reports on performance.
2. Technology tipping points: Technology has redefined the art of the possible for finance, actuarial and risk management. Advancements that seemed “just too hard” are now within reach, including the re-platforming and rebuilding of actuarial models, the migration of core ERP and enterprise performance management (EPM) solutions to the cloud and the implementation of data-as-a-service solutions that allow for huge scale, capability, speed and operational cost savings. The opportunities range from more straight-through processing to easier access to consistent data (which is critical for integrating with risk and actuarial), to enhanced scenario modeling and insight generation.
3. Increasing regulatory demands and the shift to long-term value: New accounting standards – including IFRS 17, IFRS 9 and Long Duration Targeted Improvements (LDTI) – are having a major impact. Regulatory requirements for data availability and transparency are increasing, especially relative to ESG. New metrics will fundamentally shift how both life and P&C insurers measure and report earnings. In some cases, finance leaders will need to help senior management (as well as financial markets) understand and interpret these new numbers. Insurance accounting has always been complex, and these new regulations will make it seem more so, at least in the near term.
4. An intensifying battle for talent: As cloud capabilities, artificial intelligence, machine learning and hyper-scale computing transform accounting, tax and actuarial processes, people will provide differentiation and competitive advantage through more informed decision-making and increased risk intelligence. Finance will need more analytical, tech-savvy workers, meaning that insurers must become better at attracting and retaining scarce talent. The next generation of talent is looking for meaningful workplace experiences, too, including access to advanced technology and careers that represent more than a paycheck.
5. The huge potential upside: The final – and perhaps most compelling – reason for reimagining the finance function is the upside potential it offers the business. First movers and early adopters will realize not just near-term value but a sustainable competitive advantage. Insurers that move quickly and boldly to digitize, integrate and transform their finance, actuarial, risk and tax functions will see the value in the form of increased operational efficiency and a strategically oriented function that adds value to the business.

See also: CEOs Expect More From Finance Function

Core strategies for the future of finance

Beyond these five drivers of change, the report highlights four key strategies to build the finance function of the future:

1. Set a vision, define the services that finance offers and integrate with the business

High-performing finance functions have clearly defined visions to guide everything they do, from process design and service portfolios to tech selection and organizational models. Developing such a vision requires asking potentially difficult questions, such as:

• What value do we really offer?
• Which capabilities are truly core?
• Can others provide services more effectively than we can?

Finding the right answers is critical to defining the mission and purpose of the finance function. It is also important to define what finance does not do.

2. Strengthen the data management foundation to generate value

Strengthening data management capabilities is arguably the most important investment for creating the finance function of the future. That’s true because many firms struggle to manage enormous quantities of data residing in legacy systems – a problem that will only get worse as volumes continue to expand dramatically.

Finance organizations can – and should – serve as the gateway to deep insight into business performance. It’s not just about having clearer insight into current performance and efficiently reporting results; rather, finance must excel in data management so that it can provide the business with forward-looking views for better decision making.

3. Innovate, automate and optimize with enabling tech and the cloud

Those finance teams that have transformed automate end-to-end business processes to achieve excellence in service delivery. Straight-through processing across end-to-end processes is essential to achieving high degrees of efficiency and effectiveness. Indeed, widespread process automation enables a shift from transaction processing and data manipulation to more strategic, analytical and value-adding capabilities. The benefits of a strong technology strategy include:

• More scalable applications and wider adoption across the business
• Simpler integration across the application landscape
• More flexible, on-demand access to computing power and capacity
• Lower total cost of IT ownership

4. Get the right people and teams working in the right way

The right people, culture and organizational design are necessary for insurers to execute their service, data and technology strategies. Further, they are necessary to unleash innovation and maintain high-performance levels as finance functions become truly data-driven and tech-enabled. Not only must finance work more collaboratively with the business, but groups within the broader finance function must do the same.

Design principles for change

Driving transformation at this scale requires blending revolutionary thinking with an evolutionary approach to change, with a focus on cultural change and capacity expansion, and new sourcing and vendor management strategies.

To transcend the common pitfalls of failed transformation initiatives, finance leaders must combine bold, creative ideas with proven tactics that build momentum through incremental gains. Taking a long-term view will help shape viable plans that address the most pressing “fix-now” issues and create capacity for change without losing sight of the need for continuous innovation.

Cultural shifts are necessary to operationalize vision and purpose and, most importantly, sustain change. Achieving ambitious goals requires defining what you want to achieve, crafting the plan to achieve it and committing the necessary resources. Communication is important because more engaged teams lead to more effective change programs.

Beyond integrated data, advanced technology and empowered teams, tomorrow’s top-performing finance functions will also excel at building mutually beneficial relationships with key vendors and partners. Leaders must think through the various attributes they are looking for in their partners and how to optimally structure the relationships. Compatibility of expertise and cultural fit are important criteria.

The path to the future

Those finance groups expand their capabilities, streamline and link their processes and enhance their technology and data to help the business take advantage of market opportunities in a strategic, safe and informed way. They will enable the business to compete more effectively and therefore contribute more meaningfully to bottom-line performance.

See also: Insurance Outlook for 2021

As the central point for all performance data, finance is uniquely positioned to accurately measure performance, identify opportunities across the business and predictively model what’s to come. With such a perspective, it can provide strategic advisory services that help promote innovation and growth, even during a time of great uncertainty and rapid evolution.

While industry veterans understand the risks of overly ambitious transformation programs, we believe that the future upside is so compelling that finance leaders must act – and the sooner the better – if they are to create the value that’s within reach.

Thank you to Steve Capps, EY Global Insurance Finance Transformation Leader, for his contributions to this article.

Life and health insurance carriers place a high priority on innovation. In the International Insurance Society’s 2020 Global Concerns Survey, innovation was ranked as even more important than any other issue, including the implications of COVID-19 and cybersecurity. This was true across Asia–Pacific, EMEA (Europe, the Middle East, and Africa) and North America.

Unfortunately, only 35% of respondents said they had an actual plan for innovation. Perhaps that’s unsurprising given the nature of the business we’re in – risk averse and methodical – as we carefully plan for long-term, large commitments. But a lack of planning for innovation is an unhealthy habit that life and health insurers must break if they hope to survive the next decade and beyond.

The Life and Health Insurance Innovation Challenge

As an industry veteran, I’ve been working with life and health insurance carriers for the greater part of my career. There’s no getting around the fact that it’s difficult for traditional carriers to innovate. Many are large, structured organizations that have been doing business fundamentally the same way for decades. This consistency helps ensure they are around to pay when benefits are due.

A decade or so ago, many carriers purposefully avoided focusing too much time and energy on innovation. Their reasoning seemed sound: Insurance is a serious business; carriers are legally bound to pay high dollar benefits, so mistakes can be costly; the planning horizon can be 50 years or longer; and innovation in life and health insurance can be a risky bet that runs counter to tolerance levels.

Besides, if no one else in your industry is innovating, do you really need to push the envelope? Carriers were comfortable in their belief that the insurance industry and the market were slow to change. But times have changed.

I probably don’t need to dive deeply into the disruptors we now see in the life and health insurance industry. We read the news every day and hear stories about insurance start-ups, large and small, that showcase new ways of doing business. Most of the carriers I work with are aware that we should address processes up and down the value chain to find ways to compete and operate more efficiently. These processes include everything from marketing to sales, underwriting, policy issue and in-force management. The bottom line is that insurance carriers went from competing for every sale with a handful of known names to competing with potentially dozens of companies, from the tech giants to the small point-of-use insurance solutions, including some they had never heard of and some that were brand new to insurance.

I don’t want our founders, our legacy companies, to see core business slip away. The industry may have to take bigger, faster steps to innovate along the value chain and, in some cases, fundamentally restructure to survive.

Partnering for Innovation in Life and Health Insurance

In my experience, those who welcome outsider participation in innovation can unlock new ideas and solutions without the need to radically reinvent their current businesses. In fact, RGAX, subsidiary of global reinsurer and lifelong innovator RGA, was created to help traditional carriers do just that. But what works for one company doesn’t work for others. While many factors can affect a carrier’s ability to innovate, it is size, talent and timing that can determine when to jump forward with innovation activities and when to slow down.

See also: Solving Life Insurance Coverage Gap

Large, established players: In some ways, it’s hardest for large carriers to innovate. One might argue that they have the most to lose. On the other hand, they may have the most resources to dedicate to innovation.

While a partnering strategy in the past was often met with great hesitation, it’s becoming far more acceptable in large insurance organizations. As noted in NMG Consulting's 2020 U.S. Individual Mortality Reinsurance Study, 40% of large carriers said they had launched a partnership in the last twelve months. That’s a significantly higher percentage than the 13% who had indicated so in the 2019 U.S. Individual Mortality Reinsurance Study. In the wake of COVID-19, insurance executives seized the opportunity to advance timelines and progress initiatives currently underway or planned, resulting in a sharp lift in partnerships over the prior year.

While collaborating with an external partner can help large carriers break through many of the obstacles to innovation, they can also consider separating large innovation initiatives from the day-to-day operation of the business. A dedicated innovation team can function like a start-up within the business. They have access to funding and strategic resource support (think “parental support”) and also have existing markets available to test their ideas. The setup can help the carrier be more agile and, thus, able to act on immediate market feedback. Innovation teams are a great way for incumbent life insurers to ignite big, bold, new ways of doing business.

Mid-sized carriers: Mid-sized insurers and some larger carriers may elect to focus on a single part of the value chain or one small part, such as market acquisition, underwriting, policy issuance or claims adjudication. Instead of creating their own division or subsidiary, they can partner with an existing start-up to innovate the existing ways of performing that function.

This approach can be a win/win for both parties. The established carrier can generate and test ideas faster because it doesn’t have to create its own infrastructure and process to execute on them. The start-up has access to a market to test different solutions. Both sides bring knowledge to the table: The carrier knows the market; the start-up can challenge the carrier’s assumptions about what will and will not work. Then, together, they can set up trials, which can lead to prototypes and minimal viable products (MVPs). If prototypes and MVPs are deemed successful and positioned as ready for scale-up, the carrier may invest more time or resources into the start-up or even choose to acquire it.

Small carriers: Small carriers often don’t have the budgets to invest in innovation, so partnerships become even more important. They may look for more established (lower-risk) insurtech providers to help them test new ideas. Agility is their advantage, as it is often easier to get approval for new projects at small carriers. Also, markets are smaller but often more homogenous, making it easier to pilot initiatives in a direct, targeted way.

Looking Outside the Industry for Life and Health Insurance Innovation

Finding the innovators in your organization and teaming them up with innovators at partner organizations is a great start. But there are other ways to formalize innovation that are truly outside the box, and these can be doable for the traditional carrier.

Some of the best examples of truly innovative thinking have happened when a carrier invites product, technology and marketing associates from outside the industry to the table, for example, astronauts, scientists, academics and manufacturing experts. The carrier provides a “moonshot” idea, such as, “What if we offered free insurance? What would that look like?” and then let the group generate ideas.

An even broader approach is to crowdsource innovation. For example, RGAX holds a Big Ideas Contest (most recently in 2019), inviting innovators from outside the insurance industry to compete for a 10,000€ prize for the most promising ideas.

See also: Can AI Solve Health Insurance Fraud?

Fostering Innovation While Managing Risk

No matter how you structure your innovation initiative, it’s important to remember that companies don’t innovate. People do. Even if you partner with a start-up, you need someone inside your organization to manage the relationship without stifling creativity. The individual(s) will need to be focused on your objectives and priorities, but they should also place a high value on the relationship with the partner, allow some freedom of expression in how they work together and be willing to have fun.

Finally, a partner’s urgency may sometimes be stronger than the carrier’s, especially if it’s a young start-up without inherent risk aversion or the need to adhere to set processes. A relationship manager must have a proper sense of pacing to keep the creativity flowing without overwhelming the core business.

If nothing else, 2020 has shown us to expect the unexpected. The insurance industry is rapidly evolving, and, to keep pace, your organization will either innovate or be left behind. Choosing an innovation path can be intimidating. We invite you to dip your toe in the water by thinking about how your team can incrementally invite innovation and new concepts into your more traditional business opportunities.