The National Oceanic and Atmospheric Administration (NOAA), part of the Department of Commerce, released a report in May predicting a strong chance of a busy Atlantic hurricane season this year. So far, that prediction has held true. The World Meteorological Organization (WMO) reports that the 2020 Atlantic hurricane season has been so active that scientists are running out of names on the year’s official list of storm names. For only the second time in history, hurricane experts have started to name additional storms this year using the Greek alphabet. 

There’s no question that an above-average number of hurricanes can have serious, immediate consequences for the millions of Americans who live in vulnerable coastal areas. But there may be far-reaching effects, as well. This unprecedented hurricane season, during the pandemic, could potentially affect the insurance industry both now and for years to come. 

Below are six ways an active hurricane season combined with a pandemic might affect homeowners, renters and insurance providers in the U.S. 

More claims: Perhaps the most obvious impact that an active hurricane season can have on the insurance industry comes in the form of more damage and a higher number of claims.

Weather-related claims cause more homeowners insurance losses than other types of events. Wind and hail claims, for example, make up 33% of total losses. Water and freezing damage are close behind at 30%, with fire and lightning claims accounting for 27% of total homeowners insurance losses. 

Even a seemingly small amount of damage may be more expensive than most people realize. The National Flood Insurance Program reveals that a single inch of water inside a home or business may cause around $25,000 of damage.

Increased rates: A trickle-down effect that comes with a higher number of weather-related claims (from hurricanes or other natural disasters) is the potential for insurance rate increases.

The state of Louisiana, for example, saw a 23% increase in homeowners insurance premiums after Hurricane Katrina, according to International Risk Management Institute Inc. (IRMI), a continuing education and certification provider for insurance and risk management professionals. 

The cost of homeowners insurance has already increased nearly 50% over the past decade.

See also: A Lesson From Hurricane Laura?

Fewer available adjusters: When major storms hit the U.S., insurance companies receive an influx of claims from homeowners in affected areas. Adjusters from insurance companies then travel to the covered properties to help assess the damage. However, during the COVID-19 pandemic, social distancing orders and travel within the U.S. posed great challenges. 

Travel restrictions may limit the ability of insurance companies to get adjusters to areas hit by hurricanes in a timely manner this season. On top of these restrictions, S&P Global reports that insurers may also have concerns about sending their adjusters out into potentially dangerous conditions — not only from the storms but also from potential exposure to the coronavirus. As a result, there could be an uptick in remote claim adjustment, especially in cases where less damage is reported. 

Increased interest in flood insurance: An active hurricane season may have at least one potentially positive side effect, especially for the insurance industry. More storms might lead to more interest in flood insurance, because most regular homeowners insurance does not cover this type of damage. 

While the National Flood Insurance Program, run by the Federal Emergency Management Agency (FEMA), is still the largest provider of flood insurance, more private insurers have been getting into the market in recent years.

Lapsed policies: People who are moving out of cities into hurricane zones may not realize they need special insurance coverage. In some cases, policies may be allowed to lapse. 

FEMA has put measures in place to help customers of the National Flood Insurance Program who are experiencing financial difficulties during the COVID-19 pandemic. The grace period these customers have to renew their existing flood insurance policies has temporarily increased to 120 days (normally 30 days). Insurers may not be able to help every client, but goodwill can go a long way toward customer retention. 

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

Higher taxes or spending cuts: Andrew Hurst, a data writer at ValuePenguin, an insurance comparison site, said, “The government has allotted a substantial amount of money toward COVID-19 relief. At the beginning of August, FEMA alone had planned to spend $10 billion over the course of its fiscal year on coronavirus aid. The damage from this year's strong hurricane seasons could combine with the vast expenses that COVID-19 has demanded to a sum that's unprecedented.” 

In the end, it’s the taxpayer who may have to foot a large portion of the bill for the increased government spending. These expenses from hurricane damages, coronavirus relief and vaccine development combined might trigger austerity measures like tax increases or budget cuts.

If you are still trying to identify all the risks you are exposed to within the context of your business or spend endless hours converting historic data into useless risk reports in an effort to mitigate as much risk as possible for a green light on the road to taking less risk (for less reward); if you are spending a fortune on controls and the digging of trenches for your lines of defense… fear no more!

The Radical Risk Management process is here, and the future is bright for those who choose to go through the disruption of dumping the outdated thinking, concepts, models and processes -- things like the risk management “process” that is based on the assumption that it is possible to identify all the risks you are exposed to and then follow a dedicated process of mitigating all those risks as well as ideas like “Green is Good” and the three, four or, even worse, five “lines of defense.”

The management of risk is a mental process, not a technical process of data gathering, evaluation and reporting at consistent intervals with an expectation of a different outcome, or even improvement. Those who do nothing will just be exploited by those who change and get better at the management of risk.

This radical process involves only four components: Situational Awareness, Mental Simulation, Naturalistic Decision-Making and, finally, Response Execution. 

These are built around key elements of an effective risk culture, namely: Risk Intelligence gathered from everywhere (not just last quarter’s outdated risk report), a Risk Nervous system through which this information can flow everywhere in the business (not a process of sanctification where reporting gets better the higher it goes) and all employees having the Competencies and skills to manage the risks associated with their jobs on a daily basis to ultimately build sustainable competitive advantage for the organization (no levels of assurance, squadrons of policemen or lines of defense; there is nothing to defend against).

Risk Intelligence

“Information is anything that can be known, regardless of how it is discovered. Intelligence refers to information that meets the stated or understood needs of [the users] and has been collected, processed and narrowed to meet those needs. Intelligence is a subset of the broader category of information. Intelligence and the entire process by which it is identified, obtained, and analyzed respond to the needs of [users]. All intelligence is information; not all information is intelligence” --Mark M. Lowenthal, Intelligence: From Secrets to Policy (from Special Warfare Bulletin, JFK Special Warfare Center and School, Fort Bragg.)

In an effective risk culture, people care enough to think about the risks associated with their jobs before they make decisions on a daily basis.

In the ultimate risk culture, every person acts as a risk manager and will constantly evaluate, control and optimize risks to make informed decisions and build sustainable competitive advantage for the organization.

Success depends on the levels of accountability you drive in your organization and the time and effort you put into building an effective risk culture. Do not even attempt this if you are going to keep a process of making risk decisions in committees where these decisions are “syndicated” without anybody taking any accountability. That will not work in the Radical Risk Management process!

There is also no need to employ consultants to help you with this. I could never anyway understand why organizations would pay outsiders to come in and gather ideas from their staff and convert these into PowerPoint presentations they sell back to the organization. There is no blueprint of one-size-fits-all for the Radical Risk Management process; you have to build the unique process in your organization, based on the underlying corporate culture and organizational structure and focusing on driving both the behaviors you want to encourage and the behaviors you want to avoid.

You need to take each of the four components and develop these within the context of your business strategy, goals and objectives. If a risk will not prevent you from reaching your business goals, don’t worry about it; you can never identify all the risks you are exposed to, the key factor is how your employees will respond to a situation of risk in real time. Business is not a game, and business decisions based on last quarter’s risk report are not such a good idea in real life, there is no reset button!

See also: Adios to ‘3 Lines of Defense’ Risk Model

Let us briefly look at the four components:

Situational Awareness Is:

• “The perception of the elements in the environment within a volume of time and space, the comprehension of their meaning and the projection of their status in the near future,” as defined in Endsley's model of Situational Awareness.
• “Skilled behavior that encompasses the processes by which task-relevant information is extracted, integrated, assessed and acted upon” (Kass, Herschler, & Companion, 1991).
• “Continuous extraction of environmental information, integration of this information with previous knowledge to form a coherent mental picture and the use of that picture in directing further perception and anticipating future events” (Dominguez, 1994).

Situational awareness is having an accurate understanding of our surroundings — where we are, what happened, what is happening, what is changing and what could happen; knowing what’s going on so you can figure out what to do, collecting information from your surroundings and situation to improve your decision making and circumstances by:

• Using your senses (sight, smell, sound, taste and touch)
• Monitoring the messages that others are providing through their behavior and communications
• Being attentive to environmental circumstances that may indicate challenges, opportunity or danger

Reticular Activating System

A pathway in your brain that:

• Filters incoming information
• Turns on the “pay attention” button
• Expands your intuition
• Improves the message system between your subconscious brain and your conscious brain

Levels of awareness

• Tuned Out
• Relaxed Awareness
• Focused Awareness
• High Alert
• Incapacitated

Mental Simulation is our mind's ability to imagine taking a specific action and simulating the probable result before acting. Anticipating the results of our actions improves our ability to solve new problems. Mental Simulation relies on our memory, learned via perception and experience. (Josh Kaufman, The Personal MBA)

There are a number of things you can do to minimize the perceptual analysis. The first is doing exactly what you are doing at this moment. You are thinking! Become aware of the possibilities and think about them. Sudden situations of risk and the likely adrenaline dump are not things we are used to or comfortable with. By thinking about our reactions, by cognitively dealing with the possibilities of outcomes, we take the first step in managing the risk response.

Mental Simulation includes running imagery of the situation and the actions to achieve outcomes. Imagery is the set of mental visual pictures of oneself proceeding through a series of actions. Imagery can go beyond just pictures and incorporate the other senses, as well. Research into the use of imagery indicates that it has positive effects, including improving self-confidence, task completion, concentration and coping. Effective use of the imagery technique has seven elements: physical, environment, task, timing, learning, emotion and perspective (PETTLEP: Dave Smith, Caroline Wright, Amy Allsopp, and Hayley Westhead, “It’s All in the Mind: PETTLEP-based Imagery and Sports Performance,” Journal of Applied Sport Psychology 19/1 (2007)

Naturalistic Decision Making 

Decision making involves assessment and choosing a course of action. Decision making requires an understanding of the situation and controlled thinking. The situation determines the urgency of the decision, risks and limits of action.

The naturalistic decision making (NDM) framework emerged as a means of studying how people make decisions and perform cognitively complex functions in demanding, real-world situations. These include situations marked by limited time, uncertainty, high stakes, team and organizational constraints, unstable conditions and varying amounts of experience. Every business in today’s marketplace operates under these conditions, and practicing this based on last month’s risk report can be futile.

Mindfulness is a key element in decision making. Mindfulness is the idea that one should be present in the moment and acknowledge his or her own feelings, thoughts and sensations. Arguably, mindfulness is linked to situational awareness. Research suggests that mindfulness decreases accidents and mistakes while increasing memory and creativity. Researchers also assert that mindfulness can decrease stress and even increase a person’s general health. Additionally, recent research into mindfulness showed that it could actually change the brain physically for the better. This research indicated that mindfulness could increase the density of brain matter in the anterior cingulate cortex and the hippocampus, resulting in better attention, self-regulation, thinking flexibility, reduced stress and increased memory.

See also: Claims and Effective Risk Management

Response Execution

Once these steps are complete and a response has been selected; the response, or action, must be executed. Correct and effective execution requires smooth and timely coordination to achieve the desired result of optimizing the risk to get maximum benefit for the organization. The availability of resources also affects a response, and inadequate attention results in ineffective execution. 

Peak Response Execution is an action of optimal cognitive, emotional and physical functioning. Cognitively, people are at their peak when they have focused attention, ignoring unimportant things and allocating brain power to the task at hand. War fighters performing at their peak can better assess the situation, make decisions and perform the right tasks at the right time. Additionally, individuals performing at their peak are less likely to succumb to stress and choke when it counts.

That is it! You have to research each of these four components and apply your learning to your organization to build a Radical Risk Management process in your organization. With no blueprint, there is nothing to implement, and there is also no standard. (I hope somebody will not try to create a standard for Radical Risk Management and a whole industry of three-day certification courses to try and certify Radical Risk Management Practitioners).

The way forward: You can take the concept and go forward at your own pace and own target, as long as you use the process outline graphic with due reference. Alternatively, you can steal the concept and develop it further for your own commercial gain, but “chickens always come home.” 

Changes in vehicle technology and traffic conditions and new driver distractions affect the already fragile balance in insurer motor portfolios. In highly competitive markets, a shift toward, for example, higher repair costs for fender benders can turn a healthy portfolio into a product manager's nightmare. So as an insurer, what can you do to make your portfolio more resilient? Increasing premiums is possible but only to a limited extent. It is my strong belief that, in the end, it is in everybody's interest that insurance companies take a more active role in controlling accident rates and reducing the frequency and impact of road accidents, with broad benefits to our society in terms of traffic safety while at the same time improving portfolio returns.

About the limitations of road safety regulations

Why is this relevant for insurers? Isn't it foremost the role of governments to manage road safety and reduce accidents? In principle, yes, but there are a number of issues:

1. It may take a lot of time to respond to today's fast-paced developments with new policies and regulations. For instance, in a state like Utah, reducing the permissible alcohol consumption limit while driving has shown significant improvements in accidental fatality rates. The Utah bill was passed in early 2017, but it took the state over 20 months to bring it to implementation. So we're talking years and sometimes decades.
2. If there are no real-time, contextual data available, actual regulations may not accurately reflect the nature of specific accident causes. Take the Vision Zero Model: Initially implemented in Scandinavia, this program focused on redesigning high-crash zones. This has caused fatality rates to go down in 2018 and 2019. The change does, however, require detailed data collection.
3. There are differences in the data provided by different organizations. NSC and CDC data provide partial views and are often inconsistent.

Surge in injuries and fatalities related to motor vehicles

In the U.S., over $177 billion was spent in 2018 by federal and state governments in constructing highways and public transit systems. Compared with this, the federal budget for running road-safety programs was $579 million in 2015. A huge number, even though it is only 3% of the construction budget. Yet the NSC notes a spike in pedestrian deaths in 2018 and concludes that 90% of accidents involving a car are caused due to human error, with over 57% of fatal crashes attributable to driving under the influence, speeding or distraction. Recent CDC data show a 20% uptick in fatality rates attributable to motor vehicle accidents, despite all public spending. So what are we missing?

America First also applies to road-crash deaths

Recent data show that incurred losses for auto insurance between 2015 and 2019 have increased by nearly 20% in liabilities and approximately 30% in physical damage claims for the private passenger auto segment.

While the physical claims increase can be attributed to the 17% jump in the price of hospital services, as tracked by the Consumer Price Index for the same period, the increase in liability rates is not explainable with the same reasoning. On the contrary: In the same period, the CPI for both new and used cars has gone down.

Something has led the U.S. to become the home to the highest number of road-crash deaths for any high-income country, and the number is over 50% higher than the nearest one reported by Western Europe, Canada, Australia and Japan. There is a piece of the puzzle missing that's required to bring these fatality rates down. One thing the data suggest: Whatever it is, it's unique and specific to the U.S.

Approaching the road safety problem from a different angle

Government-initiated measures are increasingly ineffective. Implementation is long, hard and expensive, and they don't seem to have a tangible impact. It's high time to complement these top-down approaches with bottom-up activities addressing behavioral change at the individual level -- for instance, by building reward mechanisms that consistently promote and reward safe driving behavior. Modern telematics solutions can provide the data to do that seamlessly.

A 360-degree view on traffic situations

While currently often being implemented to provide usage-based insurance (UBI) or pay-how-you-drive products, telematics encourages the individual driver's behavior to drive safely. Of key importance is the quality of the data. Earlier telematics initiatives were limited by ambiguity. Was the harsh braking a quick reaction to avoid an accident? Or was it dangerous behavior? Modern solutions have been designed to solve these limitations, by integrating different data streams to provide a 360-degree view on incidents.

The technology has a wide range of use cases. Addressing individual driver behavior, telematics provide insurance companies the opportunity to build new value propositions around claims reduction, safe driving, emergency response services or pay-per-mile offerings that are especially relevant in our COVID-9 reality, where lockdowns and working from home reduce overall mileage driven by commuters. Forward-thinking insurers can unleash all their creativity and innovation power to create engaging motor insurance solutions incorporating modern technology and services now that the underlying telematics technologies are maturing.

Capitalizing on granular traffic safety data

It is my firm belief that expanding existing road safety programs with sophisticated data-driven technologies will provide the basis for more effective strategies to be implemented. Onboarding and exploring the latest solutions and technologies is critical to remain effective. There is a big advantage: New solutions are increasingly easy to implement, providing no-regret learning scenarios to find the best use cases and roll out approaches quickly.

See also: Life Insurance’s New Occupation

Real-time contextual data is reducing ambiguity

Earlier telematic solutions may have provided partial data that did not always provide the full picture of what was going on, or required hardware solutions like dongles. The associated costs, complexities and limitations in data quality may have hampered well-meant, early business cases. The successfully scaling up of safety and prevention initiatives in combination with insurance is definitely not for the faint of heart, as I wrote in an earlier article on barriers for these initiatives.

The lesson here is not "We've tried, it didn't work, let's forget about it." Instead, these activities are much-needed stepping stones toward understanding what in fact does work. For decades, insurers have worked with sketchy, outdated, often unverified or unstructured data for their decision making, under the assumption that inadequate data are always better than no data at all. These days, we can increasingly leverage granular, real-time data from low-cost sensors, e.g. in mobile phones, that contribute to better risk pricing, early warnings for all kinds of hazards and automated claims processing. That is in itself a major improvement of existing insurance processes.

Actionable insights enable the transfer from managing policies to managing risks

There is another upside. With real-time, contextual data, we can present actionable insights to customers and partners in an intuitive, user-friendly, non-intrusive way. This is what I call the transformation from managing policies to managing risks. Why wait until something happens, when the technology and data are available to actually reduce the chance or impact of an unforeseen event? You might be able to start a PPM insurance project and gradually expand to more sophisticated features to nudge your policy holders toward safer driving habits.

Insurers have the opportunity to broaden their value proposition and solve customer engagement challenges at the same time.

The nature and scale of the risk of future pandemics far outstrips the insurance industry’s capabilities, so any public-private partnership must make the most of them.

COVID-19 has revealed the expansive landscape of pandemic risk. The federal government has already committed $2.2 trillion to fund pandemic relief programs for individuals, businesses and state and local governments, just for 2020. Congress is currently debating whether to commit an additional $1 billion or $3 billion, with an outcome probably somewhere in between.

Meanwhile, policymakers, commercial interests and the insurance industry have been working through how to prepare for the risk of another pandemic in the years ahead. While they may argue about how much capital the insurance industry should be asked to put at risk against future pandemics (ranging from $0 to $50 billion), even the most aggressive proposals would transfer only about 1% of foreseeable losses to insurers.

Further, those proposals would direct all of the insurance industry’s pandemic risk capacity to take on “business interruption” losses. For example, the Pandemic Risk Insurance Act would give large corporations the tools to make up for lost profits and reduced executive compensation during a pandemic. The proposed Business Continuity and Protection Program, as well as Chubb’s Pandemic Business Interruption Program, would provide benefits similar to those recently paid out under the Paycheck Protection Program.

None of these proposals address any of the other foreseeable pandemic exposures such as third-party liability claims, workers compensation claims or the cost to remediate contaminated property.

See also: How Risk Managers Must Adapt to COVID

Without a doubt, the insurance industry’s role is severely constrained compared with the enormous scale of the pandemic risk. Accordingly, policymakers must thoughtfully position insurance industry capabilities where they can have the greatest impact for those individuals, state and local governments and businesses suffering financial loss during a pandemic.

The Pandemic Risk Landscape is an effort to provide policymakers and other stakeholders with a practical tool to assist them to consider the optimal positioning of the insurance industry’s capabilities within a public-private partnership. Equipped with a view of the full scale and range of exposures to financial loss confronting families, governments and businesses, policymakers may continue to conclude business interruption is the single best target of insurance industry resources within a public-private partnership. Or, they may find at least some of those limited resources should be allocated to other stakeholders and other exposures to loss.

We’re about five years into the insurtech boom, but we’re also in the middle of a pandemic. Excitement around emerging technology and startup innovation has taken a backseat as the insurance industry shifted its focus to COVID-19. 

Yet startups have not failed as quickly as the industry might have predicted. It’s possible that some startups will begin to outrun their funding and close their doors in the next year or two. But for the time being, the insurtech market and funding remain relatively stable. What’s driving this?

COVID-19 and Insurtech Partnerships

The pandemic has altered insurers’ approach to insurtech investment. Insurers appear to be focused on tactical initiatives that can produce more immediate results. This contrasts with the R&D that was more prominent pre-pandemic. 

Yet it turns out that startup activity and the global pandemic are not necessarily mutually exclusive. Insurer priorities most notably changed focus to cloud computing and digital strategy — with digital covering both external channels and internal workflows. Cloud and digital are two areas in which almost every insurtech excels and have led to additional opportunities in many cases. Insurers expect that these areas will continue to be prioritized even when the pandemic is over. 

Lemonade’s IPO and What It Means for Insurtech  

Lemonade’s IPO cemented one of the most notable insurtech players as a certified unicorn. IPOs validate the potential returns of insurtech and will help attract more investment dollars into the space, whether from venture capitalists or insurer investment arms. Few other startups have gained the investment attention that Lemonade has, but others — like life insurance startup Ethos or property insurer Hippo — have received funding over $100 million. Each of these startups’ successes helps attract dollars for the rest of the insurtech ecosystem.

See also: How Startups Will Save Insurance

New Growth Paths 

Many insurtechs, especially startup MGAs, are exploring new revenue streams. For some, this means selling a wider variety of coverages directly online or embedding at different points of sale. Some MGAS are also moving to become full-stack carriers, like Buckle and Clearcover. Still other startup carriers, like Slice, Trov and Metromile, have gotten into the software business and are licensing their platforms out to other insurers. 

Platform and analytics players are also finding success proving value to insurers in the current environment. Atidot, for example, partnered with Pacific Life to analyze product and pricing changes to help optimize market penetration for the insurer. In addition, Principal is licensing Human API’s medical records platform to circumvent paramedical exams for disability insurance during the pandemic. 

Many startups have interesting ideas but haven’t thought through long-term financial or regulatory hurdles. The goal of many startups is to validate a business model first, then work out the details later. It’s possible that some startups will start to outrun their funding and eventually close their doors. But it will be interesting to see how insurtech evolves in a post-pandemic world, especially as new realities cause insurers to rethink processes that were manually intensive. For startups that can show value to insurers, this new normal may be an opportunity.

Although the insurance industry seems to have aggressively and (mostly) successfully shifted toward digital interactions during the pandemic, an even trickier transition lies just ahead as part of what is being called "the Great Reset."

That transition to a post-pandemic world requires insurers to not just understand the internal workings at their companies, or even the new preferences of that fickle beast known as the customer; it means figuring out what the world of work and home life will look like after the universe resets, so insurers can revise products and revisit sales and marketing tactics. Maybe, for instance, some insurers will want to deemphasize small businesses, in general, as long as so many may go out of business and migrate toward "ghost kitchens" (which only offer takeout or delivery).

To try to help as we all sort through the complexity, I've pulled together the smartest thinking I can find on what comes after "the Great Reset." (Warning: McKinsey provides some serious pessimism at the end of what follows.)

In this article, the consulting firm lays out the broad parameters of what comes next for the economics of home life, including these predictions:

"A 12% drop in private consumption is anticipated in the United States over the next two years, with recovery to pre-crisis levels only by 2023–24.... The explosion of small brands, underway before the pandemic, has given way to a strong preference for global A-brands. After years of growth, out-of-home consumption has almost disappeared; many of us have stopped going to stores entirely....

"Zoom’s daily user base grew from ten million people to 200 million in three months.... At the same time, there has been an enormous rise in unemployment, which is expected to reach approximately 15% when 2020’s third-quarter results for the U.S. are complete."

Those predictions, if true, suggest not only that insurers will face headwinds with consumers because of a diminished appetite for spending but could also adjust policies and marketing/sales tactics to account for changes in how people use their homes and cars.

Of course, consumer buying behavior spills over into the businesses that serve them. Target, for instance, recently said that while it will hire 130,000 temp workers for the holiday season, the same number as last year, a far greater percentage will support e-commerce. Target, whose e-commerce sales tripled in the second quarter, says twice as many workers as last year will be assigned to help customers with onsite pickup of online orders; Target says that 90% of its online orders are now picked up at stores.

Small businesses have much bigger issues than big box retailers like Target do. How big? A recent headline in Crain's New York Business said of small businesses, "60% See Survival Past Six Months." That means, of course, that 40% don't see survival past six months, yet Crain's described the outlook as "Less Apocalyptic."

A new federal rescue package could throw a lifeline to small businesses, but I wouldn't want to have bet on anything getting through Congress until after the election settles which party has the upper hand -- perhaps until after a new Congress is seated in January.

The mix of businesses that are thriving will surely change, too, at least until a vaccine begins to kick in next summer or fall (the time frame that currently seems most likely, though hardly assured) and old habits can begin to reemerge. Movie theaters will have a hard go of it. Inside dining will, too, though those "ghost kitchens" seem to be doing a good business with takeout. Anything associated with tourism will stay muted. Visits to doctors' offices will remain far less frequent, while telehealth continues to take off. Cushman & Wakefield projects that the vacancy rate for commercial office space will rise from 11% pre-crisis to nearly 16% in the second quarter of 2022 and won't return to pre-crisis levels until 2025. And so on -- all kinds of habits are changing, and new ones are getting plenty of time to take hold.

There will be a good deal of variation by country in terms of what new habits form. McKinsey reports, for instance, that, while 60% of consumers in Italy have shopped online during the crisis, only 10% enjoyed the experience -- suggesting that the switch isn't permanent (or that online stores need to improve a bunch). New behaviors will also depend greatly on the sector involved. McKinsey again: "While use of e-pharmacies... has doubled or tripled in the U.S. over the course of the crisis, only 40% to 60% of consumers express an intent to continue using those services."

A wild card for all businesses is that the pandemic seems to have thrown brand loyalty out the window. McKinsey finds "an astonishing 75% of U.S. consumers trying a new shopping behavior in response to economic pressures, store closings and changing priorities. This general change in behavior has also been reflected in a shattering of brand loyalties, with 36% of consumers trying a new product brand and 25% incorporating a new private-label brand. Of consumers who have tried different brands, 73% intend to continue to incorporate the new brands into their routine.... The beneficiaries of this shift include big, trusted brands, which are seeing 50% growth during the crisis."

While the change in brand loyalty seems to apply mostly to retail products, I suspect that "the Great Reset" is making customers more open to changing insurance carriers and agents, too. You can either see that as a threat to your customer base or as an opportunity to poach from others.

The bad news -- and I warned there'd be bad news -- is that McKinsey projects in this article that the prospects for the entire insurance industry are under pressure.

I know far too much about this work because I was the ghost writer for "Strategy Beyond the Hockey Stick," the book that three of the article's authors published in 2018. The simple version of their warning goes like this:

A massive amount of analysis that they've done on the profitability of companies and of industries found that the results fit on a power curve: If your company or industry falls in the second, third of fourth quintiles, your results are pretty much the same as all the others in those quintiles. But, if you fall in the top quintile, well, lucky you. Your results are far, far better than those in the middle quintiles. Unfortunately, there's a tail, too; if you're in the bottom quintile, your results are far worse. And the McKinsey research for this recent article found that the pandemic is making the rich richer and the poor poorer. So, those industries in the bottom quintile, like insurance, have even more of a mountain to climb than they did before.

The good news is that the changing landscape creates opportunities for smart insurers. Life insurers have clear opportunities because COVID-19 has raised awareness. The trend toward telehealth offers big opportunities for not only health insurers but for those involved in workers' comp. And "the Great Reset" opens the way for all sorts of insurers if they adapt quickly to how consumers and businesses will operate.

Stay safe.

Paul

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

Where Blockchain Shines Right Now

The seafood supply chain, for instance, can become transparent and trustworthy, while blockchain automates location updates.

Reflections on Insurtech and the Pandemic

Will the dramatic change to work and life patterns unleash innovative startups and new rounds of funding?

Did Pandemic Kill Intuition? No, but…

With the pandemic throwing historic data out the window, more algorithms and AI are being used in what might be called bionic decision-making.

A Commercial Claim’s Journey, With AI

AI is still very new to insurance, and claims teams are only scratching the surface on how it can be applied for the betterment of all constituents.

Life Insurance’s New Occupation

Insurers must rethink their scope, away from a policy transaction and to a broader lifestyle experience across health, wealth and wellness.

Adios to ‘3 Lines of Defense’ Risk Model

The only way forward is building an effective risk culture and teaching everyone in the company radical risk management skills.

It has been a long time since I took chemistry as a pre-med student in college – yes I was pre-med before switching to a math and computer science major! I loved science, and I remember the experience. I can’t recall many of the formulas or compounds. But I remember the labs – especially the all-night ones. I remember mixing chemicals, and I remember the role of the catalyst. No matter what you had in the tube or the beaker, we always had to watch out when we added the catalyst. It was the game changer. It was the one that could set the classroom on fire. The catalyst took all of the primary chemicals and created a quicker reaction. Poof.

A catalyst accelerates a chemical process without itself being affected. If you think about it, COVID-19 has acted as a sort of digital demand catalyst.

In an earlier blog, we talked about reading the signs of what is to come in the life insurance industry, and we talked about connecting the dots. If we look at the trends closely, we can make out a picture of where the life insurance industry seems to be headed. Too much is changing not to notice. COVID-19 has added an extra variable – a catalyst – that has accelerated and pushed insurance to the point of reaction.

No test scenarios could have accomplished what COVID has accomplished in seven short months. In fact, Microsoft CEO Satya Nadella stated in April, “We’ve seen two years’ worth of digital transformation in two months.” COVID has compressed time frames for digital utilization as it has ignited a rush for digital capabilities. It is speeding up a demographic and customer engagement shift. That is a catalyst!

We have not seen such a rapid shift like this in our lifetime, one that will demand core systems that will adapt to customer needs and behaviors – moving between jobs regularly, seeking on-demand offerings, looking for value-added services, buying benefits that can port to individual insurance and full digital engagement. These trends are tied to the new dominant insurance buyer of the digital era.

Who are the new dominant insurance buyers? How will they change the nature of insurance?

In Majesco’s latest thought-leadership report, Rethinking Life Insurance: From a Transaction to a Life, Health, Wealth and Wellness Customer Experience, we use our recent consumer survey to paint a picture of this dominant insurance buyer as we chart the similarities and differences between demographic groups. For the purposes of our reporting, we place the segments into two large “super segments.” Gen X and Boomers fit into one segment – the older generation that has been the foundation of growth for 50-plus years. And the younger segment -- Gen Z and millennials, who represent the next generation of buyers and who expect digital-first engagement, products and business models.  

Some interesting insights regarding the younger generation set the stage for a different view on expectations and engagement. Currently, the younger generation rents at twice the rate of the older generation and is two times more likely to live with parents/family or friends/roommates, as seen in Figure 1. However, the younger generation is also 80% more likely to have children under 18 in their household. Yet, they represent a strong segment increasingly ready for insurance as they form new households and raise their families, replacing the older generation as the coveted insurance buying segment.

Figure 1: Demographic profiles of the generational super segments

These segments identify how insurance’s dominant buyers are changing, particularly their expectations, usage and perception of life insurance. The urgency of adapting to millennials and Gen Z is reaching a tipping point. Next year, millennials will overtake the older generation. And by 2025, the combined Gen Z and millennial generations will dominate the 30- to 60-year-old sweet spot for insurance — a complete flip in dominance in the next five years.

Insurers unprepared for this new dominant insurance buyer and their extremely different needs and behaviors will increasingly find they are no longer relevant.

See also: Reigniting Growth in U.S. Life Insurance

Opportunity Within the Dominant Market

As we have been pointing out recently in our webinars and blogs, insurance’s focal shift from transactions to experiences is going to result in a wide range of growth opportunities. The younger generation seems to understand the value of insurance and wants it. However, they expect something that is personalized to them. To get this, they are more willing to share personal data like health and exercise data (including in real time) to underwrite their policy. They want services. And they expect a seamless, digital process. 

You may not realize it yet, but this is the generation we’ve all been waiting for! The only drawback is the lack of preparedness and the swiftness with which this is unfolding…now accelerated by COVID-19.  

While L&A insurers needed to operationally improve prior to COVID-19, they are now more pressured to do so, both during and after the crisis. The pandemic is rapidly exposing less-than-desirable customer experiences, as insurers deal with paper-bound processes, non-digital post-service transactions, a rise in “fluidless” online life insurance purchases through new competitors and the need for extra caution due to fraud. At the same time, risks have emerged that demand new products such as “pay gap” for employees unable to work during a shutdown, various health products and simple life coverages – either as individual products or voluntary benefits. 

To retain the customer and revenue, insurers must rethink their scope away from a life insurance transaction to a broader lifestyle experience across health, wealth and wellness that includes:

• Insurance Product: Product (risk, services, experience) redefined but requires insurance to participate and play within ecosystems, rather than simply existing as a product unto itself.
• Lifestyle - Health, Wealth and Wellness: A unified view to cover all aspects of life from health, wealth and wellness for banking, insurance, wellness activities, brokerage account 401K accounts and more, in a holistic way instead of separate transactions or policies for each.
• Services: Provide services such as wellness discounts, preferred access to gym memberships and access to online brokerage accounts that provide a powerful, single engagement, eliminating points of friction between the different participants of the ecosystem.
• Continuous and Fluidless Underwriting: Constantly updating the risk profile of an individual or thing that changes the terms and pricing that are influenced by the continuous flow of data and use of the data to avoid fluid-based underwriting for a range of life insurance products.

Highly networked, data-driven business models are emerging, within and outside of insurance. They are redefining the customer journey, and the entire customer relationship, across a broader set of health, wealth and wellness options.

The viability of the insurance industry is vitally connected to demographic and market trends, customers’ expectations and their adoption of new technologies. The combination of these factors will pressure the insurance industry to develop products and services that are more affordable, tailored to very specific needs, digital-first, simpler and grounded in trust that not only protect lives but also enhance those lives across a wide array of areas beyond insurance, as reflected in Figure 2. They will also be looking for consolidation. “Can I meet more than one need with this one relationship?”

Customers will expect a different experience that brings solutions to all of these needs together. 

Figure 2: Elements of a holistic lifestyle ecosystem

Protecting Themselves and Their Lifestyles

Numerous research studies, including our own primary consumer and SMB research, have highlighted customers’ view that insurance is complex and difficult and unpleasant to deal with. From the multi-page, fluid-oriented applications to the multi-page contracts full of confusing legal terms and exclusions and a variety of different riders, traditional broad policies exacerbate the problem. Understanding what is covered and how much can be like a maze, where the “truth” is difficult to determine, creating frustration and lack of trust. 

In contrast, newer coverage options remove complexity, because they are simple, specific coverages for specific needs and time frames. Simplification of the life insurance process and policy has been a major focus of startups like Ladder Life, Haven Life, Bestow, Fabric, Health IQ and others – driving their growth and loyalty with customers. But simplification may also mean a broader approach.

As we mentioned in our recent blogs on mobility ecosystems, organizations are expanding their brands to offer simplicity through tools that meet multiple needs at once. With life insurers, this kind of ecosystem will begin to look much more like a comprehensive life, health and lifestyle management process. Insurance will always be a part of it. The experience created by the insurer, however, might look dramatically expanded and radically simplified. The result will be straightforward – insurers will be contributing, not just to the security of individuals and families, but to holistic life improvement.

Connecting to Better Life, Health and Wellness

Technologies like IoT and wearables have rapidly matured from emerging technologies over the past five years. Fitness trackers and other connected wearables are becoming important connections and hubs for new ecosystems that provide value-added services or insights for people to manage their health and wellness. A 2018 study commissioned by Vitality found that adults who used fitness trackers tied into a rewards scheme could add two years of life expectancy, on average.

Scientists and tech companies are realizing the potential of these devices beyond their original fitness tracker role to predict possible adverse health conditions, including COVID-19. In the 2020 Innovation in Insurance Awards sponsored by Efma and Accenture, a submission by PZU in Poland used a wearable device to measure oxygen and pulse in real time to reduce transfer infections of COVID to medical staff in hospitals. 

Michael Snyder, chair of genetics at Stanford School of Medicine, noted that smartwatches and other similar connected devices make at least 250,000 individual measurements a day. This continuous stream of data, fed into powerful predictive algorithms, can be more effective than traditional methods at detecting health issues. For example, Scripps Research Institute found that changes in heart rate caused by an infection can get detected four days before a conventional temperature check detects a fever. Recognizing the health and wellness potential of these devices, Apple has been researching how its watch can be used to detect heart problems, and Fitbit is conducting 500 research studies on issues like cancer, diabetes and respiratory conditions.

These innovations fit the younger generation. Gen Z and millennials who own a connected device are nearly three times more likely to say they received an insurance discount or free/discounted products or services as part of the device as reflected in Figure 3. Whether these discounts are real or perceived, it’s clear that the younger generation wants a stronger connection between these devices and related products and services – an example of ecosystem thinking. Just as these generations grew up with digital technology as a defining factor of their youth, ecosystem engagement is a defining influence on their behaviors and expectations (just look at Apple and Amazon engagement) as they become the dominant buyers of products and services to protect life, health and wealth. 

Figure 3: Discounts and benefits bundled with smart devices

But the use of these devices is not just for wearables; it extends to home IoT as well, offering an opportunity to create a bridge from P&C and home security into home health and wellness. As health awareness technologies arise, IoT home devices can add value to those who choose to age in place, creating an all-in-one connected home and health offering.

See also: Will COVID-19 Spur Life Insurance Sales?

So, if we follow the digital thread properly, the same capabilities that are desired by the younger generation are going to be used to assist the older generations with their health, security and lifestyle during retirement. With more than 10,000 Baby Boomers retiring each day, this is a huge market opportunity. Life insurance’s “new occupation” may be far broader and far more helpful than insurers had ever imagined. In targeting millennials, insurers may find themselves better prepared to meet the needs of all generations.

The Mood to Move

Motivation is the key to insurance sales. Is the new dominant generation motivated to seek life insurance, and are our sales processes advanced enough to capture them at the point of need?

In this age of disruption, all those organizations that spent many years and lots of cash to dig beautiful trenches for their useless Three Lines of Defense are being seriously damaged. These organizations are now left needing even more effort, to fill up their trenches and get out on the battlefield of real business.

R.I.P., Three Lines of Defense model (the three being: operational managers; risk managers and compliance functions; and internal auditors). Your creators saw a tiny speck of light, but millions are left without defense, and the trenches are in shambles. Sadly, your ghost will haunt many for a long time. They still have three lines, but these are now so blurred that organizations must be extremely careful not to kill their own front-line fighters, a situation much worse than running around in the old trenches. 

The model turned to a story of failed backward innovation -- making something useless even more useless…… and that in the middle of the age of disruption.

As Michael Volkov recently said: “The IIA’s revised model [for the Three Lines of Defense] should be ignored and relegated to the ash heap of bad ideas.”

The elephant in the room is actually a grey rhino, not a black swan; it is time for risk practitioners to learn the lessons. Time to wake up to the reality that an outdated risk management process of steps to Identify, Analyze, Evaluate, Treat and Monitor the Risk, together with beautifully crafted RAG reports linked to a bunch of risk-mitigating responses, are of no use, and that following any standard or framework contributes nothing to the actual management of risk. The effective management of risk depends on the risk management skills of the front line and the decisions made by them in every situation of risk that they encounter.

It is time for auditors to get away from the management of risk, far away -- and to stay away. By the time anything gets to their line, it is too late anyway; all they can do is to issue a finding, implying that they “found” something. I have never seen an auditor resuscitate a dead business. Lately, we see more cases where they actually contributed to the death of organizations through a lack of diligence and susceptibility to corruption.

What a pity that the hours of heated, heat map-driven debates in the risk committee meetings on whether something should have been red, amber or green at the end of last month (or, even worse, last quarter); came to .....nothing! 

See also: COVID-19: Technology, Investment, Innovation

The dominant personalities glaring at risk reports created from historic data, with their thinking clouded by unconscious biases, also made the syndication of decisions in these meetings so much more difficult. The hear no evil, see no evil, do no evil committee members who were mostly dedicated to their mobile phones during these debates are still going with the flow. Just like dead fish.

We also learned that "tested" business continuity plans are of very little value; no disaster will follow your plan. Success lies in the way each and every employee will respond to the situation of risk on D-day.

It is time for risk practitioners to grab the bull by the horns and learn this elephant-size lesson that the only way forward is building an effective risk culture and teaching everyone in the company radical risk management skills.