The first COVID-19 business interruption claim met defeat in a Michigan courtroom three months ago. Since then, courts throughout the country have wrestled with similar motions to dismiss filed by insurance companies.
As summarized in the attached chart, 11 courts have ordered a dismissal. while four court orders have denied the insurance company's motion and allowed the policyholder to proceed to the discovery phase.
These 15 rulings fall into three general categories.
1. The Policyholder Alleges COVID-19 Did Not Cause Physical Damage
Direct physical loss or damage is a prerequisite to recovery under standard business interruption coverage. Nine courts have dismissed complaints where the policyholder pointed to a state or local government's lockdown order - not the virus - as the cause of its loss. In all but one of these cases, the policyholder had been trying to avoid the policy's virus exclusion.
So far, this argument has only worked in a state court in Hackensack, NJ. In Optical Services v. Franklin Mutual, the court saw "an interesting argument ... that physical damage occurs where a policyholder loses functionality of their property and by operation of civil authority such as the entry of an executive order results in a change to the property." While characterizing the argument as a "novel theory of insurance coverage," the court found the policyholder should be given the opportunity to develop a factual record to support its argument. Certainly not a ringing endorsement of the approach, but a chance to keep moving forward for now.
2. The Policyholder Alleges COVID-19 Caused Physical Damage
A more successful strategy is to allege COVID-19 causes property damage. The same federal judge in Missouri has twice found allegations that "COVID-19 attached itself" to property as sufficient to survive a motion to dismiss. To keep their cases alive, policyholders must still convince a judge or jury that COVID-19 really did attach to property and that the resulting damage caused a suspension of business operations. Significantly, the policies in both cases did not contain a virus exclusion.
Three cases have taken the virus exclusion head-on -- two have lost. Federal judges in Florida and California both found the policy's virus exclusion clearly applies to bar the claim. Another federal judge in Florida was not so sure.
In Urogynecology Specialists v. Sentinel Ins., the court seemed uncomfortable with a virus exclusion applying to "fungi, wet rot, dry rot, bacteria or virus." Specifically, "COVID-19 ... does not logically align with the grouping of the virus exclusion with other pollutants." Accordingly, the policyholder has been permitted to proceed into the discovery phase. Two days earlier, the California court in Franklin EWC v. Hartford found this same language to be plain and unambiguous.
Importantly, the other Florida finding that the virus exclusion is unambiguous looked at a different formulation of wording. In Martinez v. Allied Insurance, the court considered an exclusion applying to ""[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease."
So, what do we know about COVID-19 business interruption claims?
The most reliable formula to survive a motion to dismiss seems to be a policy unencumbered by a virus exclusion coupled with an allegation that COVID-19 itself caused property damage. The hard work follows as the insurer and policyholder litigate the science of the virus and the precise reason the business shut down.
Prospects to survive a motion to dismiss appear far less promising if the policy contains a virus exclusion. Two doors have recently cracked open just a sliver. First, the policyholder can launch a frontal assault on the virus exclusion as unclear or ambiguous. The argument almost always fails - decisively - but some wording variations may lead a judge to at least pause. Second, the policyholder can point to the lockdown order (not the virus) as the cause of "property damage." This tactic draws attention away from the virus exclusion but invariably runs into a wall of deep judicial skepticism -- except when it doesn't.
More than 1,000 COVID-19 business interruption lawsuits remain pending in court throughout the U.S. At this point, no court of appeals has yet to touch a COVID-19 business interruption case. While we can start to see some edges of the litigation landscape, we are a long, long way from having a clear picture of how COVID-19 business interruption claims will ultimately resolve.
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Jason Schupp is the founder and managing member of the Centers for Better Insurance. CBI is an independent organization making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators and policymakers.
Every day I probably see a dozen headlines about new insurtech breakthroughs and deals, but how many will actually succeed? How does one separate the leaders from the pretenders? Insurtech leadership isn’t about buying the technology, nor is it solely about inventing the technology.
Insurtech innovation is leveraging technology to improve the insurance experience. And technology is effective only when it is integrated into business processes and workflows and delivers measurable results over time. After all, insurtech should change the way insurance is sold.
Although I didn’t realize it when I started my first job in the '80s, I was about to devote my entire career to insurtech innovation. Back then — long before program administrators would adopt standard software — there was no such thing as insurtech. Little did I know as I drove up and down the West Coast installing software on agency systems that I was on the cusp of something transformative.
That was 30 years ago, but the lesson is clear: It’s impossible to build a culture of insurtech innovation overnight. Growth is the result of a relentless pursuit of better ways to underwrite and service commercial insurance — enabled by technology.
This is not to take anything away from startups; they’re developing game-changing solutions. But to thrive as an insurtech innovation leader, you need more than a product. You need to surround the product with proper execution, the right people and sustainable partnerships.
No. 1. Execution: Commit to Continuous Improvement
When you’re an MGA and not the risk bearer, you’re less susceptible to market swings but more vulnerable to obsolescence. So, you have to out-execute the market.
It helps to have what I call a healthy paranoia — a state of vigilance where you’re always looking around the corner, keeping an eye out for the next challenge or potential disruption. Behind that paranoia must be humility, an admission that we don’t have all the answers and that, if we don’t remain alert, we could easily get tripped up and overtaken.
We must constantly ask ourselves how we can infuse established businesses with technology and analytics that will help them do what they’re doing better and convert them to a digital state that will survive disruption. We must take advantage of market disruptions to launch innovative products and write business even as other MGAs are exiting markets.
The heartbeat of innovation is continuous improvement, an inexorable pursuit of unattainable perfection, and it starts by questioning the status quo. MGAs are best positioned to play the role of facilitator, enabling efficiency for carriers, producers and the end customer. A facilitator’s role is to know what its partners need to be more efficient — to understand what will save them time, reduce costs and manage their capital.
Over time it’s possible to build an entrepreneurial incubator that helps partners along the value chain gain a competitive advantage. As an MGA, seek to provide fast and accurate quotes for coverage against a volatile peril, backed by data collected from a number of external sources, with little input required of the agent. Not only will you reduce the agent’s time, labor and costs, but you’ll also provide benefit to the carriers, who can receive reports that show exactly how their capital is being deployed. Arrowhead developed such a program; after 2 1/2 years, it’s become successful and profitable.
No. 2. People: Identify the Entrepreneurial Spirit
Every organization, regardless of what it does, should recognize that its most important asset is its people. Your team members don’t have to be Elon Musk or Tim Cook, but they must have a passion for what you do and continually strive to take the friction out of insurance. Those with an entrepreneurial spirit are curious, deeply engaged, proud of their craft — and unafraid to experiment and push boundaries in pursuit of a better way.
As it happens, with the right people in place, leadership will play an important role by playing less of a role. Insecure leaders can have a chilling effect on innovation. An effective leader insists on forward momentum over personal agendas, communicating that every team member belongs and that their contributions are valued. Rather than competing internally, teammates can then channel their energy toward doing what’s best for customers.
As a leader, you also need to keep your ego and pride in check, and that’s never been more important than during the pandemic. There’s something about a turbulent period that fosters humility and reflection. It gives us an opportunity to reflect on everything we do and why — because it’s often difficult during normal day-to-day operations to see the forest through the trees and not to mistake movement for progress. Every team member must gain a clear understanding of what the organization is capable of, where the gaps are and where it needs to go.
No. 3. Partners: Get Each One Invested
The true mark of success is performance, and that’s not possible unless every party brings its best to the table. Insurtech startups bring technical expertise, digital and advanced analytics, agile development and quick decision-making. Insurance organizations bring industry knowledge, a broad customer base, historical data, the capital and an ability to implement and manage change.
A program administrator is the nexus of this partnership and, as the facilitator, must ask the questions that help the partners collectively arrive at the desired result. Ask questions such as:
What does the carrier need to improve profitability on a book of business?
What do producers need to improve their service or make the underwriting process less painful?
What do insureds need to make their lives easier?
The successful MGA must evaluate opportunities in the insurtech space and adapt them to existing infrastructures to simplify commercial insurance buying, servicing and claims. After vetting an insurtech offering, for example, why not take the next step and do a “proof of concept” with a handful of producers in a carefully controlled pilot? If the pilot is successful and sustainable performance can be predicted, it can be rolled out across the entire program. Making prudent investments in technology, data and analytics will position your MGA to grow programs at a time when hard markets are ahead and risks will only become more complex and challenging.
Remember, you don’t make a penny until your partners sell something. Maintain a shared interest in their success — which means that, when a carrier considers making an investment, you should participate in the discussion, the evaluation process and the execution. Better yet, you should be initiating the discussion.
Insurance is hustling to catch up to other industries as it pursues a frictionless value chain. MGAs must scale technology to meet the challenge — whether it’s using machine learning to streamline medical billing, or enabling agents nationwide to quickly quote and bind small commercial insurance polices, or helping a claims administrator deploy staff and resources more efficiently using the science of predictive analytics.
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The connectedness of everything – assets, people, business and commerce – has increased the severity and frequency of cyber attacks. The insurance sector faces a bigger threat than most industries because insurers deal with extremely sensitive data. Several insurance companies, such as Premera Blue Cross and Anthem, have experienced significant data breaches over the past years. However, these are not the only insurers affected. A report by Accenture shows that an average insurance company receives over 100 cybersecurity attacks each year, with 30% of the attempts being successful.
As an insurance leader, being aware of the potential cybersecurity threats puts you in a better position to adopt the right prevention measures. Here are the top cybersecurity threats in the insurance sector that you should know.
6 Cybersecurity Threats for Insurance Leaders
1. Cloud Vulnerabilities
Cloud data access and storage has become a common practice for many people. However, this practice can increase the risk of a data breach. You can be susceptible to denial of services (DoS) and account hijacking attacks. With such attacks, hackers can access and tamper with your company’s data while preventing your team from accessing it. This threat can be prevented by implementing an extensive cyber risk management plan.
2. Patch Management
If your insurance company is using outdated software, you have a higher risk of cyberattack. Most cybercriminals exploit software vulnerability to access and steal company information. Failing to update your software patches makes your organization vulnerable to numerous data breaches.
Cybercrime vulnerability can be through something you consider as minor as the computer operating system. For instance, most organizations became exposed to cyber-attacks in 2018 for failing to update their Microsoft Office software following a patch release for Eternal Blue vulnerability. Therefore, it is advisable you stay up-to-date with any software you are using in your organization to avoid costly attacks.
3. Social Engineering
With the increase in social interactions, cybercriminals are exploiting such opportunities to launch social engineering attacks. Deception is the major aspect of such attacks. Usually, these criminals use trickery and manipulative approaches to lure individuals into taking various actions. For instance, you can be lured to disclose sensitive information or even bypass set security measures.
Social engineering threats are high because targets simply give hackers access to the system. Thus, it is hard for you to prevent these crimes with cybersecurity systems. However, regular training on cybersecurity is necessary for ensuring that your team members know how to detect and prevent such crimes.
If you thought it was only individuals who can be held hostage, think again, because your computer systems and data can, too. Ransomware attacks are some of the serious cyber threats you should worry about in the modern era. A report by the U.S Depart of Homeland Security reveals a rising number of ransomware attacks. The hackers attack your network and prevent you from accessing any data in it until a certain amount is paid. Such attacks are associated with significant losses. For example, besides the immediate losses, a ransomware attack can lead to huge monetary damages because of lost data and loss of productivity.
5. Third-Party Exposure Threats
The use of third-party services is a common practice nowadays, especially for payment processing. Most organizations do not take the necessary precautions when engaging in third-party transactions. Even where the party you are transacting with does not handle personal data directly, it can put your organization at risk of attack.
Hackers are using malware to access personal data, such as credit card numbers and Social Security numbers, through third-party companies. Therefore, it is important to take all the necessary precautions when dealing with a third-party vendor. For instance, inquire about their policy on data breaches and find out whether they have any measures in place to prevent cybersecurity attacks.
6. Outdated Hardware
There is a common misconception that cybersecurity threats have to come from software. If you are using outdated hardware, your company data is vulnerable, too. With the increasing rate of software updates, some hardware may find it challenging to keep up. Obsolete hardware may be difficult to accept the latest security measures and patches. In such cases, your organization’s data is exposed; hence, at a high risk of cyberattack. Therefore, it is critical to regularly check your devices and replace any obsolete ones to avoid outdated hardware-related cyber-attacks.
There you have it – a comprehensive overview of some of the top cybersecurity threats in the insurance sector. Evidently, as technology advances, insurance companies will continue to face different forms of cybersecurity threats.
While there might not be a one-size-fits-all approach to address or prevent cyber threats, being knowledgeable on the various cybersecurity vulnerabilities can help you adopt better risk detection and prevention measures. Therefore, make sure to adopt a holistic management plan to stay away from most of these threats.
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As the pandemic accelerates insurers' efforts to communicate more efficiently and effectively with customers, two-way texting has emerged as the preferred choice of a new generation of customers, who communicate natively via text with everyone — family, friends and brands included. Two-way texting is more popular than chat, but, unlike chat, it raises new issues around customer opt-ins and opt-outs.
In the new normal, insurers will have to manage customer opt-ins and opt-outs carefully to keep the conversation going. It will take more than having policies on accepting cookies and handling customer data — it requires a better understanding of customer consent, and changes to your data management strategy.
Here’s the good news: It doesn’t have to be hard.
Unite the Data, Solidify Relationships
Business people understand that customers are willing to share data (including email and mobile phone numbers) in exchange for something of value. In the insurance sector, maybe that “something of value” is a quote on renters’ insurance, a video download of drone-based damage assessment after a storm, the status of a claim or a renewal or payment reminder. The opt-in to communicate could be captured at any point in the customer journey.
While the business unit that captures the opt-in might be a call center, a claims department, a vendor that handles assessments, etc., it’s all the same — your brand. So, the opt-in doesn’t have to apply only for one business unit and specific situation. That’s why it’s so important to unite your data across business units and partnerships. You need a single source of truth on opt-ins and opt-outs to solidify the relationship with the customer.
With the power of the cloud and APIs, it can be easier than you think to integrate data across systems using the infrastructure you already have in place, including on-premises systems. You may have gotten away with not consolidating opt-in data before, but, in the new normal, customers expect more. It’s time to unite the data and solidify the customer relationship across the organization.
Opt-In, Opt-Out, Opt-In Again
Have you ever opted-in to a text or email communication with a brand to get something you wanted (a discount, a free ice cream cone, etc.), then opted out again? It happens all the time, and privacy regulations are increasingly putting teeth into consumer preferences about data use. That’s another reason it’s so important to have a single source of truth on opt-in status across all operating units, as well as the ability for everyone to collect and process opt-ins and opt-outs.
The upside is huge for any business, and maybe especially for a sector that relies as heavily on customer relationships as the insurance industry does. When you create a way to unify and manage opt-in and opt-out data on top of your existing infrastructure, you multiply the opportunities to converse with customers and show respect for their preferences. Your automated text solutions, chat agents, call centers, automated claim submission portals, etc., can all collect an opt-in to start and continue conversations. And everyone can join in the conversation as appropriate.
You can set your insurance company up for success in the post-COVID-19 world right now by enabling all business units to manage consumer consent for communication on their preferred channels, and it will be a lot easier than you think with cloud technologies and APIs. So, what are you waiting for? Disconnected communication data might have worked before, but the new normal is here, and it’s time for your customer data management strategies to reflect it.
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Tara Kelly is founder, president and CEO of Splice Software. She has a passion for enabling clients to engage in a meaningful, data-driven dialog with their customers.
In this week's Six Things, Covid and 'the Great Reset.' Plus, where blockchain shines right now; reflections on insurtech, pandemic; commercial claims journey with AI; and more.
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.)... continue reading >
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The global COVID-19 pandemic has almost shut down entire industries, forcing companies of all sizes to adapt and evolve. It has also done incredible things for a pivot to innovation.
Safety has had to come first. And for many, that meant changing how they worked, using technology to power a shift to remote work and servicing of customers. For some, like retailers, restaurants and manufacturers, it meant shutting down key services or production lines and pivoting to new offerings or entering new markets just to survive and stay relevant. Others, rather than just close doors, have repurposed their assets to contribute to the collective effort to fight the crises.
When commercial flights were shut down, airlines like Virgin Atlantic, Lufthansa and American Airlines switched to cargo-only flights. In the U.K., healthy fast-food chain Leon announced it was turning its 65 restaurants into shops, selling meals via both click-and-collect and delivery. Hotels started offering day rates for remote workers. And multiple manufacturers, like Scottish craft beer specialists BrewDog, converted their plants to produce hand sanitizer.
What does it take to shift this fast successfully? And is this kind of progress sustainable?
The reality is that it is not essential that we be thrown into crisis before this kind of change can take place.
With the enforced change in human movement and behavior came a change in customer demand. Businesses had to think and act fast to repurpose assets, talent, resources, distribution channels, offerings. Minus the crisis, it’s what successful businesses do every day.
SpaceX’s giant step
On April 11, 2019 – before we knew what 2020 would bring – a Falcon Heavy rocket was launched Cape Canaveral, FL, making history. It was the first in a new generation of space exploration: a rocket that would not only be able to pilot its way through space but be able to navigate and return to Earth for re-use, radically reducing the cost of space travel.
To achieve this, SpaceX combined radical and creative funding systems, brilliant talent and, perhaps most importantly, vision. But the question at the heart of this isn’t – "How did SpaceX achieve this?"; the question is, "Why didn't the incumbents?" How has innovation and creativity become so stifled in large, established organizations that it takes a new kid on the block to go, quite literally, where no one has gone before?
It’s about culture, leadership and some very practical steps that enable businesses to be their own catalysts for change, rather than relying on a crisis to spark exponential change.
The DNA of organizations that thrive through change
From Incremental to Exponential, a book I have written with Ismail Amla, looks at what it takes to drive exponential change in an enterprise. We examine five common components that make up the DNA of organizations that thrive through change.
Firstly, speed. Leading companies just operate faster – from reviewing strategies to allocating resources. McKinsey research indicates that these companies relocate talent and capital four times more quickly than their less nimble peers.
Secondly, being ready to invent. While business need to maintain the profitable elements of what they do, business as usual is dangerous. Leading businesses are investing as much in upgrading the core as they are on innovation.
Thirdly, being all-in. These companies aren’t just making decisions faster, the decisions themselves are bolder, braver and further outside the box.
Fourthly, making data-driven decisions. Data is providing the fuel to power better and faster decision making. High-performing organizations are three times more likely to say that data and analytics initiatives contribute at least 20% to EBIT. Which is profound.
And finally, following the customer. Top companies that sustain a comprehensive focus on the customer (in addition to operational improvements) have been shown to reap economic gains ranging from 20% to 50% of the cost base.
Vivek Wadhwa is a fellow at Arthur and Toni Rembe Rock Center for Corporate Governance, Stanford University; director of research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering, Duke University; and distinguished fellow at Singularity University.
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.
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.
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.
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.
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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!
“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.
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.”
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Horst Simon has been in commercial banking and the risk management consultancy industries for four decades. Since 2010 he is a risk management consultant and trainer and was associated with leading global players in the field of risk management consultancy and training as well as business process outsourcing.
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:
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.
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.
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.
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.
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Onno Bloemers is one of the founding partners at First Day Advisory Group. He has longstanding experience in delivering organizational change and scalable innovation in complex environments.
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.
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.
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Jason Schupp is the founder and managing member of the Centers for Better Insurance. CBI is an independent organization making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators and policymakers.
