In this week's Six Things, Paul Carroll contemplates Biden's first 100 days in office. Plus, 11 insurtech predictions for 2021; how low-code accelerates change; COVID-19 risk and buyers' psychology; and more.
In this week's Six Things, Paul Carroll contemplates Biden's first 100 days in office. Plus, 11 insurtech predictions for 2021; how low-code accelerates change; COVID-19 risk and buyers' psychology; and more.
Although I’d like to think that the big news in the world this week is that my sister Anne turns 60 years old today, I have a feeling that there is considerably more focus on what happens tomorrow at 12:01pm EST, when Donald Trump leaves office and Joe Biden becomes president of the U.S.
The tradition is that the new president has a honeymoon of 100 days or so, when his people settle into their roles in the new administration and he starts to implement his agenda. But Biden’s plans to start out with a series of decisive actions suggest more of a divorce from the tone and policies of the Trump administration, and the dysfunction in Washington nearly ensures that Biden faces the obverse of the usual honeymoon.
Although I think the longer term is still clear — we will get the virus under control some time in 2021 and see a strong economic recovery, barring some craziness at the inauguration or in coming days — I suspect we will all be left guessing about where the economy and the country stand for at least that first stretch of three months-plus... continue reading >
Much of the focus on innovation has related to personal lines and that makes some sense: Policies tend to be more cookie-cutter than in commercial lines, and individuals, spoiled by online resources like Amazon, have demanded a better experience from insurers. But don’t sleep on commercial lines. As businesses see what’s changing in personal lines, they aren’t going to be left behind. Businesses are demanding simpler interactions and more understandable policies, as well as better prices.
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With the passage of the California Privacy Rights Act (CPRA), U.S. data privacy law entered a new era. In addition to establishing the first data protection enforcement agency in the U.S., the CPRA ushers in several stringent requirements for insurers and their service providers and is likely to serve as a model for other states considering similar legislation. As we head into 2021, your business should be on notice that data privacy requirements are about to get a lot tougher and ensure that your service providers have put the appropriate safeguards in place to protect your personal information.
While laws like the CPRA require insurers to protect sensitive data, they often give businesses little guidance on how to secure the information systems that process that data. If your business is wrestling with the growing patchwork of data privacy and security requirements, selecting service providers that have certified against an industry-recognized security framework like HITRUST CSF can help you streamline your compliance efforts while providing powerful validation that your service providers have implemented industry standard security programs and best practices.
HITRUST CSF – Not just for healthcare anymore
When vetting service providers, looking at their security certifications is an important starting point. However, not all security certifications are created equal, and relevance will vary depending on your industry and location. In terms of scope, HITRUST CSF offers one of the most comprehensive certifications available. The Common Security Framework consists of 270 requirements spread across 19 domains ranging from access controls and business continuity to risk management and data protection and privacy. Although HITRUST CSF was originally developed to help healthcare organizations address the security requirements of the HIPAA Security Rule, the framework has now been aligned with the controls of other industry standard cybersecurity frameworks, making it an elite certification across multiple industries — like P&C and life insurance — around the globe.
The broad-based appeal of HITRUST CSF is due in large part to its “assess once, report many” approach to certification. HITRUST CSF draws on multiple security frameworks, including ISO 27001, PCI DSS, NIST 800-53 and the NIST Cyber Security Framework. Because so many HITRUST CSF controls align with those of other security frameworks, certification against HITRUST CSF helps businesses comply with a wide range of security and privacy frameworks while streamlining the assessment process.
Getting certified – What’s involved?
In terms of getting certified, HITRUST CSF offers one of the most rigorous assessments available. Organizations begin the certification process by engaging an external auditor approved by HITRUST to perform a validated assessment. More than other certifications, HITRUST CSF also stresses the importance of developing and implementing the appropriate policies and procedures to safeguard covered information. This combined emphasis on program development and independent third-party assessment place HITRUST CSF in a league of its own when it comes to validating your program to customers concerned about the security of their data.
Once organizations do achieve HITRUST CSF certification, they must demonstrate continuing commitment to data privacy and security through annual assessments. In addition to the biannual validated assessment, organizations must complete an interim assessment that is more limited in scope during intervening years. This annual review cycle ensures that service providers engage in continuous monitoring and improvement of data security and privacy rather than adopting a “one and done” approach to compliance.
One size does not fit all – Which certifications should your service providers carry?
While HITRUST CSF is intended to harmonize requirements across several security and privacy frameworks and legal requirements, many service providers find it useful to maintain multiple certifications. These certifications represent some of the most widely recognized options available to businesses that process sensitive information:
PCI DSS – Companies that process credit card transactions should maintain PCI DSS certification, which is overseen by the Payment Card Industry Security Standards Council (PCI SSC). PCI DSS certification requires businesses to meet stringent requirements and engage in continuous monitoring throughout the year. Requirements address seven critical security controls, including change management processes. Other requirements include biannual penetration testing of internal and external networks by an independent third party, as well as quarterly vulnerability scanning of your organization’s information systems.
ISO 9001 & 27001 – The International Organization for Standardization (ISO) publishes international standards that address best practices for a wide range of industries and applications. ISO 9001 is a formal Quality Management Program developed by the USPS and major mailers specifically for the mailing industry. The widely known ISO 27001 standard provides requirements for establishing and maintaining an information security management system (ISMS). While organizations can certify against ISO 27001, it is not obligatory, and many organizations choose to address ISO 27001 requirements without pursuing formal certification.
SOC 2 Reporting is not a certification, per se. Rather, it is a report that requires organizations to attest to five Trust Services Criteria: Security, Availability, Confidentiality, Privacy and Processing Integrity. SOC 2 reports are widely accepted across many industries and can be done in conjunction with security certifications. For example, some organizations choose to obtain a SOC 2 report based on HITRUST CSF control requirements.
FISMA – The Federal Information Security Management Act (FISMA) is a United States federal law that requires federal agencies and contractors to develop, document and implement an information security and protection program. FISMA certification demonstrates compliance with NIST 800-53 Baseline Security Controls for Federal Information Systems and Organizations. Requirements include maintaining an up-to-date system inventory, data categorization, selection and implementation of NIST security controls, development of a System Security Plan, continuous monitoring and conducting annual risk assessments.
USPS Platinum Full-Service Certification – Platinum Full-Service Certification is reserved for mailers who consistently meet USPS mail quality thresholds, have a formal Quality Management Program and pass an internal audit and an independent external audit by a certified Quality Auditor. Only a handful of mailing service providers in the U.S. have achieved USPS Platinum Full-Service Certification. Thus, any vendor that maintains this certification is in select company.
As more states enact tough data protection legislation, validating the security of your service providers will become increasingly vital. Moreover, while it’s never too late to make a good impression, it can be really tough to earn back the lost trust of your customers following a data breach. Verifying that your service providers maintain rigorous, relevant, industry-recognized certifications is one of the most important steps you can take to protect your data and inspire the confidence of your customers.
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Scott Stephens is president of DATAMATX, one of the nation’s largest privately held, full-service providers of printed and electronic billing solutions.
Roughly a third of the population of South Africa live in informal dwellings in settlements and rural villages. Many of these are shacks, costing less than 5,000 rand to build. That's the equivalent of around 300 euros. These homes may not figure on a land registry or have a certificate of building quality, but they are family homes nonetheless, providing an essential roof over heads and a safe place to store everything the family owns.
Enter Ntando Kubheka, an entrepreneur with a passion to make a difference in the world. Ntando is the CEO and founder of Sugar, a start-up insurer in South Africa, who is on a mission to make home insurance accessible to those who need it the most.
To find out more about this young and ambitious start-up called Sugar, I Zoomed with Ntando.
What is the problem Sugar is addressing?
Ntando told me, "The problem we are solving, quite simply, is the provision of insurance protection for the mass market. This is the bottom of the pyramid when it comes to demographics. Our focus is on home insurance because the traditional insurers don't want to insure homes that are in informal settlements, in rural villages or are homes in township areas."
The point here is that this sizeable chunk of the world's population needs a financial safety net more than most. If their home goes up in flames, then everything they possess goes with it. With no stash of cash to fall back on, they become totally dependent on the good will of nongovernment organizations (NGOs), the community and the church.
And it's not just a question of money alone, although, by definition, this is a low-income group. There is also an issue of supply. The insurance products to fit these types of homes are simply not there.
So, how is it that Ntando can do what the traditional insurers won't?
Redefining a home
Ntando explained,"There are three issues we have had to deal with for our home insurance products on Sugar. The first is that there are no formal addresses to identify a home. The second is that, even if it is a bricks and mortar building, it won’t be built by a registered builder who has a license with a national agency.And, finally, there will be no formal documentation, such as a certificate of occupancy from the local authority, or building regulations or a land registry record. These are informal dwellings that people have built where they want to build them."
When you think of it like that, it is blindingly obvious why a traditional insurance product would fall at the first hurdle. There's no record of where the house is, how it's been made, what it's been made of and to what standard it has been built. The issue for insurers is, how do they assess risk when there is no address, or standard description of how the home is built or any certification to demonstrate the quality of the construction?
This is why the purpose of Sugar is to build an insurance product for people who live in homes like these.
Technology to the rescue!
It was about now in the conversation with Ntando that I had one of those aha moments. It came when I asked him how you find anyone when the person is living without a street address. I was thinking of the trouble I have with couriers and the "I can’t find your house" call I seem to get with every delivery. Which is particularly challenging for me as I live in southern Spain but speak un poco de español!
It had never occurred to me how you find someone when there isn't a system of road names and numbers to rely on.
The answer is simple: The person sends you a WhatsApp locator! The perfect fusion of the analog and digital worlds.
But it gets better: Sugar has built a platform using proprietary technology similar to What3Words to provide a location point for every dwelling. For those unfamiliar with What3Words, it is a global addressing system that does not use street names or GPS locations.
Instead, What3Words has divided the entire planet into a grid of 57 trillion squares that measure three meters by three meters. Each square is given a unique combination of three words to identify it. This system provides greater accuracy for identifying locations and is remarkably easy to use. Words are easier to remember than a GPS location; it always works offline; and it is more precise than saying, "Meet me outside Oxford Street tube station!"
How is Sugar doing it?
Sugar scans and remaps the country every six months with its in-house spatial platform to keep the core platform up to date. Sugar can put a pin in the map and locate every one of its customers.
Customer onboarding is entirely automated and driven by a conversational, AI-enabled chatbot. It typically takes 10 minutes for a new customer to go through the entire process of inquiry, quotation and buying a policy. The experience is specifically designed to be conversational in a choice of 11 languages (not everyone speaks some English).
As part of the onboarding process, customers take photos of the four elevations of their dwelling. Sugar takes the four images and strips out the metadata of each one, such as the location data, timestamps, etc. Sugar then compares the images with its own datasets to validate the photos against what it already knows about the dwelling.
Which all sounds great, but what about valuation and the setting of the premium? Ntando explained, "When it comes to valuing the property, we leave that to the customer. We ask them to assign the value that they think is sufficient to cover the rebuild cost of the property and the value of its contents. If they over- or underestimate, well, it is what it is. They make that choice for themselves."
"When it comes to settling claims," Ntando said, "we send out an assessor for bricks and mortar property claims to view the damage and assess the loss. But for the Shack product, we pay out the full amount on every claim. We deliberately made this a pre-paid product for a fixed amount, say 5,000 or 10,000 rand. This is unique in our marketplace to have an insurance product like this."
One of the smart moves Ntando has made with Sugar to minimize the risk of fraudulent claims is to enter into a series of partnerships with retailers and do-it-yourself (DIY) stores. When a claim is paid, it is usually in the form of vouchers or a pre-paid card to spend at a store, and not in cash. This discourages anyone from seeing an easy route to cashing in their total loss policy when they know they'll be paid out in timber and nails!
Bringing insurance to the masses
Sugar is about to complete its first round of seed funding. The tech platform is built and already serving customers. The underwriting capacity is in place with Genric Insurance, backed up with reinsurance from GenRe.
This newly raised capital will fund growth in distribution as Ntando goes on his mission of educating the people of South Africa on the value of insurance to people who have little or nothing to fall back on.
Social impact!
Afterward, when the Zoom was over and I was reflecting on the call with Ntando from the safety and comfort of my riverside dwelling, I had one overwhelming thought. The social impact of providing financial protection to those who need it the most makes Sugar more than just an insurance company.
And for that, I wish Ntando and Sugar the very best of luck and good fortune for the future!
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Rick Huckstep is chairman of the Digital Insurer, a keynote speaker and an adviser on digital insurance innovation. Huckstep publishes insight on the world of insurtech and is recognized as a Top 10 influencer.
Biden's 'Reverse Honeymoon'
Although a new president traditionally has a honeymoon of 100 days or so, what Biden faces feels more like divorce proceedings.
Although I'd like to think that the big news in the world this week is that my sister Anne turns 60 years old today, I have a feeling that there is considerably more focus on what happens tomorrow at 12:01pm EST, when Donald Trump leaves office and Joe Biden becomes president of the U.S.
The tradition is that the new president has a honeymoon of 100 days or so, when his people settle into their roles in the new administration and he starts to implement his agenda. But Biden's plans to start out with a series of decisive actions suggest more of a divorce from the tone and policies of the Trump administration, and the dysfunction in Washington nearly ensures that Biden faces the obverse of the usual honeymoon.
Although I think the longer term is still clear -- we will get the virus under control some time in 2021 and see a strong economic recovery, barring some craziness at the inauguration or in coming days -- I suspect we will all be left guessing about where the economy and the country stand for at least that first stretch of three months-plus.
The biggest variable will, of course, be the pandemic. It's clear that the Trump approach of deferring to governors hasn't worked, and that the Biden approach will have the federal government aggressively centralize the response -- but not that the Biden approach will work.
Even if the approach does work, how quickly can invoking the Defense Production Act increase the supply of raw materials for the vaccines? How fast will it be possible to set up national vaccination centers? How rapidly can we get back to normal, given that we're starting from such a high baseline, with hundreds of thousands of new cases a day in the U.S.?
It won't help that the Trump administration delayed working with the new team on some aspects of the pandemic response and declined to coordinate on others.
Once the pandemic subsides, life can return to normal, but the speed of economic recovery depends on how much damage has been done by then. Legislation should pass Congress soon that will provide another round of stimulus and protect, in particular, small businesses, which are particularly vulnerable, and employees -- but "should" doesn't mean "will."
Beyond the normal ideological conflicts, tensions are running incredibly high because of the coming impeachment trial for Trump and because many Republican leaders still find it useful to stoke grievance by refusing to acknowledge that Biden won a free and fair election (according to all the election authorities and all the courts that reviewed the results). Assessing who, specifically, is to blame for the assault on the Capitol two weeks ago will also keep tempers hot -- imagine if the Democrats follow through on threats to try to expel Josh Hawley and Ted Cruz from the Senate.
So, we'll surely get some form of new stimulus, but what it will look like and how soon it will arrive are highly uncertain, at least to me.
Even if the course were clear on the pandemic and on stimulus, Biden would be getting off to a slow start because the Senate won't confirm his Cabinet appointees until much later than normal for a new administration. That tardiness partly reflects tactical decisions by Senate Majority Leader Mitch McConnell but also the fact that the composition of the Senate wasn't resolved until the runoff elections in Georgia two weeks ago. Now that the Democrats are about to take control, via the tie-breaking vote that Vice President Kamala Harris will be able to cast in a chamber split 50-50, the ground rules are being set for running the Senate, and confirmation hearings will begin -- but, in a normal transition, the process would already have been well under way, especially for key positions in the Cabinet.
The way I see it, Biden will struggle through his first 100 days and come out of that stretch... somewhere. He'll either then have things sort of under control and enjoy a belated honeymoon, or we'll all have to batten down the hatches for even longer, while we wait for the pandemic to subside and the economy to revive.
I wish I could be more optimistic about the economy and our political prospects, but, hey, a sister who was oh-so-close to dying of cancer 19 years ago hasn't had so much as a single cancer cell show up in her tests since getting a bone marrow transplant from my younger brother and turns 60 today!
Happy birthday, Anne!
Stay safe, everyone.
Paul
P.S. Here are the six articles I'd like to highlight from the past week:
Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.
The insurance market’s newfound confidence in SaaS has had a knock-on effect for the possibilities and future of low-code platforms – to the benefit of both carriers and their customers.
Talking technology, you often hear about “revolutions,” but I like to think of them as evolutions instead.
Take low-code. Change has accelerated as a result of environmental stimuli (much of which was unexpected before the pandemic). For carriers, the issue became about how quickly and smartly could we design, implement and push out product. Oh, and once we’re there, let’s double down to promote speed and efficiency in areas that have a direct impact on business operations.
Tackling the pressures of tomorrow meant innovating where we could today.
The knock-on effect from all of this? The “how can we leverage low-code” conversation no longer was simply about cost-cutting and innovating in the market – it quickly became a business priority.
Smart individuals will tell you this was coming for days, months, years – you get the point. But I challenge anyone to have predicted the speed with which the shift occurred. Many can be forgiven for not being 100% prepared.
In the case of the pandemic (as we’ve seen before with catastrophes), the expectations on systems changed. Pressures increased, as did what’s demanded of software systems, as well as the stresses they are put under.
This isn’t a siloed event, either. Pressure on systems puts pressure on processes and, in turn, pressure on people. If you’re not clear, cracks appear.
So, what’s being asked of core systems now?
It's all about velocity – plain and simple.
This need is directly related to using more effective technology and rethinking processes and workflows to solve both business and market problems in as close to real time as possible.
In a nutshell, this is what organizations are trying to achieve with low-code. (This doesn’t mean all at once. For those organizations that didn’t have the ability, resources, etc. to make this transition, the change can be undertaken in bite-sized chunks. One product, one line of business, one region/deployment – or, in some cases, entire core platforms.)
How can we get there with low-code?
Here are three tangible ways that low-code makes achieving this pursuit of velocity possible for carriers:
Broadening the tools at your disposal: Quite simply, low-code allows you to do more, with more tools at your disposal. These tools, when adapted to the right business problem, allow you to solve for more and uncover opportunities to truly reimagine workflows, refine processes and empower talent.
Making integrations easier: Many will argue this is the chief selling point – low-code makes interoperability easier and opens the doors to integrate data from a wider pool of sources. As insurance becomes closer to real time and increasingly personalized, these integrations (i.e. the speed with which data can be captured and used for a product or service) will go a long way in determining winners and losers in the new year and beyond. This won’t stop, either. More data, more analysis to do more with that data, quicker ways to act on what the data informs. It’s a snowball effect, and this is an area truly ripe for tools like automation, artificial intelligence, machine learning and more.
Simplifying content/creating better content: You can’t speak about low-code without content. At the end of the day, low-code tools make it easier to build content and to help customers, in addition to reduced implementation timelines. Having content that is ready-made to be used by a platform is invaluable. Anecdotally, there’s a shift happening where there’s now a focus on using “rules” to create and adapt content that solves for business problems in different regions or geographies. That’s the level of maturity we’re nearing in a highly regulated industry like insurance – which should excite those innovative problem-solvers out there.
Anyone familiar with games or gaming systems? Here’s an analogy for you. Low-code and SaaS’s ecosystem of tools is the console. The content being hosted, produced and tailored – that’s the games. The more games you have, the more value your console is providing and the vaster the experiences you can provide. The games themselves? The more powerful the console (the tools), the deeper, wider, smarter the games are – which, in turn, provide ROI to the owner of the console.
For those who didn’t gravitate to that example: With platform maturity comes the ability to solve business problems with robustness and completeness. This is exciting and will be realized in 2021 and beyond.
What does this say about the current (and flourishing) SaaS-driven ecosystem in insurance?
In my opinion, it’s pretty clear the industry has (finally) moved from closed to open. Now, you’re not judged on a closed ecosystem; rather, you’re judged on solution partners and how easily you can integrate with others.
It’s an open-book test, and the richness of ecosystems (and how they iterate and evolve over time) brings others into the fold. There’s no more set-and-forget – cloud-based platforms are always up to date, and it’s where low-code tools thrive.
Being open becomes key – and the cloud provides both access and security. Accessing these tools becomes even easier still – APIs, content kits, solution exchanges, etc. It’s all there and satisfies all comers.
More good news? Talking talent brings excitement – and the prospect of continued technology acceleration
Another reason I’ve heard excitement around low-code – the doors it opens for talent in the industry. Insurance will always be highly regulated, highly specialized, and highly dependent on human empathy.
What this doesn’t call for is an army of developers to make solutions and products to solve for these problems.
What it does call for is smart application and solution architects, for example. More brainpower to solve some of the industry’s biggest problems. Innovators bringing more intelligent and elegant solutions to solve for problems and improve value and experiences.
With low-code tools as a part of your organization’s arsenal, you can shift hiring foci to meet these needs. Don’t worry about keeping the lights on; worry about being creative, innovative and groundbreaking in your approach to serving customers.
New flavor will make us stronger.
In the end, what does this SaaS and low-code transition mean for customers in 2021 and beyond?
Empowerment.
Ultimately, it will give individuals and carriers the power to choose what’s best for their organizations and strategic goals. It truly is a constantly refilled smorgasbord of the best tools the enterprise can offer, packaged in an accessible way that makes sense for insurance.
Leave overhead behind. Get on with driving greater ROI. Think long-term about improving total cost of ownership (TCO). Solve those bigger business challenges that can return greater satisfaction.
Empowerment. It’s exciting to see insurance companies go on the offensive rather than playing catch-up. Watch and see!
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Despite all the attention devoted to the continuing devastation from COVID-19, compliance with mitigation measures is not turning out to be universal. Even public officials have been bending the rules. Indeed, a recent study from the U.K.-based behavioral science consultancy Dectech found that nearly a third of those surveyed had spent time with someone outside of their household despite restrictions on such socializing.
Similarly, many families are underinsured, suggesting that perhaps they do not see the value of such financial protection, or do not understand their risk in not having it.
Is the problem that people just don't understand the risks of this pandemic, or is the issue with risk in general?
A handful of studies published since the summer have examined the psychology of how the public perceives the pandemic's risks. What can these results tell us about the public's perception of COVID-19 risk, and how can this information help insurers understand consumer mindsets and needs?
Understanding the threat of COVID-19
When people understand that a reasonable threat exists they will generally be more likely to take actions to avoid it. This was shown to be the case during 2014's avian flu epidemic, and COVID-19 research has consistently been telling a similar story -- the larger the threat people feel, the more likely they are to take protective measures such as washing hands, wearing masks, social distancing and even panic shopping.
But the bigger challenge may well be the public's sense of the threat in the first place. In one U.S. study, half of the respondents substantially underestimated their risk of dying if infected. Perhaps more worryingly, older respondents and individuals with underlying health conditions also underestimated the virus's potential threat despite understanding that they were at higher risk than the population average.
A well-established finding from behavioral economics is that humans are often poor at understanding their own risk objectively. For example, a majority of people implausibly believe they are better than average drivers, and many also believe their chances of avoiding cancer are better than other people's, despite no objective basis for the belief. This comparative optimism -- the belief that negative events are more likely to happen to others -- might also explain how people are perceiving the risk of COVID-19. A study early in the current pandemic on perceived risk and self-reported personal behavior conducted by researchers at the California Institute of Technology found that participants perceived a high level of risk to the general population but tended to rate themselves as being at lower risk than the average person. This perception was not influenced by whether the respondents were actually at lower risk than average.
This finding, replicated by a group of researchers from the U.K., U.S., Europe and Australia using the U.K. data, also suggests that, despite the inescapable factual information available about COVID-19, people still believe "it won't happen to me."
Perhaps most interesting is the finding that factors beyond objective facts influence COVID-19 risk perception. According to a study from the University of Cambridge of almost 7,000 individuals in 10 different countries, although participants had relatively high threat perception, men, who are statistically far more likely to die from COVID-19, were less likely to report feeling threatened by the pandemic than women. The researchers also found that risk perception can be amplified by how a person's friends and family are perceiving the risk and by their having existing prosocial values (values that promote behavior benefiting society as a whole). The Cambridge study also showed that the most powerful predictor of COVID-19 risk perception was direct personal experience with the disease.
Clearly, despite all the objective information we have at our disposal, visceral experiences -- i.e., concrete evidence obtained and interpreted through our own senses, emotions and social interactions -- and existing attitudes are powerful drivers of people's reactions to external threats.
Is risk knowledge or a feeling?
These studies paint a picture of reactions to the COVID-19 pandemic that are consistent with psychologists' view of risk perception: Perceiving a threat may push people to take action, but perceiving a threat accurately is not guaranteed. While perception of COVID-19 risk is relatively high on the scales used in the studies, it is still underestimated and subject to biases such as over-optimism and social influence, and context such as pre-existing worldview, direct personal experience and gender identity.
Risk, to humans, is subjective -- fundamentally about what one is feeling. Fear, disgust and the prospect of guilt and regret turn people away from danger, and, when not sure how to respond, humans look to other people's behavior and their own expectations for answers. This is how people experience the world first-hand, and this experience, rather than objective facts, frequently dominates judgments and decisions.
To understand the physical effects of COVID-19, seeing someone in a hospital bed who is either intubated or on mechanical ventilation is likely to have a far more powerful visceral effect on a person than case numbers. People can empathize with the horror of the situation and grasp the risk in a way that knowledge of the numbers just cannot achieve.
Perhaps this was the idea behind one U.K. city's campaign to promote compliance with COVID-19 restrictions. Its shocking slogan, "Don't Kill Grandma," sought to elicit an emotional response to promote a personal understanding of COVID-19's risks rather than presenting statistics and then expecting a highly rational and analytical response.
Communicating to inspire protective action
Should communicators use shock tactics such as fear appeals to help people gain an appropriate understanding of risk? One of the most widely discussed uses of fear appeals, i.e., tactics designed to elicit emotional discomfort and motivate particular responses, are the campaigns to push smoking cessation. Cigarette packets in the U.S. are required to display warning messages, and in the U.K. must have both warning language and harrowing images of the physical effects of smoking, in the hopes that user exposure to these horrifying images may promote behavior change.
Fear appeals can be effective, but there are serious caveats. Overly shocking communications can make people disengage and ignore or react defensively to the intended message altogether. Finding the right balance of engaging emotions while sustaining people's attention is vital for risk communicators. In particular, being able to show that a risk is personally relevant and that one's own actions can minimize the danger of a particular risk are key elements of making fear appeal messages work.
Insurance marketers face a similar challenge in persuading consumers to protect their assets and finances. It can be off-putting to communicate risk by scaring potential customers. Also, the industry is dominated by a highly objective and numbers-based understanding of risk, but, as the COVID-19 research shows, people do not usually think of risk statistically.
Insurers can learn from the COVID-19 research that, while it is difficult for people to appreciate intangible risks, communicating risk in terms of lived experiences, whether their own or that of others, might be a powerful tactic. From this perspective, it is unsurprising that insurance sales increase in response to emotively striking but objectively unimportant events, such as widely reported floods leading to increased insurance demand in unaffected areas, and the death of Kobe Bryant generating a spike in life insurance sales. For insurers, this might mean finding ways to approach customers at moments when risk events are salient and emotionally resonant -- when such events and people's interactions with the information are spurring thinking about caring for their families, health and homes. These could be important opportunities for demonstrating the value of insurance products.
COVID-19 communications and insurance marketing share a conundrum. Objective risk for humans is often intangible. Insurers seek to understand and communicate health and financial risk objectively, but also need to acknowledge that customers might not receive that objective message. Exposing the risk by creating or exploring feelings that resonate with lived experience, identity and expectations are going to count for far more than just bare facts.
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Dr. Peter Hovard is vice president and chief behavioral scientist at RGA.
Hovard has a Ph.D. in experimental psychology from the University of Sussex, has taught university classes across psychology, and has published in peer-reviewed journals on eating behavior, appetite, and atypical perception.
In my annual rundown of the year that was, and things to look forward to, I like everyone else have missed far too much of what we love so much but adapted and got on with it, traveling the world from the comfort of my own chair. I also watched our industry go through great highs and horrible lows. Some of that is reflected in this year's predictions as leading indicators as to what we need to do and will fix through 2021 and beyond. I've started recently to use one word to describe 2020 -- quite simply, it was relentless.
Before we get into this year's predictions, as usual here's my scoring of 2020's predictions!
See here for the full predictions. My quick report card is below 👇🏻
Insurtechs fade away— We have seen some startups leave us this year, fewer than I thought, to be honest. I do wonder how the funding runway survives through 2021. Marks 1/2
Move innovation externally — I think, given COVID, innovation hasn't really happened at all. If anything, innovation units changed shape and got shut down. Marks 0
Collaboration slows — I've definitely seen this through 2020, mainly because our focus has been on surviving 2020 and ensuring business as usual (BAU), reemphasizing that some insurers are notoriously hard to work with and slow when it comes to decision-making (note, not all of them!).Marks 1
Convergence of fintech, insurtech and wealth — I was hopeful for this, but I don't feel it's here yet at scale. We have pockets of examples, when you look to the likes of Revolutl with 10 million customers you can do all three. Marks 1/2
Invisible and embedded — Still plodding on. This feels like my pandemic or cyber risk item on the Annual WEF global risks report. I'm going to keep it on the list until it actually comes true. An encouraging number of partnerships and new capabilities gives me a generous result. Marks 1.
SME, SME, SME— I remain super excited by this, globally. Has anyone cracked it yet? Not really. I remain optimistic, based on what I have seen this year as well as the many legal cases this year. Marks 0
Peak conference — This happened for the wrong reason but still was correct. As we all moved to Zoom, Teams, Meet, etc -- only a few of the great conferences survived online, and with that a welcome collaboration between ITC and DIA. I do hope to get back to them in person in 2021. Marks 1
Fewer but larger investing rounds — I was right on the money on this one; our research in Q3 proved it, too - read the full report here. Marks 1
Health — COVID-infused, this trend has just started, and has even more focus going into 2021. Marks 1
e-scooters will work —Darn it, I hate being right sometimes. Another COVID-accelerated outcome, with trials around the U.K. and more to follow, with them expected to be legalized shortly. They are here to stay. Deal with it, Nigel. Marks 1.
The year of the electric vehicle.This was helped by the U.K. government bringing forward the deadline to 2030 to scrap petrol and diesel vehicles. A great read here, but sales of EVs are up on last year and continue to rise. We also expect that the U.S. will rejoin the Paris Climate Accord under a the new administration, which will further accelerate the EV trend in 2021. Marks 1.(Don't mention the Apple car yet; still a few years off.)
2020 Score: 8/11 - 73% — I'll happily take that.
2021, Looking ahead - so here goes!
1. Let's fall in love with insurance
If 2020 taught us anything, it is that insurance matters, really really matters! When it doesn't do what you expected it to do, you lash out and claim it's not fit for purpose, it was sold incorrectly or whatever, but you likely didn't read or (if you did) you didn't really understand what you was buying.
The U.K. Business Interruption Test Case is a wake-up call to the industry on so many levels, especially for small businesses. Many other cases are going on around the world, too. Add to that event cancellation, travel disruption and wedding insurance, plus many others that have all kicked into action. Back in April, the ABI estimated payouts to be in the region of £1.2bn in the U.K. Motor insurers across the world refunded premiums. I tracked many of them back in April here, which I found super-encouraging, with many thinking and looking to why insurance is not more of a utility? This was a positive move by many global carriers (but very view U.K. ones!).
A large part of this is that policy wordings simply have gone too far for too long. Regardless whether direct carrier or delegated to a broker, we are out of control, and if we are not out of control then we don't really know in some case what we are signing up to. We need to know what's included and what's not; this is clear across all business lines - more importantly, we need to ensure people on all sides of the table understand policy wording if we are ever to fall in love and build (rebuild?) trust. The SARS outbreak in 2003 had us rethink things and tighten up wordings but not in a uniform and consistent way. In many cases, this is no different from silent cyber or solar flares. For every new event/issue that emerges, we can't keep going back over the same old costly process every time. Wording will come into further scrutiny by regulators in 2021.
2. Education and awareness
To fall in love, we need to talk and engage more. During the pandemic, communication has been consistently poor (see our SME research here). We heard from practically everyone over the last year that we have ever engaged with or given our email address to, other than our insurance company or broker (I appreciate a sweeping generalization, and this is not true in all cases). Net result, we need simplicity and transparency in the industry, and we need to start now.
Communication cant just be about up-sell/cross sell. We also need to look to education and understanding around insurance (and broader financial services, much much earlier). I look at my kids and see they will come out of school knowing about cosines, sines, tangents and many other things, I hope -- but won't know how or why to use a bank account, change a plug or car tire or, importantly in this instance, the purpose and need for insurance, how you mitigate and manage risk.
As an industry, we have improved a lot already, but we have a long way to go, especially if the embedded and invisible nature of insurance takes off as we expect. It's at risk of being further and further away from the consumer's or business owner's mind.
In 2021, we will see people get smarter and wiser when it comes to insurance. As an unintended consequence, we may see a resurgence in agent and broker channels to support some of the demystification.
By agreeing we need to address #1 above, starting with #2, we will ultimately have a larger talent pool of people who want to and will come into insurance over the next decade. The fix will take a generation or, worse, multiple generations. But there is an intrinsic link among all three of these, a continuous direct correlation. As our industry relies more and more on technology, partnered up with deep insurance domain, we need more people -- lots more people -- and in today's digital age, when everyone is remote, competition has never been fiercer. Talent pools are now global, no longer restricted to your local area. Your options and competition may be thousands of miles away.
To attract great talent, we need to change the narrative, rebuild trust, make insurance an inclusive and diverse environment and show that we are tackling problems that really matter, from global climate change to keeping businesses moving and people alive and healthy. As a result, we will see more insurers focus on brand and reputation. This was never more apparent for me than recently when interviewing industrial placement candidates for Deloitte; they knew more about and importantly were inspired more by our values, purpose and actions than by our actual capabilities, practices and the client work we do. Reputation will be a key focus for insurers in 2021, with many, including Aviva, already making moves; see here for their most recent appointment around brand and corporate affairs.
Insurtechs such as Lemonade have long focused on their giveback as well as being a certified B-Corp. Randomly, I first wrote about insurance brand in 2015 here.
4. Acceleration vs disruption -- digital indigestion
2020 meant everything was accelerated. The things we thought would take years got completed in months. After all, necessity is the mother of innovation. It was amazing to see the speed of change in an industry that is frankly not known for this.
That said, the change we have seen is acceleration, not true change. We, like many industries, are doing the same things in a digital way. We have not re-imagined, rethought or in many cases challenged what we are doing in the first place or why we are doing it. Zoom, Teams, Google Meet replaced physical, face-to-face meetings. Collaboration tools replaced whiteboards. Online forms replaced paper ones. For many, there is no going back to the old ways of doing things. My point here is that the old and current ways in most cases are the same, just digitized. I truly take my hat off to the many teams that got on with this, worked tirelessly to enable remote working, purchased laptops and remote desktop tools and generally in most cases allowed business as usual.
As we enter 2021, I expect to see an element of digital indigestion. How do we cope with all these things we put in to patch things up? What are the implications? Are these things what the business needs now and in the future? Are they effective and efficient? I expect many of these now to be reevaluated and held up accordingly to see if they will or should survive the test of time. Are they needed still, can they be simplified or changed entirely? Most of this indigestion is purely from a process/technology lens -- and doesn't yet take into account the human element of change needed.
While 2020 was relentless and while we achieved so much, 2021 will in some ways slow this progress down again and force us to re-look, reflect and address the areas where we can truly make an impact.
5. Consolidation
In our funding review last year here, you see that there were zero net new startups in the first half. Add to that that 80% of the funding went to the top 10 insurtechs; that simply means there are a lot of mouths to feed with very little money left, even if funding surpasses, as we expect it to, that of 2019. Hardly surprising: The world is a very different place right now. Insurtech has matured, some markets and lines more than others. We have seen IPOs from Lemonade and Root (congratulations, Daniel, Alex and respective teams!) with an IPO filing from Oscar Health on the health side. Hello, world! WeFox raised $110 million, Series B, and there is a profitable 2021 ahead. Insurtech has firmly landed on the lawns! Lemonade cruised to a market cap of more than $10 billion!
A whole flurry of new deals emerged in the last few weeks, too, across traditional incumbent players consolidating, carriers buying insurtechs and insurtechs buying insurtechs, including:
I expect consolidation to accelerate into 2021 for a number of reasons, from funding runways reducing, insurer decision making slowing and bandwidth to focus on innovation and new tech drastically reducing, given the focus on what 2020 delivered us. I also think the digitization push of 2020 COVID enabled many of the traditional carriers to level up with insurtechs that, while they had a strong initial proposition, were still just a feature of a larger play. Insurtech's dominance for 2021 will focus on those that enable further existing carriers vs full stack competing ones (despite the success of Lemonade, Root, WeFox and soon to be Oscar) or those that have specific communities or niche groups they serve. With the latter, the question will always be -- how do we get to scale still?
6. Healthcare is the real winner in 2021
From listening to customers, colleagues and partners over the last 12 months, I think health is the big winner ahead. As with life insurance, while thinking about mortality and what happens if... we have also turned to our own health. I remember, early on, a U.K. national press headline read something like: Coming out of lockdown, you are going to emerge a drunk, chunk or hunk!
While the industry has moved mountains, we ourselves haven't moved as much, or in some cases at all. This in itself has had a profound impact on our health, physical and mental. Insurers have stepped up and then some in this category, both for our own thousands of employees across the globe, displaced to home, and for customers. I recall listening to Ali Parsa from Babylon Health on Secret Leaders Podcast talk about how pre-pandemic an MD in the U.S. said people would never use telemedicine, and as soon as the lockdown hit there was a gold rush. This to me is the Zoom of our industry.
This year alone, I have done an at-home DNA test with 23andme and a blood test with Thriva, and I keep looking to buy a Whoop Band to give myself more data than I care to imagine (the company raised another $100m in Series E in October). If my healthcare provider could take all this information, I would let them have it in a heartbeat. I'm pretty sure I know more about myself now than they do, which I would love to reverse -- they are the experts. Take all this data and tell me how I can be healthier and live longer; don't wait for my call or claim.
Some proof points for me, beyond the forthcoming Oscar Health IPO, include.
Physical health with Peloton -- right time, right place, and those who know and follow me already know I'm addicted. The IPO was in September 2019 at $29 per share, now trading at over $150 per share. They just doubled down with a $400 million acquisition of Precor, and now with a market cap of $49 billion. Apple, of course, also launched Apple Fitness as many other gyms, yoga studios and more all turned to Zoom. Those that have vertical integration are still winning, in my mind.
Mental health with Calm -- now valued at $2 billion, with their latest $75 million investment here showing that mental health is more important than ever and that companies large and small need ways to help individuals manage their mental health.
Brain health with Heights, from Dan Murray-Serter and his team, recently raising over £1 million in just 20 minutes through crowdfunding. Heights is a new smart supplement, focused on your brain health -- a subscription service that's packed with goodness and a podcast of health experts and brilliant insights with supporters including Stephen Fry, Jay Shetty and Dr Rangan Chatterjee, to name but a few.
Remote dentistry - Instant Dentist from Aalok Shukla and Lucie Marchelot Shukla and how they are bringing remote dentistry here really surprised and impressed me with the level of engagement and capability of things you can evaluate and see, without ever sitting in a dentist's chair -- music to many ears, I'm sure! Add to this, cosmetic care such as Straight Teeth Direct, also from the comfort of your own home, very similar to Invisalign. Super impressive. Excited to see where this goes.
Finally, Swiss Re's new partnership with Google Verily demonstrates how insurance is further partnering with Big Tech to drive clear benefits for customers -- more here on the recent announcement of a Verily patch. Again, the exciting thing for me is the combination of hardware, software and services in one proposition.
I'm not sure I should include this in health, but, hey, 2020 and all! -- pet insurance is on a roll! With everyone at home, I just need to look at my Facebook feed, immediate friends and the price of pets, and it seems the entire world has bought a dog (except us; Emma won't let us!). The reason I mention pet insurance here is that I genuinely believe there are a lot of similarities between human healthcare (systems, processes, etc.) and pet healthcare. In the same way that humans have turned to telemedicine, so have our pets with 24x7 video calls to vets and much more. Bought By Many has partnered with FirstVet. Others, including everypaw, have followed suit, offering the same service. I mean, after all, we love our pets more than we love ourselves sometimes!
I should say a huge thanks to the online community for continuing to motivate each other -- Bobbie, Sharon, Nick, Pat, Ed, Chris and many others! We truly have kept each other moving, when some days we never really wanted to!
7. Life and protection grow
Much focus and funding will shift from P&C to life, protection and health. We have seen some of this already with the likes of Dead Happy (making life insurance simple), YuLife (rewarding living) and the InsureTech Connect global winner this year, bequest, which is bringing life insurance, wills and family well being all under one roof! (Another push to simplification and composites!)
This year, we have seen huge advances from folks like Swiss Re with iptiQ and IKEA, new motor partnerships with Daimler, partnerships with PingAn, back in the U.K. John Lewis partnering with Munch Re Digital Partners and (another) rumored Tesla partnership or insurance launch. That's not even starting on the GAFAs (Google, Apple, Facebook and Amazon) of the world. Traditional insurers creating platforms for partnerships: There is a great example from Nationwide in this video here, as well as others such as the Chubb Studio, described as insurance in a box.
From Angela Strange, A16z: Do you want insurance with that? relates to ecosystems and much more. I had a ton of fun last year helping non-insurance companies define and build insurance propositions (more on that in 2021!) and can only see this trend growing. I wrote about it earlier this year when Amazon launched its Care Hub. Will the winner in the future be those that own distribution and access to the asset, be it the home, car, truck, fleet, ship or building, rather than layers and layers of additional providers? Sure, we will always want choice, but how much - when does convenience and ease take priority when we are already time-poor?
We just need to look at neobanks like Starling, which recently hit 2 million new customers and which has continued to grow both its personal and SME offerings, both including multiple insurance lines from mobile to motor to health and life, almost in line with what I have highlighted above. It's making me think, have I been too short-term-focused or is Starling ahead of the curve?
And that's it! What do you think? Do you agree? Have I missed anything obvious? Focused too much on the short term? Come up with ideas that are too far and can't be true? (I honestly don't think the latter this year).
Looking for some additional perspectives? Check these out:
As always, many of of my friends throughout the industry make similar predictions. Here are a few of my favorites:
Martha Notaras, managing partner of Brewer Lane Ventures - 11 Predictions for 2021 - here. I'm 100% with Martha on these, especially "Do you want insurance with that?"
Matthew Grant and Robin Mertens from InsTech London this year crowd-sourced insurance predictions, with an all-star cast from around the market - a great event to re-watch and look out for the post on soon.
My old friend Tony Tarquini from Pega not only is as fit as a fiddle but has a great summary in "3 Trends That Defined Insurance in 2020" here.
Chris Frankland, CIO over at Care Bridge. has posted his year in review here.
Outside of Insurance, look no further than Kara Swisher and Scott Galloway from Pivot Podcast and their Big Predictions for 2021 here Always good to look outside our own wheelhouse to see how the rest of the world is reacting, and these two are my favorites!
Of course, look out for our own insurtech predictions show in early January with InsurTech Insiders here, which we recorded a few weeks back. Thanks, Hanna, Sarah and Alex.
If one thing has encouraged me in 2020 it is that the community is stronger than the individual and that the global insurtech community brings it by the bucketload -- I'm delighted to be a small part.
Look forward to your feedback, challenge and thoughts as always, as well as seeing as many of you in person through 2021!.
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Nigel Walsh is a partner at Deloitte and host of the InsurTech Insider podcast. He is on a mission to make insurance lovable.
He spends his days:
Supporting startups. Creating communities. Building MGAs. Scouting new startups. Writing papers. Creating partnerships. Understanding the future of insurance. Deploying robots. Co-hosting podcasts. Creating propositions. Connecting people. Supporting projects in London, New York and Dublin. Building a global team.
Despite what we all feared in March, insurtech has continued to flourish, with lots of capital supporting the sector in public and private markets, closer integration between incumbents and startups and promising solutions for longtime needs in SME and cyber. Keeping up the annual tradition, here are my 11 predictions for the insurtech market in 2021.
1. Do you want insurance with that? Insurance will be embedded in every financial and retail transaction
Because no one loves shopping for it, we will see more insurance being sold as part of another transaction, where the user has a high intention to buy. "Embedded" has been a buzzword in fintech for several years, best illustrated by Buy Now Pay Later (BNPL) players like Affirm and Klarna. Embedded insurance started with travel insurance and extended warranties sold at point of sale, like Square Trade and Assurion. Branch Insurance now sells home and auto as part of the mortgage process, and Matic is embedding with mortgage servicers. 2021 will bring opportunities to embed insurance into transactions, with the goal being delivering a seamless experience of product plus protection.
2. 2021 will be the year for Plaid for Insurance
The original Plaid provides infrastructure to connect banks to financial apps like Venmo, which need access to a consumer’s bank account, so the user can take money from a bank and send it via Venmo, to the recipient’s bank. The explosion of financial apps drove dramatic growth at Plaid. Yes, the Department of Justice has sued to block the acquisition of Plaid by Visa. Worst case: Plaid is forced to go public at a valuation way above the $5.3 billion offered by Visa. In 2020, at least seven “Plaid for Human Resources” were funded. Data connections and enablement are critical across life, health and P&C insurance. In 2021, we will only see more pitches for Plaid for Insurance, and some of those pitches will be winners.
3. The robotic uprising: Automation will take over routine processes and improve customer experience
Automation will be used to support and empower the humans who are still in the process, starting with claims. Startups will accelerate the sale of automation to incumbent insurers, leading to improved customer satisfaction. Who wants to call an insurer to check whether the policy includes glass coverage? Consumers prefer to use their cell phones to text or speak, submit the claim and schedule the windshield replacement service. To show how quickly this change is happening: In 2019, State Farm ran ads mocking Lemonade’s bot; in 2020, State Farm led a venture investment in Replicant, which provides Voice AI to support human call centers. Faster, better customer service, which is cheaper for the carrier: Automation is a win-win with unstoppable momentum.
4. Playing for keeps: Deeper partnerships between incumbents and startups, accelerated by the pandemic
At the beginning of the insurtech phenomenon, way back in 2015, insurers responded by creating innovation groups and adding innovation KPIs to employee reviews. Following the law of unintended consequences, the result was incumbents starting a lot of experiments and proofs of concept with startups. It was frustrating all around, and many of those experiments failed. Now, insurers have moved the decision making back to the operating teams, and those teams are choosing partners to last. The pandemic has focused the efforts of incumbents. That focus will only get stronger going forward, as incumbents understand that they depend on startups to deliver the organization’s goals.
5. More startups will go full stack
Insurtechs will continue to take off their MGA training wheels. Following the high-profile IPOs of Lemonade and Root, 2021 will see full-stack carriers multiply. While the managing general agent model has the advantage of being capital-light and enables a startup to get to market quickly, structuring as full stack gives the startup maximum control over its product and customer experience. Capital is available to build a carrier, coming from multiple sources, as evidenced by sizeable fundraises by Pie, Kin, Hippo and several life insurance startups.
6. SME market will finally get the solutions it needs
At the end of 2019, I swore it was the last time I would predict the success of insurance solutions for SME. But there are finally some serious signs of success and traction in this market. Embroker, Vouch and Next Insurance continue to grow. And Bold Penguin has integrated with the flow of existing insurers, delivering value where incumbents could not. Finally, SME will have some good choices in protecting their businesses, thanks to persistent insurtechs!
Incumbents are yearning for alternatives to existing core systems, with an average age over 15 years, antiquated programming languages and vendor implementations measured in years. Two trends are providing hope here: no code/low code and coretech, delivering cloud-native core capabilities. The challenges of 2020 encouraged more incumbents and insurers to start limited implementations of no code and coretech. In 2021, we will start seeing a few insurers adopt these new approaches at scale.
8. Cyber insurance will lead the market in delivering dynamic risk protection
There have been many startups in cyber insurance, covering one of the existential threats for companies. Some startups have struggled by aiming at companies that are too small to afford the premium; others have chosen the wrong threat assessment partner and taken unwarranted risk. The whole market continues innovating and growing, which is good news, because cyber threats are also increasing. By combining real-time threat assessment with insurance, startup cyber insurers will deliver dynamic risk protection, enabling their customers to reduce risks as soon as they are identified. That may be a model for future real-time risk coverage in other business lines.
9. Parametric coverage will surge
Insurtechs will tackle claims costs and delays by eliminating the claims process, via parametric solutions. Defining a loss by reference to a standard objective index like rainfall in a specific geography is no longer reserved for markets like drought risk in developing countries. Now, insurtechs are delivering parametric cover for a range of risks, including earthquake, wind and cyber outages in developed countries. One driver is the user experience, where the insured no longer needs to trust the insurer to pay an indemnity claim promptly. Look for more kinds of risks to be covered by parametric solutions in 2021.
10. Record support for insurtechs at all stages
The pace of both early- and later-stage investments in insurtechs proves that investors remain enthusiastic about the market. Valuable business models built in fintech will serve as examples to its younger sibling, insurtech. There is still plenty of insurtech innovation to go around, and abundant capital to support it. We will see new launches and a record amount of capital raised across insurtech in 2021.
11. More big exits
The public market in 2020 has been the story of hot money looking for a home, and eager to pay up for future growth. Insurtech carriers Lemonade and Root went public via IPO, and Hippo is expected to become public either via initial public offering (IPO) or special purpose acquisition company (SPAC). Metromile became the first insurtech carrier to be acquired by an SPAC. These successful exits will drive continued investment in insurtechs that are taking big swings, and we will see more public exits. We can also expect more insurtechs buying insurtechs, like Bold Penguin’s acquisition of Risk Genius and Next Insurance’s purchase of Juniper Labs. The target will be filling a specific strategic need for the acquirer, and buying is faster than building.
In addition to going public, insurtechs will find other options, including strategic exits. Prudential’s 2019 acquisition of Assurance IQ created a lot of hope, but insurers have not yet shown a broad willingness to pay startup valuations. Brokers, always ready to spot the main chance, have made a couple of acquisitions and can be counted on to find deals that deliver focused value to their existing clients. Verisk, Duck Creek, Guidewire all have public currency, and at least the latter two have created long lists of partnerships with startups. There will be multiple insurtech exits in 2021, ranging from additive deals between insurtechs all the way to more IPOs.
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Martha Notaras is managing partner at Brewer Lane Ventures, investing in early-stage insurtech and fintech companies focusing on full-stack solutions, technology that enables incumbents, distribution, and leveraging data to predict risk.
We have to talk about the “B” word. No one wants to go there. But as COVID-19 continues to wreak havoc throughout the world, we are seeing more companies headed toward bankruptcy. Although the stock market continues to soar, the underlying U.S. economy is sputtering. Bill collectors are still open for business, and certain companies, especially those that were in precarious financial positions before the pandemic (think certain retail chains and energy companies hit with the double-whammy of the virus and the oil crisis), are suffering.
Bankruptcy presents a host of problems for directors and officers. Although litigation against the company is stayed during the bankruptcy process, suits against individuals are typically not. As company indemnification dries up, D&O insurance is the last line of defense for executives. So, it is important to understand how that insurance may/may not respond to protect directors and officers.
How are D&O Insurance Programs Typically Structured?
Public companies typically purchase traditional D&O insurance coupled with additional dedicated Side A limits of liability.
A quick refresher…traditional D&O insurance has three main insuring agreements. Side A is coverage for directors and officers personally in the event claims are made against them and the company cannot legally or financially provide indemnification. Side B is coverage that protects the company to the extent it indemnifies directors and officers for claims made against them. Side C is coverage for the company when it is named in a securities claim.
The dedicated Side A limits that “sit on top” of a traditional D&O tower of insurance are typically written on a “Difference in Conditions (DIC)” basis. If the underlying traditional D&O insurance does not respond to an A side claim, to the extent covered by the DIC insurance such insurance will “drop down” and begin to pay on behalf of directors and officers.
It is important to review the terms and conditions of your D&O policies to ensure they will respond properly in the event of bankruptcy.
Traditional D&O Insurance Considerations in Bankruptcy
There are a number of provisions within a traditional D&O policy that can have a material impact on the way a policy does or does not respond in the bankruptcy context.
The first such provision is the change-in-control clause in the policy. This provision details the instances in which the policy will automatically convert into a tail period; meaning that, from the date of the change of control until the end of the policy period, the insurer will only cover claims for wrongful acts that occurred prior to the change in control date. The most common change in control trigger is the sale of the company to another company. In some D&O policies, however, bankruptcy triggers a change in control. Most companies will want this trigger deleted from their policy as they will want coverage to continue, uninterrupted, throughout the bankruptcy process. Companies typically purchase a multi-year tail program to trigger at the end of the bankruptcy process.
As traditional D&O insurance covers multiple constituencies (e.g., natural persons and corporate entities), how are policy proceeds accessed during bankruptcy? If there are no claims outstanding and no claims are made during the bankruptcy proceeding, this question does not need to be answered. The D&O insurance goes unused. If, however, there are claims against the company and individual insureds that have triggered (pre-bankruptcy) or do trigger (during bankruptcy) the insurance policies, the policy and its proceeds may become an asset of the debtor’s (the company’s) estate. As such, directors and officers may need to petition the bankruptcy court for access to such insurance proceeds to pay their defense costs. Additionally, the insurer may request a comfort order from the court.
It is very important that the D&O policy have a carefully thought out “Order of Payments” provision. This provision is an indication to the court considering the petition (and to all insureds) that:
the intent of the policy is to first and foremost protect individual directors and officers; and
particularly in the event of a bankruptcy, A side claims should be given priority and paid first.
Next, we turn to exclusions within the policy. In this time of market upheaval (both in the broader financial markets as well as in the D&O insurance market), insurers have been attempting to add insolvency-related exclusions to D&O policies. Although there are arguments that can (and will!) be made under the bankruptcy code that these exclusions are unenforceable ipso facto clauses, these exclusions are very dangerous and should not be added to policies if there is any way to avoid them.
Additionally, it is important to review the entity (or insured) versus insured exclusion. This exclusion is designed to prevent collusive behavior between insureds. In other words, the company cannot sue an executive and expect insurance to pay unless that suit is brought in specific situations. As creditors’ committees are common plaintiffs in bankruptcy actions and are often acting “on behalf of the companies,” it is imperative to have a full bankruptcy-related exception to the entity versus insured exclusion.
In all instances, the retention (deductible) applicable to an A side claim should be nil, and the policy should respond first dollar. To ensure that defense costs are quickly advanced to individuals ensnared in litigation, the policy should have clear wording that, in the event the company fails or refuses to indemnify for any reason (including financial insolvency), the insurer will advance such amounts to the insured individuals, dollar one.
Finally, the policy should include bankruptcy waiver language. This language is a contractual promise that both the insurers and the insureds agree to waive and release (and agree not to oppose or object to) any request for relief from any automatic stay or injunction as to the policy proceeds.
Side A DIC D&O Insurance Considerations in Bankruptcy
As with the traditional D&O program, it is important to review the Side A DIC bankruptcy-related terms and conditions.
The insuring clause will indicate if and when the Side A DIC insurance will come into play in a claim. This insurance is similar to any excess insurance in that it will respond to A side claims if the underlying limits of liability are exhausted. The DIC feature provides that, even if the underlying insurance is not exhausted, the Side A DIC insurance can drop down and begin paying A side claims if the underlying insurance fails to do so. Most Side A DIC policies enumerate the instances in which it will drop down. From a bankruptcy perspective, the key trigger is that the policy will drop down in the event any underlying traditional insurer fails to pay because the bankruptcy court has imposed a stay order upon the policy proceeds.
In line with the recommendations made with respect to the traditional D&O policy form, the following should be considered:
Some insuring clauses include “any source” language. This language indicates that the policy will not trigger if the individual is entitled to indemnification from “any source.” This language is less favorable than language that allows the policy to trigger as soon as the individual is not indemnified by the company itself.
Although we cannot recall a Side A DIC policy that has a bankruptcy change-in-control trigger, stranger things have happened, so double check your policy.
On the most difficult risks, we can imagine even Side A DIC insurers introducing bankruptcy exclusions as part of the underwriting process. For companies that are teetering, if this exclusion is ultimately enforceable, it defeats the purpose of the purchase. To avoid coverage disputes over the exclusion, every alternative to the exclusion must be considered.
Some A Side DIC policies have an “order of payments” provision that is unique to debtor-in-possession scenarios. The provision simply states that claims for wrongful acts occurring prior to the company becoming a debtor in possession have priority over claims for wrongful acts occurring after such event.
Strong bankruptcy waiver provisions should be included.
If the lead Side A DIC policy is followed by excess policies, each one should contain a DIC through DIC endorsement. This endorsement requires excess DIC insurers to drop down and fill any gaps that may be left if an underlying DIC insurer fails or refuses to pay loss.
Final Thoughts
One of the largest concerns we have seen from insureds is limits adequacy/management. It is important to remember that the D&O limits you purchase could, if the bottom falls out, be the limits you have available to you in bankruptcy for any and all claims associated with the bankruptcy. We have witnessed unfortunate examples of companies that had NO expectation that bankruptcy was even a blip on the horizon one year ago and that now find themselves in the midst of it and unable to secure additional D&O limits. As most of us have learned in one way or another from COVID; “NEVER SAY NEVER – ANYTHING IS POSSIBLE.”
We have seen claims in which defense costs get out of hand and limits are eroded to the point where there is little if any money left for settlement. This can obviously occur if the limits of liability purchased are too low. It also happens in conflict of interest (whether actual or potential) situations where insured individuals want separate counsel.
With respect to conflicts, do the directors and officers agree that they should be entitled to separate counsel only in the event of an actual conflict of interest, or do they require language in the D&O policy (and discussion with the insurers) that any potential conflict of interest warrants separate counsel. As noted above, limits go quickly, and expectations should be set up-front. Remember, in a bankruptcy situation, the D&O insurance is the last line of defense for the individuals.
Finally, and from a practical standpoint, and not unique to bankruptcy scenarios, it is important to make sure that, if an insured requires panel counsel to be used, the company and its directors and officers are comfortable with the panel list before a claim comes in.
The time to prepare for these issues is now.
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Carrie O’Neil is a senior vice president at CAC Specialty and serves as a product development leader and claims advocate within the legal and claims practice.
Six Things Newsletter | January 12, 2021
In this week's Six Things, Paul Carroll looks at what's next. Plus, 3 trends that defined 2020; how to start selling on TikTok; how carrier tech drives agency change; and more.
In this week's Six Things, Paul Carroll looks at what's next. Plus, 3 trends that defined 2020; how to start selling on TikTok; how carrier tech drives agency change; and more.
While I’m less optimistic than I was a week ago about the speed of a return to normal — a riot in the U.S. Capitol building will do that to a guy, as will a week of record deaths from COVID-19 and growing concerns about the rollout of the vaccine — I remain confident that we’ll get there some time in 2021 and that we all need to be ready for the next normal.
Having read everything I can find about how that next normal will take shape, I commend to your attention this article from McKinsey, which draws on surveys and on evidence from nations that are further along in the recovery from the pandemic than the rest of us. Among the predictions: that 20% of people could work the majority of time away from the office and that we are at the beginning of a new wave of innovative startups — while the risk of failure for established businesses has increased... continue reading >
Much of the focus on innovation has related to personal lines and that makes some sense: Policies tend to be more cookie-cutter than in commercial lines, and individuals, spoiled by online resources like Amazon, have demanded a better experience from insurers. But don’t sleep on commercial lines. As businesses see what’s changing in personal lines, they aren’t going to be left behind. Businesses are demanding simpler interactions and more understandable policies, as well as better prices.
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