The thoroughbred horse Spring Racing Carnival is in full swing in the state of Victoria, Australia, culminating in the running of the Melbourne Cup, “the race that stops a nation.” Attendance at what is more akin to a “garden party” setting can well exceed 100,000 on Derby Day, Oaks Day and Melbourne Cup Day, and there are plenty of on-course bookmakers in the Betting Ring ready to offer odds to the eager punter. Bookmakers, like insurance underwriters, make their profit from risk by estimating the probability of an event occurring. This is reflected through the bookmaker’s odds and the rates charged by underwriters. The traditional method of managing a balanced book has been as much an art as a science combining deep research, risk parameters, instinct and psychological management, which is gradually changing by taking advantage of emerging technologies. While bookmakers are forging ahead with the opportunities provided through technology, the insurance industry has lagged, providing an opportunity for others, known as insurtech companies, to revive some dormant approaches to distributing insurance products. Two such companies are Lemonade in the U.S. and Huddle in Australia. Lemonade and Huddle are not insurance companies per se, but rather underwriting agencies that have taken advantage of emerging technologies, including the use of bots to deliver and service coverages on behalf of an insurance company, the underwriter of risks. For example, Huddle is an underwriting agency for Hollard Insurance, delivering and servicing three of Hollard’s insurance coverages in Australia: private motor vehicle, home and travel insurance. Lemonade Insurance Agency sells and services homeowners and renters insurance coverage insured by Lemonade Insurance Company in the U.S. See also: 7 Keys for Automated Event Response   Bots can be equally and effectively applied to tasks that are structurally repetitive such as in workers’ compensation, where, for example, in the vast majority of cases to determine whether an incident is AOE/COE (Arising Out of Employment/Course of Employment) a “yes” or “no” answer is required to nine questions on average. Using bots can reduce this effort to just seconds, and for the 75% of all claims that are either medical only or short-period lost-time claims, processing times can be reduced to mere minutes. Bots also provide the ideal opportunity for introducing machine learning and artificial intelligence into workers’ compensation claims. For example, bots can be applied to monitoring the progress of an injured worker’s recovery and, if necessary, suggest revised treatment plans. Adversarial behavior is not uncommon in this area, and bots can be used to alert and prevent a likely occurrence. Returning an injured worker to the workforce can be a challenging process. Bots can assist in developing a road map. Also, as fraud is an ever-increasing problem in workers’ compensation, a further benefit to introducing bots is that their visibility in monitoring the processes can act as one of the best deterrents. While some may say these tasks are better handled by claims personnel, administrative costs can be exorbitant, especially in California. ULAE (unallocated loss adjustment expenses) and ALAE (allocated loss adjustment expenses) can account for around 40% of claims costs, which can be dramatically reduced with bots. Whether current claims administrators adopt this approach remains to be seen, but insurtechs are embracing it and will challenge existing third party administrators for marketshare by providing a better service at a much lower cost. Insurtechs could equally challenge the need for an insurance company’s in-house claims department. Between now and 2023, it has been suggested, investors will be investing in insurtech startups like eager punters placing a bet on their favorite horse. However, as with betting on a horse race, there is a high probability that a number of insurtechs will be scratched from the race due to poor performance, and, for those remaining, the race conditions may be challenging. Only those insurtechs with agility and stamina will make it to the finish line. The race is on.

Last week's news that the U.S. military was retiring a 50-year-old system of 8-inch floppy disks that helped control the nuclear arsenal reminded me of my own brush with outdated technology that could have led to Armageddon. 

I was waiting to be interviewed by the History Channel for a special on the early days of the personal computer and was sitting on a couch at the front of a warehouse at Moffett Field that was the temporary home for items that now populate the Computer History Museum down the road in Mountain View, CA. In front of me was a coffee table that consisted of a round piece of clear plexiglass on top of a large, hollow cylinder full of wiring. 

Was there a story behind that cylinder? I asked the museum curator.

Oh, he said, that's the guidance system from the nosecone of a Minuteman missile from the 1960s. 

Yikes. That thing was supposed to accurately drop a nuclear warhead on a specific spot in the Soviet Union? It looked like one good kick or bit of turbulence would have dislodged enough wiring that the warhead would have landed on Tokyo, or Topeka, or would have just blown up in the missile silo.  

But that nosecone turns out to be a good metaphor for how to handle information systems that simply can't lead to an error—including many in insurance.

Now, I'm not conflating any insurance error with Armageddon—no matter how much General Electric's miscalculations on long-term care might feel like doomsday for a company that long was one of the world's most-admired. But the long tail of many insurance contracts creates unusual pressure to avoid mistakes, as do regulatory watchdogs and the desire to treat customers as well as possible in their moment of need, when they have a loss and file a claim.

So, let's look at that nosecone. 

The wiring was an aging technology even when implemented in the nosecone I saw and became positively antiquated as the years went along, given that guidance systems, driven by computer technology, have doubled in capability roughly ever year and a half since the '50s. But the wiring had been thoroughly tested, and it worked, once it was "ruggedized" enough to withstand the rigors of traveling through space. Sure, new guidance systems were demonstrably better, but would you bet the defense of the U.S. on their reliability? The fate of the world?

The same concern drove the technology decisions behind the moon landing in 1969. My microwave oven has far more computing power than Apollo 11, but the mostly hard-wired technology for the lunar mission had been tested in space, so advances in technology could wait for later programs. 

Silicon Valley, despite its ethos about being on the cutting edge, sometimes takes the same, conservative approach. When I covered Intel for the Wall Street Journal, an executive described for me a process the company calls Copy Exactly. The idea made no sense at first blush: The company would build a chip-manufacturing facility by exactly copying an existing fab, even though Intel had learned in that existing fab how to correct all sorts of inefficiencies by improving a myriad of processes. Why not build all those updates into the new fab from the get-go? Because all the processes interact, and making a bunch of changes at once led to new sorts of problems popping up. Better to copy exactly and introduce the improvements one at a time, in a controlled way.

How do the military, NASA and Intel approaches apply to insurance?

At a high level, they suggest leaving legacy systems alone as much as possible. Yes, better technology is out there, and I'm sure that the many companies selling new software can make a compelling case for updating, but legacy systems are always a mess.

In the biggest technology transition that I've covered—the move from the mainframe era to "client-server" in the 1980s and 1990s—the quick, big wins went to those that focused less on the server piece and more on the client piece, the front end. Technology advances, driven by all those hungry insurtechs out there, allow for all kinds of ways to make improvements, especially in any process that touches a customer, without having to wade through all the back-end complexity.

Focusing on front-end technologies won't let you save humanity, but you could avoid some thorny issues and produce better results faster.

Cheers,

Paul Carroll
Editor-in-Chief

Pushed by internal and external process stakeholders, customers and board directives to drive innovation and growth in increasingly competitive and often shrinking markets, insurance company CEOs are not sleeping much these days. Topping the list of insurance CEO nightmares is a world where it is impossible to access new markets with new products that have plentiful, ready-to-buy customers. In a world where new ideas and revenue streams are difficult to find, at best, nightmares can quickly become reality. Technology is often held up as the single silver bullet for all of the insurance industry’s problems, but the best minds know that the greatest opportunities surface when insurtech startups partner with incumbent insurance organizations and ambitious managing general agencies (MGAs) to promote new business models, introduce products and provide solutions actually applicable to the world’s new ways of working. Industry veterans can easily identify the challenges involved in trying to build and launch insurance products, especially in a regulatory environment as complex as that in the U.S. Even when forward-thinking underwriters and marketers get time to ideate, it takes six months and a $500,000 investment (or more) to take a product to market, and that makes an iron-clad business case to scale the efforts hard to see. This means many promising opportunities will fall by the wayside. See also: Focusing Innovation on Real Impact   Traditionally, insurers often considered simplification and amalgamation of technology solutions onto a single platform or to a single provider as ideal. It seems reasonable to assume that it is easier to launch products and provide a better customer experience when there is only one system to consult and one single source of data for policy information, right? Unfortunately, this quite often proves to be an incorrect assumption, and, not only do insurers suffer when the selected single platform becomes a bottleneck, but the journey to get there is also high-risk and high-cost. In fact, rarely does everything else get switched off, and, even if that is achieved, inevitable weaknesses get amplified (because EVERY platform has weaknesses). No Single Silver Bullet Today, insurance buyers expect 24x7 access to information, instant delivery of products, outstanding customer experience and rapid claims resolution. It is not realistic to expect a single solution or platform to deliver every capability and to do it in a seamless, high-quality way. Often platforms focus on back-office functionality, and strength in this area is important; however, the real value for insurers sits at the actual customer interface. Insurance buyers, whether commercial, personal or intermediary, don’t care how well the back-end technology feeds accounting and underwriting systems. That part is, in effect, the insurers’ problem, and not the producer's or policyholder's problem. A solution that provides a single view of the customer and integration with back-office systems will ensure smoother operations, no doubt. But this shouldn’t be the only driver for what insurers use to take products to market. The truth is, no single platform, technology or solution can effectively handle both front-end and back-end functions – no matter what the technology people may say. As with most other things, the best solution to complex requirements is to create an ecosystem of solutions to deliver appropriately. And, while “appropriate” delivery may not be the most dynamic of terms, the concept is far more exciting. In very few other areas of business or life would the technology tool be allowed to determine what can be accomplished. The all-too-often-used “that’s not the way the system works” mentality and heavy lift of customizing monolithic legacy systems means that the entrepreneurial spirit erodes. Instead of innovation, diversification and growth, insurers are forced to settle for roughly on-time, hopefully on-budget and various not-ideal workarounds. Increasingly, however, insurers are waking up, and a number of dynamic businesses are combining legacy and insurtech for more agile, flexible solutions. These digital, API-enabled, front-end-focused platforms combined with sophisticated underwriting allow insurers to rapidly address the challenges by creating portals and functionality that sit outside the archaic change request process, where IT road maps are locked down months in advance, limiting any opportunistic ventures. See also: The Components of Innovation Capital Building an environment that offers low-cost, no-code functionality via API integration gives insurers real choice. Internal leaders and growth champions will have tangible ways to access new markets, rapidly develop products and streamline processes. Ultimately, the real barriers to innovation are not modern cloud native systems or a lack of ideas but legacy mindsets and an inability to understand or want to do things in a different way.

Relevant change and speed can only be achieved through investing and partnering with fintech and insurtech players. That’s why we asked Marco Keim, responsible for Aegon Continental Europe and member of the management board of Aegon, to share his thoughts. In our view, he is one of the boardroom executives who not only advocate change but really support and push innovation first-hand. According to Marco, to drive innovation we should leverage the blurring boundaries. And we should pack our bags and move to Asia. Aegon is a global financial services company and currently present in 20 countries. The U.S. unit is the largest; after that comes the Netherlands. The company serves over 29 million customers worldwide and generates over €800 billion of revenue-generating investment. Over 26,000 employees worldwide help Aegon achieve its purpose of "helping people achieve a lifetime of financial security." Let us start by talking a bit about Aegon. Aegon’s purpose is to help people achieve a lifetime of financial security. Can you tell a bit more about that? Marco: “We re-thought our purpose after the financial crisis, more than 10 years ago. We asked ourselves: ‘As an insurance industry, what would add value to customers?’ It’s not just about building better products than competitors or whatever. We realized that, even though we have a lot of financial knowledge to share, most customers are not interested in financial matters. 90% of customers in Western Europe, but probably also in Asia and other parts of the world, are not busy thinking about their financial situation. They spend more time buying a new pair of jeans than on thinking how to improve their financial situation with financial products.” What do you do to bridge that gap? Marco: “We decided to use our knowledge to help customers make better decisions themselves. In our view, that is our reason for being. As a result of retreating governments and corporations, more and more of our customers are responsible themselves for their retirement. Most of them don't even realize that. Here in the Netherlands, most Dutch believe they will get 70% of their final wage as a pension. Which is really not the case. This is the gap we need to address.” So, you see that the need for these services is bigger than ever. But we also notice that, in certain markets, sometimes even the same markets where the latent need is getting bigger, actual demand is declining. How do you get to the customer in the right way? Marco: “It’s about digital and data. This for us is the future, the Digital Insurance Agenda. With all due respect, if you're not digital in these days.… It’s as basic as plumbing. And data is where we can add much more value. To use our data, which we already have as an industry, and combine it with external data, we can be much more relevant for customers -- at the right moment with the right information, that is the nut that needs to be cracked. And a growing number of initiatives, like PSD2 in the banking area, enable us to have more access to data.” In Asia, you already see digital platforms joining with insurers to share data for better underwriting and better targeting. Marco: “Next to data and digital, you need an insurance product, but you need more than just that. Recently, I did a presentation for the insurance practice leaders of a global consulting firm. I told them that, if they would stick to insurance, they probably would face problems going forward. Because I believe you should not look at the opportunities strictly from an insurance point of view. Boundaries are blurring. Our business is much more than insurance. We are in financial services, but a customer doesn't mind whether the solution comes from an asset manager, a bank or an insurer. We need to broaden insurance to financial services.” Could you give an example? Marco: “Well, if you take our company in the Netherlands, our new business hardly comes from insurance. It is mortgages; we are a  third-party administrator for pension providers. So, what formerly was an insurer now is a completely different company. That’s also reflected in our balance sheet: €316 billion assets under management. You may think we are more of an asset manager than an insurer.” See also: A Game Changer for Digital Innovation   So, a key takeaway is that the future is about blurring boundaries. Then the obvious question would be, how do you manage this change? Marco: “At Aegon, we use what we’ve coined the ‘core - satellite - universe’ approach. About 10 years ago, when I started with innovation, we first started in-house. We had some ideas, we wanted to create a new digital in-house bank, but it didn’t work out as we hoped for. Because in-house innovation is very difficult, almost impossible." Most incumbents are not the best inventors in the world ... Marco: “Indeed! So, we decided to do this differently. We realized that within our own environment the existing organisation is less open to everything that is new. That’s why we decided to create companies separate from the existing organisation that were still 100%-owned. One of these companies was Knab, a digital bank, which was set up at a different location and in a fully remote fashion with no interference from existing business. It focuses on individuals and the self-employed, and it is quite successful. It is the only profitable digital bank in Europe, and it has the highest NPS [Net Promoter Score]. But we actually made a very interesting mistake.  We thought we wanted to disrupt the banks by offering more transparency, not hiding the hidden costs. So we decided to charge more than regular banks. Instead of €5 a month, we’d charge €15 a month but without hidden costs other banks charged, well in excess of the €15 a month. It turned out to be a disaster! The Dutch press opened with the line: 'Knab, the most expensive bank of the Netherlands.' We decided to pivot, go back to the €5, and now I dare to say it is quite a successful bank: Its rapidly growing customer base shows that it is a very attractive proposition for the self-employed, which is a growing market segment across the world.” Speaking of blurring boundaries, you have an interesting partnership with BCD Travel, with whom you launched GoBear in Asia. Can you tell a bit more about that? Marco: “A lot of corporates invite us to do something together. That’s what happened with BCD, which is a worldwide travel agency with a lot of experience in Asia. Initially, we discussed selling travel insurance. Long story short, that’s how GoBear got started. Conceptually, it was more or less a copy of Skyscanner, but it is pivoting more to a financial supermarket than to an aggregator. It is now operating in seven Asian countries. Data is the key here. We own 50%.” Based on your experience, should you always own 100% of a startup when you have the opportunity? Marco: “My answer is clearly no. Having a 50% private equity partner disciplined us.” At DIA, we see insurtechs operating in different business lines using the latest technologies. How do you, as an incumbent, make sure to have access to this cutting-edge knowledge? Marco: “We realized we could never have access to that ourselves. That’s why we started Transamerica Ventures as one of the first corporate insurtech VCs in the industry. Here, we are looking for these cutting-edge companies, series A startups, that have certain very specific, extraordinary and technology-driven knowledge. We always look for a link with an Aegon entity so that we combine knowledge from outside with that of our existing businesses. We want to learn and make use of what is happening outside in the world, because we don't have the skills to develop it ourselves.” What about the companies selected, are you looking for specific solutions? Can you share a few names of the companies in the portfolio of Transamerica Ventures?  Marco: “Transamerica Ventures itself wants to have a return on the investments, of course. So, our criteria are that, as Aegon, we should be able to make use of their solutions. Let me share some examples: Everplans developed a digital solution for estate planning. Our agents use this to increase interaction with customers and improve cross-sell and deep sell. By the way, here we own less than 5%, as we don’t strive for major influence or to have board seats. Nextcapital is a robo adviser that we use for expiring pension policies. In case you have a defined contribution scheme, it supports in where to invest the money. A very innovative solution that we integrated in our core systems. H2O.ai is an AI company. Almost seven units in Aegon are using their technology to advance AI. In all three cases, we invested in the company but also helped them to get access to the corporate, to create use cases and to benefit from all the knowledge and experience we have. And in return we get access to their technology.” More incumbents these days are setting up venture funds. What are your thoughts about that? Marco: “There are a few challenges to deal with. Take the cultural challenge. It is still very difficult to get our own people excited about ideas they didn't invent themselves. But yes, it is true that more and more companies are creating such funds. So, if I would be a startup, I would really look at how sincere the fund is, what proof points they can show you, for instance on how to leverage their customer base. These days, startups have a choice. It is Aegon’s ambition to be the best partner and the best investor in series A for startups. We show the proof points. But we also show the cases where for whatever reason it didn't work out." Recently, you set up the Aegon Growth Capital, a new fund investing in expansion and growth capital for fintech and insurtech companies. How did that come about? Marco: “Apart from blurring boundaries, the unbundling of the value chain is also very important. Revenue pools are created outside our industry by companies now rapidly scaling up. For us, it’s very clear what our role is, what we do and what we shouldn’t do. That’s why we created a separate fund. This fund is run by professionals, and they manage it like a fund, and we, as a shareholder, are at a distance. So, if companies are doing business commercially with Aegon, the people they deal with are different from those who invest in their expansion and own the shares. Also, by using the fund, we don’t finance these investments from a budget. This avoids short-term discussions because at some point the investment could be perceived as an expense. We separate the shareholders’ discussions from the incumbent businesses to avoid interference. Gijs Jeuken, CEO of Aegon Growth, headed a company financed by a private equity firm himself, which after a steep growth path was acquired by Aegon. He knows first-hand the benefits of having access to growth equity, and the other side of the story.” That’s an interesting lesson; if the incumbents start to interfere, in essence the whole system dies … Marco: “We asked ourselves: ‘What is the future'? Our strong belief is that our type of companies are not able to reinvent themselves. You can put a lot of money in innovation labs and hiring people, but innovation is already happening outside. So why not look and invest in those companies that potentially, not per se, might be the future of our company. We learned a lot in the process. For instance - and this may sound a bit cynical, but it is the truth - if we own 50% or more we run the risk to kill the company. We learned this the hard way. So, our Growth Fund rather has a stake of, let's say 20-40%, and has private equity in it as well for financial discipline. Then, hopefully, we reach a point in time to get a bigger stake if the company is already sufficiently strong, and at least have made a good investment decision by backing the right entrepreneurs.” See also: Focusing Innovation on Real Impact   So, you invest into companies you really believe in, and that will potentially be the future of Aegon. How does this work in practice? Marco: “We focus on four segments. We strongly believe that the value chain in the financial industry will be completely disrupted. Only if you're extremely strong in every part of the value chain will you survive. Most of us are not strong in every part of the value chain, so we have to outsource it. Don’t try to own everything. Then the question is: 'Which part of the value chain is the most interesting part?' We believe those that are closest to the customer potentially create the biggest value. That's why two of the focus areas of the Growth Fund are digital/omni-channel distribution and customer engagement, content marketing and platforms. Furthermore, we focus on business process optimization and automation to decide on the new way of getting to customers in an efficient way, making use of digital and data, and still have the right products for the customer. Then we have asset and wealth management because, in a world where governments are retreating, it's very clear that customers have to do more themselves.” One of the main overarching themes of the 2019 DIA conferences is "East Meets West," because we believe there is so much we can learn from one another. What is your view on the developments happening in Asia? Marco: “I have the privilege to travel to Asia about 10 times a year. Every time, it is a mind-boggling experience, and I’m flabbergasted when I come back. That’s where I get most of my energy from! The speed of change in Asia.... Here in Europe and America, we are somewhat behind the curve compared with what's happening over there! We must be careful not to become sitting ducks. Granted, Asian players can benefit from the big numbers, more (young) people, they don't have GDPR -- and I can find many more excuses. But the real differentiator is that they are much more entrepreneurial. They just try and do and act. They leapfrog, and that is what really resonated with me. Also when it comes to blurring boundaries, you see that all over the place in Asia. You see the big Asian tech firms expanding, really building huge ecosystems. A nice example is Go-Jek, the ‘motor Uber’ of Indonesia. But when you look at their offering ... they have everything, from insurance to banking, and you can even book a massage via their Go-Life app! We see more and more incumbents like ourselves teaming up with them. We are doing the same in India. Because this is the future. When you say that we learn a lot from Asia, I can only confirm.” Any closing words for the DIA Community? Marco: “Let me end with three takeaways: First, interact as much as possible with startups, and enjoy. The DIA conferences are the perfect place for this. Secondly, don't look at our challenges only from an insurance perspective, watch the blurring boundaries. We are in financial services. A customer doesn't know who has a license, they want a solution for their problem. Finally, pack your bags! Move to Asia and try to learn!”

Are you next for white-collar crime? Unfortunately, the answer is likely yes. Karen’s family-owned company prided itself on the loyalty and longevity of its employees. However, when she didn’t recognize a vendor receiving continuing payments, she grew suspicious. When the company’s bookkeeper assured her the invoices, which totaled in the tens of thousands of dollars over 18 months, were legitimate, Karen wanted to believe her. A thorough investigation determined the vendor was a front for fraud, and the “loyal” employee was the mastermind behind an all-too-common crime. Chances are you know a client, colleague or acquaintance who has experienced a similar nightmare. According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, small businesses – those with 100 employees or less – lose nearly twice as much per scheme to white collar crime as larger businesses, $200,000 versus $104,000. Detecting fraud required a median duration of 16 months. While misappropriation schemes like fraudulent disbursements are the most common, at 89% of occupational fraud cases, financial statement fraud schemes are the most costly, racking up a median loss of $800,000 in 2018 – enough to put most small businesses out of business. The most common forms of occupational fraud were corruption, billing fraud and non-cash theft. Why are small companies more vulnerable? First, most employers trust their people, especially those with tenure. If you think Darla in claims who just celebrated 20 years with the organization is unlikely to be running a false invoicing scheme, think again. Fraudsters who have been with a company longer than five years steal twice as much. Fraudsters who collude with coworkers, a common occurrence, up a company’s losses exponentially. Word to the wise: Don’t trust Darla, and don’t overlook her friend Sheila in accounts receivable! Second, there’s a misplaced assumption that it “won’t happen to me.” The truth is that occupational fraud happens all the time, and most victims don't recover a penny. In 2018, 2,690 cases of occupational fraud were reported globally, costing companies over $7 billion. However, the incidence of fraud is likely much higher. Why? Companies don’t want the negative publicity. In fact, the number of occupational fraud cases prosecuted in 2018 decreased by 16%. Third, many companies simply don’t have the resources to establish a fraud prevention department. As a result, internal control weaknesses are responsible for half of all frauds. This includes a lack of formal controls, no management review of vulnerabilities and no independent checks or audits. Many companies choose instead to rely on employees to “tip them off” to co-workers who are skimming or running scams. While employee tips do work, it’s no guarantee that fraud will be avoided or less damaging. See also: ‘Jobsolescence’: How Big a Threat?   The best defense is a good offense. Formal fraud control mechanisms result in lower losses and quicker detection. Among the most common fraud prevention tactics include employee codes of conduct, external audits of financial statement and reporting processes, audits by internal staff, independent audit committees, management certification of financial statements and fraud prevention training for employees and management. Surprisingly, the best tactics for reducing fraud losses and duration are the least used. Surprise audits result in 51% lower losses and 54% quicker detection, and data monitoring and analysis results in 52% lower losses and 58% quicker detection. Yet only 37% of companies victimized in 2018 had these controls in place. Here is my advice to insurance clients on how best to protect their businesses as well as those of their insureds from fraud: Understand that an external audit is not intended to detect risk. Most accounting and assurance firms clearly state in their letter of engagement that an audit of financial statements is not designed for fraud detection. Any fraud-related services require a separate letter of engagement with a specific scope of services focused directly on fraud detection. Know that neither you nor your insureds are impervious to fraud no matter how delightful your people are. There are six well-known behavioral red flags, such as living beyond one’s means, financial and family difficulties, control issues, a wheeler-dealer attitude and unusually close associations with vendors or customers. Fraudsters typically display one or more of these red flag behaviors. Understanding and recognizing the red flags can help detect fraud and mitigate losses. Select an audit/assurance professional who holds both CPA (certified public accountant) and CFE (certified fraud examiner) designations. CPAs understand the financial side of organizations and financial ratios/relationships, while CFEs understand investigative techniques, fraud schemes, prevention and deterrence. Put these distinct knowledge bases together and your organization will have a powerful advocate for mitigating, preventing and detecting white-collar crime. Conduct a risk assessment. The objective is to identify what makes an organization most vulnerable to fraud. The process involves assessing the incentives, pressures and opportunities that individuals within your organization have to commit fraud and determining those who put you at greatest risk. The assessment also looks at existing controls and their effectiveness and whether the organization is complying with regulations and professional standards. The findings serve as the foundation of the fraud prevention strategy. Develop and implement a fraud prevention strategy that incorporates policies and procedures for: preventing and detecting fraud; educating employees; communicating continually; responding to fraud once identified; limiting damage; punishing perpetrators; and rebuilding organizational confidence in the wake of fraud. If you suspect fraud is present in your organization, contact your CFE immediately. A CFE will help determine whether an issue is actual fraud or a mistake, and how best to proceed. The sooner you engage a knowledgeable CFE, the quicker you can determine fraud, the perpetrator, extent of damages and how best to proceed. See also: Hacking the Human: Social Engineering I close this article by asking the same question I opened with: Are you next? It is my hope that your organization is the next to implement an anti-fraud strategy and not the next victim of fraud. While no system of internal controls can fully eliminate the risk of fraud, well-designed and effective controls will mitigate your risk.

With third-party risks on the rise, there is renewed focus on maturing extended enterprise risk management (EERM) practices within most organizations. This focus appears to be driven by a recognition of underinvestment in EERM, coupled with mistrust of the wider uncertain economic environment. To understand the broader risk environment and provide organizations with the insights needed to effectively assess their risk and adapt processes accordingly, Deloitte recently conducted the EERM Risk Management Survey 2019, obtaining perspectives from more than 1,000 respondents across 19 countries covering all the major industry segments. Results shed light on crucial considerations surrounding economic and operating environments; investment; leadership; operating models; technology; and affiliate and subcontractor risk. More specifically: Economic and operating environment: Economic uncertainty continues to drive a focus on cost reduction and talent investment in EERM. The main drivers for investing in third-party risk management are: cost reduction, at 62%, reduction of third-party-related incidents, at 50%, regulatory scrutiny, at 49%, and internal compliance, at 45%. Organizations urgently want to be more coordinated and consistent in extended enterprise risk management across their organization, as well to improve their processes, technologies and real-time management information across all significant risks. Investment: Piecemeal investment has impaired EERM maturity, left certain risks neglected and hurt core basic tasks. Only 1% of organizations say they address all important EERM issues, and only a further 20% say they address most EERM issues. One of the main reasons for this maturity stall is that organizations are taking a piecemeal approach to investment – they are mostly making tactical improvements rather than investing in strategic, long-term solutions. This piecemeal approach has led to certain areas – such as exit planning and geopolitical and concentration risk – being neglected, and some organizations not doing core basic tasks well, such as understanding the nature of third-party relationships and related contractual terms. See also: The Globalization of Risk Management   Leadership: Boards and senior executives are championing an inside-out approach to EERM, which includes better engagement and coordination and smarter use of data. The survey reveals that boards and executive leadership continue to retain ultimate responsibility for EERM in the majority of organizations. Better engagement and coordination across internal EERM stakeholders is a top priority for boards and senior leaders. Boards are moving away from using periodically generated data to more succinct and real-time, actionable intelligence, generated online. But who has ultimate responsibility for third-party risk management? According to the survey results, 24% indicated the chief risk officer, 19% indicated other board members and 17% indicated the CEO. Operating models: Federated structures are the most dominant operating model for EERM, underpinned by centers of excellence and shared services. More than two-thirds, 69%, of respondent organizations say they adopt a federated model, and only 11% of organizations are now highly centralized, which is down from 17% last year. Investments in shared assessments and utilities, and managed services models, are also increasing. Furthermore, co-ownership of EERM budgets is also emerging as a trend. Robust central oversight, policies, standards, services and technologies, combined with accountability by business unit and geographical leaders, is a pragmatic way to proceed. Technology: Organizations are streamlining and standardizing EERM technology across diverse operating units. The survey confirms Deloitte’s prediction last year that a three-tiered approach for third-party risk management will continue. Smartly coordinated investments in third-party risk management technology across three tiers can drive efficiency, reduce costs, improve service levels, increase return on equity and create a more sustainable operating model. More specifically, 59% of the respondents adopted tier one, 75% adopted tier two and tier three continues to grow. Affiliate and subcontractor risk: Organizations have poor oversight of the risks posed by their third parties’ subcontractors and affiliates. The lack of appropriate oversight of subcontractors is making it difficult for organizations to determine their strategy and approach to the management of subcontractor risk. Only 2% of survey respondents identify and monitor all subcontractors engaged by their third parties. And a further 8% only do so for their most critical relationships. Leading organizations are starting to address these blind spots through “illumination” initiatives to discover and understand these “networks within networks.” Less than 32% of organizations evaluate and monitor affiliate risks with the same rigor as they do other third parties. As affiliates are typically part of the same group, organizations are likely to have a higher level of risk intelligence on them than other third parties. See also: Is There No Such Thing as a Bad Risk?   For more information on Deloitte's "2019 Extended Enterprise Risk Management Survey," or to download a copy, please visit their website here. You can find the full report here.

A strong economy does not translate to commercial insurance profits. After eight consecutive years of underwriting losses, commercial automotive insurers are shouting, “Enough is enough!” Today, these insurers are in a strong position to right the ship and turn those losses into profits. While written premiums have increased 64% from 2012-2018, the industry continues to experience significant profitability challenges, having booked more than $11 billion in underwriting losses during that same period, according to BestLink Industry data from A.M. Best. Trade combined ratios have been deteriorating in recent years and peaked at 108.1% in 2016 before improving marginally to 107.8% in 2017 and 105.8% in 2018. [caption id="attachment_37131" align="alignnone" width="570"] ©A.M. Best – used with permission[/caption] Changes in risk exposure are pressuring insurers to improve pricing and underwriting effectiveness. As macroeconomic fundamentals remain strong, drivers are logging more miles and fleets are steadily growing, resulting in a shortage of experienced drivers, according to the Truck Driver Shortage Analysis conducted by ATA. With increases in exposure due to more miles driven, less-experienced drivers on the road and a rise in distracted driving incidents, it can be difficult to see how we can return to profitability anytime soon. Choose a Smarter Path to Profitability Despite these challenges, you can break the money-losing cycle of losses and create profit within your commercial auto book. A simple option is to increase base rates and risk alienating current and prospective clients. Alternatively, you can work more surgically, while improving your underwriting returns by using more data, information and technology. See also: Cyber Insurance Needs Automated Security   There are a number of ways to improve your underwriting and pricing decision-making process and reclaim commercial auto profits:

1. Reduce your MVR expense — Don’t waste money ordering MVRs to determine if a driver has a violation on his or her record. TransUnion’s internal data shows that 72% of drivers have a clean driving record. To validate driving histories, use court record data first and only order MVRs on the drivers who warrant it. Court record data is readily available for a fraction of the cost of MVRs.
2. Use new driver information for fleet underwriting — Aggregated driver information and non-adjudicated violation data are available to help insurers improve underwriting and pricing. For example, according to TransUnion’s aggregated results based on an internal study, we have seen insurers realize up to a 200% improvement in loss ratio lift by using new driver information. Look for ways to use more data to build smarter predictive models for fleet driver underwriting.
3. Include vehicle history in underwriting — Every vehicle has a different story. For example, two five-year-old trucks, same make and model, may have different histories. One may have a branded title, while the other may have a single owner and no damage. Vehicle histories are predictive of future losses, and incorporating this data into your underwriting process can provide benefit. Adopt aggressive portfolio management techniques. Monitor, identify and mitigate changes in risk. Profits are gained by narrow margins in commercial auto insurance, and changes in risk can be one of your biggest portfolio exposures. Today’s advanced portfolio management techniques are more available and affordable than you may think.
4. Reward companies engaged in preventing distracted drivers — Distracted driving is a growing factor in trucking accidents and fatalities. Truce Software and other similar devices mitigate against distracted driving. Provide policy incentives encouraging clients to adopt technology and programs that help reduce distracted driving.
5. Require telematics program participation — Electronically monitoring driver safety and behavior enables you to encourage better driving habits. Monitoring can benefit your customers and enable you to better understand the risk within a fleet. Make telematics a standard requirement for writing a policy.
6. Enhance your fraud prevention strategy — The best defense against fraud is to stay on offense. Insurers face fraud throughout the entire policy lifecycle, from the initial application to the claims process. The majority of insurers believe fraud contributed at least five percentage points to their combined ratio, according to a recent Forrester Consulting study. Fraudsters continue to evolve, and so should your fraud strategy.

See also: Underwriters Need Some Power Tools   As you can see, despite the challenges associated with profitability, there are ways commercial auto insurers can bend the loss curve toward profit. By leveraging more comprehensive data, information and technology, you can give your underwriting business a fighting chance and say, “Enough!” to underwriting losses.

Nearly 60% of insurance executives rank a differentiated customer service experience as having the highest impact on successful competition. For many years, customer demands, the effects of digitizing customer relationships and the creation of a successful customer journey have been the focus when it comes to customer service in the insurance business. But inquiries in the insurance industry are issue-driven, and customers often only reach out when they have a problem and are already likely frustrated. So, how do you make sure customers are truly the focus of your business during every touchpoint with your brand? From when potential customers start evaluating insurance offerings to the point where a customer reaches out for support or submits a service claim with your organization, what are consumers expecting in terms of service? Throughout the customer journey, insurers must adapt to the unique needs of each consumer to provide the best experience and earn loyal customers who will serve as important ambassadors for your company. Here are tips for creating a positive relationship between insurer and customer at each stage of the customer journey: Actively Communicate During the Consultation Phase Insurance isn’t a nice-to-have, and consumers seek coverage out of necessity rather than desire. Changes in someone’s personal situation trigger consumers to enter the consultation phase and start requesting information from insurers. Instead of insurers looking to create demand, customer communication in large part only begins when the need is already acute. Traditionally, interactions between insurers and customers are “accident-driven” instead of being initiated by insurance companies. So, how do you improve the customer experience? See also: 8 Key Changes for Customer Experience   Many insurance companies are failing to promote products or services to customers. Too often, customer interactions are based on need and without cause, occurring haphazardly. Globally, 44% of customers have had no interactions with their insurers in the last 18 months. Instead of relying on customers to communicate, insurers should take more control by making customers aware of comprehensive risks and the need to protect against them. Personalize Across Channels in the Purchase Decision Phase As customers enter the purchase decision phase, the customer experience becomes even more integral. With the growth of digital channels, there are several options for a customer to purchase a policy, such as personal sales, an intermediary, your website or comparison portals. With 80% of customers willing to use digital and remote channel options to complete tasks and transactions, it is critical to meet customers with a highly personalized approach regardless of the purchase platform. Customers value an easy process and individualized options and want to buy from insurance companies that serve up comprehensive policy information that is tailored to their situation. Across all purchase options, the human factor (or personal contact) is a crucial component of converting a prospect into a customer. Personal consultations still remain important, but consumers now also expect to quickly reach you through intermediaries, service centers or digital channels. To offer both detailed and personalized communications, insurance companies need to offer personal consultation services that are supported by other channels to communicate the value of products and services. Balance Humans and Technology During the Support and Service Phases When customers reach out for support, they want the experience to be three things: personal, fast and easy. Insurers must integrate trusted, familiar contact channels with digital options. While customers still want quick and stress-free access to friendly and accommodating insurers over the phone, there is also a desire to communicate via digital contact options like email, chat and even self-service. For customers, analog and digital channels are equally important when they are looking for insurance support. When submitting a claim, customers also want a seamless, rapid and individualized process. Although customers are used to leveraging the service center for direct exchanges with insurers, digital and mobile processing are often underused even though they can increase efficiency by solving claims quickly and providing tracking for customers. See also: Customer Experience Gets a Major Facelift   Final Thoughts The insurer-customer relationship is a valuable differentiator throughout the entire customer journey from the initial consultation through to support and claims. To put customers front and center every step of the way, insurers need to communicate during the information phase, focus on personalizing interactions with customers on diverse channels during the purchase phase and create a blend between personal contact and digital tools to elevate support and claims services. To attract and retain customers, insurers must seek opportunities to innovate their service approach to address customers’ needs and drive positive experiences during every touchpoint along the customer journey.

Clarke's Third Law, posited by science fiction legend Arthur C. Clarke, says that "any sufficiently advanced technology is indistinguishable from magic." Well, we're going to see some magic, courtesy of the technology that led Google to claim "quantum supremacy" last week, and we should start adapting sooner rather than later.

The underlying technology, quantum computing, is as far from conventional computing as quantum physics is from the Newtonian view of the world and will have important implications for insurance.

Traditional computing is already pretty magical. Right, Siri? But traditional computing depends on a highly prescribed approach: Billions of transistors are in either an on or an off position, and problems are solved through an unbelievably fast manipulation of those 0 or 1 values, mostly in sequence. Quantum mechanics, meanwhile, operates in ways so mysterious that even Einstein was famously wary of the implications, and quantum computing is no different. Values don't have to be binary: they can be both 0 and 1 at the same time. (Told you this was weird stuff.) And all the values work together at the same time, not in sequence.

The Google claim of "quantum supremacy" means it believes it has solved a problem with a quantum computer that could not have been solved with a conventional computer. To be precise, Google says it solved a problem in three minutes and 20 seconds that would have taken the most powerful IBM supercomputer 10,000 years. IBM cried foul, saying its computer could have solved the problem in 2.5 days if the problem was set up right, but, even in the best-case scenario, IBM was 700 times slower. 

Quantum computing will take an estimated 10 to 15 years to establish itself, which allows time for us to adapt—but not loads of time, in some areas. Quantum computing will render trivial today's approaches to encryption, which count on making problems (related to prime numbers) too hard to solve, and it takes about a decade to broadly replace one encryption scheme with a new one throughout industry. Quantum computing may require ending today's reliance on passwords and other computationally intensive schemes, in favor of sampling of DNA, fingerprints, retinal scans or other biometric evidence, and the switch can't start too early.

Richard Feynman famously said decades ago that chemistry isn't Newtonian, it's quantum, so any tool that's really going to help us understand chemistry needs to be based on quantum mechanics. Et voila. Such a tool is now in sight, and being able to simulate the quantum behaviors of atoms could lead to all sorts of new materials, new medicines and new understanding of the basic behaviors of our bodies—for instance, while we talk about DNA sequences and can define them, how the strands of protein fold up is also hugely important and has been hard for conventional computers to predict. 

Quantum computing could also lead to much better models for the development of hurricanes and, more generally, for potential natural disasters. While such disasters occur at a massive scale, not at the subatomic, quantum level, the intricacies of the massive number of interactions lend themselves to a quantum computing approach.

Lots of deep analytics in insurance, such as looking for fraud or identifying patterns that can help mitigate risk, also lend themselves to a quantum approach.

And fundamentally new technologies like quantum computing often produce convergences with other technologies that can rewrite the business landscape. Think, for instance, about quantum computing powering the AI that goes into driverless cars. You don't think Google will hook up its "quantum supremacy" computer with the brain that powers all its autonomous vehicles?

Now, any technology that is expected to arrive some 10 years in the future can turn out to be mere science fiction—I'm still waiting for my flying car. And quantum computing has at least one clear drawback: It doesn't provide a definitely right answer like conventional computers do. The quantum world is probabilistic, so quantum computers just tell you an answer is probably right. If you test the problem enough times—Google tested 1 million times in those 200 seconds in its "quantum supremacy" experiment—you can be highly confident, but you still likely want to check your work with a conventional computer. 

So, don't throw away your supercomputer just yet. But do start understanding quantum computing, and even experimenting. It's coming, and it will make today's AI seem like child's play. Quantum computing will pull new companies and even new industries out of the proverbial hat.

Paul Carroll
Editor-in-Chief

Many companies want to establish a culture of innovation, one that encourages flexibility and creativity and supports risk-taking. The benefit? Breakthrough products, a superior customer experience and a nimble response to market challenges. But what is happening in organizations today, and what can HR teams do – specifically the L&D (learning and development) function – in not only supporting, but also driving, a culture of innovation? While the shape of an innovation culture can vary from company to company, certain traits tend to stand out. There should be no surprise that the companies leading the innovation culture charge are unafraid to take risks, create diverse environments where employees can personalize their learning, and are role models for the rest of the company in terms of their approach to learning and development (L&D). (Findcourses.co.uk has highlighted some of the best practices for harnessing risk and building a culture of innovation at your organization.) Creating a safe space for risk Innovation happens when employees feel free to take risks without repercussions. Focusing on employees’ individual strengths has been key to creating a culture of innovation. Focusing on strengths creates trust; it creates a safe space to try something and possibly fail, have a conversation about it and move forward. For many organizations, innovation is a byproduct of their culture that prioritizes relationship-building and trust between employees and managers over learning hard skills. Going hand-in-hand with creating an environment where risks can happen without repercussion, encouraging idea-sharing between colleagues on all levels of the organization will also propel innovation. The takeaway? Learn to create risk programs that allow employees to cultivate their individual strengths while building relationships with others on the team. Where there’s support, there’s innovation - and trust needs to exist between team members for innovation to flourish. Experiment (and then recalibrate) Innovation comes from risk-taking. But because there are so many effective mediums and methods to deliver learning in 2019, it’s important to think outside the box and beyond traditional learning - and to never be afraid of recalibrating based on results. According to the 2019 L&D Benchmarking Survey, employee engagement and risk-taking go hand in hand, with 77% of organizations with highly engaged employees "very willing" to take risks. However, it is also worth remembering that not every risk works. It’s vital to carry out evaluations and continuously monitor feedback to produce and develop the most innovation-driving programs. Evaluation and recalibration are at the heart of world-leading innovation initiatives. Through surveys, focus groups or other evaluations, it’s crucial to determine which programs work, which can be optimized and which should be scrapped. Even more critical, however, is that you cultivate a working environment where employees can question current processes without repercussion. In a space where there’s mutual trust, reflection can grow into innovation. See also: Is Your Education Strategy Effective?   Embrace diversity Research shows that companies with diverse and inclusive workforces are more innovative and profitable - and increasing inclusivity isn’t something that needs to be relegated to your company’s talent management or D&I functions. L&D teams should create or offer initiatives themselves. “We’ve had people from over 25 different countries developing our content,” says Martin Hayter, the Global Assurance Learning Leader for EY. “The team has a global flavor to it. It brings more creativity and higher quality, and we know that the content we develop is going to be applicable to different cultures and to both emerging and mature markets.” The evidence is beginning to emerge: The more diverse your team, the stronger your culture of innovation will be. Keep your L&D function agile An agile L&D program is the key to supporting innovation, especially when your company is composed of a large multinational workforce. L&D teams must be built upon a flexible framework and remain nimble, adjusting to continuous organizational changes without compromising either the speed or quality of talent development strategies. An overly planned L&D program is less likely to adapt with any changes in business strategy, so don’t be afraid to stray from your schedule when business needs shift. This also means that, for innovation to occur, your program needs to tailor itself to the individualized present (and future) need of employees. See also: Case Study on Risk and Innovation   To stimulate a culture of innovation, look outside your company walls for inspiration. Other companies and teams likely have excellent insights that you can apply to your own programs. For your L&D team to create a culture of learning for your organization, your team itself must also be constantly learning. Participating in industry L&D or HR award programs is another way to get insights on your strategy and programs, and it’s one approach EY has used to benchmark themselves. Their L&D team also works with external vendors to ensure they’re incorporating the best practices in the industry. An innovative, forward-thinking L&D team is one way to spark progress across the entire organization. Make the connection between L&D and innovation explicit You could plan great L&D initiatives and hope that it sparks innovation company-wide, or you could be even more aggressive. Planning programming around the concept of innovation might include a speaker series with innovators in your industry, a course on design thinking or hack-a-thons where employees get to take a step back from their daily duties and focus on what could be improved at your company.