Third-party reinsurance, or alternative capital, has become a “new normal” for reinsurers as they seek to remain competitive, meaning that so-called convergence capital from the insurance-linked securities (ILS) market will remain key. Despite falling for the first time in 10 years, the use of ILS or convergence capital by insurance and reinsurance firms has become increasingly strategic and embedded within their business models. This has led rating agency S&P Global Ratings to call ILS capital “key,” explaining that the use of third-party capital, particularly by reinsurance firms, should be considered a “new norm” as it is incorporated into their operations to help them remain competitive. In a new report, S&P explains that after the dip seen in ILS capital following the losses of recent years, the inflows to ILS funds and other collateralized reinsurance vehicles have continued, although at a slower rate. S&P notes the flight to quality, the well-documented ability of the more established, largest and best-performing ILS fund managers to continue attracting capital, explaining that, “we believe capital will continue to flow into the market, particularly to insurance-linked security (ILS) funds with strong underwriting, established track records of successful capital deployment and transparent reporting.” Overall, the rating agency says that it expects that “convergence capital will continue to play an important role in the competitive dynamics of the global reinsurance market and bolster capacity.” While traditional reinsurance firms will increasingly “factor third-party capital into their strategies to help them respond to the ongoing challenging competitive environment.” See also: Model for Collaboration and Convergence   S&P highlights that investors have shown some reluctance to enter the ILS market, or to reload their allocations to reinsurance linked investments following the major catastrophe loss years. This is “not surprising,” S&P says, following the two worst performance years for ILS and catastrophe bond investments since the market’s inception. In addition, 2019 returns have been depressed by the continued impact of prior year losses and loss creep, as catastrophe loss events such as typhoon Jebi and hurricanes Irma/Michael continue to develop. But even taking into account the catastrophe losses and loss creep suffered by ILS investors, “new capital has entered the market–albeit at a slower rate,” S&P explains. But the focus of investors has sharpened, S&P continues, saying that “the recent losses have put investors’ focus on seeking out the best available returns.” S&P believes that enhancements to models and adjustments to contract language, such as peril exclusions, will encourage further growth of the ILS market, once the recent losses are settled. “Many third-party capital investors have made good returns over the long term, and the argument for investing in insurance risk to achieve portfolio diversification remains valid,” the rating agency explains. It added, “For cedants, this means that there is capacity for the right risks at the right price.” The collateralized reinsurance segment of the market has demonstrated that “convergence is truly underway,” S&P notes. “All players continue to innovate and explore different routes and solutions to gain access to capital or insurance risk in the most cost-effective manner,” S&P continues, trends that are developing very quickly as new startups are set to demonstrate in months to come we would add. Rated reinsurance vehicles is one route to market that is more direct and efficient, as are initiatives that seek to bring ILS capital closer to pools of directly originated risk. Insurer- and reinsurer-owned third-party capital vehicles are perhaps where the greatest convergence is seen, as here the capital markets are directly integrated into the traditional business model as augmentation to the re/insurers own balance-sheet capacity. “These platforms help insurance and reinsurance companies attain greater scale and relevance as well as target lines of business where the returns might not support their own cost-of-capital adequately, which would allow them to provide more complete solutions to their clients,” S&P explained. In the past, traditional reinsurers viewed third-party capital as a “nice to have,” S&P says. But now, “It has become the new norm, with established players incorporating third-party capital into their operations to stay competitive.” S&P further explains that in analyzing reinsurers for rating purposes it looks closely at the businesses risk profile, with its competitive position compared with peers a key factor in this. Typically, a company with a stronger competitive position is expected to exhibit consistently higher and more stable profitability metrics than peers, S&P explains, leading it to say, “Using third-party capital to profitably grow the top and bottom line should, in general, reflect positively on this assessment.” That reflects the rising importance of having access to third-party capital and owning the deployment of it for reinsurers. But, we would again note that it has yet to be proven out how this strategy will play out for all reinsurers, as they look to juggle own balance-sheet shareholder capital with that raised into reinsurance vehicles and ILS funds they own. Is the fee income and profit share that can be earned by underwriting using third-party capital really a sufficient replacement for the profit earned by underwriting using a reinsurers’ own balance-sheet? Or will the use of increasing amounts of third-party capital force the need for increasing efficiency and lower expenses on reinsurers? In addition, the questions of conflicts of interest remain and have not been answered to the satisfaction of many investors, who find allocation decisions by reinsurer-owned ILS vehicles and funds often difficult to understand, largely because the explanations for decisions are often not particularly well-articulated. While some players seem to be managing this juggling act adequately for now, it is going to take time for the industry as a whole to establish just how successful this will be across the sector. Questions also still exist about what will happen if rates continue to rise, so reinsurers decide their appetite for catastrophe risk on their own balance-sheet has increased? See also: Shift in Capital for Reinsurers?   Will they continue to feed their third-party investors at that point in the cycle, and how will allocation decisions (to the different forms of capital) change at the same time? The crux of this is that reinsurance is still evolving and the market adapting to the availability of capital market financing, the use of financial market technologies such as securitization, and the emergence of the ILS investment market. In addition, the use of data and technology is going to change the playbook again for re/insurers and ILS fund managers alike in years to come, with the evolution and disruption we’ve seen so far likely to be eclipsed by what comes next. Yes, convergence continues, looks set to be sustained, will likely accelerate and has certainly become a “new normal.” At the same time, it remains early days in this evolving world of reinsurance and risk transfer, with the winners and losers yet to be fully identified. Which all means there is plenty of room for change and for new strategies to emerge, as the traditional insurance and reinsurance market continues to converge with the growing sources of third-party capital. You can find the article originally published here. 

With more vehicles on the road and less experienced drivers operating them, insurers are rushing to compensate for the increasing lack of profitability of commercial auto insurance lines. According to a report from Insurance Journal, two major carriers have closed their doors in the past decade, and some accounts have increased prices by 30%. Experts point to multiple factors contributing to the dilemma. To begin, the improved economy means more consumers are purchasing new vehicles and taking them on the road. Because more vehicles mean more accidents, this poses serious problems for commercial auto insurance. Further, the improved economy leads to a tighter labor market, which causes trucking companies to hire drivers with less experience. This means that roads are not only more crowded, but also filled with drivers who are not as equipped to drive as they should be. Another rapidly increasing threat to commercial auto insurance is distracted driving. When drivers use technology on the road when they need to be paying attention, they cause serious accidents. These accidents often involve more sophisticated vehicles that require more sophisticated repair, leading to higher costs. On top of that, injury claims are more severe and litigated more often than before, with settlements and verdicts reaching the millions. Better Strategies Need Better Structures Many think of technology as the most significant contributor to hurting commercial auto insurance. Other than the excess costs of repairing technologically advanced vehicles, drivers themselves are too often distracted by technology like cellphones and other personal devices on the road. More than that, technology is driving a push toward fully automated vehicles in the coming years, and many insurers wonder whether commercial auto insurance lines will become obsolete as a result. See also: How to Extend Reach of Auto Insurance   In industries that are used to adapting quickly and nimbly, technology is not necessarily a major driver of declining profits. However, the insurance industry tends to operate traditionally and be less quick to move, which leads to delayed reactions and reluctance to adopt new ways of doing things. Because insurers usually measure trends over decades, not years, they are uncertain how to react in real time as commercial auto insurance lines suffer. The answer is to reform the structures that make technology seem like hindrances and turn them into advantages. Insurance is an industry with a number of institutions that have been in the business for decades, which offers distinct advantages others simply do not have: longevity and expertise. Having refined a practice for years is valuable, and insurance companies can harness that value to shift their infrastructures and adapt to the needs of current markets. In other words, those in the insurance industry must turn what seems like a disadvantage at first glance into a unique competitive edge — and there are some key ways to do this. For instance, those cars equipped with monitors, sensors and hands-free technology, while much more expensive to repair, produce a wealth of data that can lay the foundation for a comprehensive approach to augmenting risk models, managing change and reacting to shifts in market trends more rapidly. Companies that already have years of experience behind them also have formidable databases that allow them to build and bolster this new model of operation. The longstanding trust that customers have in many insurance institutions can also be leveraged to introduce technology that helps transportation companies mitigate risk associated with new hires or even to detect situations in which drivers are distracted by cellphones. The institutions can be more than just insurers and instead become partners in helping companies lower claim rates, protect their investments and implement innovative solutions to address the dangers increasingly found on the roads. The Silver Lining, Found There is no doubt that the dynamics of commercial auto insurance have changed and that most insurers have struggled to adapt. However, not every company has failed to respond and those that have have proved that there is plenty of hope for the industry and commercial auto lines to survive and thrive. See also: The Best Approach for Small Commercial?   Some companies have found success in boosting commercial auto rates by encouraging their agents to speak freely with clients about issues facing the industry and to work with those clients to implement sensors and monitoring technologies in their vehicles to make safer, better conditions for themselves and those on the road. Using technology and data to understand the market and letting go of old business models that stand in the way of adaptation will prove to be the silver lining insurers need to make it through what seems like dire times. These tactics might just prove that times are not so dire after all.

One of the greatest revelations for women comes when they fully grasp how dramatically the world can change and what they can do about it. Many women today feel like they’re barely keeping their head above water: They feel hammered by their “to do” list, resentful and resigned or scared and insecure as they furiously tread water. As the world around them changes at a dizzying pace, they don’t know how they can possibly do more, how to better position themselves for success. Some women are content to simply survive, get along and have a small piece of the market. Others set unusually high aspirations. Many are setting new standards both in their personal and professional lives, forcing others to react and move away from the status quo. Around the world, too many women are living at the mercy of events. They feel like victims or they respond to events by acting like victims. They’ve lost their birthright, the power to control their own destinies. They resent that, on a very large scale, women feel “less than” or “not good enough.” They want someone to blame. It’s depressing to watch, and it doesn’t have to be that way. Who wants to be out of control on the things that are important in their lives? Most of the time achieving these high aspirations is not possible with an incremental approach. These women, already successful and stable, understand the requirement for a transformation in how they think about the totality of their career, how they engage with both men and women, how they put judgment aside, how they create compassionate power, etc. But they are not moving forward. See also: Why Women Are Smarter Than Men   Women often get themselves tangled up and constrained. Like Gulliver, they end up tied down by hundreds of strings. Incremental coaching and education do not cut through the tangles. It takes getting to the heart of the matter, staying focused on the desired outcomes without getting lost in the tangles and weeds. Transformative thinking (or innovative thinking) demands clear, compelling and unmistakable desire to change quickly, coherently and effectively to bring about desperately needed and passionately wanted breakthroughs. There is a level of penetrating thinking, focus and intensity to create a transformative way of bringing forth women’s full potential. Through a transformational process, odds for success are dramatically improved. If you want to engage in conversation, if you want to explore how women can move forward, breaking through the tangles and making transformational changes for themselves and those around them, we would like to talk with you. Please reach out to us or check our website at www.hightidesgroup.com.

Why do so many advocates stumble when it comes to preparing for mediation? Perhaps the most important thing a lawyer can do to prepare for mediation is to write a brief. Done properly, the process forces the writer to focus and get ready to negotiate. But many people do it wrong, mostly by providing irrelevant and obsolete information and not providing the data necessary to evaluate the claim. This problem is so common that I now instruct parties in my confirmation letter what to include. The brief doesn’t have to be fancy. I don’t care if there’s a caption. An email message is fine. What would be helpful would be sub-headings for the categories shown below. Transmit the brief at least seven days in advance of the mediation. This helps everyone prepare, including the mediator. Your brief may prompt a request for a document. Showing up with your brief at mediation wastes participants’ time and money as the mediator reads the brief. Late preparation can raise new questions and sometimes leads to adjournment and a second session to allow time for everyone to get answers. Claims professionals, you know the mediation is coming up. Ask your lawyer to provide you a copy of the brief at the same time it is sent to the mediator. This ensures that you and your advocate are on the same page. You can also monitor the timeliness of the preparation. The brief should briefly (that’s why it’s called a brief) recite facts such as the dates of injury, affected body parts and the injured worker’s date of birth. Indemnity State specifically if indemnity is open. If it is open, what do you think is the correct percentage and dollar amount? If less than 100%, what are the permanent disability advances to date? At what rate are they being paid? Is there any argument about apportionment, overpayments or retro? Do the parties agree on the DOI? If parties disagree on an issue, spell out your position. What does the other party say? Medical Copies of narrative medical reports (AME, QME, PTP) from the last two years will be very helpful, as will a print-out of medical expense payments for that period. Medicare Status Is there a current (within the last year) MSA? If so, attach a copy to your brief. If the injured worker is a Medicare enrollee or is at least 62 1/2 years old, get a current MSA report and attach it to your brief. If you are not obtaining an MSA because the injured worker is undocumented or is otherwise ineligible for Medicare, say so in your brief. If you have obtained CMS approval, provide a copy. Other Issues Are there any other issues to be resolved? Mediations are most successful when parties are able to prepare for negotiation and do not encounter surprise issues. Confidentiality Indicate if the brief is confidential or is being shared with the other party. You may choose to create two briefs, one for exchange and one confidential.

Did you catch that headline a few weeks back? An official of a health system in North Carolina sent an email to the entire board of the North Carolina State Health Plan calling them a bunch of “sorry SOBs” who would “burn in hell” after they “bankrupt every hospital in the state.” Wow. He sounds rather upset. He sounds angry and afraid. He sounds surprised, gobsmacked, face-palming. Bless his heart. I get it, I really do. Well, I get the fear and pain. Here’s what I don’t get: the surprise, the tone of, “This came out of nowhere! Why didn’t anyone tell us this was coming?” Brother, we did. We have been. As loudly as we can. For years. Two things to notice here:

1. What is he so upset about? Under state Treasurer Dale Folwell’s leadership, the State Health Plan has pegged its payments to hospitals and other medical providers in the state to a range of roughly 200% of Medicare payments (with special help for rural hospitals and other exceptions). In an industry that routinely says that Medicare covers 90% of costs, the payments actually sound rather generous.
2. What is the State Health Plan? It’s not a payer, that is, an insurer. It’s a buyer. Buyers play under a different set of rules and incentives than an insurer.

Payers Are Not Buyers That #2 is key: Insurers are paying for your healthcare with your money, the premiums you pay them. Under the Affordable Care Act, their entire administrative cost, executive salaries and the profit for shareholders comes out of a strictly limited percentage of the total cost. Think about that. The higher the total cost of the healthcare they buy for you, the more money to go around for executive salaries and shareholder profit. The more your healthcare costs, the better their bottom line looks. How’s that for an incentive? Buyers, on the other hand, are paying for your healthcare with their own money and yours together. Self-funded employers, union health plans, state health plans, pension plans and other buyers pay the actual medical bills through a third-party administrator (TPA). The higher the total cost of your healthcare, the worse their bottom line looks. The lower, the better. If they can help you avoid an expensive unnecessary surgery, or get it done at a provider that charges one-fourth as much, or help you get your expensive drugs at half the price or less, you will be happier, and so will they. Buyers’ incentives are closely aligned with their members, employees and beneficiaries. As large buyers buying for thousands, tens of thousands or hundreds of thousands of people, they have the freedom and power to do something about those costs. This has been the drumbeat of my books, talks, columns, articles, YouTube videos and tweets, for years: The healthcare economy is hollow, inflated and flammable, like the Hindenburg approaching Lakehurst in a thunderstorm. What will set it off? A rebellion of the buyers. Analyze This Can we analyze this for just a moment? Bear with me for a little systems analysis. Picture healthcare as a complex adaptive system with multiple interdependent parts (hospital systems, pharmaceutical companies, device manufacturers, government payers and regulators, insurance companies and so on). Each part is busy taking in energy (mostly money) from the other parts and putting out products and services, or money to fund other parts. The input of each part is someone else’s output. The more one part puts out, the more other parts can take in. Each part is at a local optimum. Picture this as a 3-D “fitness landscape,” where the height of each part represents its “fitness,” its ability to survive and prosper. In healthcare, each part is on a tall mesa; that is, each part has optimized its position over time so that it is doing as well as possible in the system that exists. That’s why the parts operate the way they do and make the choices they make. See also: Healthcare: Asking the Wrong Question   Think about the people who run each of these organizations. By definition, they are at the peak of their careers. They got all their training and experience and climbed the career ladder to the C-suite, by being excellent at the existing way of doing things in an industry that has not changed its fundamental structure for 40 years or more. Not all the mesas are the same height. Some are doing very well, some not so well. But nearly all of them see a wide gulf between where they are and any other higher level of fitness that they might hope to reach, a gulf that is fraught with danger and unknowns. This complex adaptive system is stuck in a Nash equilibrium. That is, each player, doing as well as possible for itself in the system as it is, sees no advantage in changing the way it does things. In every direction in this fitness landscape, any change will see a player and its organization climbing down off their mesa, their “local optimum” into a lower level of fitness, into a valley of uncertainty, into being beginners at this game. Yet at the same time the system is more and more unbalanced, with some mesas growing ever taller, drawing in more and more energy from the other actors—the vast health insurers, the increasingly consolidated healthcare systems, the world-girdling pharmaceutical companies. What Breaks the Stuckness? So what moves a Nash equilibrium off of its equilibrium? Either new sources of energy, new players or longtime players waking up to new energy and awareness and options. Today, we are seeing all three. Think of yin-yang. The more unbalanced the system becomes, the greater the energy driving any potential instability. Any complex adaptive system in an unbalanced state at a sufficiently high energy level will resolve its potentials into a more stable, lower-energy state. The greater the potential instability, the more likely the resolution will not be incremental but sudden and catastrophic. What’s that mean? It means that the “burn in hell” guy is losing. Why? Because of something else we can learn from systems dynamics, which is this: This disruptive resolution and rebalancing will come from the system actors who:

• are the most disadvantaged,
• have unified incentives,
• and have the greatest freedom of action.

Who am I describing? Where do we find such system actors? Where? Not in the political realm. In their nature, like Obamacare, attempts at reform mostly end up being efforts to stabilize the existing system a little longer by taking the edge off some of its inequities and arbitrary cruelties. So, the various proposed reforms, even the most radical ones, are mostly just about making sure that everyone is covered in one way or another. No mechanisms for actual cost savings or elimination of rampant waste is contemplated beyond government fiat, which has proven a slender reed on which to depend. Not from the healthcare providers, nor the insurers, the payers, who actually are mostly doing quite well on their ever-exaggerating mesas in the fitness landscape, drawing in more and more energy from the rest of us, and whose true incentives are to keep the imbalance going and keep costs up. It’s the buyers, who are professionally, personally and financially aligned with their members, beneficiaries and employees. They have traditionally been quiescent, unaware of their power, without the knowledge, the strategies, the tools to take up their power, simply paying the bills without questioning them. All it takes is for them to wake up. And they are waking up. Imagine Yourself… Put yourself in their place. Imagine you are running one of these entities, buying healthcare for tens to hundreds of thousands of people, in charge of trying to keep that budget in line and those costs down. With all the new pricing information coming out in various ways, imagine that you are contemplating the fact that MRIs in your area may vary from $400 to $2,200 depending not on quality but just on the site. Or you see hospital bills that ring up a single bag of saline for $91 to $758 for no reason, for a generic item that costs less than $1 to manufacture. Or you see, as we have seen online, a young man with a rare genetic condition sharing his hospital bills on the internet. He requires an infusion that requires an overnight hospital stay twice a month. His life circumstances have required him to move between states, change insurers and get treated at different centers. For the exact same procedure with the exact same materials, his insurers have paid from $3,319 to $20,736, while he has co-paid from $222 to $4,261. For no reason. If you have studied quality theory, you know that variation for no reason is always a marker of damage in a system. See also: Healthcare Buyers Need Clearer Choices   If you were a self-funded buyer, paying directly for medical care for your employees or beneficiaries, what would you do when confronted with these random absurd variations in cost for no reason? You’d say, “I’ll take door number 2.” You’d say, “Wait, who’s the chump here?” You’d say, “This is B.S.” You’d say, “I will figure out what it takes to pay the lowest price possible for high-quality care.” And that’s what’s happening in 2019, facing 2020. The buyers are not buying the story any more. They’re saying, Show us the goods. Show us:

• The cost of the whole thing, diagnosis to rehab, whatever the package might be.
• The appropriateness. Does this really need to be done? How do we know? Where are the real checks in the system?
• The quality. How good are you really? Show us.
• The real outcomes. Not metrics you choose for your marketing. Real metrics.

Why now? What’s different this year is that increasingly the tools the buyers need exist, the strategies are there and tested, and there are insurgent vendors ready to show them how to execute on the strategies. This year and the next are likely to be a tipping point. The huge cost of healthcare is rooted in the way we pay for healthcare in a line-item, fee-for-service, treat-to-code payment system. Fee-for-service is like taking your car’s bent fender to an auto body shop and being charged for each sheet of sandpaper, each can of Bondo and each ounce of paint, instead of getting an overall estimate and a single bill. So I am telegraphing the punchline here: Any serious and widespread attempt to substitute new and different payment systems based on risk and true competition through transparent bundled prices and quality of outcomes will implode today’s healthcare market. Here Comes Everybody The North Carolina State Health Plan is not isolated in its efforts. Similar stories are playing out in Montana, Kentucky and other states. Haven, the amalgamation of JP Morgan Chase, Amazon and Berkshire Hathaway, is just such a buyer with just such incentives. Giant retailers like Walmart, Kroeger and Loews, tech giants like Apple, Microsoft and Google and many other large employers are waking up to their power as wholesale buyers of healthcare. Buyers across the country are using multiple strategies such as reference-based pricing, bundled pricing, medical tourism, cost plus caps, even onsite, near-site and direct pay primary care. Consultants and other vendors are proliferating who are eager to help buyers of any size, even small employers, map out these strategies. None of these are yet majority practices across all buyers, but they are trending rapidly and appear to be at a major bend in the curve of adoption. The more buyers get up on their hind legs and insist on their power as true customers, the faster that change will happen. As more buyers experience and demonstrate that they can get high quality healthcare for 10%, 20%, even 30% less in the system as it exists today, the more other players in the system will have to adjust, accommodate, change their pricing and cost structures, stop wasteful expensive practices and focus on providing what their customers want, need and are willing to pay for: real healthcare and real attention at a reasonable cost. Change is gonna come. First published on TheHealthcareBlog.com.

The small commercial insurance market is hot – there’s no doubt it. In fact, the entire small business environment is quite active, with around 11 million businesses that employ fewer than 20 people, according to the U.S. census bureau, and another 6 million with between 20 and 500 employees. Around 600,000 business are started every year in the U.S., and almost as many fail each year. As in every other segment, small business owners’ expectations have risen over the past decade, due in part to their daily experiences with digital and mobile capabilities. See also: Conundrum Facing Commercial Insurance   In the insurance sector, the competition for retaining small business customers and acquiring new ones is intense. During this time of active industry transformation, a variety of approaches are being employed by commercial lines insurers, especially when it comes to distribution options. Which of these options are the best? SMA has identified five prevalent distribution strategies that are currently deployed by insurers. A synopsis of these strategies follows, along with recommendations for insurers.

1. Existing agent channels … enhanced with tech: Many insurers are doubling down on their independent agent distribution channel. Agents, after all, still sell most of the small commercial business. However, in this digital age, insurers must be aggressive in the tech capabilities they provide to agents – with modern portals, mobile capabilities, enhanced agent-carrier connectivity solutions and more.
2. Direct digital: The direct model, successfully deployed for years in the personal lines space, is moving to small commercial. Small business owners are more tech-savvy, and some want self-service capabilities to identify the coverages they need, get quotes and finalize their policy – all online.
3. New digital brand: Some insurers are establishing new digital brands for small commercial distribution. In most cases, the underwriting and back-office support remain with the insurer, but the front-end marketing and sales are done via a newly established, visible brand. This allows insurers to distinguish the channel from the agent channel and go after different segments in new ways.
4. Partnering with insurtech: An appealing option to many insurers is to partner with insurtechs that are capturing attention with their focus on the customer experience. These insurtechs may be digital agents/MGAs or comparative raters. Many insurtechs offer agent-focused solutions or enhance the agent/carrier relationship and support the approach in #1.
5. Establishing a marketplace: Several very large insurers are establishing their own marketplaces that support either agent or direct submissions. These marketplaces typically provide automated appetite matching, triage and recommendations on coverage. In addition to traditional small commercial players such as Chubb and Hartford, large personal lines companies such as Progressive and Nationwide are also going after small commercial business with this approach.

Which of these approaches will turn out to be the most successful in growing a small commercial book? Of course, there isn’t one definitive answer. The likelihood is that a combination of approaches will yield the best results for each specific carrier. The omni-channel world has come to small commercial, which means that most insurers will utilize at least two of these methods of reaching customers. Perhaps the most important advice is to understand customer segments at increasingly discrete levels and adopt an outside-in approach. The commercial lines business has continued to move in the direction of more specialization, and small commercial is no exception. The deeper the understanding of the characteristics and risks of each type of business, the better-equipped insurers will be for creating products and programs to serve that segment. The distribution channel then becomes part of the customer expectations discussion. What methods will be most successful for each segment? Will the business owners in a particular segment react most positively to experienced agents whom they know and trust? Or are they more likely to prefer acquiring their insurance via a direct self-service approach (or one of the other options outlined here)? See also: Insurance 2030: Scenario Planning   One thing is certain. The distribution channel environment for small commercial will evolve over the next few years. And all of the five options in this blog (and probably others) will be in the mix. For more information on the small commercial market, please read the research report, Ten Guidelines for Success in the Small Commercial Market.

After years of being on the sidelines, many insurance companies are on the path to innovating for growth, considering tech solutions to gain operating efficiencies, create important products and services and even develop new economic markets. 

Some companies recognize the inevitable need for some form of innovation but struggle to cross the starting line; others are in the early stages of this journey; and some are well along the innovation road. One thing they all have in common is that somewhere along the way they will encounter (if they haven't already) a series of obstacles that will inhibit or derail progress. These challenges can fester for months before being recognized and addressed. 

Wouldn't it be better to know the innovation road hazards in advance? What if, instead of a post-mortem, you could conduct a "pre-mortem" to understand ahead of time how these innovation killers develop and why they apply to all incumbent companies? Then, you could mitigate the problems and perhaps never have to inspect a corpse.

The phrase, "fail fast and learn," is often used on innovation teams, but what if you could learn from others' failures and not have to make your own? 

Based on our experience advising incumbents on innovation, ITL will hold a workshop during InsureTech Connect, Sept. 23-25, in Las Vegas and share key understandings about challenges you're sure to face. We'll explore why they occur and show how to navigate resolutions, as well as take preemptive actions.

We organize the universal challenges into the following five categories:

1. HR Issues. Few corporate divisions are as vital to innovation as HR. For many insurance companies, addressing the talent needs of innovation requires creativity, but how many companies have truly addressed this issue before problems occur? Some key HR questions that will arise include: How do you attract and nurture innovation talent? Once you have had some success, how do you retain that talent? Bringing in innovation talent from outside can provide fresh eyes and needed skills, but there may be a lack of insurance knowledge. Forming an internal team means asking people to disrupt carefully managed career trajectories to meet a mission that may stretch cultural norms. Should this increased risk be matched by a unique compensation structure? For new concepts launched into the market, who will lead these to scaled growth? If the concepts fail, are those small teams guaranteed jobs back in the parent company? If these concepts take off, will the rewards reflect entrepreneurial success? In the context of innovation best practices, what does the term "incentives" mean? Who "owns" those ideas submitted from the workforce that are selected for further development by an internal innovation practice?
2. Boundaries. Innovation success rarely comes from blank check budgets while searching the universe of possibilities. This is why small and mid-size incumbents may be favored for innovation success. Innovation requires constraints. However, defining organizational limits one idea at a time invites traditional executive reactions, which are acutely sensitive to time horizons and depend on the capacity of key decision makers. The solution is to identify a general approach, prioritizing "jobs to be done" and game-changing technologies. There also needs to be a determination of organizational appetite either very early in the innovation journey, or as an iteration to existing efforts that are not quite meeting expectations. How do innovation teams avoid constantly chasing the shiny new object? How do best-in-class innovators improve the consistency and actionable quality of ideas submitted by customers, colleagues, and startups? How do you get consensus among senior management and innovation leaders on which ideas are worth considering, which should be set aside, and why? Once a set of targets is established, how can you keep everyone from straying out of bounds?
3. Innovation Theory vs. Innovation Reality. Many insurance companies are learning design thinking as a process for innovation, which can be extremely helpful. However, after learning these concepts, tens of thousands of associates return to their daily responsibilities at incumbents with the nagging question, "Now what?" If understanding a customer segment, or potential new customer segment, is to be the genesis for generating ideas, and idea flow is the fuel to any innovation practice, how does design thinking bridge customer knowledge and solutions for real economic growth? The intent of design thinking is to bring together key constituencies around a specific consumer "job to be done." In practice, however—particularly in the context of insurance—companies are discovering significant challenges when moving from theory to tactics. What if design thinking concepts could be used to focus all of this energy into accelerated ROI?
4. Launch and Scale. Many insurance companies have successfully developed an innovation strategy, have run idea campaigns and even have come up with some compelling proofs of concept. What happens next? Does the innovation team hand off ideas to relevant business units? What if existing business units don't welcome new concepts with open arms and provide needed resources? How do you avoid a momentum stall when early success is achieved, and the resources needed for scaled success cannot be obtained? How do companies launch without tipping competitors off to new opportunities? How do successful innovators operate with significantly faster decision making and procurement tactics?
5. Leadership and Mandate. It's unlikely that many insurance companies will pursue an innovation strategy without the approval of the C-suite. But is the CEO merely ticking a box on innovation—perhaps because A.M. Best will soon require it? —or providing leadership and enthusiasm for the effort? At the other extreme, how does the innovation team deal with a CEO who is constantly micromanaging or pushing his or her own ideas to the top of the queue?

At the ITL workshop in Las Vegas, we will present case studies from actual engagements to illustrate each of these challenges. Attendees will have the opportunity to select the two topics of greatest interest to them for a deep discussion to analyze the scenario. They will explore what factors lead to a problem or, just as important, what could cause a successful outcome (and what would allow that to be repeated)? All the innovation challenges will be recapped and reviewed as a group at the workshop.

The program will be led by ITL Chief Innovation Officer Guy Fraker. Moderators for the discussion groups include Robin Roberson and Kenneth Knoll of tech consultant Goose & Gander (formerly CEO and COO, respectively, of WeGoLook); Rob Galbraith of AF Group and author of "The End of Insurance as We Know It"; ITL Editor-in-Chief Paul Carroll; and me.

The goal of the workshop is to equip attendees with the knowledge to recognize and prepare for seemingly small decisions that can later send an innovation program off course. We want insurance companies to be confident they can lay the groundwork to avoid the traps, wrong decisions or gaps that can inhibit them from achieving their innovation goals.

Does it sound like it would benefit you and your company to learn how to avoid innovation obstructions? Please register today at http://info.insurancethoughtleadership.com/itc-innovation-workshop.

Paul Winston
Chief Operating Officer

Cybersecurity best practices for digital businesses have been discussed ad nauseam. However, there’s comparative silence when it comes to securing non-digital businesses. Today’s reality is that every business has at least some digital components. Even if it equates to simple e-mail access, a CRM system or services that involve internet-connected devices, any instance of a digital footprint results in cyber risk, meaning even seemingly straightforward, non-digital industries like food and beverage, paper or janitorial aren’t necessarily safe. Take Target’s massive 2014 breach. Hackers infiltrated Target’s network by stealing networking credentials from a third-party HVAC vendor. Because the HVAC company had external network access -- and, even more shocking, because the vendor wasn’t restricted from Target’s payment system network -- hackers were able to inject malware into Target’s point-of-sale devices and collect card records from live customer transactions. Ultimately, the HVAC vendor-induced breach exposed upwards of 40 million debit and credit card accounts. Even Well-Intentioned Actions Can Create Risk Tactics as malicious and elaborate as the 2014 Target breach aren’t the only way vendor-induced breaches can occur. A paper supply vendor could easily become friendly with a client organization’s employees, for example, and see something on an employee’s desk they shouldn’t be privy to. Perhaps they borrow an employee’s computer to check their email and click on a nefarious link. Maybe the paper supplier is fired and retaliates by stealing one of the client organization’s laptops and connecting it to a coffee shop’s insecure Wi-Fi. See also: How Digital Platform Smooths Operations   Even well-intentioned, fundamental business tasks can cause a debilitating, vendor-induced breach. Say an electrician sends its client organization a digital invoice. This creates a digital path that automatically has the potential to be breached. E-mail phishing, too, can affect any third-party vendor and customer relationship. Posing as a trusted customer contact, hackers can leverage social engineering to trick vendors into voluntarily sharing sensitive information about their client organization. Cyber Insurance Mandates Require Education and Specificity Because of the serious cyber risk that third-party vendors like HVAC, paper supply or janitorial companies can introduce, more and more large enterprises are requiring their vendors to purchase cyber insurance. In fact, according to recent research conducted by my company, nearly half (46%) of small and medium-sized businesses are buying cyber insurance due to contractual requirements with larger companies. Not only can cyber insurance help lessen the financial blow of a cyber attack, it can also help reclaim an organization’s holdings if malware infects the company network or a hacker shuts down access to the server. Despite the clear benefits of mandating third-party cyber insurance, the majority of vendors -- especially ones not overly comfortable with technology -- don’t know where or how to acquire it. It’s no longer enough for large enterprises to simply institute a cyber insurance mandate; they need to also educate their vendors on the specific cyber risks they pose and explain why cyber insurance is so critical. Ideally, enterprises should also work with each third-party vendor individually to find cyber insurance plans that match their unique needs and role within the larger organization. See also: Global Trend Map No. 12: Cybersecurity   You’re Only as Strong as Your Weakest Link The adage, “You’re only as strong as your weakest link,” rings especially true when it comes to cybersecurity. Massive corporations like Target or even franchisers like McDonald’s can allocate all the resources in the world to cybersecurity, but, if they’re not also defending against the risks their vendors introduce, all it takes is one digital action -- even a well-intentioned one -- to wreak havoc. Take the time to educate everyone involved in an organization’s digital activity on the specific risks they pose, and protect everyone’s actions and assets by ensuring all vendors adhere to cybersecurity best practices and company-wide policies, invest in basic cybersecurity tools and implement comprehensive cyber insurance.

Insurance companies are at a crossroads. They have unprecedented opportunities to transform as consumers become increasingly digital-centric and demand seamless, personalized experiences, but they have historically been slow to adopt new technologies due to the conservative preferences of traditional customers as well as limitations of legacy infrastructure.

Organizations are beginning to invest in new technology to deliver heightened and highly curated experiences for digitally inclined policyholders. At the same time, they’re navigating the regulatory jungle to ensure end-to-end compliance. For example, at TCS we recently helped transform the contact-center experience for a large insurer using a combination of voice to text (V2T) and AI to help deliver next-best-action and next-best-offer services in real time. An agent who receives a call gets a 720-degree view of the customer, interaction history and top two reasons for the call within seconds—all before the call even begins. Upon answering the call, the agent can see a real-time transcript of a customer’s voice, is informed if the customer is happy or unhappy based on tone analysis and more. AI is also used to prompt the agent with contextual next-best offers. This provides the customer with unparalleled customer service and improves the quality of work and agent experience, as well. Successful digital transformation for insurers relies on their level of investment in four broad business behaviors of Business 4.0. They are: AI for actuaries (unbiased risk modeling); intelligent bots for brokers and customers; prediction and prevention of claims (through connected ecosystems); and balancing both traditional and usage-based pricing and underwriting (exponential addressable market). In fact, recent studies have shown that the banking and financial service industry (which includes insurance organizations) has more leaders in Business 4.0 digital transformation than any other industry. See also: And the Winner Is…Artificial Intelligence!   When it comes to bringing innovation to life, it’s no surprise that a key driver of this change is adoption of artificial intelligence (AI) throughout the lifecycle of the insurer-customer relationship. AI enables optimization and hyper-personalization at every stage of the relationship—from prospecting and planning, to customer service and beyond. A recent study shows that 70% of insurance providers in North America have already begun investing in AI. But AI is only as useful as the quality of data it receives. Therefore, other technologies—specifically V2T—are integral to aggregating the data needed for meaningful AI innovation in the insurance industry. Going Back to the Basics V2T provides both the agent and the customer with convenient, time-saving alternatives to traditional conversational interactions. On the provider side, V2T can take prerecorded voice notes and organize them as text emails to be sent instantaneously. Additionally, insurers can use V2T capabilities to prioritize all inbound inquiries from customers without having to listen to every call. But where V2T innovation begins to set itself apart, is when AI is used in parallel to V2T technology—bringing actionable data aggregated from V2T interactions to life in groundbreaking ways. Identifying and Targeting Experience Gaps Customer service capabilities are judged by the efficiency and accuracy of their responses. AI enables insurers to identify trends among recurring service requests and complaints—allowing them to produce templates for new solutions and capabilities that bridge these experiential pitfalls. Likewise, if insurers notice trends among customer service interactions that are relative to a specific product bundle, they can reshape product offerings to reflect customer preferences, driving long-term satisfaction and enhancing brand affinity. Whether it be in quality, pricing, CRM, user experience, etc., V2T provides AI with the necessary data sets to pinpoint areas for strategic investment. Pinpointing Potential Growth Areas V2T data isn’t solely beneficial for reactively fixing experiential problems. V2T-enabled AI will let insurers identify trends among prior V2T transactions to predict what technological innovation might increase customer satisfaction by understanding the attributes that customers appreciate about their insurance-related interactions. See also: Innovation: ‘Where Do We Start?’   For example, if an insurer realizes that most customers prefer to host agent-to-holder interactions online, then the insurer can develop digital tools to make other, more traditional aspects of the business a digital-first experience. V2T and AI are tightly knotted. V2T is essential in gathering data while AI is integral in successfully processing it. Both are necessary in providing insights and influencing key business decisions, especially when it comes to customer experience. Customer preferences for researching and buying insurance policies will continue to evolve – and possibly fragment even further – which means there can be no cut-and-paste solution. For instance, recent studies have shown that young adult consumers prefer in-person interactions when purchasing homeowners insurance, but prefer online interaction for auto and renter’s insurance. AI weighs the checks and balances of these behavioral complexities and generates intelligent solutions to best meet the needs of all existing and future customers. Through V2T data aggregation and AI integration, the possible solution-based outcomes are limitless.

On Jan. 1, 2001, it would have been beyond human ability to predict, with precision, most of what has happened in the first 20 years of the 21st century. Certainly, no one was expecting that following September to dramatically alter the geopolitical landscape of the world, nor was anyone expecting the U.S. to use UAVs (unmanned aerial vehicles) to eliminate targets, terrorist or otherwise. Perhaps more crucially, though, people were not expecting to have a substantial chance of having the security of their lives drastically diminished over the course of the following 20 years due to hardware and software engineers, some of whom were “dark knight” software engineers, hackers. However, more than any other occurrence since the start of this century, the cyber realm has, and will continue to have, profound impacts on nearly every aspect of our lives regardless of where we live globally. It is only fitting then, as we review the lessons we have learned, to examine their inextricable links to and impacts on cyber liability and technology E&O. Let us start with some numbers. Of breaches that have compromised 30,000 records or more, there have been at least 266 since 2001. Each year since 2001 there have been no fewer than 13 such breaches. In 2014, the global average cost of a data breach was $3.5 million. Today, the number stands at $3.9 million, based on an average records size of approximately 26,000. In the U.S. in 2018, the average cost of a breach was $7.9 million, and today it stands at $8.2 million. According to a 2001 CSI/FBI Survey, the aggregate loss for firms reporting data that year was close to $456 million. For mega breaches, the cost of losing 50 million records in 2018 was $350 million; this year to date it stands at $388 million. Essentially, two mega breaches today would likely equate to all of the losses that were sustained in 2001. In 2014, cybercrime cost the world economy at least $400 billion, and today the figure stands at $600 billion. Calculating the cost of any breach with exactitude is difficult, but the above figures are reasonable cost approximations. Certainly, it is clear from the information available that the cost of a data breach is significant. More concerning is that there is no foreseeable future in which the cost of a breach decreases. The future is also bleak where the amount of unwanted system intrusions is concerned. After all, as the cost of doing business in countries like China and India increases, those increases will have a direct upward correlation with the cost of data breaches. Furthermore, the number of people on this planet continues to rise, as does the number of devices connected to the Internet. The passage of privacy laws, like the General Data Protection Rule (GDPR) in the E.U. bloc, will also force the cost of data breaches upward. The numbers are rising in multiple ways, and they are not in favor of cyber liability and technology E&O insurers or their clients. Despite the staggering numbers, cyber breaches are treated with an uncommon tolerance. If San Francisco, New York City, London, Dubai, Singapore and Hong Kong all lost power for seven straight days each year, then the energy providers to those areas would be lambasted and perhaps face new, more reliable competition. However, despite all the damage that hackers are causing, not enough resources are being put into place to prevent the next cyber breach. The mega cyber breach of Capital One in 2019 would seem to validate this conclusion. We have also learned that the rule of law is far less bothered by data breaches than other types of incidents. After the sinking of the Titanic in 1912, governments and shipbuilders enacted major changes to try to ensure that such a disaster would never happen again. After the 1956 sinking of the SS Andrea Doria, training was mandated on the use of radar and a change to radar screens was required. Shipping accidents are now rare. Governments forced changes in the design and operation of nuclear reactors after disasters at Three Mile Island (1979) and Chernobyl (1986), and worldwide energy companies got the message. In contrast, each year since 2005 has included at least one major to moderate data breach somewhere. Some years, like 2013 and 2014, saw at least three major data breaches. Often the worst penalty the exposed organization faced was not levied by any governmental agency but by a private organization like American Express or Visa. (The E.U. has the strongest and most exacting data privacy legislation. The state of California also has admirable privacy laws. Elsewhere, strong data privacy laws are the exception.) Perhaps one of the most shocking aspects of the first part of the 21st century is the lack of accountability in the private sphere for CEOs, boards of directors and other senior individuals. If an entry-level employee were to take a photograph of a client’s banking records, even by accident, that would be more than enough for dismissal. The employee could even face civil and criminal penalties. In contrast, in the aftermath of the June 2017 NotPetya attack on the international shipper A.P. Moller Maersk, its CEO was not dismissed nor was he criminally charged even though the attack on Maersk cost the organization no less than $300 million. The CEOs of Marriott International and Target also retained their positions despite the data breaches those organizations suffered in 2013 and 2018, respectively. When a director or officer can neglect the legal duty of care owed to an organization, then the profitability and even the continued existence of the organization is at risk. Such failed diligence constitutes gross negligence! There is an interesting communication pattern with regard to data breaches as evidenced by Target (2013), Equifax (2017) and Capital One (2019). In this routine, a statement is released by the CEO. The CEO says how she or he understands that the company’s clients may feel frustrated or worried that their data is now in the public domain. Then the CEO expresses a bit of remorse for the breach. Finally, the CEO says that dutiful action will be taken to get to the bottom of things. Next comes the public outcry over how an organization, especially a large one, could be so irresponsible as to not screen its sub-contractors and segment its network (Target), or how an organization could be lax in its security standards, especially as they concern software patches (Equifax). Usually, the numbers of afflicted customers creeps up over the next few weeks, as was the case with DSW Shoes (2005), LexisNexis (2014). Or, as in the case of Maersk, the severity of the damage done becomes fully apparent over the course of days and weeks. By the time the last of the initial steps occurs, which is the providing of identity theft protection, clients are so numb with pain that the “freebie” of identity theft protection provides next to no solace for the clients. Still, to this day in the U.S. and many other countries, there is nothing on a national or multinational scale that compares with the E.U’s GDPR to help prevent data breaches and make it clear to organizations what the penalties are for inappropriate security standards. Another setback is the continued lack of recognition of how the data breach landscape changes with different attacks, or a severely delayed response to that change. To this day, many people are unable to appreciate how much side-channel attacks at the CPU level have altered the landscape, especially because more side-channel attack possibilities are being realized. When Stuxnet was made public in 2010, it forever changed the cyber breach landscape because it meant that every organization in the world could not only suffer damage in the cyber realm but that computer and networking systems could physically be damaged by a worm or virus, as well. WannaCry and NotPetya (the enhanced Russian strain) have NOT struck so much fear worldwide that organizations of every size are now only using variants of Windows 10, MacOS 10.15 or Fedora version 30. To this day, there are multi- national corporations that have not upgraded to Windows 10, even in the financial services sector. This is not even counting the damage of election interference in the U.S. in 2016 and the political fallout that is still afflicting the U.S. Also uncounted are the ways social media can be corrupted to negatively influence people. It certainly is possible to continue to list advances in breach technology that have altered the cyber landscape, but suffice it to say the ways in which a breach can occur and the sophistication with which it can happen since 2001 have significantly eroded the security of most people on this planet. Today, for a majority of people around the world, our health, financial, and even electronic identities are all compromised to varying degrees, and our privacy or collective societal independence has further been eroded by companies like Cambridge Analytica. There are two areas of further concern in the professional sphere, and these segments have grown less secure since 2001: medical data and servers that form the data backbone of organizations. Each year, more and more medical data has been put online, whether by primary care physicians, pharmaceutical companies, insurance companies or other private sector organizations. The vast amount of medical data that has been put online, though, has been done with a focus on ease of access without a similar regard for security, as evidenced in the consistent rise of medical identity theft since at least 2010. Sometimes, the information comes from a large-scale hack, like that of Anthem (2015), and sometimes it comes from a smaller one such as that made on Sutter Medical Center (2011). On the server side, the hack of Capital One is a reminder that cloud-based data is not beyond the reach of unauthorized users. Furthermore, Spectre and other side-channel attacks on CPUs continue to chip away at the safety of the cloud, as does the illicit alteration to products from a company like Supermicro. We are clearly not safer, overall, today than we were in January 2001, despite the rise of cybersecurity firms and cybersecurity technology. lt would be misguided to say that nothing has been done to advance our cybersecurity in the first 20 years of this century. Perhaps our biggest advantage in this century was the creation and success of cybersecurity firms, especially ones that publicly call out bad actors. Today such firms can offer a sorely needed layer of protection in the fight to defeat a cyber breach, and this layer can often be updated each day to account for the knowledge the cybersecurity firm gained in fending off attacks from its various clients. Advances in quantum encryption are also allowing nearly impenetrable discrete communication even over long distances. Internet browsers, like Chrome, are forcing organizations to have valid and up- to-date security certificates. Otherwise an organization risks being labeled as dangerous to online users. Private sector competition between internet browser makers is helping to advance the creative effectiveness, from a security standpoint, with which internet browsers are created. Similar competition in the cloud segment is also helping to ensure safety. When the Capital One breach was announced, Amazon was quick to point out that there was no indication that its AWS cloud had been breached, as well. We also have two-factor authentication for securing our e-mail and even our mobile devices. Card issuers, at least in the U.S., have finally moved almost entirely to cards with chips built into them. Now card users have a more secure method of making a payment than with the magnetic strip on the back of the card. On a much larger scale, Apple Pay, Samsung Pay and contactless technology built into credit and debit cards have been introduced over the past 10 years. They have made POS purchases much safer and easier today compared with 2001. 2016 saw the first mature version of the payment card industry data security standard (PCI DSS) framework, which helped to encourage merchants to install firewalls, segment networks and only retain credit/debit card information when necessary. Furthermore, financial firms often provide the option for a client to be notified in the event of unusual activity on a card or when a large purchase is made with a credit or debit card. Ultimately, despite all of the cybersecurity advances, the cost and number of cyber breaches has gone up consistently since 2001. Moreover, the ease with which societies and the rule of law accept such breaches remains high. Even today, CEOs are rarely held responsible, legally or otherwise. Furthermore, people and organizations of all sorts fail to understand how the cyber landscape changes on a continuous basis, and that failure reduces the responsiveness to the altered terrain, which consequently increases the chances of yet another cyber breach. Globally, almost all of us bear scars in one form or another due to the damage that our lives have suffered over the course of the past 19 years. Time and again, governments have failed to protect their citizens, and organizations often grasp for cybersecurity without the knowledge of what true cybersecurity is. However, even from this grim landscape we can find hope, direction, and ultimately a reliable path forward, such hope lying with cyber liability and technology E&O insurers.