Insurers have for decades nurtured brands that reflect stability and caring: Prudential's rock, the Travelers umbrella. More recently, insurers have spent billions of dollars developing hip brands: Geico's gecko, Allstate's Mayhem, Farmers' "we've seen a thing or two." But we're now in an age where brands can take a hit overnight, at the hands of an angry mob, so it's important to think ahead about where the dangers may lie. Otherwise, your reputation may find itself caught up in Mayhem.

To see how quickly a reputation can change, look at the Equinox and SoulCycle fitness companies. They were growing fast, with progressive, healthful reputations. Then it was announced that Stephen Ross, who owns Equinox and has a significant stake in SoulCycle, was holding a fund raiser for the Trump 2020 campaign. Protests erupted all over, and many canceled memberships. It remains to be seen how deep the damage is, but damage has clearly been done. 

In a fascinating podcast with our Wayne Allen, Ryan Cassin, a digital and political strategist who is the CEO of Asset, cited a 2018 study that found that 64% of customers buy on belief, which he described as a company's values and politics. He said that figure was up 13 percentage points in just one year.  

So, he argues, it's crucial to make sure your beliefs as a company line up with those of your customers.  

That's not always easy. The Business Roundtable's recent statement encouraging companies to focus on all stakeholders, and not just on generating short-term profits, sounds great in theory, but how does a CEO tell a major investor with a seat on the board that the management team isn't interested in maximizing profit? How much should a CEO take on politically contentious issues, such as climate change or gun control? Some customers will feel one way, others the opposite—and, especially these days, many will be passionate about their beliefs. 

Sometimes, the tradeoffs can be explicit. Chick-fil-A wins many fans because of the religious beliefs of the owners of the fast-food chain but those same beliefs alienate many others. Nike took a huge hit to its market value when it launched an ad campaign supporting football quarterback Colin Kaepernick but actually saw sales surge because its target audience was more likely than not to support his kneeling during the national anthem of NFL games to protest racism. The companies can sort through those sorts of tradeoffs.

Sometimes, though, problems can sneak up on companies. Wayfair found employees and customers suddenly up in arms when it became public that the company sold furniture for use in detention centers for migrants along the U.S.-Mexico border. Google faced an uprising among many employees over some work it was doing to use artificial intelligence to interpret video for the Department of Defense. Both companies could defend themselves. Migrants deserve good furniture, right? And the U.S. needs the best defensive capabilities possible. But some actions create problems even if reasonable rationales exist.

To me, the best way for our industry to head off reputational hits is to stay focused on our True North. We're about removing risks from people's lives and making them feel more secure. That's a pretty great mission. 

Nobody gets a pass in a day and age when an angry mob can appear on your doorstep in a nanosecond, so we have to defend our reputations every day, but if we keep the main thing the main thing I think we'll be okay. 

Cheers,

Paul Carroll
Editor-in-Chief

Recent corrective pricing aimed at combating deteriorating loss costs across the commercial auto insurance industry has put increasing pressure on fleet managers and employees insured. Driving the point, commercial auto insurance renewal rates increased 4.5% in Q1 2019, inching toward the 6% to 12% increase predicted in 2018.

Luckily, the use of telematics – specifically vision-based AI solutions – has presented an opportunity for business fleets to identify unsafe driving, analyze the conditions in which they occurred and implement measures to reduce it, thereby lowering premiums and increasing safety measures. Currently, the automotive usage-based insurance market, which gives insurance companies the ability to quote coverage costs specific to driver behavior, has 65.1 million policyholders and is expected to grow in coming years. UBI separates itself from traditional formulaic premium quoting and serves as a voluntary policy in which drivers may pay less if they provide the insurer with access to all driving behavior up front. The tighter, streamlined insurance supply chain formed through the adoption of telematics and usage-based models ultimately benefits both the insurer and the insured.

Here are four ways telematics is evolving commercial auto insurance:

1. Improving overall safety Safety is the top line item in both insurers' and insureds’ objectives. By collecting data on driver speed, harsh braking, rapid acceleration, driver drowsiness, etc., vision-based AI solutions allow employers to record incidents, intervene in unsafe driver conditions and train employees to practice safer habits.

By agreeing to submit behavior, actions and conditions to the insurer, drivers are generally more conscious of their surroundings and position – increasing awareness and promoting a culture of safety. While in-cab cameras and vision-based technologies may not be able to prevent an accident in real time, they do ensure measures are taken to prevent future incidents. Captured video gives employers a passenger-seat view of employee driving behaviors and enables them to correct bad driving habits and instill better ones. From the employee, to the employer, to the insurer, having access to driver behavior data creates a safety ecosystem where all parties can manage and build on driver improvement.

See also: A Vision for 2028, Powered by Telematics  

2. Providing hard metrics Unsafe drivers can put employers at risk for a 10% to 15% increase in insurance rates. Ultimately, the goal is to hire only safe drivers. However, mistakes do happen, which is why fleet managers turn to telematics software to help improve existing driver performance. Not only does real-time telematics enhance driver safety, but it also gives weight to the claim that a company’s drivers are safe, making premium cuts and discounts from commercial auto insurers more likely.

Companies using telematics to monitor driver behavior receive a 5% to 15% insurance discount on average. The concrete evidence provided when harnessing this data gives fleet managers peace of mind that each driver is maintaining a safe speed and obeying state driving laws. In the event of an accident, the data provided can help determine liability in a claims settlement, potentially protecting businesses from false claims and subsequent rate increases.

3. Adding a next-generation visual component Telematics technology has been around for decades – not solely for automotive purposes, either. As it became more commonplace in fleet monitoring, traditional uses involved the collection and distribution of data to support claims and flag dangerous behavior. Now, the convergence of telematics data with video and AI, vision-based technology is giving fleet managers and insurers more in-depth, real-time insight for decision making.

The industry is starting to see the virtual and real world blend together with vision-based solutions that provide context about what is going on inside a vehicle at the time of an alert. Telematics technology previously existed to inform companies when a driver was being erratic or braking too hard, and before now little to no context was provided as to the condition surrounding the event. New vision-based video solutions are incorporating artificial intelligence and machine learning, which in some cases leads to drivers being rewarded for defensive driving when they would have previously been penalized for seemingly dangerous behavior.

4. Developing a mutually beneficial partnership The annual accident rate for commercial fleets is around 20%, and each accident can cost an average of $70,000. Not only is this detrimental to the driver and the company employing the driver, but it also makes insuring a great risk.

See also: Advanced Telematics and AI  

The information provided through today’s telematics technology solutions allows insurers to assess potential customers and associated risk, and fleet managers to lower insurance premiums. As next-gen telematics technology continues to evolve, fleet software companies are starting to partner directly with insurance providers to give discounts to businesses that adopt telematics software to track safety and monitor assets. If drivers are continuously being recorded and reported, auto insurers are more likely to be comfortable with providing affordable coverage, knowing they can easily spot potential liabilities.

The rise in premiums and increasing renewal rates designed to combat auto insurance market instability can only be deterred through the use of telematics technology that monitors, reports and supplies driver data directly to the insurer. Engaged companies are using this solution to drive growth, reduce risk and distance themselves from the competition. This insight, on average, encourages insurance discounts that not only benefit the company but encourage drivers and their fleet managers to improve safety practices, ultimately benefiting the insurer, as well.

To some, it is magic. To insurance, it is reality. The ability to accurately discern the past and predict the future based on nothing but data points and the long-lived experience of actuaries and adjusters has served the industry well, allowing insurance to become a multibillion-dollar industry.

The picture has changed dramatically in recent years, however, driven by the advent of the Internet of Things (IoT): technologies that collect, record and transmit live and granular data about their surroundings. The technologies may already seem ubiquitous, but estimates of how many IoT devices will connect our cars, homes, communities, medical services and work lives by the year 2020 range from 30 billion to 50 billion. Whatever the precise number, the IoT will generate a huge amount of data to be analyzed and monetized.

Already, writing policies can now be far better informed by what is known about the risk level of an individual or entity, as opposed to simply what is known about the claims generated by an entire class of risk. John Hancock, for example, announced in 2018 that all new life insurance policies must use digital fitness trackers to monitor policyholders. Using the high-quality, objective data derived from IoT, it is now possible to assess claims more accurately and efficiently, and in some cases, even prevent them from arising entirely.

“IoT is already enabling customers to avoid bad things happening to them," said Nick Ayrdon, head of strategy and development at Aviva. "Some people call it prevention. I see it as empowerment of customers.” Insurers are changing how they interact with customers, both before and after a claim. One executive predicted that that we are in fact “shifting from a claims-handling business to a claims-prevention one.”

As the value proposition of exchanging data for value becomes more concrete, it could drive uptake of connected insurance products. And yet, already operating in an environment of squeezed profits, high regulation and low consumer trust, the industry is witnessing something of a perfect storm. The tools for insurance carriers to stay relevant and appeal to today’s consumer do exist, but uncertainty over how best to implement such profound strategic transformation is holding many back.

See also: 3 Technologies That Transform Insurance  

To provide a comprehensive overview of the progress and prospects of connected insurance, Insurance Nexus has produced the Connected Insurance Report, an in-depth study of the progress of insurance technology globally, based partly on a survey of over 500 people working in insurance and related industries, as well as on the insights of 20 thought leaders, including Matteo Carbone (founder and director of the IoT Insurance Observatory), Cecilia Sevillano (head of smart homes solutions for Swiss Re) and Boris Collignon (vice president, strategy, innovation and strategic partnerships, Desjardins General Insurance Group). Access the Connected Insurance Report today for in-depth insights, analyses and case-studies on the technology-led transformation of insurance, including:

• How the Benefits of Technology Confer to Insurance: More data, fewer claims and lower costs. Discover how the application of technology to insurance is changing the relationship between insurers and insureds and where extra value can be created.
• The State of Play of Technology in Insurance Today: What progress has been made so far across the different lines of insurance? Which lines are most developed and where is ripe for transformation?
• The Practicalities of Embedding Technology in Insurance: From proving the business case to organizational restructuring and digital transformation, explore how carriers have succeeded in leveraging the benefits of insurance technology.
• Making Sense of the Insurance Tech Stack: Provide value to customers by maximizing the worth of all data throughout the value chain. While challenges to each entity and line of business are unique, discover and overcome the principal challenges to embedding technology as reported by the industry.
• The Long-Term Opportunities: From claims prevention to customer engagement, what will the technology-led future of insurance be like? Discover what is on the management “to-do list” to ensure readiness for the era of “insurance 2.0.”

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