The term post-digital was coined by a tech journalist named Russell Davies in 2009 to describe a new paradigm he saw on the horizon. His use of the term in no way suggested that digital was to become obsolete or a thing of the past, rather that digital was becoming so commonplace, so deeply entrenched in how we operate in the world as humans, that to even differentiate something as such would soon be futile. To be post-digital, he explained, would have nothing to do with not being digital, but the opposite; to be post-digital would mean to be totally, completely and fundamentally digital. Digital to the core. In the words of architectural designer, professor and writer Adam Fure, the post-digital “is deeply digital.” Fast-forward 10 years, and whether or not we have arrived in the post-digital age Davies described is still up for debate. What is undeniable is that in the 10 years since Davies coined the term we have only become more deeply entrenched in all that is digital, so much so that it now seems easier to point out industries that have not gone digital than those that have. For the most part, the industries that are still lagging behind (think healthcare, insurance, financial services) have all had digital transformation agendas in play for years, yet many are still struggling to digitize even the most basic functions of their businesses and tend to confuse the use of technology that has been around for years (i.e., chatbots) with innovation, all the while being left in the dust by industries that either grew up digital or went digital years ago. These later industries don’t have digital transformation agendas; they are already digital. Instead they are focused on true innovation. While acknowledging that digital technology will inevitably play a role in the future, companies doing true innovation aren’t focused on technology as an end in and of itself, but are instead embracing and experimenting with different ways of thinking, learning and working that breed creativity, out-of-the box thinking, and ultimately new transformational ideas. Whether you are just getting started with innovation or are further along on your journey, there are a few key things we encourage our clients to keep in mind when partnering with an agency: Stop buying deliverables. Invest in mindsets. “…we must not be seduced by the artifacts of this process” - Dwight D. Eisenhower Clients often come to agencies frustrated by experiences they have had with other agencies; they are tired of paying high dollar and getting "nothing" actionable. All the while they are up to their old tricks, requiring pages and pages of documentation and slide after slide of deliverables that show the work happened. From my experience, slide decks and documentation are never evidence that innovation or transformation has taken place and are seldom a playbook for how to achieve it. Evidence of innovation and transformation can be best measured by looking at you (and your team) and how mindsets have shifted over the course of the engagement. If the engagement has been successful, people think, work and operate differently. In short, you are the deliverable. Everything else is just office decoration. See also: 3 Steps to Succeed at Open Innovation   My advice. Stop asking your agency partners simply what you are going to get or what they are going to help you build. If this is what you expect out of a successful engagement, you are looking for and buying the wrong thing. That website redesign isn’t going to change much of anything, at least not anything sustainable or real if you haven’t actually learned anything. Your mindset hasn’t changed. Instead of expecting your agency partner to leave you with cool new product ideas, expect the partner to teach you how to think like they do. Any skilled agency can create deliverable after deliverable, but if you are exactly the same person you were before the project, you still won't be able to do anything with the deliverables. Your mental models will still be the same. You will be the same. Your team will be the same. Left alone, things will devolve into what you already know, and what your team knows. Going through a design-thinking process is about living in the messy, no clear lines/phases between things. If you haven’t come to terms with that ambiguity, you haven’t really experienced what it feels like to work in this very different way -- let alone explain it to others, no matter how clear that project plan is. It’s not just different outputs, or a different process. It’s actually a different way of thinking. You should be buying mindsets and outcomes, not things. Think of it as Marie Kondo for your brain. For this to happen, you’ll need to let go of control, of rigid lines, of business as usual. For innovation to work at scale, you have to stop evaluating the in-between against a rigid framework (i.e., the three-year plan, the requirements document) and start measuring outcomes. Your success or failure is dependent on that truly incongruous detail. Can you imagine if Starbucks had a three-year plan that they refused to move away from? Instead, they are constantly responding to and evolving the customer experience. They experiment, they test, and what works gets rolled out and what doesn’t gets designed out. They don’t just innovate at the product level, they innovate at all levels of the business from manufacturing down to the drink straw. That’s why they were named the most innovative company by Fast Company in 2018. Innovative companies have innovative cultures, not just innovative people. While transforming mindsets should be the goal of an agency partnership, changing one person or even three isn’t enough. Innovation is about investing in new mindsets to change how the whole organization thinks. Much like Starbucks’ end-to-end approach or Microsoft’s famous shift from a know-it-all culture to a learn-it-all culture; the responsibility of innovation is on everyone at every level of the business. Toyota is famous for making every single person on the workforce focus on continued improvement. That’s what it takes. Success in innovation is about respecting and empowering everyone, the model for a true learning organization. No matter how "innovative" you or your immediate team is, the larger business you reside within is probably still operating very traditionally (unless you are one of the lucky few). The same poorly structured incentives, the same operational structures, the same LOBs, the same territorial blindness and the same power politics – all of which are the death knell to innovation. Innovation today requires much more than a surface remodel, it requires a new business model. It also starts at the top-down. That grassroots stuff, it's cute, but it rarely works and requires an incubation period way longer than most businesses have the patience for. You can't just snatch all the innovative thinkers and plop them onto a new "innovation lab" and assume the barriers are gone. All you've done is just create a siloed vacuum of a bunch of smart people who "get it." The problem is that a large percentage of them have only an academic understanding of what an innovation process actually “feels” like. They have to be set up for success at the highest levels of the business. In the end, those corporate innovation labs almost always end up hiring an agency to “fix things” or to get “results faster.” Worse is when they want to learn new ways of working, but don’t make time for it and aren’t around for the actual learning part. Innovation is more than a process. It’s an experience. “To achieve breakthrough results, you can't just change what you do.
 You first must change how you think… New thinking leads to new doing.” - Mark Bonchek True innovation goes beyond practices and processes. If you haven’t experienced it, it’s hard to explain it. There’s a deep understanding that comes from real, in-the-trenches problem-solving. Innovation is all about learning a new way of thinking and working. It’s about developing a nimble mindset that allows you to move through an ambiguous problem-solving exercise, constantly revisiting your original thesis, to solve wicked problems. This kind of thinking requires an honesty and a flexibility that is contradictory to most command/control structures. All that success of those Silicon Valley people isn’t because they are “Agile.” It's because they solve problems differently; as a collective, that’s a powerful thing. You have to want to “think differently,” not just want to be successful. And you can’t learn to think differently, unless you actually experience what it’s like. See also: Era of Insurance Innovation Is Upon Us   And this experience is something everyone in an organization needs to get a taste of. Here at Cake & Arrow, we run workshops with our clients where the whole output is shifting how a department thinks, giving them hands-on experience with the methods to help them sustain that shift. To do so, we aren’t just working with the “creatives” or the “innovative thinkers” within that department. We are working across the organization, with people from marketing, from operations, from IT, etc. In doing so, we help them move from a service mindset (cog-thinkers are quickly being replaced in today’s world of automation), to one where they form strategic relationships with their partners across the business. These new patterns of interaction are what businesses need to solve complex problems today. With the proper support, fundamental change like this can cascade throughout an organization, providing longer-term, sustainable transformation. Every now and again, in partnership with amazing Agency X, companies manage to bring that consumer optimized digital experience to market. While that’s all fine and good, it’s just the beginning. Without the right minds on hand to actually continue to evolve and sustain that product long-term, they will eventually end back right where they began. They relapse, and two years later, they go right back to the agency to redesign and relaunch the experience. This is because they bought a thing (a website, an app, a sparkly powerpoint) and not a mindset. Innovation is about a new way of working; it’s a different way of problem-solving that requires continuous nurturing to expand and grow. When it comes time for your next project, stop buying deliverables, and instead invest in mindsets. Only then will you have the right tools to solve for what’s next and finally move beyond your digital transformation agenda, because now you have actually transformed, and digital was only part of the story. This article originally appeared here.

If actuaries are the elite of the insurance industry, members of a licensed class whose workaday language is intelligible to few but influential to many, then business advisers are the interpreters of a separate yet equally important language: data. More to the point, business advisers are an independent class—hence their advisory role—in which they do much more than translate data into reports. They use artificial intelligence (AI) to find intelligence worth analyzing. They use intelligence to advance wisdom, because it takes skill to convert ones and zeros into a message that is as concise as it is compelling; it takes a different class of advisers to actualize a future that is close but hard to see; it takes verbal facility and visual acuity to present the future—to make the future present—for the insurance industry.

AI is a tool to accelerate the future. That future depends on business advisers who can explain why what seems possible is not only probable but inevitable: that AI answers the needs of insurers. Making the answers accessible—proving the answers are right—is an issue of talent, not technology. According to Nick Chini, managing partner of Bainbridge, AI augments the models actuaries develop and business advisers deliver. Which is to say actuaries theorize scenarios—they quantify what may happen—while business advisers qualify how things will likely happen; how a business adviser infers what will happen; how the inferences a business adviser draws are the result of his fluency in data; how his education is more extensive, his expertise more expansive, his experience more exhaustive than that of a typical adviser. He is atypical, in a good way, because he represents the future of business advisory services. He may have a doctorate in linguistics or degrees in finance and computer science. He may be a former professor or a career academic. To paraphrase Chini, what matters most is a business adviser’s ability to advise: to add value by abandoning generalities—to stop generalizing, period—and offer specifics about the future direction of the insurance industry and the course insurers should follow. In this situation, AI acts like a compass. It points the way, telling a person where to go without revealing how or when that person should start his journey. See also: What to Look for in an AI Partner For an insurer to begin that journey, he must know the advice he receives is right. To advise, then, is to communicate—to communicate with clarity and conviction—so an insurer has no reason not to do the right thing, so an insurer believes in the rightness of his decision, so an insurer knows he is right. If business advisers can further what is right, to get insurers to more easily and expeditiously do the right thing before challenges arise, the insurance industry will benefit as a whole. If AI can substantiate what a business adviser recommends, if that recommendation is brief yet bold, if that business adviser can prove his recommendation is right, an insurer can succeed. Let us welcome the chance to read—and endorse—these recommendations.

I talk to a LOT of executives on a weekly basis from all parts of the insurance industry:

• Senior executives at the reinsurer level
• C-level executives at the insurer level
• C-level executives at the intermediary level
• Regulators
• Reporters/writers/bloggers
• Wholesalers
• Advisers
• Administrators
• Other insurtechs
• Literally anyone who will talk about the sexy subject of Insurance!

These conversations give me an extremely interesting perspective about not only the current state of the insurance industry, but also about where we are heading. A few themes consistently emerge during these conversations: Machine learning, AI, the role of advisers in the future and the most prevalent topic "disruption." Let me start by offering a perspective: "No one needs to be disrupted unless they choose to be." Innovation and technology at large are about inclusion and raising the bar of a particular industry. Innovation DOES NOT mean people have to LOSE for other people to WIN. There is a WIN-WIN-WIN; we just have to be motivated to find it. See also: Is Insurance Really Ripe for Disruption?   We, in this part of the world, are lucky enough to truly have equal opportunity. Technology democratizes our ability to compete. WE determine what is possible, who we choose to work with, which problems we solve, etc. To turn around as an industry and say "we are being disrupted" is a completely inaccurate way of looking at the future and exceptionally unfair to those individuals/companies who are looking to create meaningful change. Here are a few thoughts: 1) Advisers will be around in the next generation of financial advice (and the one after that). Their role will remain the same (helping people feel better about the financial decisions they make), but how they do their job will fundamentally shift. As we streamline parts of the industry that are siloed, cumbersome and antiquated, we will allow for advisers to re-invest their time into what matters: the customers they serve and their own development. Technology will allow people to UNLOCK their human potential and do what they love. 2) Technologies such as machine learning will AUGMENT, not replace, the role of amazing advisers. Many believe that as technology and automation come into the insurance space, fewer advisers will be needed. The contrarian view is that if people are able to focus on WHY they love the industry (helping people!) and we automate the functions they dislike (administration, compliance, etc.), more people will be drawn to our industry. Insurance (and all financial services) is about people, not paperwork. This may actually INCREASE the number of advisers. That is my hope. 3) You simply cannot solve a systemic problem with technology alone and expect everything else to take care of itself. Technological innovations will make today's systems better, but they will inevitably become legacy in the future. This is the nature of technology. It is a moment in time, until the next moment. What will be everlasting is the MINDSET that executives take to navigate the future. There is NO SILVER BULLET. This is about systemic change. We must THINK DIFFERENT and forget some of the preconceived notions that stifle our ability to effect change. Currently, our industry is being hampered by a "triple-legacy" problem: Legacy technology, built for legacy processes, operated by a legacy mindset. Addressing each part of the "triple-legacy" challenge is required to ensure the future success of our industry. See also: Insurtech vs. Legacy Insurance Carriers   At Finaeo, we are dedicated to solving many of the problems that are holding back our industry and are starting our journey by helping the hundreds of thousands of advisers around the world get their time back by streamlining processes and providing them with elegant, intelligent and thoughtful technology to manage their day. We are actively seeking partnerships with insurers, reinsurers and intermediaries who also believe that advisers and their customers (the policy holders) DESERVE a better experience. Want to know more about why you should join Finaeo? Check us out here. This article first appeared here.

In a late February blog post, Insurance Thought Leadership.com editor Paul Carroll urged the industry to “watch your (our) language!” and to “get our talk – our vocabulary – straight.” While he focused on examples of inaccurate word choice impairing customer perception of insurers and their products, his point is equally relevant when talking about the cyber insurance segment. Nomenclature matters for insurers and their customers alike. Two industry terms that are being used inconsistently and are often conflated in the cyber markets are “silent cyber” and “cyber as a peril.” “Silent cyber” relates to an insurance policy that does not affirmatively include or exclude coverage for losses arising out of the cyber peril. Such a contract causes uncertainty. For example, if a hacker manipulates connected devices or systems and causes property damage, will your property policy cover the losses? If a hacker or a human IT error brings down a power grid or causes a dam to flood, would a business interruption policy respond? Historically, insurers did not price for these events in their rates, as these events weren’t relevant when the policy language was written. Property policies also often don’t price for, nor address, extra-terrestrial invasions in the language; while there is a non-zero possibility of a Martian landing, we are reasonably comfortable that it is okay to be silent there. But loss events from the cyber peril that affect a variety of property and casualty policies are becoming more apparent every day. A few examples include Stuxnet, the 2015 Ukraine power outage, Saudi Aramco’s 2012 hack and NotPetya. Understandably, more insurers are reviewing their various P&C contracts to ensure contract certainty on policies with potential exposure to cyber events. Forward-thinking insurers are inventorying policies to determine where silent exposures exist and amending policy language to affirmatively exclude (using language like CL380) or affirmatively cover (and price for) losses from the cyber peril. While competitive pressures can make this exercise a real challenge, insurers that get this right will have better certainty on exposures, manage capital more efficiently and be better-equipped to innovate on products that cover the various losses that can emanate from the cyber peril. See also: Cybersecurity for the Insurance Industry   Insurance policies are contracts of adhesion drafted by the insurer, so ambiguity will often be interpreted in favor of the insured by the courts, due to the asymmetric influence the insurer has over the language. Next, consider that a property policy can have limits as high as $1 billion, while the typical affirmative cyber insurance policy limit is below $25 million. We can see why it is a benefit to the market for insurers to have certainty (by ending the silence) on large property policy limits with potentially catastrophic exposure. Brokers and risk managers need to ensure that the organizations they represent have adequate coverage (in terms of coverage scope and policy limits). Brokers are expanding physical coverage on traditional cyber policies as well as adding cyber, as a covered peril, on adjacent P&C policies. Reinsurance carriers and brokers are also making new reinsurance products. These efforts will benefit the market at large in the form of more robust policies that are underwritten and priced with a conscientious evaluation of the covered perils. Insurers are moving swiftly to offer cyber coverage. About 150 insurance companies have booked premiums for such insurance, up from about 100 last year. Only about 50 carriers offered cyber coverage four years ago. This activity all matters because cyber is a virtual and existential business risk that, for the most part, insurance products don’t adequately address yet. The industry needs to solve this problem to remain relevant by providing broad coverage and limits for the cyber peril on the variety of insurance lines it affects. Teams across insurers are collaborating to provide appropriate line-specific and cyber-specific expertise to approach the problem. And greater attention from regulatory institutions and rating agencies is likely ahead in terms of inserting stronger language in regulations to address cyber risks and holding conversations with insurers. Lloyd’s of London, which its CEO says has a 20% to 25% share of the multibillion-dollar cyber insurance market, is requiring its syndicates to report quarterly on their cyber exposures. Companies, however, have been slow in adopting cyber insurance due to its complexity and limited coverage. Calling them “cyber” policies implies coverage for a wider variety of exposures than the policy actually contemplates. Again, nomenclature matters. While the majority of companies subject to data breach regulations, like large financial institutions, healthcare, retail and hospitality companies, purchase coverage, total market penetration is only about 15% in the U.S., with small business being the lowest adopters. Outside of the obvious statement that no one is immune to a costly data breach, there are several reasons for insurers to engage with cyber insurance and promote the coverage to businesses. The significant factors include:

• The explosion in the number of devices connected to the internet, which is expected to reach 200 billion by 2020 -- from just 2 billion in 2006, International Data Corp. estimates. Each of those devices is a point of entry for a cybercrook, and every employee interaction with the internet poses a potential threat of a breach.
• Automation of business operations and processes that makes critical elements of a company’s infrastructure and systems vulnerable to cyberattacks and should be part of any risk management plan. Manipulation of this connected infrastructure could cause physical effects arising out of the cyber peril.
• Rapid development of more sophisticated cyberattacks, including ransomware, supply chain attacks and formjacking – inserting code into retailers’ websites –making it tough to respond with countering technology. Ransomware payouts alone in 2017 reached $5 billion, according to Cybersecurity Ventures.

Like insurers, companies and their brokers should be inventorying their own policies to evaluate the scope of coverage on their “cyber” policies, as well as evaluating coverage for the cyber peril on all of their P&C policies to ensure there are no surprises at the time of a claim. See also: Innovation — or Just Innovative Thinking?   As technology continues to advance, insurers need to find ways to adapt quickly and create innovative products that properly protect their customers from the exposures that are relevant today. Collaboration is needed within insurance companies and across all parties in the insurance value chain to properly protect insurers and insureds from this existential business risk.

Anchoring occurs in third-party settlement negotiations when one side throws out a number in an effort to influence—or “anchor”—the way the opposing party values a claim. Our experience shows that anchoring directly affects the settlement value of injury claims, so it’s critically important for insurance adjusters to “own the anchor” in negotiations. What Drives Anchoring? Anchors come in many varieties, but we find that medical costs are, by far, the greatest and most troublesome. It’s natural to assume that medical costs are an important factor to a settlement and a possible starting point in a negotiation. We are aware that some medical providers grossly overcharge for services and run up their bills. Most of us also know full well that medical costs are only one factor to consider and shouldn’t be the sole determinant of claim value. However, what we don’t realize is that medical bills have an undetectable and powerful impact on the ultimate settlement amount. While we believe we treat medical costs as separate and distinct from other elements in a claim, our research demonstrates that medical costs have an oversized influence on the pain and suffering portion of the claim. The Proof Chart 1 To understand how medical costs influence, or anchor, the settlement, we looked at the relationship of first demands as a multiple of submitted medical costs (e.g., a settlement demand of $10,000 with $2,000 in submitted medical bills represents a 5:1 multiple), with final settlements as a multiple of medical costs (a $6,000 settlement demand with $2,000 in medical bills has a 3:1 ratio). Chart 1 illustrates how medical costs dramatically affect the amount we are willing to settle for. It’d be hard to show any higher correlation. The higher the demand by a plaintiff attorney vis-à-vis the medical bills, the higher the settlement the attorney was able to negotiate. The plaintiff attorney very effectively “owns the anchor” by anchoring the overall value of the claim in the medical costs. See also: Surprise Medical Bills: Just a Distraction   Why Medical Bills Influence Medical bills have such an outsized impact on settlement values because they are, often, the only tangible item in discussions. Venue, pain and suffering, a claimant’s age, etc., aren’t tangible. By contrast, the dollar amounts shown in medical bills are easy to reference, and we naturally latch on to them. Even when we seek to discredit the medical bills, we’re still referencing them, granting them relevance, even authority. They stubbornly remain the anchor. The Fact-Based Fix Chart 2 Thankfully, facts are stubborn, too, and work very effectively to unseat anchors! Plaintiff attorneys rely heavily (and successfully) on medical costs that they fail to examine to understand the underlying facts of their case. To exploit a claim’s facts, the approach demands a command and use of the facts of the injury and its treatment. As Chart 2 illustrates, the same adjusters who produced the results in Chart 1 were subsequently able to “own the anchor” through negotiation grounded in facts. Our experience shows that using fact-based analyses dislodges the anchor of the submitted medical bills. In fact, the bills showed a negative correlation on the ultimate settlement accepted by the plaintiff attorneys. The dispersion of results in Chart 2 shows that the tight relationship between submitted medical bills and settlements had ceased, with the anchor effectively displaced. This yields accurate settlement values grounded in facts. When arguing from facts, the adjuster calls the plaintiff attorney’s medical bill bluff and “owns the anchor.” Set Sail It's facts or nothing. So, how do we stake our negotiations in facts? The answer rests in shifting a case from its “raw data,” like medical bill costs, to substantive arguments. And we don't mean bill review services, which focus on explanations of benefits and reductions in charges according to a fee schedule. Their use of obscure medical codes and rules, which aren't widely understood or capably explained in negotiations, means that bill reviews diminish their authority and can't help us to unseat the anchor. Substantive arguments must be backed by evidence drawn directly from claim records, such as information from treatment notes, emergency room reports and observations from the medical world about how injuries are objectively documented and what justified medical care looks like. This approach will lower your ultimate settlement costs, with the wind in your sails. See also: How to Cut Litigation Costs for Claims   For example, in a soft tissue injury case, plaintiff lawyers frequently assert that their client struggles with everyday activities. Rather than being drawn into this assertion, adjusters must undertake a thorough review of the claimant’s medical records (including treating physician, chiropractor and physical therapist notes) to determine if evidence is presented that demonstrates actual physical impairment. This includes examining observations of the claimant’s range of motion, strength and other functional deficits. If we aren’t prepared with this information, it is not difficult for a plaintiff attorney to use these assertions in conjunction with anchoring to drive the doubt in one’s mind that drives up the offers we’re willing to make. Except to the extent the lawyer’s claim of severe injury can be tied directly to evidence in the medical records, there is no basis for the adjuster’s evaluation to be influenced by the lawyer’s assertion. Where objective medical data indicates little to no impairment, claims of daily distress don’t hold water. To dislodge the anchor cast by a plaintiff’s lawyer, adjusters must have organized medical records, a methodology (including the use of medical standards) to consistently review and interrogate the evidence from those records and the ability to produce a single, coherent assessment of the claim. We have found that the most effective use of evidence lies in the assessment of each component of a claim–-the pain and suffering of each injury, the legitimacy of claimed medical costs from each healthcare provider, the support for lost time from work. This is carried into negotiation, where an adjuster methodically presents his or her analysis of the claim and uses tactics for focusing the claim on facts. Training is a necessary element in this, but the dividends are significant.

Y2Q. Years-to-quantum. We’re 10 to 15 years from the arrival of quantum computers capable of solving complex problems far beyond the capacity of classical computers to solve. PQC. Post-quantum-cryptography. Right now, the race is on to revamp classical encryption in preparation for the coming of quantum computers. Our smart homes, smart workplaces and smart transportation systems must be able to withstand the threat of quantum computers. Put another way, future-proofing encryption is crucial to avoiding chaos. Imagine waiting for a quantum computer or two to wreak havoc before companies commence a mad scramble to strengthen encryption that protects sensitive systems and data; the longer we wait, the bigger the threat gets. The tech security community gets this. One recent report estimates that the nascent market for PQC technology will climb from around $200 million today to $3.8 billion by 2028 as the quantum threat takes center stage. I had the chance to visit at RSA 2019 with Avesta Hojjati, head of research and development at DigiCert. The world’s leading provider of digital certificates is working alongside other leading companies, including Microsoft Research and ISARA, to gain endorsement from the National Institute of Standards for breakthrough PQC algorithms, including Microsoft’s “Picnic”and ISARA’s qTESLA. See also: Cybersecurity for the Insurance Industry   Hojjati outlined the challenge of perfecting an algorithm that can make classical computers resistant to quantum hacking — without requiring enterprises to rip-and-replace their classical encryption infrastructure. For a full drill down of our discussion, give a listen to the accompanying podcast. Below are excerpts edited for clarity and length. LW: What makes quantum computing so different than what we have today? Hojjati: The main difference is that a classical computer is able to digest a single value (single bit) at a time,  either a zero or a one. But quantum computers are storing information in quantum bits or “qubit.” Quantum computers are able to digest 0, 1 and superposition state of both 0 and 1 to represent information. And that’s where their performance excels. Just how fast a quantum computer can perform is based on the number of qubits.  However, whenever you’re increasing the number of qubits, you introduce the possibility of error, so what you actually need is stable qubits. Another problem is that quantum computing produces a lot of heat. So the problems of errors and heat still need to be solved. LW: How close are we to a quantum computer than can break classical encryption? Hojatti: To break a 400-bit RSA key, you would need to have a 1,000-qubit quantum computer, and the closest one that I have seen today is Google’s, which has around 70 qubits. That’s not enough to break RSA at this point. That being said, we’re in a transition period, and we shouldn’t wait around for quantum computers to be available to transition to post-quantum crypto. LW: What’s the argument for doing this now? Hojjati: It takes some forward thinking from the customer side. Do you really want to wait for quantum computers to be available to change to post-quantum crypto? For example, are you willing to distribute 10,000 IoT sensors today and then pay the cost down the line when a quantum computer is there to break the algorithm? Or are you willing to push out hybrid (digital) certificates into those devices, at the time of production, knowing they’re going to be safe 20 or 30 or 40 years from now? LW: Can you explain “hybrid” certificate? Hojjati: A hybrid solution is a digital certificate that features a classical crypto algorithm, like RSA or ECC, alongside a post-quantum crypto algorithm — both at the same time. It’s a single certificate that, by itself, carries two algorithms, one that allows you to communicate securely today; and the other algorithm will be one that the NIST currently has under review. Picnic, for instance, was submitted by Microsoft Research and is one of the post-quantum crypto algorithms under NIST review; the other is qTESLA, which was submitted by ISARA Corp. A hybrid digital certificate provides the opportunity for customers to be able to see how a post-quantum crypto algorithm can work, without changing any of their infrastructure. See also: Global Trend Map No. 12: Cybersecurity   LW: So you take one big worry off the table as numerous other complexities of digital transformation fire off? Hojjati: Absolutely. This is one of the elements of security-by-design. When you’re designing a device, are you thinking about the threats that are going to happen tomorrow? Or are you considering the threats that are going to happen 10 or 20 years from now? Solving this problem is actually doable today, without changing any current infrastructure, and you can keep costs down, while keeping the security level as high as possible.

Incentive programs can be an integral part of directing your sales team’s focus toward company goals. The concept of incentives is pretty simple: Offer rewards for desired actions, and those desired actions will be repeated more frequently. However, in application, things aren’t quite so simple. For the relationship between action and reward to be established in the first place, salespeople need to have the sense that the desired actions and rewards are a part of their immediate environment. Otherwise, they will simply lose interest over time or fail to engage from the jump. What’s an incentive program without active engagement? A cost that is unlikely to generate a ROI. Out of Sight, Out of Mind People are easily distracted. If you have ever managed a sales team in a demanding, fast-paced field like life or property insurance, you’re probably well aware of that. Your salespeople will focus on whatever issues seem the most pressing. Most incentive programs have a website where your sales team can interact with the program; some might even include an email campaign to drive user engagement. But, even then, a large portion of those emails will go unopened. Much of your sales force will go to the website once, maybe twice, to check it out. Then it’s back to business as usual. Points go unredeemed; sales metrics go unmet. You might be left wondering why you ever bothered with an incentive program in the first place. Introducing Gamification One of the most effective ways we’ve found to increase participation in an incentive program is through gamification. What is gamification? Gamification is the use of game-like elements – such as point-scoring, leaderboards and other competitive components – to increase engagement with a web-based application, such as an incentive program. A systematic review completed at the University of Australia found that users spent more time on online applications that use at least one element of gamification versus those that do not. Not only that, they visited these applications more frequently and more contributions by engaging with the available interactive features. Overall, the study found that gamification produced “significant positive effects, medium to large in magnitude” in terms of user engagement. Leaderboards, in particular, were shown to be effective, possibly because they have more tangible, real-world social value. See also: Is Research Ready for ‘Gamification’?   Incentive Programs as a Form of Gamification If you want to get really broad, ask yourself: Aren’t incentive programs, by their very nature, a form of gamification? They certainly can be, given that many are point-based. Those points can be redeemed for rewards. Rewards can be used for ‘bragging rights,’ which allows them to serve as a form of friendly competition. In certain incentive programs, the leaderboards update in real time. These fun and rewarding types of gamification can be a very powerful way to modify behavior. It’s part of why incentive programs, when used strategically, can be so integral to the growth of a business. When salespeople are invested in participating in an incentive program, they become more self-motivated. Companies should look for ways to enhance the game-like elements of their incentive programs, both during the onboarding phase and throughout the lifetime of the program. Gamification During Onboarding Consider the following setup: Each of your sales reps is given a quiz (or a series of quizzes) testing knowledge of insurance law or risk management. They are rewarded points based on their performance. This score plugs into a point-based leaderboard, where they can compare their standing against other sales reps in the organization. From there, they can see how future points are awarded according to specific metrics, and to compare the points they currently have against rewards in an online catalog. In this example, a significant amount of gamification is built into the front end to capture the attention of your salespeople and to get them invested. The stakes are clearly communicated from the get-go. There is an immediate short-term payoff in terms of points awarded, as well as the necessary structure to direct their attention toward future goals and rewards to keep them engaged. Upping the Ante Times have changed. Members of your sales team experience gamification everywhere in their day-to-day lives – on social media, on various phone apps, on their exercise equipment – so they are already familiar with these concepts. If your incentive program isn’t making use of these principles, chances are your participation, and your ROI along with it, isn’t what it could be. See also: In Age of Disruption, What Is Insurance?   Taking a little time upfront to incorporate gamification elements into your incentive program – and incorporating software to make those elements responsive and easy-to-use – can make a significant difference throughout the life of your program and, by extension, to your bottom line.

In the wake of A.M. Best’s announcement that it will include a formal innovation assessment as part of its rating procedure for insurance companies, ITL Chief Innovation Officer Guy Fraker and I attended Best’s “Review and Preview” event in Scottsdale last week. Guy’s session was super well-attended, about twice as many folks as we expected. It’s rare in this type of event for no one in the audience to be looking at their phone or whispering to their neighbor, but everyone was attentive. With good reason: As became clear in all the sessions and in private conversations, the industry is at an inflection point. 

You are either growing or dying, according to the adage. Nothing remains constant. If you are trying to maintain the status quo, you are setting simple survival as your "strategy," and mere survival is not a strategy. Given all the change that lies ahead for risk management and insurance businesses, you have to be aggressively innovating – or you are falling behind. You can’t just try to tread water while the world is changing rapidly around you..

As we noted in last week’s Six Things, A.M. Best has done the insurance world a huge favor by announcing a procedure for formally scoring insurance companies on their ability to innovate. Guy Kawasaki opened Best's event with a humorous run down of 10 insights on how to innovate (actually, 11; he threw in a bonus) and included this key: An innovative leader must bring people to the point where they “believe before they see.”

At ITL, we say you cannot do or build what you cannot imagine. But how do you imagine an unrecognizable future? That turns out to be hard for every insurance company. The successful companies will have the ability or willingness to believe in an innovation process before seeing results, because that process can keep you moving toward that future until it becomes possible to visualize it. That process doesn’t take ridiculous amounts of capital or gobs of people or a month of Sundays. We know. We’ve done it.

The call to innovate will divide insurance companies into three categories: those that drive toward growth and success; those that focus on the status quo and survival; and those that choose to sell. 

Because technology is making our world safer all the time, the frequency of claims is falling, and our bet is that the severity will also decline. Roughly 90% of companies fight over 10% of gross written premium (GWP), and, in some circles, GWP is expected to drop as much as 20% over the next 10 years. The cost of customer acquisition and retention will remain high, and there will continue to be pressure on profitability as customers demand an experience like they’ve become used to thanks to Google, Amazon, Netflix, etc.  

Many companies will want to take a wait-and-see approach, but time is not your friend. If you take a "slow follower" approach to innovation you will land by default in the hoping-for-survival category.

If you are in this survival category, either because of inaction, or a wait-and-see stance, you really are choosing to exit the game, at some point. How fast you exit will depend on a number of factors, but the time won’t be measured in decades, and you might have less control over the timing than you think. Brokers are looking to meet the needs of their customers to spur organic growth in their business, and, if a carrier has not innovated in ways that understand and meet those needs, the broker will recommend a different product from a more innovative company. Voila, you’re gone. 

The last category comprises companies that do not have the will or capital to play the innovation game. For some, perhaps many, exit might be the best choice for stakeholders. But do not tarry. The markets will look for the best balance sheets. The longer you wait to hit the eject button, the more likely you are to find there are fewer buyers and lower valuations, if there are buyers at that point at all.

If you want to be in the category of companies that pursue innovation, get a favorable assessment from Best and thrive, ITL can help you to get a handle on whether you have the essential elements in place for innovation success. We have developed a free innovation assessment, which includes about 20 questions that will produce useful insights on the state of your innovation effort. At the end of the assessment, we will provide you with our findings and suggestions so you have a clearer picture of what your innovation future looks like. Click here to learn more and get started.

Best,

Wayne Allen
CEO

Sight is the savior of the insurance industry. Where insurers were once lost, where they were once blind, they can now find their way because they can see the way to safety and success. That technology allows policyholders to see everything is the best insurance policy of all. That video cameras reveal what we cannot otherwise see, that we have the power to prevent accidents by avoiding the most egregious ones altogether, that I continue to say what I see—that I have written about this issue twice before—should inspire insurers, I hope, to acknowledge that what is essential to one industry, the construction industry, is also essential to the insurance industry. Specifically, video cameras are a necessity for crane operators and their fellow construction workers. Video cameras are a necessity for all people at or near a construction site, because were a piece of equipment to fall and kill a worker, as it did in Bradenton, Fla.; because were a similar accident to happen again—that it will happen again is almost inevitable—insurers will have to pay tens of millions of dollars in damages, unless they accept the truth by seeing it for themselves: that construction is perilous; visibility (without video cameras) problematic; safety precarious. See also: Construction Safety: Listen, Learn and Lead   Sight is not the problem. The inability to see without the help of video cameras is—and will remain—a problem, not because crane operators do not have perfect eyesight, but because no person can see what is not in his line of sight. The refusal to subsidize the purchase of video cameras, or to give policyholders incentives to buy and install these cameras, is the biggest problem facing insurers on behalf of the construction industry. According to Chris Machut of HoistCam, lack of sight is no oversight. Which is to say crane operators cannot see what they need to see—what they have a right to see—if they do not have video cameras to assist them. “Far from increasing liability, video cameras lower the risk of accidents or injuries. In so doing, insurers can save more money than they spend regarding payouts to construction companies,” Machut says. If insurers are reluctant to change, and they are, it is more a matter of operations than opposition. They run their companies like they underwrite their policies, with caution, which can cripple their ability to change, which can—and has—cost them the chance to stay ahead, which may cost them clients in many industries. See also: Let’s Open Our Eyes to Work Safety Issues   If insurers listen to construction workers, if they do more than listen, they will know where to look and what to see. They will see the images that crane operators see, courtesy of the video cameras on construction cranes, that make it less expensive and more efficient for these workers to do their jobs. If insurers embrace today’s technology—if they have even modest expectations about the present—they will nonetheless make tomorrow a vision to behold. That vision is worth the investment. That investment starts with video cameras. That vision is too great to ignore.

The three P&C venture-backed U.S. insurtech start-ups -- Lemonade, Metromile and Root -- finished 2018 with pretty good results. Quarterly growth was the slowest ever, but all three paid out in claims less than they collected in premium. All three start-up carriers have more work to do to achieve sustainable financials. A year ago, when I started with my friend Adrian a public conversation about insurtech statutory results, the picture was ugly -- loss ratios well over 100%, an aggressive focus on price and promotional messages on company blogs that dismissed traditional measures of success in insurance. Since the first post titled "5 Dispatches From Insurtech Island,” the conversation has shifted dramatically. Fast forward a year, and one founder said he “messed up an entire quarter” because premium growth turned negative, when in fact the company generated its best quarterly loss ratio ever. In the months since, several start-ups have hired top underwriting talent from their traditional competitors, showing that they increasingly recognize the value of traditional insurance skills. Skeptics point out that a quarter doesn’t mean much, that there’s a long way to go before reaching sustainability and that each additional point of loss gets harder to take out. True, but the increased focus this year on reducing losses and increasing prices is making a difference. Here are the quarterly results: I think – as already mentioned in the previous articles - these companies have strong management teams who could ultimately create valuable businesses. This will take several years, but all three companies are well-funded, even if the combination of statutory capital injections and operating losses consumes tens of millions in capital each year. (The Uber/Lyft model of growing rapidly while also incurring large losses is doubly penalized in insurance because carriers have to maintain statutory capital that increases with premium.) Here is a year-over-year comparison. The three companies have sold in the last 12 months between $40 million and $110 million, less than some of the early 2017 enthusiastic forecasts that Lemonade (for example) would hit $90 million of premiums by the end of 2017. In auto, I pointed out at my IoT Insurance Observatory plenary sessions that the pay-as-you-drive telematics approach seems to attract only the niche of customers that rarely use cars – maybe a growing niche, but not a billion-dollar business (in premium at least). See also: 9 Pitfalls to Avoid in Setting 2019 KPIs   Loss Ratios Loss ratios have all been below 100%, which is a great improvement from the 2017 performances. The quarterly dynamics show a positive trend, but these loss ratio levels are far from the U.S. market average for home insurance (Lemonade) and auto insurance (Root and Metromile). While loss ratio is a fundamental insurance number – claims divided by premiums -- I've been asked how to normalize/adjust the loss ratio of a fast-growing insurtech company. Imagine a fast-growing insurer with the following annual figures:

• Premiums written: $10 million
• Premiums earned: $6 million
• Claims paid: $2 million
• Losses incurred but unpaid: $5 million

Any of the following numbers might be called a “loss ratio”:

• Claims paid divided by premiums written: 20%
• Claims paid divided by premiums earned: 33%
• Claims paid and losses incurred divided by premiums written: 70%
• Claims paid and losses incurred divided by premiums earned: 117%

The least attractive is the right one. Claims paid and losses incurred divided by premiums earned is the loss ratio, for a fast-growing start-up as for a large incumbent. The others are only “exotic loss ratios.” I’ve heard people say that accounting rules cause the loss ratio to be overstated based on the following unlucky scenario: There is a book of business done by a one-year homeowner’s policy sold for $730. This policy will earn $2 of premium each day. If a $100 claim (net of the deductible) is received on that first day, the loss ratio is 5,000%. That’s how it works, but is it overstated? Well, as long as premium is being earned, more claims could arrive and the loss ratio could go even higher still. Obviously, you expect the following 364 days to be less unlucky for this portfolio. But I don’t think there is any need to adjust that loss ratio…only to know that is not (statistically) relevant. The analyzed start-ups have portfolios of more than 100,000 policies, so the bad luck can’t be accountable for eventual unfavorable loss ratios. It could be that some approaches are specially targeted for fraud, and it only takes a few fraudsters to cause big problems in the loss ratio on a small book, as the above illustration shows. Some start-ups have advertised how quickly they pay claims, sometimes not even having a human review them, which invites unsavory people to pay a small amount to start a policy then “lose” a valuable item. Early on, when less premium has been earned, this fraud has a particularly great impact on the loss ratio. Over time, in a bigger and more balanced book, fraud gets tempered by the law of large numbers. Additionally, some start-ups have offered large new-business discounts. If they can retain customers, reducing the premium leakage, their second-year loss ratios should be more reasonable, but the overall loss ratio will be elevated for however long they are acquiring customers with aggressive discounts. Expense Ratios I would love to discuss also the other lines of the income statements, but unfortunately they are not meaningful or comparable any more, because companies now move expenses among their entities not represented in the yellow books. The cost amounts represented in the yellow books are only a part of the real costs necessary to run the insurance business. The statutory information I’m commenting on is reported only for insurance companies, not agencies, brokers or service companies. The term “insurance company” or “insurer” has a very specific meaning: “the person who undertakes to indemnify another by insurance.” Within an insurance holding company, it is typical to have an insurer and an affiliated agency, and sometimes other affiliates such as claims administrator. The insurer pays the agency to produce policies. This may feel like moving money from one pocket to another, but there would be reasons for it -- which I won’t get into now. The point for commentators and investors is to beware of this: If an insurer (for whom the public receives financial data) pays an affiliate 25% of its premiums to provide certain services, then the insurer’s expenses (which are reported in the yellow book) are set at (or close to) 25% of their premiums, regardless of what they actually are. Major investors are typically privy to large amounts of information and can disentangle the back-and-forth between the insurer, agency and holding company. For smaller investors, or those who simply pick up a statutory filing, it is easy to be misled. At the beginning of 2018, Lemonade was no longer consolidating its parent and affiliate expenses into Lemonade Insurance Co., its statutory entity. Lemonade’s CEO commented that this change was at the request of its home state regulator. Root followed suit in October 2018, so the 4Q18 expense ratio is moved to 28% from the 70% in the 3Q18. So the “new” expense ratios (and therefore combined ratios) are artificial and not comparable with the previous ones or with competitors'. While regulators may have reasons for their actions, it is better for students of insurance innovation to know the full, real financials, so as to determine if the start-ups are ever able to “walk the talk” of better expense efficiency from “being built on a digital substrate.” Unfortunately, bloggers are not the main audience of statutory filings. Nonetheless, innovation cheerleaders, investors and journalists …please pay attention to these accounting differences before commenting the performances. Since the beginning of the quarterly discussion of U.S.-based insurtech carriers’ financials based on their public filings, many have responded that these players needed to be evaluated on other metrics, too. I agree, so let’s look at one of those measures and talk about some questions to determine whether the measure really stacks up. Misleading vanity metrics The insurance value chain is complex and difficult to compare across models. This can lead to comparisons between very different companies. Take these two hypothetical companies:

• Company A — flashy Start-up Insurance Co. uses outsourced call centers, bots, incessant Instagram ads, comparison rater websites, third-party claims administrators and a slick app. It sells one line of insurance, only personal, with low limits, and has no complicated old claims (yet). If your house burns down, you open an app and wait. The company has a low expense ratio, high acquisition costs and a high loss ratio.
• Company B — old Traditional Insurance Co. uses a mix of direct sales, captive agents and independent agents. Claims are handled mostly by agents and in-house staff. If your house burns down, your agent turns up with a reservation for a nearby hotel, billed directly to the insurer. The company sells 12 lines of insurance, including small commercial, and a wide range of products within each line, with bundling encouraged. The company has a high expense ratio, high acquisition costs, strong customer loyalty and losses less than the industry average.

A “vanity measure” could easily make one of these companies look better than the other. The start-up, for example, may claim performance several times better than the incumbent on a “policy per human” KPI, considering in the count of “humans” agents and brokers. Why does a policy-per-human number matter at all? And why is more policies per human better than fewer? See also: Insurtech: Mo’ Premiums, Mo’ Losses   Company A and Company B are two different business models, with two opposite approaches about humans -- neither of which is necessarily better. Steve Anderson and I wrote a heartfelt defense of the model based on agents, brokers and other distribution partners a few months ago. To measure efficiency, I prefer to use the two traditional components of the expense ratio:

• General operating expense ratio = general operating expenses ÷ earned premiums
• Acquisition ratio = total acquisition expenses divided by the earned premiums (for high growth companies, it’s acceptable to do the division by written premium). This metric includes advertising, other marketing expenses, commissions and other distribution expenses. However, this number (like CAC) can be difficult to compare - for example, are fixed marketing expenses included or excluded? And the economics of customer loyalty are different between direct (where initial CAC is high but renewal is low) and agent sales (where initial CAC is lower and variable but renewal commissions are significant).

***** I love numbers and – as shared in an interview with Carrier Management - the absence of quantitative elements in self-promoting website articles, conference keynotes, whitepapers and social media exchanges have been one of the reasons for starting the publication of articles about the full stack U.S. insurtech start-ups. Although I’m sometimes described as “critic” or “cynic” about insurtech companies, I’m only critical of the misuse of numbers and am a big fan of those who get the old school insurance KPI right. I’d love to see innovation succeed in the insurance sector, and I wish all the best to these three players and their investors.