By pure chance, at a completely non-insurance event, I found myself seated next to a deputy commissioner of insurance for a prominent state. This deputy commissioner, when he learned through the pleasantries of exchanging minor personal information around the table that I consulted for insurance agencies, let me know in no uncertain terms that he thought agents were mostly scumbags. It was a wonderful way to embark on a two-hour dinner with strangers. His perspective was that he saw so many cases of agents selling the wrong coverages, purposely selling inadequate coverage and leading clients to believe they had far more coverage than they had. Honestly, through all the E&O work I do, I cannot disagree. It happens every single day. I do not know that I agree agents do so from an unethical basis as much as an incompetency basis, based on my E&O audits, but the issue is real. And I understand from a department's perspective that only sees the problems and never hears about the good outcomes (how many insureds call their department of insurance to exclaim how great their agents are?) that their perspective would be highly biased. I get that. The examples are plentiful. An industry newsletter that often lists new E&O cases recently included cases for a multimillion-dollar coverage shortfall, failure to disclose a major exclusion, an agent arguably not providing realistic client expectations and an agent advising a client they didn't need more than $x liability limits. A separate recent list of E&O claims followed a natural catastrophe, and, while the data I reviewed was limited, it suggested strongly that most of the situations were caused by agents not selling the right coverages or coverage limits. Some of the situations were truly massive incompetency on the part of the agent. An example might be something like advising someone flood was not necessary when the house was on the water or that the client had coverage for a business in the home when the policy specifically excludes such coverage unless the endorsement was purchased. I am not suggesting these are the claims, but these are the types of claims. See also: Agents, Brokers Are Dead? Not So Fast!   I can understand the insurance department thinking agents are scumbags, although I truly prefer thinking these agents are just incompetent. Idiocy feels better to me than the connotations of a scumbag. Insurance departments have a role in this because, as one Michigan judge ruled not long ago, the licensing requirements for an agent are less than that of a beautician. Insurance departments could always raise the licensing standards. Insurance associations and their members are at fault, too. I have heard for decades how agents want to lower the standards of care, so they are less likely to be sued and, if sued, more likely to win. I have heard E&O attorneys and instructors pound into agents' heads to not increase their standards of care. This is truly the epitome of cutting off one's nose to spite their face. If agents want licensing standards far less stringent than someone who paints nails (I am not saying painting nails is not a difficult profession that requires considerable training to avoid injuring a client's fingers or toes) and if agents and their associations want standards of care so low the agent is basically not responsible for much of anything, then in reality who needs a licensed insurance agent? My conclusion is: Absolutely no one. Which brings me to two new legal developments. The first is legislation whereby only "natural" persons will be required to carry a license but non-natural persons, i.e., artificial intelligence computers selling insurance, will not be required to carry a license. This is real and likely to pass. Think about this just for a moment or more. The computer will have no standard of care because it won’t be licensed, and, with no offense, though it may be offensive, an incompetent but licensed human cannot compete with an unlicensed supercomputer that actually probably is fairly competent. Another development is a recently passed law that requires insureds to "understand" their insurance. How any reasonable person could vote for a law that requires a consumer to "understand" their insurance is beyond me. That is an impossible standard, but it negates a standard of care for agents and companies. In fact, it makes agents mostly irrelevant because companies can then sell whatever to consumers, and the consumer loses the middleman agent, the good ones of which are fantastic protectors of clients from insurance companies and incompetent and scumbag agents. That law might be applauded by agents who want no responsibility for selling clients the coverages they truly need. It probably is being applauded by certain companies, especially those that like to cut corners. (As an aside, I wanted to ask the deputy commissioner about his department's efforts to prohibit some companies' filings of policies that actually provide almost no coverage, but that seemed pointless.) I hate it that insurance commissioners and others think of agents as scumbags. These perspectives make it so hard to create trust for those who do their job well and with pride. Someone else at the table asked me if all agents are scumbags, and I explained that in my interactions with thousands of agents over 30 years a large percentage of agents are absolutely the best. They take to heart their clients' coverage needs. They are extremely well-educated in the coverages clients need. They work hard to protect clients from companies, especially when a company is not interpreting coverage correctly after a claim. These are good, hard-working, ethical people who make a positive difference in people's lives. See also: Use Insurtech to Help, not Replace, Agents The high road is always the hardest road. By definition, the high road means climbing, working against gravity and working hard. The low road goes downhill. You know what rolls downhill. With the new laws being passed and promulgated, with many companies working to push aside agents, with the "scumbag" perspective many important people have of agents and the industry, with how insurtech and AI are working to replace agents in some venues, understand all these forces are aimed at eliminating incompetent agents. Incompetent agencies are paid too much, and their extinction creates a cost savings. The low road leads nowhere good. The high road is the ethical, positive legacy and financially beneficial road. If you want to learn more about the high road and if you do not already know where that road is and how to counter all the negatives, let me know. I have created a special path for those wanting to develop a high road that makes their clients' lives better and ultimately rewards them financially and in their hearts.

Medicare Set Asides (MSAs) have become a standard feature in settling workers’ compensation claims over the past 15 years. This year, MSA proposals for 26,000 workers’ compensation claims might be submitted to the federal government. We present new evidence that strongly suggests that this voluntary process of submission predictably and excessively inflates the cost of claims. For claims payers who are concerned about the burdens of set asides, this problem and its solution are top news. Workers’ compensation claims payers far over-spend on Medicare set-asides (MSAs), paying as much as double what they need to. The conventional practice of submitting a MSA report to CMS for review and approval, which is entirely voluntary, predictably inflates costs and overburdens claims payers. Claims payers simply need to change their gameplan. This year alone, for some 26,000 claims and at an average of about $93,000, claims payers will set aside funds to reimburse Medicare for any medical care Medicare delivers to injured workers to treat their work injuries. I became involved in this massive, cumbersome process of financial resolution in 2000. I participated and watched as most claims payers selected to follow a certain game plan. They’ve stuck to it. In a nutshell, here is what happens, at an annual outlay of more than $2 billion. At the time of a claims settlement, claims payers want to cap their future financial exposure to Medicare. They know that if they submit to Medicare a report for funding (“set aside”) a fixed, irrevocable amount of money for treatment under Medicare, and Medicare approves the report, they can wash their hands of the claim. This method of resolution spawned a small industry of firms that help claims payers prepare these reports and negotiate an amount. Problem solved – but at a very high cost. First, the process is extremely convoluted and time-consuming. Our company’s survey of three dozen claims payers, which we undertook in 2016, revealed a very low level of trust in the process. Due to the involvement of Medicare, it is inherently bureaucratic. Second, these irrevocable set-aside plans (“MSA reports”) tend to be extremely costly. They greatly inflate the projected treatment costs over actual treatment costs. See also: 8 Questions on Medicare Set Aside   Our company recently analyzed several hundred approved reports. We compared the forecasted spending on medical care (surgeries , medication, etc.) with actual spending on behalf of the injured worker for the first five years post approval of the MSA report. We found that in the fifth year, the pace of medication spending was 64% of the forecast and for all other medical care 55%. In other words, close to half of the funds locked up in the MSA reports were not being used! Another study confirms how medical spending declines for many claimants over time. We analyzed a huge database of eight million non-settled workers’ compensation claims, noting medical spending for as much as 11 years after injury. We focused on opioid treatment patterns, as opioids are both expensive and create patient safety risks. The data showed a rapid early decline, as we expected. But it strikingly showed that the decline in use never ceased. For instance, for every 100 claimants who were actively using opioids in the fourth year post injury, only 50% were using opioids in the seventh year and 25% were using opioids in the tenth year. Why don’t MSA reports anticipate that medical spending will go down? The reason is due to mandatory rules that Medicare imposes. If you elect voluntarily to submit an MSA report, you must follow these rules, three of which are worth noting: First, Medicare requires that medications (which compose about half of all set-aside budgets combined) be priced unrealistically high, at Redbook “average wholesale price,” or AWP. I cannot imagine a claims payer paying for drugs at that price. Pharmacy benefit managers arrange for prices that are as much as 30% lower. Second, Medicare unrealistically requires that all medications be budgeted unaltered for the projected life of the injured worker. The average life expectancy for an MSA is 24 years. There is no scientific assurance whatsoever that opioids are effective in providing long-term relief from pain, much less being safe to use for 24 years. Third, Medicare requires that any treatment the worker is receiving or has planned at the time of settlement will continue. In reality, treatment evolves as patients adapt. Rather than submit an MSA report, which locks the claims payer in to an inflated and unalterable fixed amount, the claims payer can prepare a MSA plan for the large majority of claims using realistic forecasts, fund it and enjoy a cap on its financial liability without submitting a report. CMS has always recognized a non-submitted, funded plan as sufficient to satisfy its secondary payer rights so long as certain compliance steps are taken, and in fact states that the submission process is a voluntary one. See also: Medicare Set Asides: 10 Mistakes to Avoid   There is a way to realistically predict the medical spending: refer to a huge database of actual spending. Care Bridge’s analytic-powered MSA generates a Medicare Set Aside plan in minutes, based on machine learning algorithms of more than a billion medical claim transactions. It forecasts future medical care and costs at a zip code level. The variables of a claim can be matched against a large data set of similar claims to forecast care, which offers a more objective and accurate projection compared with current methods. Our clients are able to fund Medicare protection at the most probable cost, rather than an inflated cost, and settle claims  six to eight months faster. This  offers  a defensible way to protect Medicare and manage risk at a more realistic cost. An authoritative white paper, “Medicare Set-Asides: What Is the True Cost of Future Medical Care?” is available here.

Amazon has made no secret of its intent to disrupt virtually every industry on the planet, most recently announcing a partnership with JPMorgan Chase and Berkshire Hathaway to create an independent healthcare company. Reportedly, the retail giant has also begun to explore the idea of setting up an insurance price comparison site in the U.K.

The formula is now clear. Amazon and other consumer-first digital disruptors like Google set their sights on a conventional industry with aging distribution and marketing channels, then things start to change rapidly. With an insurtech revolution already starting to brew in the home insurance marketplace, how long will it be before the likes of Amazon and Google enter the market in a serious way? And, if they do, will customers welcome them?

While industry incumbents like State Farm, Allstate and Progressive have begun to speculate on potential scenarios for this kind of digital disruption, J.D. Power’s P&C insurance industry practice went right to the source – the consumer – to ask how real home insurance customers would feel about the presence of tech companies in this space.

Following were the key findings from the J.D. Power Pulse Survey:

20% of Consumers Would Use Amazon or Google for Home Insurance The data revealed that 20% of consumers would use an Amazon or Google for their home insurance. Millennials showed even higher interest at 33% for Amazon and 23% for Google. Of those who indicated that they would be willing to switch, 80% currently have insurance with a large national carrier.

See also: What if Amazon Entered Insurance? 

75% of Consumers Interested in Home Telematics While most of the media’s attention has focused on the future of automation technology in automobiles, the disruption to your home experience – and by extension your home insurance – through smart home technologies is likely to have an equal or greater impact. Smart home technologies are revolutionizing many areas of the home, from simple comfort features that can now turn lights on and off or access in-home entertainment by control of your phone to home security and emergency support with automatic shutoffs and alerts.

The insurance industry wants in on the action. Insurers see smart home technologies as an opportunity to deepen their relationships with customers, while improving home coverage options and underwriting. While leading home insurance carriers have begun to venture into these areas, not much research has been done to understand the consumer’s demand as these features become available.

Based on the J.D. Power Pulse Survey, following are insights into the current consumer appetite for this type of technology:

• Top areas for insurtech disruption: Among consumers polled, following are the top area of their relationship with their home insurance provider that needs the greatest improvement:
  • Product Options/Coverages – 20%
  • Underwriting Sophistication – 15%
  • Claims – 14%

• Top insurtech technologies: Among consumers polled, following are the top technologies consumers are most excited about coming to the insurance industry:
  • Cybersecurity – 36%
  • Blockchain – 25%
  • Internet of Things (IoT) – 24%

• 75% of consumers are interested in home telematics. While the bulk of talk on telematics has been focused in the automotive space, home insurance customers are overwhelmingly interested in getting discounts on their homeowners insurance for proper home maintenance and security.

• 46% of consumers would be willing to allow their home insurance company access to smart home sensor technology in appliances, such as refrigerators and air conditioners to help prevent loss and malfunction (smart tech loss prevention). 56% of consumers who currently have “smart” tech in their home would allow access

See also: 5 Misunderstandings on Home Insurance  

• 34% of consumers would likely switch to a home insurance company that offered smart home technology loss and protection options:
  • 57% of millennials would likely switch
  • 40% of consumers who currently have “smart” tech in their home would be likely to switch (64% of consumers reported having some sort of smart tech in their home, such as a smart thermostat, doorbell, etc.)

Insurance policy data migration, namely the process by which insurance policies are transferred from one or more source systems to one or more target systems, can be of strategic importance to insurers undergoing core policy system transformation for a number of reasons:

1. When a legacy policy system is replaced with a net new policy platform, the new platform may deliver additional functionality, but it is the policy data migration that has the potential to deliver mature, profitable books of business to the new platform. As such, in many cases, the underlying business case for a core policy system replacement relies heavily on successful policy data migration.
2. Legacy policy system decommissioning relies on successful data migration; it is not possible to decommission a policy system until all significant books of business have been migrated off it. As a consequence, building a strong data migration capability able to quickly migrate books of business off legacy policy systems cuits the cost of running the IT estate, freeing funds and resources for other value add activities.
3. Unsuccessful data migration carries significant downside: poor data quality of migrated policies, lost-in-translation policies that are extracted from the source system but that never land in the target system and data breaches related to migrated records. It is in the interest of insurers to invest in data migration upfront to get it right the first time around.

See also: 4 Steps to Ease Data Migration   Although each policy data migration has its own characteristics, most share the following architectural components:

• Source System/s: the source system/s from which policies are being migrated.
• Source System Extract Engine: component extracting policies from the source system/s.
• Transform Engine: component transforming the policies extracted from the source system into a format that can be accepted by the target system/s.
• Target System/s: the target system/s into which policies are being migrated.
• Load Engine: component committing the output of the Transform Engine into the target system/s.
• Reconciliation Solution: component counting migrated records at key steps in the policy data migration flow, to ensure that all extracted policies ultimately land in the target system/s.

Below are some points to consider when designing insurance policy data migration, paired with some experience-based points of view. 1. Target system/s and architecture should be built so that policy data migration can be effective:

• When designing the target policy system, and all the systems around it, the impact of solution decisions on data migration should be considered. For example, a decision to introduce a net new solution to handle party-centricity may have a limited impact on new business flows, but a significant impact on data migration. If the data migration impact is disregarded, then the project may find further down the line that data migration is prohibitively complex to perform because of the party-centricity solution.

2. Policy data migration should be considered at a company level, rather than at a divisional level:

• Within insurance companies, in many cases books of business residing on source systems relate to multiple divisions. For example, source systems X, Y and Z may each have books of business from retail, commercial and specialty. When this is the case, it is important to ensure that data migration is considered at a company level, to ensure that books of business are migrated in such a way that decommissioning is feasible. Otherwise, the risk is that policy data migration programs driven by a single division may fail to capture the value derived from decommissioning source systems, as on each source system there may be books of business other than those that the specific division is migrating.

3. The pipeline of policy data migrations should be developed in parallel to the timelines for core policy system replacement:

• A common error related to policy data migration planning is to delay it until after the detailed planning for the core policy system replacement program is complete. The risk is that only too late will it become apparent that the rate at which books of policies can be migrated is insufficient to complete the data migration within the program timelines. In some cases, the rate may be so slow, for example no more than two books of business per calendar year, that it is not even possible to migrate all books from source to target before the target itself becomes legacy and is replaced.

4. Migration reconciliation should be catered for with either an automated or manual solution:

• Reconciliation with regard to policy data migration entails two elements: firstly, counting that all the records that are extracted are transformed, and that all the records that are transformed are then loaded into the target architecture, and secondly, determining what has happened to dropped records. For example, if during a data migration cycle 100.000 records should be extracted, transformed and loaded, but only 99,980 are extracted, 99,960 are transformed and 99,940 are loaded, it is the reconciliation solution that should highlight that 20 records have been dropped at each step, and that should indicate what has happened to each of the 60 records.

5. There is significant benefit in defining the goals of each policy data migration in a single sentence:

• Not everyone is familiar with data migration, so defining what data migration is looking to achieve in a concise manner provides a clear platform to engage non data migration stakeholders. Below is a template sentence using letters to highlight key data migration elements:
  • The data migration for book of business X needs to migrate Y records from source system M into target system Z at a load success percent of T at a rate of R records per second.

6. The decision on whether to migrate policies as quotes or as live policies should be made early in the solution process:

• When performing policy data migration, the options are to migrate policies into the target system/s as live policies, or as quotes that then convert into live policies a number of days before their renewal date. The advice is that unless there are strong reasons to migrate records as live policies, it is best to migrate as quotes that then convert into policies, as loading as live policies introduces complexity around the live elements of the policies, such as billing accounts.

7. Policy data migration performance implications should be considered upfront:

• Where the data migration components use transactions that are either shared with new business, or particularly complex and performance-heavy, it is important to ensure that performance implications are considered. For example, a transaction that is used 10 times per minute in new business may be used 1,000 times per minute in data migration, which may cause contention issues. Consequently, both the target architecture and the data migration solution should be designed to avoid performance bottlenecks.

See also: The Rise of Big (Bad) Data   Key takeaways:

• Policy data migration in insurance has the potential to drive significant business value in that it can deliver mature books of business to net new policy handling systems, and it may allow decommissioning of legacy systems.
• Most policy data migrations share common components, namely Source System/s, Source System/s Extract Engine, Transform Engine, Target System/s, Load Engine and Reconciliation Solution.
• Designing a policy data migration is not simple; leveraging insights from previous data migrations may be the difference between success and failure.

Amazons and Apples and Googles. Oh my… What do these companies have in common? Devout brand loyalty from the modern consumer coupled with world-leading technology. This poses a massive threat to insurance companies that value ownership of the customer above all else and are seriously lagging on tech. In a post-financial crisis world where financial brands are reflexively distrusted by modern consumers that have incredibly high digital UX standards, technology brands and emerging insurtech startups have a considerable advantage in winning future insurance business. Amazon, Apple, Google and other tech giants don’t do anything small. It would be foolish for insurers to think that these disruptors will enter the industry to play nice and simply serve as their brokers or lead generators. They have capital in spades, massive captive audiences, piles of valuable data and are perfectly comfortable navigating complicated regulatory landscapes. Insurers like to hide behind this regulatory complexity as a reason to dismiss new market entrants, but this is simply a speed bump for those who want to make insurance a point of focus – not an insurmountable barrier to entry. The Google Experience Google dipped its toe in the industry in 2015 with Google Compare and then quickly withdrew in 2016. Insurers like to point to this as the shining example of how technology companies “don’t understand insurance” or how they “underestimate the complexity of the industry.” What they forget (or simply don’t mention) is Google’s core business model – advertising. What is the sixth most expensive word on Google AdWords? Insurance ($48.41 per CLICK!). Who buys that word and drives significant revenue to Google? Insurers. Google's exit was not the result of execution failure or naivete; it was a consequence of rocking the boat with some of their highest-value advertising customers. The rest of the companies listed above, among countless other tech giants and well-funded startups, do not have that same conflict. Insurers are not immune to disruption from them. Shifting Consumer Behavior The modern consumer is a digital native and does not want to speak to people on the phone or fill out piles of paperwork. Consumers want to be offered insurance when it’s top of mind – how they want it, when they want it, from brands they trust, instantly. One of the biggest problems we see with tech-insurance partnerships is insurers’ insistence on controlling the underwriting and sales process, which creates massive friction with technology companies that offer far superior digital experiences. Consumers don’t want to leave Amazon to start a separate purchasing process on an insurer’s website, and Amazon doesn’t want them to leave its site, either. This is something that is easily solved through API-driven technology systems and programmatic underwriting – words that often give insurers heart palpitations. See also: What if Amazon Entered Insurance?   Consumers don’t want to shop around for insurance on quote comparison sites. They don’t want to engage with insurance companies more than necessary or share troves of personal data through an insurance app. They want to purchase insurance when they need it, pay for what they use and never think about it again. Insurance incumbents have responded by building their own apps, offering discounts for more shared data and doubling down on advertisement spending. Insurance in the Background Insurance is an important feature, but not always the star product. It’s sold well to the modern consumer either purely digitally or as part of a broader offering – typically at the point of purchase for a non-insurance product or service. That’s an unpleasant thought for insurers that take a tremendous amount of pride in their history, processes and brands. However, letting pride and status quo dictate your business strategy is a good way to get your business killed. Why not offer homeowners insurance in 15 seconds (not minutes) through fully digital workflow like Kin does? Why not combine cyber protection software and cyber insurance like Paladin Cyber does, so risk is reduced even further in the event of a cyber incident? Why not offer white-labeled SMB insurance to the millions of third-party retailers currently selling on Amazon? Or episodic renter’s coverage directly through Airbnb at the point of booking? Here are a few reasons why insurers aren't being more innovative:

• insurers’ technology simply can’t support seamless distribution through digital platforms
• insurers/agents/brokers insist on owning the customer
• insurers don’t want to alienate their traditional distribution network of brokers and agents
• insurers want full underwriting control through traditional, and often analog, methods
• insurers don’t want to share data with tech companies but expect tech companies to open their proprietary analytics models to insurers.

This simply will not work. The Everything Store Apple already disrupted the warranty space by owning the whole AppleCare stack for themselves. Google has the conflicts discussed earlier. Facebook has the same. As a result, I believe Amazon is the most likely tech giant to make a big splash in the insurance industry as they continue to build their “Everything Store.” We already see what they’re doing in healthcare, their investment in Acko in India, and rumors about an imminent play in banking. They recently acquired Ring, which has obvious insurance applications, for a reported $1 billion. The writing is on the wall. While I’m not entirely convinced that consumers will search Amazon.com for auto or home insurance, having millions of third-party seller merchants, adding 300,000 in the U.S. in 2017 alone, is a good starting point as far as addressable commercial insurance markets are concerned. See also: 11 Ways Amazon Could Transform Care   I am a huge admirer of what Jeff Bezos has built at Amazon, and I’m modeling Boost after what they did in the data storage and hosting space with AWS. It would be foolish for anyone to underestimate the impact a company like Amazon can have on any industry – no matter how old, established or huge the insurance incumbents’ businesses may be. Just ask Barnes & Noble, Walmart, media companies or any grocery store right now.

Ever since the early 1980s, I've been hearing about how Silicon Valley was passé, soon to be duplicated in other parts of the world and ultimately supplanted. So I've become more than a little jaded as the years have passed and the valley has not only thrived but has spread south toward San Jose and positively taken over San Francisco. The valley has even spread across the Bay Bridge and is heading east. I have a daughter trying to find an apartment in Oakland, and...yikes, it's expensive.

But Silicon Valley has planted the seeds of its own irrelevance, and it's time to start planning for what comes next. Certainly, incumbents like those in insurance need to move past the Silicon Valley model.

I'm not saying that another location—Chicago's Silicon Prairie or New York's Silicon Alley—will take its place, but the sorts of communication tools developed in the valley make it a lot easier to communicate with investors, so startups don't need to cluster around Sand Hill Road any more. The cloud, another gift from the valley (and its northern outpost, Seattle), means computing power is plentiful and cheap. Money is everywhere. The success of the valley's venture capitalists has made sure of that, and hot startups have seeded certain areas—Doubleclick multimillionaires in New York, Groupon multimillionaires in Chicago, Baidu and Alibaba multimillionaires throughout China. Expertise and the entrepreneurial spirit have spread, too. Stanford and Cal no longer have a lock.

The expense of the valley will also tend to drive people away. If you don't absolutely have to be in the valley, why not set up shop in places your people can afford: like Ohio, as Silicon Valley star Mark Kvamme did, or Washington, DC, as AOL's Steve Case did? The bar at the Rosewood Hotel in Menlo Park is quite the scene on Friday night, but you can get your Clase Azul tequila for a lot less elsewhere.

Even more important from the standpoint of insurers, the Silicon Valley model doesn't fit that well. For one thing, most of what we think of it is myths (which Vivek Wadhwa does a nice job of debunking here). For another, insurance can't be transformed just by a bunch of computer scientists, no matter how smart. Industry knowledge is required more than in perhaps any field this side of medicine—as Zenefits learned the hard way. The Silicon Valley ethos of "move fast and break things" (as memorably summarized by Facebook) doesn't work in insurance, either. Regulators won't let you break things, nor should they when we're talking about something like a person's health insurance or life insurance. Finally, the valley's alpha approach has led to rampant issues with sexism, as summarized in the recent book "Brotopia."

Why, then, is there still so much "innovation tourism" to Silicon Valley as insurers look there for answers to their innovation questions?

A different model is needed. It must draw on the audacity of Silicon Valley and its ability to take out a clean sheet of paper and reimagine almost anything. But the model must also fit within the regulatory environment of insurance, within the structure of incumbents and their insurtech partners and within insurance's peculiar constraint: that you often can't know your cost of goods until years or even decades after you sell a policy.

Helping define that model is what keeps us excited about ITL and about our Innovator's Edge platform. We hope you're excited, too.

Have a great week.

Paul Carroll
Editor-in-Chief

Recent tests by The Insurance Institute for Highway Safety on two key ADAS capabilities cast doubt on the efficacy of these technologies and thus on how soon full autonomy is likely to affect auto insurance premium. Anyone insuring automobiles is paying a lot of attention to the development of ADAS (advanced driver assistance systems) and of fully autonomous vehicles. Many of the underlying technolgies used in ADAS (e.g. cameras, radar, lidar, AI) will also be used in fully autonomous vehicles. However, the demands that a fully autonomous vehicle places on these technologies are quite different than the demands of an ADAS-equipped vehicle. ADAS-equipped vehicles will pass control to and from human drivers (or send warnings to human drivers) in various circumstances. Fully autonomous vehicles will have no hand-offs and no warnings because there are no human drivers to receive them. The Insurance Institute for Highway Safety (IIHS) recently ran a series of tests of two key ADAS capabilities: adaptive cruise control (ACC) and active lane keeping. ACC maintains a set speed and a specified distance from a car in front of the car with ACC. Active lane keeping automatically maintains the car within its current lane. See also: Autonomous Vehicles: Truly Imminent?   Vehicles with ACC and active lane keeping are at Level 2 on the SAE International scale. This is a widely recognized framework demarcating degrees of autonomy — ranging from Level 0 (no automation) to Level 5 (fully autonomous). [caption id="attachment_32988" align="alignnone" width="570"] Source: NHTSA https://www.nhtsa.gov/technology-innovation/automated-vehicles-safety[/caption] The IIHS tested five well-regarded vehicles:

• A 2017 BMW 5-series with “Driving Assistant Plus”
• A 2017 Mercedes-Benz E Class with “Drive Pilot”
• A 2018 Tesla Model 3 and a 2016 Model S with “Autopilot” (software versions 8.1 and 7.1, respectively)
• A 2018 Volvo S90 with “Pilot Assist.”

The results of these tests were reported in IIHS and HLDI publication, Status Report (Aug. 7, 2018). The results were not pretty.

• In one test on a public roadway, the Mercedes was aware of a stationary vehicle in front of it but continued without reducing speed, until the human driver applied the brakes.
• In a 180-mile test drive, the Tesla Model 3 slowed without an appropriate cause 12 times (including seven instances of tree shadows on the road).
• In testing active lane keeping on curves; the BMW, the Mercedes and the Volvo were unable to stay in their lane without the driver providing steering assistance.
• The vehicles’ active lane keeping capability was also tested when they reached the top of hills. At the top, some cars’ technologies essentially lost sight of the lane markings on the road. The BMW failed to stay in its proper lane (without driver intervention) in all 14 tests. The Volvo stayed in the lane in nine of 16 tests. The Tesla Model S swerved right and left as it attempted to locate the appropriate lane. Sometimes it also entered an adjacent lane or drove onto the shoulder.

There is evidence that ADAS technologies do reduce accidents and insured losses—here and here. See also: Autonomous Vehicles: ‘The Trolley Problem’   However, the real world test results of Level 2 technology in these five highly regarded models were certainly disappointing. Level 2 autonomy requires the driver to remain engaged and constantly monitor the environment. The key words are “remain engaged.” People, while driving, often do many things other than remaining engaged. Conclusion The shared responsibility between less-than-perfect humans and less-than-perfect technologies of Level 2 implies that either the technologies have to become intrinsically better — or they must find ways to compensate for imperfect humans. As mentioned, you cannot make a straight-line projection of elapsed time from the current state of Level 2 ADAS technology to the arrival of ready-for-prime-time Level 5 fully autonomous technology.

If the insurance industry connotes feelings of safety, if people feel safe enough to feel bored talking about insurance, if it is better for insurers to be staid than sensational, too much safety can also be a bad thing. That is, boredom is not a brand-building device. It is an effect of safety, not its cause. It is a luxury, because most people who have no insurance—including the poor—cannot afford to feel bored when all they feel is hungry or scared. What does this mean to insurers, whose principal aim is to sell policies, while their initial priority is (or should be) to increase their visibility among the very people who will buy insurance? If names and logos blur, and clarity succumbs to confusion, if insurers use the same words and wield the same pallet of primary colors, they will be too generic to be memorable and too guarded to make a sale. See also: Awareness: The Best Insurance Policy   The best way to solve this problem is for an insurer to be creative without compromising its reputation for caution. A great logo is the answer to this challenge. It is less expensive than increasing awareness through advertising or repeating catchphrases—with more advertising—only to discover a phrase neither catches the attention of consumers nor enters the vernacular of our fractured culture. I am certain about these things, not because science substantiates my feelings, but because it takes time to develop a logo that elicits feelings that scientists can record but not induce among human beings. We are too unpredictable for scientists to devise a formula that yields consistent results. Leave the science of insurance to actuaries and let artists actualize the appeal of individual insurers. According to students and professors at the Parsons School of Design, as well as graphic designers at DesignMantic, great logos are icons. They represent values and ideals. They symbolize virtues worth attaining and prove their worth in the real world. The positive feelings people have about these logos require reinforcement. Put another way, it can take years to build a brand—and the best brands know they cannot rush what they cannot control, which is time itself—but it takes only one misstep to ruin a brand’s relationship with consumers. See also: Lessons From 3 Undisrupted Brands   The logo is a lodestar. It is recognizable, outshining a constellation of competitors. If it looks the brightest, and makes people feel warm and safe, it is because of the work an insurer does and the service its agents provide. Designers give the logo its form, but an insurer is responsible for its functionality. What is missing, today, is not quality service, but a serviceable logo. Serviceable is no substitute for excellence, but I would rather have a logo that works, albeit infrequently, than one that is a disservice to the hard work insurance agents do. Now is the time for insurers to embrace success. Now is the time for them to look successful. Now is the time for them to have logos that succeed.

Summary

1. Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?
2. Gross loss ratios are generally stable or improving slightly but still unsustainable
3. Industry veterans are outperforming the newbies on loss ratio but not premium growth.
4. It will still take several years to become scale insurers
5. Reinsurers continue to subsidize losses
6. Executive compensation appears to be as expected - probably mostly in stock

Context

The networking tips from the great Spanish swordsman Inigo Montoya got us thinking about the insurtech startups climbing the Cliffs of Insanity. While the lumbering incumbents are indeed powerful giants and have a head start on the climb, they are also carrying lots of weight.

Violà, startup vs. incumbent.

The venture-backed, full-stack U.S. insurtech startups continued to gain in the second quarter through rapid premium growth and moderately lower underwriting losses. But they have yet to show the ability to win at a sword fight, battle of wits or ROUS attack or to generate a sustainable loss ratio under 100%.

This is the third installment of our review of U.S. insurtech startup financials. Here are the 2017 edition and first quarter 2018 edition, which generated many social media discussions. For more information on where our data come from and important disclaimers and limitations, see the 2017 edition.

Our scope is only property & casualty companies, so we don’t cover life, health (sorry, Mario), mortgage and title (sorry, Daniel). As before, we respect the management teams highly and admire these companies for earning the right to call themselves an “insurance company” -- more on that below.

To date, we have tracked the three independent P&C startups most commonly associated with the label "insurtech": Lemonade, Metromile and Root. This quarter we’ve looked at newly licensed Next Insurance (which wrote no premium) plus four subsidiaries of larger companies with a direct or insurtech focus.

Overall results

For the real insurance nerds, here is a summary of the 2Q18 statutory financials of three venture-backed insurance companies. Only “insurance companies” have to file statutory results, not agents and brokers (i.e., most insurtech underwriters), which are not “insurance companies.” We present the summary here and quarterly details on each of the venture-backed companies at the very bottom.

And here are the four subsidiaries of big companies that are selling direct or have a claim on being an insurtech. These companies often depend on parents for reinsurance and infrastructure, so we show mainly the gross figures.

Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?

Absolute growth was led by Root, which nearly doubled its quarterly gross premium written in three months. Our composite grew at 37% quarter over quarter, but most of the companies had their slowest or second-slowest quarter in the last six.

Is this a slight slowing trend? Maybe. Some of the carriers may be seeing seasonal effects. If the pace of growth is really showing the first signs of slowing and not just a blip, the question is whether the slower growth is despite insurers’ efforts to grow or if they are deliberately focusing on profitability. The CEOs of Root and Lemonade have hinted that they are focusing more on underwriting (here, here), so is this affecting growth rates? Here is a point/counter-point. Decide for yourself.

See also: The First Quarter in Insurtech Financials  

Point: Insurtechs are finding growth more difficult

• Early adopters of direct insurance may already have been won; consumers with a high propensity to buy online may be located in the states that carriers chose first, and future customers may be harder to win.
• It may be harder to sell the value proposition than expected, particularly if underwriting is being tightened and differentiation is narrowing (e.g. Lemonade’s giveback declined from 10% of premium in 2017 to a less-compelling 1.6% this year.)
• Retention rates may be less than expected - either because customers defect or the carrier non-renews unprofitable customers.
• Focusing on state expansion, team growth or fundraising distracts management.

Counter-point: Insurtechs could grow faster but are throttling growth to focus on profit

• It is unlikely that companies with near-zero brand recognition have penetrated even a fraction of potential customers
• Startups, their investors or their regulators may have realized that early customers were attracted to unsustainably low prices and produced high loss ratios. As they learn more about their customers, startups are being tougher on underwriting or are raising price in new state filings, meaning they turn away more potential customers through price or declining the application. Lemonade has admitted as much - see page 594 of its recent Oregon filling for this nugget:

The LCMF is a Loss Cost Modification Factor, and higher LCMFs may indicate higher pricing. In spot-checking some of Lemonade’s recent filings, we find that it is still filing a $5 minimum rate but is pricing higher than incumbents such as State Farm in certain zones, perils, etc. The company’s frequency being higher than average could be a function of (1) a bot-driven claims system inviting fraud, (2) having shlimazels for customers, (3) problems with the coverage or form or (4) the behavioral economics assumptions not working as intended.

Recall Lemonade saying: “If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today … We’ve spent recent years deepening our understanding of honesty and trust ... Lemonade aims to reverse the adversarial dynamics that plague the industry, transforming both the economics and experience of insurance.”

What do you think? 

Status of the climb up the Cliffs of Insanity (direct premium written)

Focusing on the protagonists of our previous analysis Bigger and Redder, Root’s extraordinary growth means it has opened a big gap on Lemonade and is closing the gap with Metromile. This dynamic has helped Root achieve unicorn status, with the last $100 million round of funding at the iconic $1 billion valuation. Root is not the first insurer to test a “try before you buy” (TBYB) approach based on an app, but it is the first insurer in the world to build a sizeable portfolio that way. Will Root succeed where others have abandoned their efforts or chosen different approaches such as usage-based pricing or discounts at renewal?

We commend Root for hitting the symbolic unicorn status so quickly. It appears to have a few years of runway to prove its model. By the time of an exit for the most recent investors, we believe that Root will be evaluated in greater part on the traditional KPIs that we look at in our analysis.

A few weeks ago, Bain Capital – we are Bain & Co. alumni – offered $1.55 billion to buy Esure, a P&C insurer (mainly motor) selling online in the U.K. Esure wrote £880 million (annualized) premium in the first half of 2008 (or about US$1.1 billion) -- and did so at a profit. Looking very simply at price-to-sales ratio (though we prefer ROE and price-to-book), Esure sold a bit over 1.4X, which simplistically corresponds to $700 million of premium for a valuation of $1 billion. Investors will need Root’s management to continue to grow rapidly – their 2Q18 run rate is $60 million.

Whether they can do so, and achieve profitability along the way, will be a bellwether for demonstrating if current valuations are a bubble or smart bets on a rapidly changing industry. Root’s $1 billion valuation (looking abroad, Chinese startup carrier Zhong An has a $7 billion valuation despite a 124% combined ratio in the first half) should cause companies in low-margin commodity lines like home/renters and auto that are operating as MGAs to consider becoming a carrier.

One of the strongest arguments for being an MGA, not a carrier, is that MGAs are more highly valued because they trade on a multiple of earnings rather than book value. For the time being, the most valuable recent startups in insurance underwriting appear to be carriers, not MGAs.

Gross loss ratios are generally stable or improving slightly but still unsustainable

We prefer to look at gross loss ratio, i.e. before any premiums and losses are ceded to reinsurers, because sticking losses to reinsurers isn’t a sustainable long-term strategy. Eventually, gross loss ratios need to be sustainable. This quarter’s numbers are basically unchanged since last quarter, though Lemonade and Metromile have adverse development in this quarter, which raises the reported loss ratio.

If our subject companies are shifting management attention toward profitability, it is not yet obvious in the figures. Improving underwriting results is like steering a slow-moving boat. You can turn the tiller, but the boat may not go the way you want, and it will take some time. Insurance policies last a year, rates are regulated by states and unsettled old losses can get worse if the legal environment changes.

Gross loss ratio evolution

Of the three venture-backed startups, Metromile’s figures have always shown the greatest profitability, and the company shows an improvement on the last quarter, shaving four points off the loss ratio. Not all startups are experiencing unsustainable loss ratios. Hippo -- a homeowner’s MGA -- claimed to have produced better-than-market underwriting straight out of the gate, although we have no way to verify this.

Conference chatter is increasingly turning to profit, not just premium. We welcome these signs of maturity in the insurtech market, which were a big reason we started writing these articles and presenting at conferences.

Industry veterans are outperforming the newbies on loss ratio but not premium growth.

Two of the startup carriers sponsored by highly regarded underwriters are performing very well in terms of profit. BiBerk, which ultimately reports to Ajit Jain, recorded a respectable 70% gross Loss & LAE ratio in the quarter. Intrepid, where Rob Berkley sits on the board, turned in a 60% loss ratio (without LAE). Neither company has cracked even $4 million in quarterly premium, compared with Root at nearly $15 million, but is there something that Ajit and Rob know that the newbies don’t? Or are big public companies just less motivated to grow than venture-backed companies? Or is growth first really the right answer?

 

We’re not showing State Farm’s HiRoad entity because we’re less clear on how it reports and is managed by State Farm’s executives.

It will still take several years to become a scale insurer

All three venture-backed insurers increased expenses in the quarter. Root lost $11.6 million, a burn rate of $129,000 every day. That still gives two years of runway if the burn rate can be maintained. We get details on expenditures only in annual statements, so we cannot know for sure whether Root is spending on headcount, advertising or other overhead. LinkedIn pegs the company’s headcount at 117, with 30 people joining just in the second quarter.

The company runs a referral program that has paid $860,000 to date. We speculate that $25 is the average referral bonus (so $50 because both parties get the bonus), which equates to 17,000 referrals. If the average premium is $750 (again, a guess; a bit below the national average), then the referral program has generated more than $13 million of premium at a CAC of $50, which would be an impressive 40% of all the premium in these first 18 months.

As the company expands exponentially to grow into its unicorn valuation, the question for investors is if the company can maintain exponential growth and bring down the loss ratio simultaneously, so growing without raising losses exponentially. It’s a difficult balance.

In the meantime, investors added $45 million to the insurance company’s statutory surplus, but -- because of losses -- surplus stands at $43 million at the end of the quarter.

Root’s CEO says that the company is getting better at pricing and predicting the business, and that “conservativeness” in reserves means prior results were better than they appeared. We agree with Root that there is increasing evidence of conservative reserving, but not based on the figure it cited in the blog. Root says that only 66 cents on the premium dollar was paid as claims in 2017 (net) – which appears to exclude payments expected for open claims and losses incurred but not reported (“IBNR”). The more meaningful number, in our view, is that Root has recorded $344,000 of favorable development this year -- meaning it has decided that its estimates of prior-year losses were indeed too high.

The company earned $792,000 of premiums in 2017 and stated losses at Dec. 31, 2017, at $1.3 million, for a net loss ratio of 168%. If 2017 actual losses were in fact $986,000, as they are now estimated, then the developed loss ratio would be 124% -- which is better but doesn’t greatly change the overall view of the year, which was small and volatile and hence of limited use to understand the company (but the best any outsider had at the time).

Root also deserves credit for being the only one of the three venture-backed companies to have made conservative loss picks. Lemonade continues to see its reserves be inadequate. The company had $2.1 million of reserves at the start of the year and has seen $245,000 of adverse development this year. Even a more experienced underwriter, Metromile, started the year with nearly $14 million of reserves and has recorded nearly $1.5 million of adverse development.

Stepping back from the noise of quarterly reserving, we still believe that the companies have to prove underwriting quality and do so with sustainable overheads and expenses. There’s still a long journey ahead, but the companies have the resources (in the form of cash at the holding company) to work on the challenge for years to come.

Reinsurers continue to subsidize losses

Lemonade continues to hand reinsurers $3.61 of losses for every $1 in premium in the quarter. Root handed reinsurers $1.41 of losses for every $1 in premium. Metromile -- as with other metrics -- is playing a safer game, and its reinsurers even made a bit of money in the quarter, getting $0.86 of losses for every $1 in premium.

Root disclosed that it changed its reinsurance program, reducing its quota share from 50% to 25% of premium effective June 1 through the remainder of 2018, meaning it will keep more premium (and losses) and possibly get less capital relief. The company retains a $1M xs $100K per-risk excess of loss treaty(*). Terms were not disclosed. (*)

Explanation of reinsurance basics: In quota share reinsurance, an insurer reinsures a percentage of its book – a fixed percentage of every dollar of premium and loss. The reinsurer pays the insurer a ceding commission to cover the insurer’s expenses and may assume unearned premiums (a liability), which may increase the insurer’s statutory capital. In excess-of-loss reinsurance, the reinsurer covers every dollar above a certain amount (the attachment point) up to a pre-defined limit. Excess of loss reinsurance can be written per event (such as a storm) or per risk.

In Root’s per-risk reinsurance, the reinsurers appear to take each and every loss of more than $100,000 to the extent that the loss exceeds $100,000, up to $1.1 million. Here is a technical resource on the subject of using reinsurance for capital optimization.

See also: Can Insurtech Rescue Insurance?  

Executive compensation appears to be as expected -- likely mostly in stock

Many insurers are required to file an annual Supplemental Compensation Disclosure listing the name, title and compensation of their top 10 executives. The requirement was triggered by an investigation in 1905. (Here’s some trivia for a cocktail party at InsureTech Connect: That’s the same year Las Vegas was founded.) The state of Nebraska will mail the information for all companies that operate in Nebraska to anyone who sends them $80. The hardest part is finding a computer with a CD-ROM drive.

This is a sore point among insurers (the disclosure, not the need for a CD-ROM). Some insurers risk a fine instead of being transparent, such as by putting zeros for their compensation or putting a blank piece of paper over the data before mailing it. We like numbers, and there are reasons for the disclosure in an insurance context. Most insurers are subject to extensive regulation and disclosure of their rates, which need to be reasonable, which means not paying executives excessively and passing costs through in the rate. And, as Lemonade says, insurance is a business of mutual trust, which requires reasonable executive compensation practices, even if not overseen by shareholders. For more on the disclosure, click here.

Lemonade and Metromile are required to complete the disclosure, though Lemonade’s commitment to transparency doesn’t extend to putting the required names on the form. Their disclosures are below. The numbers are not huge -- indeed, they are within what one would expect for a startup, where founders and early joiners get big equity grants with salaries that pay the bills but are often dramatically less than what a senior executive at an insurer typically earns. Interestingly, two of Lemonade’s founders sold shares in 2017, which is reflected under “all other compensation.” Metromile seems to have forgotten a few figures in its filing. Note that both Lemonade and Metromile “allocate” compensation to companies within their holding company system, and in absence of information on how this allocation works, it is possible that these figures are materially understated because of the allocation.

Here is Lemonade Insurance:

Metromile Insurance: One last note on compensation. Metromile filed its disclosure electronically, while Lemonade apparently walked down to the Post Office. We don’t know how to explain why a high-tech company like Lemonade would use snail mail. It mailed the disclosure on March 1, a Thursday, so it must have been #TBT in Lemonade’s offices.

Next Insurance U.S.

Digital small business insurer Next announced in May a plan to form a new carrier, and it has. The company was formed in September 2017, which indicates that the plan will have been in the works for a year before the carrier writes business. Next’s filing was all zeros except the surplus (or equity) in the company, which is more than $10 million. As of November 2017, the company’s business was described as follows: “The Company will initially offer Contractors Insurance in three levels of coverage for 190 classes including Handymen, Carpenters, Electricians, HVAC Technicians, Landscapers, Janitors and Plumbers. All Contractor Insurance plans will include general liability ($5 million limit), professional liability ($3 million limit) and inland marine ($3 million limit) coverages. The Company will eventually write other types of small business classes including restaurants, daycares, personal training and photographers. These products are currently produced by licensed producers of Next Parent on other insurance carriers’ paper. … The company will eventually offer the following additional types of commercial insurance to small businesses with $3 million maximum limits, unless indicated otherwise: commercial property, commercial auto, director and officer liability, employment practices liability, business interruption, surety bond ($1 million limit), liquor liability, cyber, data breach ($5 million limit). The Company’s planned net retention for all lines will be 20% of the maximum limits.” The remaining 80% of limits will be ceded to Munich Re Americas (MRAm). The company’s directors are Guy Goldstein (the CEO), Nisim Tapiro (co-founder) and Dawn Puro. As of November 2017 (before the most recent $83 million fundraising), the company’s ownership was as follows:

What’s in a name?

A recent startup proclaims: “[Company name] Insurance is a [line of business] insurance company that provides [line of business] coverage to small businesses through a simple online experience. Offering A.M. Best A-rated insurance… direct to customers since 2018...” That wording makes consumers think they’re dealing “direct” with an insurer, not an agent or broker, which is what this company is. Words matter in insurance, as illustrated in the first section of the California Insurance Code.

• Insurer: “The person who undertakes to indemnify another by insurance.”
• Broker: “A person who, for compensation and on behalf of another person transacts [insurance] … with, but not on behalf of, an admitted insurer.”
• Agent: “A person authorized, by and on behalf of an insurer, to transact [insurance] … on behalf of an admitted insurance company.” [emphasis added].

#themoreyouknow “Congratulations, you’re innovating in a highly regulated industry”

Still on the subject of regulation, let’s have some fun with deficiency letters. Part of the joy of getting a new insurance program licensed in a new state is the exchanges with regulators. The insured makes a filing of a few hundred pages, the state reviews it and states its objections, and ‘round we go for, potentially, months. If you’re an insurance nerd, you might find these letters interesting. Particularly Lemonade’s, if only because of how the sausage-making of insurance contrasts with public statements about doing better for consumers.

A recent letter from Oregon to Lemonade had language like this: "Please explain why the insurer is choosing such broad exclusionary language; and if possible, provide an example of why this is necessary to have." Hmm… A letter from Virginia last month listed nine pages of objections, even objecting to Lemonade’s definition of “hovercraft.”

A sample of the objections: "The Company will need to withdraw under the Special Limits, items (g), (h), (i), (j), and (k). The limitations the Company has outlined in these sections are more restrictive than the provisions in the minimum standards set forth in the [Virginia Administrative Code]. It is not permissible for the Company to place limitations or impose special limits that are more restrictive than the minimum standards set forth in the VAC. For items h and i, it is acceptable to impose a special limit or to exclude business property but it is not acceptable to impose a special limit or to exclude property used for business purposes. For example, if I take my laptop (business property) home to do some work, the business property can be limited or excluded. However, if I use my personal computer at home to do some Bureau of Insurance work, that is personal property being used for a business purpose and coverage cannot be limited or excluded." Score a point for the Virginia Bureau of Insurance for using human language.

All this, and we haven’t even gotten to Policy 2.0. Maybe dealing with U.S. regulators is why Lemonade is now keen on international expansion?

Meanwhile, the interviewers at Bloomberg TV have been reading our articles.

See also: Startups Take a Seat at the Table  

Looking forward

The third quarter, which includes most of the summer, could be a big one for the companies in our coverage, because insurance often changes when people move. We are gratified by the increasing focus on insurance fundamentals in insurtech, and the lofty valuations recently seen in the sector will require satisfying both venture metrics as well as solid insurance fundamentals. The startups have the time and the resources but a long way to go to climb the Cliffs of Insanity. They are gaining on the incumbents, but will they make it to the top of the cliffs before running out of power? It’s not inconceivable.

This article was written by Matteo Carbone and Adrian Jones.

Attorney involvement has been steadily driving up workers’ compensation claims costs over the past decade. In 2014, the California Workers’ Compensation Institute (CWCI) published results of a five-year study that showed that when a single injured party brought in a lawyer the associated costs per claim went up by an average of $40,000 for permanent disability payments and $25,000 for temporary total disability benefits — even if the case never went to court. In Florida from 2016 to 2017, legal fees related to workers’ comp claims totaled nearly $440 million — approximately $254 million of that came from employers defending claims while injured workers themselves were responsible for $186 million (an increase of 36% in just one year). These cases do not bode well for anyone except law firms. Given this present reality, what can companies do to eliminate or at least minimize the effect of lawyers on the claims process? How can they protect themselves and keep costs from ballooning out of control while helping workers get back to their jobs faster? Here are three keys to consider: 1. Stop Litigation Before It Starts This is the No. 1 component in keeping costs down and workers happy. Contrary to popular belief, workers don’t want to sue their companies. They need their jobs and want to return to them quickly. But they also want to get results. Most attorneys are engaged only when injured workers don’t feel like their claims are being properly addressed. For example, they might not know how to get what they need, or they haven’t heard back about who they should see or what the next steps should be. To reduce the potential for attorney involvement, companies should leverage new technologies that apply artificial intelligence (AI) to search claims and assess the risk of litigation. These solutions can quickly flag claims that need intervention so that the right member of a claims team can step in and provide a bit more hand-holding, from making appointments on the worker’s behalf with doctors who have the best outcomes scores to conducting a basic check-in to see how the worker is feeling or how the recovery process is going. See also: Breaking the Cycle of Litigation in WC   Early intervention that cuts off litigation before it starts is the ideal scenario. Claims that steer away from an engaged attorney can save roughly $42,617 from direct claims costs. That’s not spare change, particularly when a company needs to address multiple claims. In one example from a recent CLARA study, a small regional carrier ran a six-month pilot using AI-based software to identify claims that were referred to a high-touch team. At the end of the pilot, the carrier reported that its “litigation rate went from 14% of all claims to 5%. This means that even a smaller carrier, with 20,000 claims per year, would save approximately $42 million in claims costs if it was only half as successful as the pilot example.” That’s a pretty substantial, tangible return on the investment in the software. 2. Identify and Engage the Most Effective Lawyers Some claims will move forward with a lawyer regardless of early intervention. But all is not lost! Just as all workers’ comp physicians are not created equal, neither are attorneys. Claims teams can still save a significant amount of money, time and frustration simply by involving the right lawyer. Outcomes-based attorney scoring is common practice. When this scoring uses machine learning algorithms, as the newest solutions do, the best attorneys for a case are right at the fingertips of claims teams. These lawyers can work toward a fair settlement before going through a long, painful litigation process (though in some cases, it is worth it to engage in litigation if demands are unrealistic, which a good lawyer would quickly recognize). 3. Use Smart Tools to Optimize Settlements It’s worthwhile to adopt AI-based solutions that can lend invaluable insight on optimized settlements for specific cases. Having instant access to quality, detailed information about similar claims can help determine whether to fight or settle a pending lawsuit. Machine learning provides leverage. This saves money. While avoiding attorneys is always the goal, smart tools can stop the bleeding when it is unavoidable. See also: Claims Litigation: a Better Outcome?   AI and machine learning have the capacity to change the upward trajectory in workers’ comp costs. With products and tools incorporating these smart technologies in meaningful ways, the claims process can be transformed from lose-lose to a win-win for both companies and injured workers.