Ask 10 people what direct contracting (DC) is in healthcare, you’ll get 10 different answers. It’s not a clearly defined term. When doing research for her master’s thesis on "Employer-Provider Direct Contracting" at Georgetown University, Lisa Elder found that “there is no research on the effectiveness of direct contracting.” She had to rely mostly on anecdotal studies of DC and the marketing language of employee benefits firms that had tried it. Her takeaway: There is no consensus on how to define direct contracting in healthcare. This is a problem for employee benefits advisers who want to communicate what direct contracting’s benefits (previously referred to as direct-pay programs) are for their clients. What Direct Contracting Should Not Involve So, what should DC look like? Let’s begin by being very clear on what it should not involve. There are too many arrows. There’s nothing “direct” about this model. It’s a dishonest contract: a relationship of three (or more if a vendor is involved), not the two that the name implies. Yet many employee benefits brokers offer this type of arrangement, replete with the administrative fees that such an arrangement entails. Those fees can add up quickly. Say a benefits broker or vendor charges 10% of the cost of care for implementing the agreement and uses a TPA that charges 15% for facilitating the employer-physician relationship. See also: 4-Step Path to Better Customer Contacts   The cost of a $20,000 knee surgery replacement would balloon to $25,000 because of unnecessary third-party fees, leaving less value for the employer and physician. Yes, using a preferred provider organization (PPO) that discounted off a $55,000 charge for inpatient knee surgery would be even worse. But creating a less-bad PPO network via an improper “direct” contract shouldn’t be the goal for employers. The Right Way to Implement Direct Contracting A DC agreement should look direct⁠—like this. Think of it this way: Once a direct contract is in place, it should remain in place if you, the benefits adviser, were to disappear tomorrow. That requires a great deal of forethought in how the DCs are written, but it’s the right way to implement direct contracting. Establishing a DC this way maximizes and preserves value between your clients and their physicians. That, in turn, goes a long way toward demonstrating your value and commitment to transparency as an adviser. 3 Tips to Help Ensure “Direct” Contracting Real direct contracting has the potential to revolutionize the healthcare experience for employers by stripping out third parties that don’t add value. Your job as a benefits adviser is to ensure that DC is simplified, streamlined and truly direct. Here are a few tips on doing that:

1. Use Medicare prices as a benchmark for establishing reimbursement rates. 130% for physicians and 150% for facilities has worked well for Wincline in its DC client relationships. The true beauty of DC is that employers and physicians can sit down and discuss the price and value related to exchanging services.
2. Ensure that payment to physicians is timely (≤14 days). One of the biggest selling points for physicians on embracing DC agreements is that they won’t have to spend time and resources collecting payment for their services.
3. Make clear to employees that, under DC, member cost share is waived. Provide incentives to employees to use outpatient facilities rather than hospitals by eliminating their deductibles and co-pays if they do.

See also: 3 Major Areas of Opportunity   Have more questions on how to become a forward-thinking leader on direct contracting in the benefits advisory space? Check out our guide on direct contracting (be sure to download our whitepaper) and drop us any thoughts you have about DC.

Data is powering the new economy and is the main driver behind much of the transformation of industry and society. According to multiple sources, 90% of the data in the world has been created in just the last two years. In measuring the volume of data, we have blown past exabytes and are now calculating volumes in zettabytes (a trillion gigabytes). Soon we will be talking about Yottabytes and Brontobytes. As valuable as this data explosion has been, it has brought along some major challenges. Insurance, just like every other industry, is grappling with three big challenges. Managing the Real-Time Data Flow Insurers already find it difficult to manage data at rest – the data they collect or acquire and store in databases. Managing the cost, cleansing and organizing the data for transactions and analysis, and governing data usage all require significant resources, technologies, and skills. Layer in real-time data that is beginning to flow from the edge, generated by sensors and devices connected to the things (and people) that are insured, and the management challenges grow by orders of magnitude. Managing data in motion and determining where data should reside (edge, cloud, on-premises) will be tremendous challenges in the decade ahead. And the sheer volume, velocity and variety of data will make governance and usage much more complicated. See also: Transforming Claims for the Digital Era   Securing Digital Data Data security is a huge issue today, with regular headlines regarding breaches of massive amounts of sensitive data from big (and small) organizations. Software and resources for security are already a big line item in many insurance CIOs' budgets. Digital data spread across the connected world will make that task even more difficult, requiring the significant deployment of automation and AI technologies. Insurers must be aware, not just of the potential for data theft, but also of the new possibilities of data alteration. For example, photos of property or vehicle damage could be altered to show a greater degree of damage or even to show damage where there really is none. Regulation on Data Usage We are in the early stages of a great debate over who owns data, who has rights to use it and how data may be used. The global tech giants that have built their businesses on data are under intense scrutiny regarding these issues. Insurers have the additional consideration of industry regulation dictating how data can be used in the industry. Government and industry regulations will continue to evolve, which in itself creates a challenge for insurers. See also: It’s Time to Accelerate Digital Change   Of course, there are other challenges like acquiring and training talented individuals who can address these three areas and harnessing AI technologies to make sense of all the data. Both of these areas are vital and the subject of much research and debate, but they rest on the foundational issues of managing, securing and regulating data. This blog may sound discouraging, but there will be solutions and opportunities related to these challenges. Perhaps the most important strategies that insurers can adopt is to focus on recruiting, training and retaining highly skilled data professionals, and partnering with world-class organizations that have the technology and resources to tackle these challenges and enable insurers to capitalize on the power of data and analytics.

Technology is the foundation of the insurance industry: the means to solve or approximate answers to questions about the cost and availability of insurance, in addition to ways to reduce risk, improve service and expand coverage. When technology makes it easier to track possessions, when people can see—in real time—the whereabouts of goods they pay to insure, when reporting a lost or stolen item takes minutes rather than hours or days, eliminating paperwork and the temporal hell of waiting to speak to a customer service representative, of having to endure music on hold, when technology increases efficiency and accountability, everyone wins. Winning translates into not losing your possessions. Winning is a product of technology: a product unto itself in which your smartphone or tablet is a source of intelligence, syncing with an accessory that is strong enough to thwart thieves and smart enough to alert you about attempts to steal your possessions. For consumers, these benefits speak for themselves. For insurers, these benefits speak to the need for a single voice—authoritative in its text and absolute in tone—that says, “Yes We Will.” That message is one of hope (and change), regarding the use of mobile devices such as Mimic Go, where people can enjoy much-needed peace of mind not only about their valuables but items of sentimental value, too. Items that cost little, financially, but whose emotional cost is incalculable. Items that insurers underwrite but often fail to understand, because a minor loss to an insurer can be a major—and irrevocable—loss to a person, couple or family. See also: Mobile Apps and the State of Privacy   To protect these items, whether they are on a shelf or inside a suitcase, starts with technology. Without that technology, insurers and policyholders are without—period. They are unable to learn what is otherwise knowable, the status of their private or professional possessions. They are, in a sense, dispossessed: blind to the status of their most prized possessions and dependent on chance, having been denied the chance to buy and install the tools that lessen theft. They are without the actual sense of sight—and touch—because they cannot see what they cannot tap on their screens to open: an icon that shows them, a symbol that tells them everything is okay. That a solution exists, that insurers can give people incentives to use it, that people are already eager to adopt it, that it can avert the villainous and assuage the virtuous, or at least hinder criminals and help lower specific incidents of crime, is a good thing; a great thing. Achieving that goal is a matter of awareness. Insurers owe it to themselves to inform the public about the relationship between mobility and safety. Put another way, insurers cannot afford to maintain the status quo in which people go about their lives—and go wherever their work takes them—without the technology to track and secure their possessions. See also: Innovation: ‘Where Do We Start?’   Insurers owe it to policyholders to further safety, not frustrate it. Insurers have a duty to do the right thing.

Back in 2015 and 2016, we heard from oh-so-many insurtechs whose business model hinged on having carriers buy their gadget and give it away to customers because of the benefits the gadget provided. This model was flawed from the outset because of the prohibition in the insurance industry against this thing called rebating.

Fast forward to 2019, and a lot of innovative companies are thinking about a similar business model, only in reverse. Instead of selling insurance and throwing in something of value, companies are considering selling something and throwing in the insurance. This time, the idea may pass muster.

The combination could be especially hard for regulators to turn down if it enhances consumer safety, which, after all, is a key goal for insurers. Let's say a transportation network company (TNC) such as Uber has a device like a two-way camera system that monitors driving behavior and offers free insurance to drivers who will install it. How does a regulator say no to safer drivers?

What if the TNC gets clever with the bookkeeping to meet regulatory requirements? Just because a driver sees herself as buying a device and getting free insurance doesn't mean the TNC has to account for revenue that way.

Regulators will face some key questions, in new forms. Does an offer represent an inducement beyond what is reasonable? Are newcomers being given an advantage over incumbents? While regulators have traditionally been more protective in personal lines than in commercial lines, figuring that businesses have more expertise at their disposal, does the digital blurring of personal/commercial boundaries change the thinking? In a world of on-demand insurance and microinsurance, where the cover is increasingly tied to a physical device, how do you separate the two?

If some sort of bundling/rebating does work this time, the changes could be profound. Buy a cellphone from T Mobile and get a little life insurance with that. Agree to rent a property via Airbnb and get some homeowners insurance. The possibilities are endless.

In many ways, the history of the computer industry can be traced to the 1969 consent decree between IBM and the Department of Justice, which threw out the longstanding structure of the industry. In that case, IBM was no longer allowed to bundle everything—hardware, software and services—and sell only to those that would buy a whole package. The unbundling created opportunities for mainframe clones, services companies such as today's big consultants, etc., eventually including Intel, Microsoft, Google, Facebook and so on. Allowing for a rebundling of insurance could lead to similar innovation.

During the first internet boom, a Harvard Business School professor described to me what he called the Las Vegas business model—it's hard to have a normal restaurant or hotel in Las Vegas when casinos are giving away good food and rooms to entice gamblers. With the new possibilities of bundling/rebating, many in the insurance world may soon see just what the Las Vegas business model feels like.

Cheers,

Paul Carroll
Editor-in-Chief

Despite the troubling persistence of cybercrime, many organizations are not doing everything they can to protect themselves from the serious threat of data breaches and other cyberattacks. A Spiceworks survey of 581 IT professionals showed that 62% of organizations did not have cyber insurance policies. This can be attributed to a slew of reasons, but perhaps the most perplexing one is a lack of reliable policy offerings. As demonstrated by the percentage of uninsured organizations, the market for cyber insurance is essentially untapped. According to the Insurance Journal, 71% of the market for cyber insurance belonged to just 10 writers in 2018, and the National Association of Insurance Commissioners reported that only 500 companies offered cyber insurance in 2016, compared with nearly 6,000 offering commercial insurance. Additionally, a Ponemon Institute study of more than 1,000 IT professionals showed 80% of those surveyed said they believed it was likely that a successful cyberattack on their organization would occur within 12 months. Clearly, the need for cyber insurance exists. It just isn’t being addressed. The reason for this is that cyber insurance is a relatively new policy area. In fact, it’s still so new that it lacks the standardized terms and pricing that are so essential for creating baselines for policies in other markets. And even when those policies are created, it can be difficult to determine what qualifies as cyber coverage. If a breach occurs due to a stolen password, for example, is that considered cyber, crime, theft or general liability? This confusion also can lead to insureds making cyber-loss claims under different policies, even if the insurer doesn’t offer cyber insurance—underlining the importance of creating well-defined cyber policies to protect policyholders and insurers alike. This lack of established policy structure leads to uncertainty about how policies should be written, making it difficult for companies to confidently guard themselves against losses. As a result, many companies don’t offer cyber insurance because they’re unsure how to properly quantify risk and, in turn, price policies. This apprehension is understandable. It’s difficult and risky to try to provide estimates without a sufficient amount of credible information from which to infer. See also: Quest for Reliable Cyber Security   Still, cyber insurance is quickly becoming one of the most profitable and fastest-growing lines of coverage. Premiums increased by 8% in 2018 to $2 billion, and the market is projected to reach $14 billion by 2022. So, how does an insurance company find a way to understand cyber risks, calculate their costs and reliably predict the frequency of losses? By significantly reducing the likelihood of an event resulting in a claim. As obvious as it might sound, it’s important to remember that insurance ultimately comes down to risk, and when that risk is significantly reduced—or virtually eliminated—it benefits both the provider and the policyholder. To accomplish this in the cybersecurity arena, companies should recommend insurers use risk-reducing technology, such as tokenization and encryption, to better guard the sensitive data they are trying to protect and to reduce the risk and likelihood of a data breach or other cyberattack. By leveraging these additional security processes, insurance companies can more accurately build policies, knowing the risk of damages from a data breach is effectively nonexistent. Tokenization, such as that offered by the TokenEx Cloud Security Platform, especially excels at reducing risk through its use of pseudonymization and secure data vaults. Pseudonymization, also known as deidentification, is the process of desensitizing data to render it untraceable to its original data subject. It does so by replacing identifying elements of the data with a nonsensitive equivalent, or token, and storing the original data in a cloud-based data vault. This does two things. First, it allows tokens to be stored in a business system for future use without interrupting crucial business-as-usual processes. Second, it virtually eliminates the risk of theft in the event of a data breach. Because there is no mathematical relationship between the token and its original data, tokens cannot be returned to their original form. Instead, when detokenization is required, the token is exchanged for the original data, which can be done only by the original tokenization system—there is no other way to obtain the original data from the token alone. So if a breach occurs, the exposed data is worthless to cybercriminals. The original, sensitive data sits undisturbed in a secure cloud data vault. In effect, no loss occurs. Additionally, tokenization can further reduce risk by addressing many international regulatory compliance obligations. Influential privacy regulations such as the European Union’s General Data Protection Regulation and the California Consumer Privacy Act refer to tokenization specifically as an appropriate technical mechanism for protecting sensitive data. It also reduces the scope of Payment Card Industry Data Security Standard compliance by removing payment card information from organizations’ cardholder data environments. Because tokenization satisfies controls concerning the processing of sensitive data, it can prevent losses stemming from fines and other penalties as a result of noncompliance. See also: Paradigm Shift on Cyber Security   So when determining how your company should write its cyber insurance policies, consider recommending tokenization as a risk-reducing step for policyholders. It’s a small upfront investment for them that can better protect their data, their policy and your ability to provide reliable coverage.

Customer acquisition costs are a familiar problem throughout the business world. On average, businesses spend five times more to acquire a new customer than to keep an existing customer, according to Khalid Saleh at Invesp. Companies focus more attention on acquisition than retention, too: About 44% dedicate themselves to acquisition, while only 18% focus on retention. For insurers, customer acquisition is even pricier. “The insurance industry has the highest customer acquisition costs of any industry. It costs seven to nine times more for an insurance agency to attract a new customer than to retain one,” says Lynn Thomas, president of 21st Century Management Consulting. While customer retention strongly affects insurers’ bottom lines, new customers are essential to maintain a steady pace of growth and build a competitive edge. Controlling costs while still attracting new customers presents a challenge for insurance companies. How Expensive Are New Insurance Customers? When you compare the high price of customer acquisition with the low net margin of property and casualty insurance — which hovers between 3% and 8%, according to Mary Hall at Investopedia — It’s easy to see why acquisition costs are a concern. Direct insurers have had an advantage in this area for quite some time. As early as 2014, William Blair & Co. analyst Adam Klauber determined that direct insurers like Progressive and Geico paid an average of $487 to acquire a customer. Meanwhile, captive insurers like State Farm and Allstate paid $792 on average. See also: Who Is Your Customer; How Is the Experience?   When independent agents were added to the mix, Klauber said, the average cost of customer acquisition rose to $900 per customer. One reason new customer costs are so high in insurance is that the industry has lagged in adopting digital technologies that meet the expectations of today’s insurance shoppers, say Tanguy Catlin and fellow researchers at McKinsey. Customers want simplicity, 24/7 availability and quick delivery. They also demand clarity about pricing, value and services designed for the digital age, no matter what they’re shopping for. “They have the same expectations whatever the service provider, insurers included,” according to Catlin et al. Improving technologies also helps transform customers’ perception of insurance as an outdated, unapproachable industry to one that is personalized and consistently present. When insurance is easier to access, customers are more likely to see it as a valuable and important facet of their lives. KPIs in Customer Acquisition It’s important to differentiate between customer acquisition cost (CAC) and cost per acquisition (CPA). While they sound similar at the outset, Proof’s Drew Housman outlines the difference: “CPA measures the cost of an action, CAC measures the cost of acquiring a customer.” For example, if you want to measure the effectiveness of clicks on a digital ad or buy button, use CPA. To factor in every click a customer makes on the way to completing the transaction, use CAC. Tracking both CPA and CAC is important, however, because not all methods of acquiring new customers yield results in the same period, says Gordon Donnelly at WordStream. For instance, combining SEO and content marketing with Google and Facebook advertising results may make insurers think their SEO is overperforming while their advertising is underperforming. This is because SEO and content marketing “typically take longer to yield results,” Donnelly says. While a good customer acquisition cost varies by the type of insurer, one way to track CAC effectively is to balance it against customer lifetime value (CLV), Jordan Ehrlich at DemandJump says. Customers who offer a higher lifetime value may be worth more to acquire at the outset. Ideally, the ratio between CLV and CAC will always show a higher number for the former metric: A customer’s overall value will always be higher than the cost to acquire the customer. “The less it costs you to acquire a single customer and the more overall value that customer represents, the more profit you stand to make,” Donnelly says. Treating customer acquisition, retention and value as three facets of the same goal can improve insurers’ ability to attract, retain and profit from customer relationships. “Since new policyholders immediately become current policyholders, your improved customer experience increases the likelihood that they will stay with your company, refer you to others and so on,” Patricia Moore at One Inc. says. How to Lower Costs Without Losing New Customers Cutting customer acquisition costs won’t help an insurance company if it also results in fewer new customers. Fortunately, there are several effective methods for reducing these costs while improving the quality of new customer relationships. 1. Use Incidental Channels Incidental channels are products or services that deliver value separately from insurance but that build a customer relationship and gather data that ultimately support an insurance relationship, says Kyle Nakatsuji, principal at American Family Ventures. These channels can help lower customer acquisition costs and improve engagement by demonstrating value to customers early in the process. Customers are more amenable to an eventual insurance purchase because they’ve already received value from the service and have perhaps considered how insurance could further improve that value. These services can also perform data-collecting functions, making it even simpler for new customers to choose and purchase coverage, Nakatsuji says. 2. Leverage Retention by Seeking Referrals An added benefit of incidental channels is that they make it easier for your current customers to recommend your insurance services to potential new customers, says Srikumar Rao, author of Happiness at Work. For example, imagine an app that helps homeowners identify and mitigate the most common causes of household fires. When a loyal customer uses the app, benefits from it and recommends it to others, that customer “is no longer a supplicant when she draws the attention of her contacts to you. She is the enthusiastic and proud bearer of a gift. She has bounty that she will bestow on the deserving,” Rao says. Not only have you made it easier for your loyal customers to refer their associates to your company, you’ve made it gratifying to them to do so. 3. Recognize Why Loyal Customers’ Referrals Matter Customer retention has a profound effect on the bottom line. When customer retention increases by only 5%, profits increase by 25% to 95%, according to research by Frederick Reichheld at Bain & Co. Nurturing relationships with existing customers builds trust, allowing companies to offer additional products and services with a lower chance of rejection, startup adviser Yoav Vilner says. It also increases the chance of attracting new customers through referrals — by far one of the least expensive methods of customer acquisition. Referrals, or word of mouth, account for 20% to 50% of all purchasing decisions, say Jacques Bughin, Jonathan Doogan and Ole Jørgen Vetvik at McKinsey. Experiential word of mouth, in which existing customers share their own firsthand experiences with a product or service, is perhaps the most powerful. It’s also the most common: 50% to 80% of word-of-mouth marketing is based on a consumer's personal experiences. Loyal customers are more likely to speak highly of their insurance company when services exceed their expectations, according to Bughin and fellow researchers. As a result, insurance companies that underpromise and overdeliver stand a better chance of generating praise and referrals from their existing customer base. When should insurance companies ask for referrals? Sooner is better, says Eric Wlison, national account director at Kaplan. Waiting until a customer’s transaction is finished increases the chances that something might go wrong, spoiling the customer’s inclination to speak positively of the insurance company to friends and family. “Remember that it is human nature to want to help others succeed. If you don’t ask for referrals you’ll likely get zero, and if you ask and get zero you are still at the same spot as if you hadn’t asked,” Wilson says. 4. Embrace Digital Tools That Promote Loyalty Here is where customer loyalty and technology intersect to drive down the costs of acquiring new customers. Nearly every consumer-facing industry has grappled with how to meet evolving customer expectations. Any fast food restaurant will offer bundled meals as well as a la carte menu items from which customers can choose. Even change-averse airlines and cable providers have learned to offer customizable levels of service because that’s what their customers have demanded. See also: The Missing Piece for Customer Experience   This is the point the team at McKinsey is making when they say insurance customers want simplicity and quick delivery. Today’s customers want to be able to choose from any and all available product lines, regardless of which carriers provide them. This is what the BOLT Platform facilitates. Our users are able to offer and sell their own products alongside bundled products from other carriers because, ultimately, customers only care about getting the coverage they need. The best way to meet this need is to become a one-stop-shop for your customers. Insurance companies that embrace this will earn increasing customer loyalty. And, as new potential customers come forward, it will require less time, less money and less effort to convince them to buy.

Health insurance is more a question of what, rather than how. As in: What programs and prescriptions should insurers cover? What services outside the U.S. should insurers support, if the science is strong and success substantial? What should the insurance industry do, in particular, about the rise of medicinal cannabis? The questions are of a piece. Which is to say the questions involve issues both the ethical and the economic, the political and the personal, the fiscal and physical. The questions raise a larger question: If insurers agree to cover cannabinoid medicines, because it is less expensive to travel outside the States than it is to transport these medicines across state lines, if what benefits patients is also beneficial to insurers, by what right should insurers deny coverage to an American seeking medical treatment in Australia? Location is central to this issue, based on Australian advances in the development and use of medicinal cannabis. Free of the conflicting state and federal laws that make medicinal cannabis legal in one city but criminal in another in the U.S., free of the battles between patients and insurers, Australia is true to its positive stereotype: a proto-America, with similar systems of language, culture, institutions, literature, history and tradition; a member of that English-speaking alliance of nations whose customs extend across the vale of years. Medicinal cannabis is also legal throughout Australia. See also: What Are Other Marketers Doing? According to Asaf Katz, chief operating officer of Cannvalate, Australia is central to innovation and investment involving medicinal cannabis. All the more reason, then, for insurers to champion that fact. The alternative is to deny coverage and alienate patients, which is not conducive to winning the insurance industry friends or improving its ability to influence people—people whose collective influence registers in polls and at polling places, where they use ballots to reject the way insurers do business. Avoiding that scenario is in the interests of all people. If coverage for medical care in Australia is the price insurers must pay, if covering medicinal cannabis is the burden they must bear, it is a hardship they can meet. In contrast, the cost of doing nothing is no small thing. The cost manifests itself in legal fees. The cost can be ruinous to an insurer’s reputation and its relationship with consumers. In turn, it can take years if not decades to undo a bad decision; so bad as to prove decisive to an insurer’s loss in revenues and drop in profits, resulting in protests from patients and investigations by politicians. Better to take a more holistic approach to subsidizing medicinal cannabis. Better to look abroad—to look to centers in Australia—than to look away, while people suffer from chronic pain or struggle with the side effects of inferior and toxic medication. Better to go down under than to go under, as the former lessens the probability that the latter will happen. See also: Best Practices for Predictive Models   Better for the insurance industry to have an international outlook to challenges within individual nations. Better to solve these challenges—and stay solvent—than do nothing.

Way back in 1975, geochemist Dr. Wallace Broecker of Columbia University published his article “Climatic Change: Are We on the Brink of a Pronounced Global Warming?” Today, almost 45 years later, the debate has intensified but still rages, even as some believe the clock is running out. The U.N. Intergovernmental Panel on Climate Change warns that we have only 11 years to limit the chances of a climate change catastrophe. I see very strong parallels between Dr. Broecker’s warnings and those related to our loss of personal data privacy. Society is facing the threat of climate change, which some experts say will reach a tipping point; we may be reaching a similar tipping point with privacy and cyber security. In their paper presented at the 1965 Fall Joint Computer Conference titled “Some Thoughts About the Social Implications of Accessible Computing,” E. E. David, Jr. of Bell Labs and R. M. Fano of MIT warned that “the same technology which has given us new dimensions in communication has been used to implement eavesdropping equipment.” They went on to say that “the very power of advanced computer systems makes them a serious threat to the privacy of the individual”. See also: Untapped Potential of Artificial Intelligence   Just as we continued to contribute to climate change, we continue to surrender personal privacy in exchange for the lure of instant gratification delivered through simple, easily accessible technologies. Insurance Industry Opportunity The insurance industry is uniquely positioned to take the lead in safeguarding data privacy; few other industries have the same depth and breadth of personal information or the same level of dependency on the trust and loyalty of their customers. Many insurers of property, life and health, along with numerous supply chain intermediaries, are employing a wide range of connected digital technologies to gather individual data and store, analyze and use it to train AI and use it to offer new, different and attractive products and services. And, as of now, there is no easy way for customers to reclaim their data. People may consciously understand the trade-offs of using digital services, but few understand how extensively their data is captured, used and shared. And that data exists in digital form and therefore virtually forever, most certainly long after we are gone. Without applicable data laws, we’re left with a decentralized patchwork system, devoid of human control. Privacy concerns are surfacing almost daily now, but successful, high-profile applications of analytics are drowning out the cautionary voices. Facial recognition, which is not unlike taking your fingerprints without your permission, is being used by China to keep track of all of their citizens and has been deployed by law enforcement agencies all over the world. Too Little, Too Late In a relatively small victory for opponents of this rapid adoption, San Francisco recently became the first U.S. city to ban the use of facial recognition by local agencies. And California’s tough new law, the California Consumer Privacy Act, which takes effect in January 2020, will significantly limit how companies handle, store and use consumer data. The law will require businesses to be more transparent, give consumers the ability to delete and download collected data and give them the chance to opt out of the sale of their information. Still, according to a new survey by TrustArc, most companies still aren’t ready to comply. See also: 3 Steps to Demystify Artificial Intelligence   Elsewhere, the European Union’s General Data Protection Regulation (GDPR), a set of new privacy laws, went into effect in May 2018. And Hawaii, Massachusetts and Washington are all considering their own state privacy laws, while Brazil passed its own regulations, which will take effect in 2020. Insurance Industry Call To Action What we really need, however, is a standardized, global set of rules and regulations on the permissible uses of personal data and a process governing and enforcing them. The global insurance industry would gain much by taking the lead in this effort – and sooner than later.

When the California legislature established a workers' compensation system in 1913, it was designed to mandate insurance to rapidly provide desperately needed medical treatment and wage loss mitigation to injured workers. In return, injured workers would not be able to sue in civil court and receive massive verdicts that could bankrupt businesses or receive punitive damages or "pain and suffering" beyond the scope of the medical findings. There were three prongs of the Safety Act of 1913, also known as the Boynton Act. First, it provided compensation to injured workers. Second, it required employers to purchase insurance and established a state insurance company, known as the State Compensation Insurance Fund, in case employers could not acquire other insurance coverage. Third, it gave the state power to make and enforce safety rules and regulations, to prescribe safety devices to be used by employees and to require accidents to be reported. In other words, the original workers' compensation program provided an "alternative dispute resolution" program to address the particular needs of workplace injuries. The Boynton Act included specific provisions for total temporary disability, medical benefits, permanent disability and death benefits. It was an exclusive remedy, with minimal exceptions for cases involving gross negligence and willful misconduct. The Boynton Act was also strongly supported by labor unions, which had become much more interested in workplace safety following massive industrial tragedies such as the deadly March 25, 1911, fire at the Triangle Shirtwaist Company in New York City, which claimed 146 factory workers’ lives. See also: States of Confusion: Workers Comp Extraterritorial Issues  Although the workers' compensation system had significant advantages over civil litigation, by the 1990s there were substantial bottlenecks in the system with the Workers' Compensation Appeals Board taking months to set matters on the calendar over a wide range of issues ranging from medical treatment to competing qualified medical evaluators. Any time there was a dispute, even on relatively simple matters, it could take months to get a hearing and ultimately a decision. To mitigate delays, several state legislatures, including California, developed legislation that would permit labor unions and management to jointly develop "carve out" agreements that resolve disputes outside the state workers' compensation system with no diminishment to benefits to injured workers. In California, the legislature passed Labor Code section 3201.5 covering construction trades and later 3201.7 covering more lines of work, allowed unions negotiating on behalf of employees and management to develop addenda to collective bargaining agreements that described rules and procedures of alternative dispute resolution programs tailored to the needs of their particular industries. While programs vary widely, most ADR programs are paid for by a joint labor-management trust and retain ombudsmen who can help resolve disputes informally between the parties, escalate the matter to mediation proceedings and set arbitrations for unresolved conflicts that require a ruling. A party that is not satisfied with the arbitrator's decision can then appeal the matter to the state Workers' Compensation Appeals Board. To make sure that the programs are workable and are fair, they must be approved by the California Department of Industrial Relations before going into effect. See also: Workers Comp Ensnares the Undocumented   Employer and labor unions developed programs in a way that sought to minimize conflicts over medical treatment or medical-legal evaluations through the joint development of medical provider networks (MPNs) and predetermined lists of agreed medical evaluators. They require tight timelines for scheduling mediations and arbitrations, and the fact that only one case is on the docket at a time prevents the distraction of traditional hearings where litigants may have several cases on the calendar at the same time. Predetermined and stipulated medical provider networks keep lien litigation to a minimum, and cases can be resolved and closed in a fraction of the time. With an emphasis on cooperation rather than pursuing a win-lose model, these provisions save insurance companies the costs of extended litigation and provide injured workers with prompt medical care and dispute resolution. It presents both parties with a win-win.

Insurance is a complicated product. Period. No debate used to exist relative to whether insurance was a complicated product. Complication was (is) obvious given the length of the policies, legal terminology, excessive use of prepositions and the aspects that get insurance nerds excited: inclusions within exclusions and exclusions within inclusions. Moreover, no one wants to buy insurance. 2+2=4. That is simple, and the simple part is that, when complexity is combined with massive reluctance and resentment to purchase, this equals consumer misery. One solution for mitigating consumer misery is to make insurance seem simple. "15 minutes will save 15%" makes insurance seem exceedingly simple. "The average consumer saves $X when switching to..." makes insurance seem simple. The "commoditization" of insurance that has received so much press is really a misnomer. Insurance is not a commodity. A complex good, because it is complex, generally cannot be a commodity. A true commodity is a product that is always identical. Red winter wheat from one farm is the same as red winter wheat on another farm. With GMO (genetically modified organism) seeds, the product is literally identical. Silver is silver once processed. Insurance policies and claim practices between companies are not nearly the same. This is why agents actually still need to read the policies they are selling to avoid E&O claims. This is why it matters if a policy is an ISO policy versus a non-ISO policy. Policies are not identical and, therefore, fail the test for commoditization. Is the goal the same? Yes, but the means and values are different. Therefore, the product is not a commodity, even in personal auto. Instead, insurance is more easily sold by a certain kind of company/agent if that company/agent can convince the public that all policies are the same, and, therefore, the only difference is price. In other words, these vendors need to convince the public that insurance is indeed a commodity, even though it is not. And they are pretty good at doing this. See also: Selling Life Insurance to Digital Consumers   Rather than commoditization, the result is really better described by the economist Carl Shapiro in his fantastic study, "Consumer Information, Product Quality and Seller Reputation" (Bell Journal of Economics 13, no. 1 (1982): 20-35). He describes how, when a product is complex from the consumer’s perspective, mediocre vendors will always take advantage of the consumer and vendors providing higher-quality services/products. The mediocre vendors do this by causing consumers to think they are getting the same product for a lower price. They may do this in a number of ways and, often in the financial world, will reduce a quality decision to one number. This number may be a rating, such as a rating company's rating of an insurance company. The vendors know that insurance agents and consumers and regulators look at one number/letter. Then they work backwards to figure out how to get to that number with a product/service that really does not deserve that rating but that will qualify because they manage to check all the boxes. This may have happened many times in the credit crisis and was arguably a leading cause of the credit crisis. I think this may be happening with some insurance companies today, but that is for another article. Relative to commoditization, the "one" number is a price. The silent message is that all insurance is the same, and the consumer should not spend any time considering the coverage differences or claims practices. Then the vendors go one step further and truly abuse the proper use of statistics because they only cite quotes that save money. For example, take the $300 saved when switching. The statistic may be correct, and statistics do not lie. The pictures people paint with statistics can mislead, though. If 100 people get quotes from this company, and 95 quotes result in premiums higher than they are already paying, but five do save money, then technically the tag line is correct because it includes the word "switch." If instead, all quotes were included, I am guessing the average savings would be less, and the average savings of all quotes is a rather important point. Another example is the focus on new business quotes vs. renewal pricing. This is a rather interesting point because so many companies jack renewal rates. Therefore, new business quotes vs. renewal pricing is really an apples-to-oranges comparison. Theoretically, with true actuarial based pricing, this difference should not exist. Consumers inherently get this, but the companies play to their advantage in two fascinating ways. The first is that by advertising that the consumer is saving $X on new business, vendors cause consumers to think that new and renewal pricing are the same. The difference creates an opportunity to gain new business on price. The second interesting play is that companies are not exclusively, and maybe not primarily, using actuarial-based pricing on either the new or the renewal. Instead, what they do at renewal is increase the price based on their price elasticity curve. A few insurance company people actually learned economics in college. They increase the renewal pricing knowing that they'll lose a percentage of clients (to other companies encouraging insureds to switch for $X savings on average switch). The damage, if the pricing is designed well, is negligible because the extra money made with those who stay more than makes up the difference for those that are lost. Then they create stickiness in the initial sale because the initial saving is so great that consumers are likely to think they are always saving more with this company and will not shop as often, resulting in paying more than if they shopped all the time. These companies that focus the consumer on one number and the concept that all coverages and claims practices are the same are smart. As Shapiro stated, companies that focus on causing consumers to think they are getting more quality than they really are is an inevitable outcome of a free economy. What are the rules for successfully selling a non-commodity financial product as a commodity?

1. The right kind of advertising is crucial. This means keeping it simple. Avoid all indication of complexity or differences between products.
2. Barely mention "insurance."
3. Use bad humor employed by cartoonish actors/animated characters.
4. Repeat, repeat, repeat, repeat, repeat, repeat, repeat, repeat, repeat. According to a report by Coverager, Oct. 16, 2018, Geico averaged 9.83 views per household of just one of their television commercials. To create enough sales and existing consumer brand knowledge, every household had to see that one advertisement almost 10 times.
5. Spend huge amounts of money on advertising. According to the same Coverager report, citing Alphonso & Statista (TV advertising data companies), Geico spent $232 million on television advertising alone (not including online advertising) in the last quarter of 2017. It is estimated in the article that Geico spends another 20% or so online. Call it $250 million plus per quarter, which extrapolates to $1 billion plus per year. According to A.M. Best, the Geico subgroup rating unit (002933) writes approximately $30 billion in DWP annually. Advertising expense then is only between 3% and 4%. Advertising for Geico then is incredibly affordable.

(Note: I am using Geico because I have access to these data points and because the company has a successful strategy. I am not picking on them, and I am not advocating for them. With the data available, I can more easily explain the market using their data vs. other carriers, although those carriers may be more aggressive, less aggressive, better/worse, more expensive/less expensive, use all the strategies described or none. I also do not know with certainty if Geico uses the strategies described, and I do not mean to imply they do by including their specific results.) See also: How to Resuscitate Life Insurance   Barring a few billion dollars available, and remember those billions have to be used on high-quality adverting and corporate leadership, competing directly is not a wise decision. How then does an agent/company win with true quality and care for the consumer? In Shapiro's analysis, the masses are lost in these situations involving complex products. Marketing is about the masses. So the solution involves selling. Selling is about the individual. Selling is about treating people as individuals. Selling is about taking the opportunity to tailor coverage for each individual. Selling is about identifying clients who care about the right coverages (the masses are lost) and converting those who would care if someone took the time to explain why they, the consumers, should care. Selling is about matching consumers' needs and budget with a policy that best fits their needs. Selling, in this environment at least, is about having the knowledge required to create a custom policy. The producer who does not know the coverages is like a tailor who cannot measure. The suit may not be off the rack and may technically be "custom," but it is mostly worthless. You can find this article originally published here.