On March 14, insurance credit rating agency A.M. Best released its Scoring and Assessing Innovation (Draft). Per its press release, “AM Best defines innovation as a multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful. These products, processes, services or business models can be created organically or adopted from external sources.” The rating agency further notes, “Innovation always has been important for the success of an insurance company, but, with the increased pace of change in society, climate and technology, it is becoming increasingly critical to the long-term success of all insurers.” Best begins with an assessment of the commitment of senior management to innovation. In the compliance world, this is also called the “tone at the top.” Best broadly labels this criterion “Leadership.” If there is a firm commitment, then a positive culture of innovation follows throughout the enterprise, the second component (“Culture”) of the Best scoring model. This requires sufficient resources devoted by the insurer to bring to market new products, processes, services or business models and, per Best, “…a demonstrable impact on its long-term financial strength.” This is the third component of the model (“Resources”). Finally, existing company governance structures, policies and procedures must facilitate an innovative environment and address enterprise-wide data management and compliance obligations. (“Process and Structure”) That all sounds logical. See also: Changing Nature of Definition of Risk In what could be said to be an understatement, Best next observes, “A challenge for insurers is aligning the use of customer data with varying regulatory restrictions related to consumer privacy. The rules for mining of personal data are expected to fall within the confines of governance and encompass regulatory guidance.” While this is axiomatic, it also demonstrates an inadequate treatment of the various risks posed by innovation as characterized in the draft. Consider A.M. Best’s 2013 document, Risk Management and the Rating Process for Insurance Companies, in which “Operational Risk” is defined as: “Financial exposures arising from damage to a company’s reputation or franchise value stemming from a wide variety of external and internal factors, such as: management change; business interruption; fraud; data capture; data security and integrity; claims handling; and employee retention.” Operational risk is one of the pillars of the A.M. Best Risk Management Framework. Consequently, a properly governed insurance company will take into account the full scope of regulatory compliance issues raised by innovative technology, which is more than today’s increasingly complex and fluid data security regulatory environment. Enterprise risk management (ERM) must also assess the risks associated with replacing a wide range of systems and, potentially, relationships, that may occur with innovation. While insurtech startups have captured the imagination – and capital – of insurers, these ubiquitous private firms are also third-party vendors that should be subject to the same due diligence as any other service provider. This isn’t to suggest the insurance industry and the consumers of its products should curb their enthusiasm about innovation, or to minimize the benefits that are being realized by both insurers and insureds from what insurtechs have enabled. It is to say, however, that unless we innovate all elements of insurance operations at roughly the same time, innovation will be marked with unnecessary failures, regulatory entanglements and costly litigation. It is not just consumers who are affected by innovation. The whole spectrum of service providers integral to the delivery of benefits to insureds must be on board if there is to be success in these technological initiatives or, as Best puts it, if the insurance company is to be, “relevant and successful.” This includes legal and regulatory compliance, but it also must include making certain that every entity that must adapt to innovative technology adopted by an insurance company is capable of doing so. Currently, predictive analytics driven by access to big data have already been adopted by many insurers to improve the underwriting and claims processes. New web-based distribution systems – which rely on big data, as well – make getting insurance easier in the increasingly competitive world of small business insurance. Platforms such as bi-BERK (from Berkshire Hathaway) and Pie Insurance are but two examples of how technology is making it easier for small firms to do business with large insurance companies. For personal lines of insurance, the Internet of Things (IoT) has provided new opportunities to enhance the customer experience. It is vitally important, however, for insurers to understand the relationship between innovation and their partnerships with a wide range of service providers. In other words, change management is important throughout the environment in which the insurer operates. If any one participant in that environment is told to “just do it” (with apologies to Nike), then there is a risk that innovation will fail. While third-party service provider (vendor) management should already be part of the insurer’s ERM program, onboarding these vendors when new technology solutions are implemented should be something specifically acknowledged by A.M. Best when scoring for innovation. In a recently released study, process mining company Celonis looked at how both leaders and business analysts in the U.S., U.K., Germany and the Netherlands view business transformation. The results were startling. Sixty-two percent of C-suite executives set key performance indicators (KPIs) for their transformation initiative without understanding what’s going wrong in their business first. That led the sponsors of the survey to observe, “This suggests that many businesses are undergoing disruptive transformation processes because they think they should, rather than knowing exactly why they must.” See: Celonis (2019), Why are Business Transformation Initiatives Being Launched in the Dark? See also: New Phase for Innovation in Insurance   Echoing that theme, in a report by Valen Analytics, 2019 Outlook: The Data Race Intensifies, it was noted: “Adding to the innovation challenge in insurance is a trend of long IT backlogs, with most insurers reporting a backlog of one to two years. For the 22% of respondents unable to identify how long their IT backlogs are, it may be one indicator that technology innovation is not at the center of business strategy.” Today, the risk run by the A.M. Best effort at innovation scoring is that insurers will not do the thorough risk analysis necessary before launching and implementing significant technology initiatives. Only then will the path to innovation be focused, aligned with well-defined company objectives and capable of delivering value to all who are part of the claims, distribution or underwriting environments. Without that assessment, “bright shiny objects” will continue to be embraced for no other reason than to say that they were.

Workplace violence can happen any time and anywhere. This session at the RIMS 2019 Annual Conference & Exhibition reviewed a spectrum of workplace violence risk management tactics, including red flags that can foreshadow an event and training on what to do if an event does occur. Speakers included:

• Dr. Teresa Bartlett, senior vice president, medical quality, Sedgwick
• David Rydeen, senior director, risk management, Raising Cane’s Chicken Fingers
• Officer Chris Perez, Brockton Police Department

Workplace violence can stem from a variety of issues. Domestic disputes, mental health issues, drug abuse issues, disgruntled employees and racism are all drivers. OSHA reports that 2 million incidents occur each year, many of which (non-fatal incidents like bullying or harassment) go unreported. Robbery-related homicides and assaults are the leading cause of losses in retail. In this setting, there are tactics to help. For instance, post clear signs that there is limited cash on hand/surveillance cameras in use, maintain an unobstructed view of and from the cash register and sales area and create and train on a clear policy as to what to do in case of an event. Approximately 70% of attacks occur within the healthcare industry. Train your staff so they know what to do. Frequently involve police and first responders in that training. It is important to have protocols in place when events escalate and train on de-escalation skills. See also: Workplace Violence: Assessment, Response   Whatever the industry, it is important to know the warning signs. A mishandled termination or other disciplinary actions are often triggers. Know that you are not required to call someone in to work to terminate the person. Also be aware of weapons on the work site. Listen for motivations. If someone is suicidal, the person probably will not have problems hurting others. Drug or alcohol use on the job is also a red flag. Try to be aware of employees’ personal circumstances. Your management really is the front-line defense and must be consistent and present. Family conflicts, financial or legal problems and emotional disturbance can all indicate problems. Gently address any noticed changes in a non-threatening way. Start with, “Your energy is different today. Is everything OK?” Other behaviors to look for are:

• Increasing belligerence
• Ominous, specific threats
• Hypersensitivity to criticism
• Recent acquisition or fascination with weapons
• Apparent obsession with a supervisor or coworker or employee grievance
• Preoccupation with violent themes or interest in recently publicized violent events
• Outbursts of anger

Know your resources. Meet with local city and country law enforcement in preparation of an emergency. Invite them to your building for a tour. Provide architectural diagrams of the site and make them aware of emergency routes and all entrances/exits. See also: Broader Approach to Workplace Violence   Risk managers must focus on designing a customized approach that matches the goals of their organization. Use clinical resources such as mental health professionals and nurses and look to umbrella policies for planning assistance. Plan for post-event strategies, including crisis management companies to meet with witnesses and a plan for HR to go to the homes of those affected and cannot return to work immediately. Dealing with the aftermath is extremely important, especially for survivors. A variety of PTSD-related conditions can lead to a variety of mental health implications for employees. Access to psychological help will be essential. There are also return-to-work strategies that will need to be applied, including gradual exposure therapy or possibly assigning an employee to a job in a different department. All of these strategies are geared at proving that it is safe to return.

The past decade has been transformative for U.S. marijuana laws. Not since the era of Prohibition has the U.S. wrestled so broadly and intensely with the cultural, judicial and economic implications of legalizing a formerly illegal substance. And while the push to reform state marijuana laws continues sweeping the country with unambiguous fervor—a late-2018 Gallup poll showed 64% of Americans favor legalization—many questions and complications remain for those in the insurance industry. Whether it’s being used as medicine or for recreational leisure, marijuana's core problem for insurers is a policy landscape where myriad state laws now conflict with the fact that the federal government still considers marijuana illegal under the Controlled Substances Act (CSA) and classifies it as a Schedule I drug with "no currently accepted medical use in treatment in the U.S." What’s more, the particulars of individual state laws are anything but uniform, and what’s considered legal in one state may be unlawful in another—even if they both allow for some degree of marijuana possession or consumption. “This has all led to a real insurance quandary,” says Brenda Wells, director of the risk management and insurance program at East Carolina University in Greenville, NC. “Do they cover it? Do they not cover it? And if they do cover it, how is it valued? These are just some of the questions they’re wrestling with at this stage. And it can get confusing.” Marijuana and Homeowners Insurance The question is simple: If a policyholder has some marijuana—or is growing it within state-mandated limits—and it’s damaged in a fire or stolen from the property, will a homeowners insurance policy cover the loss? The answer is not so straightforward. Not only are insurers nervous about covering marijuana-related losses because of the legal disparities between state and federal policy, but most homeowner policies also contain explicit exclusionary language related to controlled substances, which means that a claim for lost, stolen or vandalized cannabis may be denied if the insurer believes the loss falls within the exclusion. This can wreak havoc on the enforcement of contracts between an insurer and its clients, says attorney Richard Blau, an insurance expert and shareholder at GrayRobinson and head of the firm’s medical marijuana team. To emphasize his point, Blau cites a now-infamous 2012 Hawaii federal court ruling that said a homeowners insurance policy did not cover the theft of one woman’s marijuana plants grown for medicinal use. The homeowner, Barbara Tracy, was allowed to grow and possess marijuana for her own medical use, and after 12 plants were stolen she submitted a claim to USAA for $45,600. USAA initially agreed to pay Tracy $8,801 for the claim, but Tracy sued, claiming the plants had a far greater value. USAA argued that, because marijuana is federally classified as an illegal Schedule I substance, it was under no obligation to cover the loss at all. The court ultimately agreed with USAA, stating that even though Hawaii law permits the use of marijuana for medicinal use it is illegal under the Controlled Substances Act and therefore not subject to homeowners insurance coverage. “So on the one hand, you have a lot of insurance companies that operate in many different states, which means they arguably fall under federal jurisdiction. They’re worried their charters could be challenged under federal law,” Blau says. “But you also have what I think is the larger issue of judicial precedence that says insurance contracts are not enforceable under federal law. The good news is that… we now have an alternative line of cases where judges have ruled that as long as the claimant stayed within the scope of state law the insurance contract is valid and enforceable. But the split of judicial opinion needs to be reconciled.” See also: In the Weeds on Marijuana and WC   According to Wells, a lot of insurance companies “are reluctant to even talk” about whether they will cover marijuana-related homeowner losses, adding that “the industry in general hasn’t been handling this very well, but they need to figure out if they’re going to cover this. And if they are, they need to be prepared to pay claims like they would for anything else.” Trying to find a catchall approach to the marijuana home insurance quandary produces a staggering variety of anecdotes, opinions and legal vagaries that fluctuate from state to state and from insurer to insurer. At the end of the day, whether a loss is covered will most likely be up to the individual insurer. “Legal marijuana is one of a few Wild West issues facing property insurance right now. It’s vast, uncharted territory,” says Janet Tulsette, a Connecticut-based property insurance consultant who has recently specialized in the intersection of insurance and marijuana law. “Not only is it complicated…but it’s also so unprecedented, which means insurers are reluctant to be the first to make any bold moves one way or the other. They’re playing it relatively safe, but that makes things more complicated, not less.” As of right now, some insurers are looking to individual state laws to establish a precedent for coverage. For instance, Allstate went on the record in 2014 saying it would cover the loss of marijuana in Colorado, where cannabis is legal for both medicinal and recreational use, adding that marijuana plants grown with a state license—and not exceeding the legal state limit—would be “limited to the perils and limits under additional protection for trees, shrubs, plants and lawns.” Marijuana and auto insurance On a consumer level, the intersection of legal marijuana and auto insurance has been fairly uncomplicated thus far, and that’s because the insurance ramifications for getting caught driving high are no different than those associated with driving under the influence of alcohol. However, cannabis-related businesses are finding it extremely difficult to obtain commercial auto insurance policies that can adequately cover various auto-based aspects of their businesses, including the transport and delivery of cannabis-related products. “A lot of the mainstream underwriters are pretty old school, and their vision of a driver in this industry is like a stoner pizza delivery guy,” says Jeff Kleid, owner of the California-based Elite Green Insurance Solutions, which provides a suite of insurance products to the cannabis and hemp industries. “They think that since these men and women are delivering marijuana they must also be smoking it while they’re driving. And that couldn’t be further from the truth. This is a problem of perception as much as it is a problem of legal disparities.” Kleid is quick to point out that insurers are also reluctant to write commercial auto policies because there’s a significant dearth of claims and risk data essential to underwriting. “Insurance is a data-driven industry, and because it’s been illegal for so long there’s not enough data out there to make insurers comfortable working in this space,” Kleid says. Marijuana and life insurance As more and more Americans legally smoke cannabis for recreational and medicinal use, life insurance providers have had to grapple with its impact on the application and underwriting process. According to insurance specialist Michael Quinn, life insurance providers are wrestling with whether smoking marijuana carries the same health risks as smoking cigarettes. “Regular smokers are charged tobacco rates, which are often four times higher than those for non-tobacco users,” Quinn says. “But some insurers are deciding to treat marijuana differently.” For instance, Prudential tends to offer some of the lowest life insurance rates for marijuana users because they do not place them in the same risk pool as cigarette smokers. According to Prudential, a preferred non-tobacco rate is granted to users who smoke marijuana no more than three times per week, and insurance applicants must admit to marijuana use during the application process. Meanwhile, providers like United of Omaha offer non-tobacco rates for those who smoke marijuana no more than three times per month, while John Hancock stipulates that it considers smoking marijuana “drug use” and will not offer applicants competitive rates. “Based on your marijuana use alone, there is no telling what kind of rates you will be offered. You could technically get rates anywhere from substandard to preferred plus,” Quinn says. “However, a company like Prudential looks at the reason behind your marijuana use, and if it’s for medicinal reasons your rates will be based on the severity of your health condition, not the marijuana use alone.” Many in the industry echo this distinction. “For underwriting consideration, the first thing we must determine is whether the use is recreational, or if the proposed insured had been issued a prescription for medical use,” Pinney Insurance underwriter Mike Woods says. “If it’s for medicinal purposes, underwriting is going to be looking to the specific issue that the marijuana is being used to treat." Marijuana and business insurance As anyone familiar with the legal cannabis industry will attest, there is a lot of money to be made from insuring cannabis-related businesses. According to Fortune, the U.S.’s legal marijuana industry grew to $10.4 billion in 2018 (it was $6.5 billion in 2016) and employed more than 250,000 people. What’s more, Fortune estimates that investors will “funnel more than $16 billion into the industry” in 2019. The need for a comprehensive approach to insuring various aspects of the legal marijuana industry is becoming increasingly critical for everyone from growers to dispensary owners, and there are signs that the insurance industry is starting to pay attention. To be sure, a handful of niche carriers and subsidiaries have begun filling the gap. For instance, Brown & Brown Insurance now offers marijuana business insurance through a new company division called Cannabis Insurance Professionals (CIP), which is based out of California and licensed in all 50 states. CIP garnered national headlines last year after the company paid out more than $1 million to one of its clients whose marijuana crop was destroyed in the 2018 Thomas wildfire. “There are small private insurers trying to fill the gap, but not many. And most of these companies are non-admitted, coverage is limited and the price is expensive,” says Dawna Capps Evans, executive director of the National Cannabis Risk Management Association (NCRMA), a membership-based trade organization that provides risk management and insurance solutions for CRB owners and investors. According to Evans, the current insurance landscape leaves business owners with tough choices. “They can either purchase very costly insurance, or they can go uninsured or under-insured—which leaves assets unprotected and exposes them from a personal liability perspective—or they have to piece a plan together from many different insurers, which can be extremely time consuming,” Evans says. See also: Marijuana and Workers’ Comp   According to attorney Meghana Shah—partner at Eversheds Sutherland LLP and co-founder of the firm’s cannabis industry team—the conflict between state and federal law once again rears its head, potentially exposing marijuana businesses and their ancillary service providers (such as insurers) to federal criminal liability. “Business owners and insurers alike remain concerned about the risks associated with doing business in the cannabis industry,” Shah says. “For cannabis-related businesses, the inability to secure insurance renders them unable to protect themselves against common business risks, some of which have the potential to irreversibly cripple their business.” Adjacent to this concern is the limited access that CRBs have to the banking system. Consider, for instance, that in 2014 Colorado’s Fourth Corner Credit Union was chartered to serve the “unique financial needs” of cannabis-related businesses. But despite operating within the boundaries of Colorado’s legalized marijuana framework, the application for a master account from the U.S. Federal Reserve System was denied because of marijuana’s continued illegality at the federal level. This is just one example of how the disparity between state and federal law has forced the legal cannabis industry to operate within a cash-intensive “gray market,” bringing with it all manner of concerns, including theft, the risks of currency transportation, money laundering and cash hoarding. “The lack of banking options is a unique and significant risk for the cannabis industry right now because so much of this economy is being fueled by large, cash-based operations, and that leads to significant exposure,” Evans says. “Banking and financial institutions play a critical role in our economy, and most businesses take for granted the way they use these institutions in a secure way. Without access to safe banking in the cannabis industry, insurers are going to be very reluctant to get on board.” In an effort to address this particular problem, the House Financial Services Committee voted 45-15 in March to advance the Secure and Fair Enforcement (SAFE) Banking Act, which aims to protect banks and other financial institutions from federal prosecution when working with cannabis-related businesses operating in compliance with state laws. What’s more, the act would prohibit federal banking regulators from sanctioning financial institutions that work with CRBs and would also protect ancillary businesses—like insurance companies—from being charged with money laundering or related financial crimes. And while the SAFE Banking Act still faces an uphill battle, many in the industry are extremely optimistic about what it foreshadows. “The industry is only going to grow, and the losses associated with legal marijuana are only going to increase,” Tulsette says. “The insurance industry really needs to come up with comprehensive and substantive solutions. They can only keep their heads in the sand for so long.”

One of the most fun and inspiring endeavors I’ve undertaken in my post-corporate life has been to advise select early-stage companies, portfolio managers and accelerators. Startups need lots of marketing advice, especially early on when there may not be a CMO on board. As a result, my work often involves defining audience targeting strategy and the value proposition (from the buyer’s perspective), building the messaging framework and then spending lots of time advising on how to navigate the corporate gauntlet. The problem is, even with a well-defined marketing, communications and sales strategy, a startup at the pre-seed, seed or even A-round stages may not have the endurance to make it through the corporate gauntlet.  The effort is just too complex and time-consuming given the demands and limitations on a young company’s talent and the sensitivity to monthly cash burn. You may say, well, the startup world is a bit Darwinian.  Only the fittest survive, and that is to be expected. My bet is that while most everyone at work in the corporate world acknowledges their own bureaucracies, too few act on the recognition that their people, policies, and processes can absolutely affect startups’ survival, which, in turn, hurts enterprise efforts to transform and innovate. Those in the corporate world pay a price for killing or weakening these innovators, who are a source of new capabilities that established companies are unlikely to create on their own. Corporate leaders can do something about it – if they can summon the leadership, courage and tenacity to do so. What exactly is happening? Here’s a sampling of what I see founders run into, once the introduction is made and there is an expression of interest to learn more. First, a couple of months pass to get a meeting on the calendar, and to take place with at least some of the right people in attendance. See also: How Startups Win Customers’​ Hearts     The conversation after the presentation and demo moves to: “We love this tech, and it would do a lot for our organization…” Yet, within a couple of follow-up meetings, phone-calls and other internal introductions, the conversation switches over to one of many variations on the big “but” …

• “But we have too many priorities.”
• “But we have to pick our battles with [fill in the blank – procurement, compliance, information security, et al.]
• “But we have so many open roles that there is no one here to lead the pilot.”
• “But we cannot get the support in 'the business'; they are just focused on this quarter’s sales.”
• “But it turns out we already do this or can do it ourselves.” [This is often untrue.]

These are real quotes from real conversations with well-paid, smart and accomplished corporate managers who get the reality of declining customer franchises, diminished brand commitment, new and unbounded competitors, legacy distribution, etc. Some of them are actually – yes – digital natives, and all are at least digitally enlightened. I wonder, are they simply beaten down? Are they afraid? Do they define their roles as being great at repeating how things have always been done, and not deviating too much? Or are they trapped inside a legacy mindset, an outmoded idea of the value of speed (no, you cannot expect the world to wait for your annual planning cycle), and higher internal hurdles for getting approval to do new stuff than to maintain the status quo? There are common characteristics inside large enterprises where the future is being advanced with meaningful adoption of some of the imaginative business models, offerings and technologies developed by startups:

• Leaders are allowing the processes, policies and procedures that are fit for the purpose of innovating to co-exist alongside those that are essential to sustaining earnings predictability.
• Leaders are willing to try new things and know that failure is a natural and expected part of experimentation.
• Leaders are speaking up and advocating for policy and process change and holding themselves and their people accountable for delivering the short term while also taking steps to the future.
• Leaders are developing their people, ensuring collaboration and diversity through action not just talk and having their people’s backs when they take risks.

See also: Who Will Win: Startups or Carriers?   Startups are discouraged by enterprise relationship opportunities where the pace and bureaucracy are simply too slow and complex to be practical when they have to demonstrate milestones every month to their investors. Is your company or another one you know of missing out as a result? Do you believe something can be done to change?

This article is based on a keynote speech, “Disruptive Leadership,” at the World Forum Disrupt, Strategy & Innovation Conference in New York City. The pace of change we are experiencing today is as slow as it is going to get for the rest of our lives. Everyone talks about disruption: digitalization, automation, virtual reality, artificial intelligence, big data. The corporate world is polarized at the moment. Companies today sometimes feel that they must choose between flexibility, on the one hand, and the stability, on the other. There is a lot of talk about agility as a way to bridge the gap between the startups and the industry incumbents. According to McKinsey, “Truly agile organizations learn to be both stable (resilient, reliable and efficient) and dynamic (fast, nimble and adaptive).” Disruptive leaders are the ones who can stand in the middle – the ones able to speak both the language of the legacy world and the language of the startup world. They stand in the sweet spot between rapid change and rigid stability. In fact, disruptive leadership is the single most important ingredient of agile organizations. Disruptive leadership is not reserved for tech and innovation departments only. It is about changing the organization's DNA, instead. Through my work over the past decade, I have been observing highly effective leaders, and, as a result, I came up with five main pillars of disruptive leadership. I will cover three here and follow up a second article that has the final two, plus a conclusion. 1. Past — Future Startup leaders ask: How could we do it tomorrow? Legacy leaders ask: How have we done it so far? Disruptive leaders ask: How might we do it today so that we bridge the gap between yesterday and tomorrow? Disruptive leaders are able to keep one eye on the present and the other on the future. They know that, to successfully lead a disruption, they need to keep the significant part of their existing operations stable. They also understand, however, that experimentation is crucial to be future-ready. Balancing these two conflicting goals is not easy. There are not a lot of leaders who can do this. It’s a missing skill in the market. See also: InsurTech Forces Industry to Rethink   Some traditional companies try to bridge the skills gap by hiring leaders from the startup world, which often fails. Why? Because they often don’t pay the necessary respect to the existing culture and the existing business model. They are great at innovation, but they are often not adequately skilled to balance stability with change. Reflect: How much time are you carving out in your day to think about where the future is headed? 2. Limited — Unlimited Limited vs. Unlimited thinking is closely related to the previous point. Our past and our present are mere indications of what is possible. Truly unlimited potential lies in the future. Disruptive leaders create an appealing vision by thinking in an unlimited manner and are then able to tie it back to reality and find ways to make it happen. Startup leaders focus on closing the so-called opportunity gap – the gap between the way things are and the way they could be. Legacy leaders focus on closing the performance gap – the gap between the way things are and the way they should be. Disruptive leaders focus on both. They aim to make improvements to the existing product or service (performance gap), while at the same time challenging whether that product or service is relevant any more (opportunity gap). Reflect: What can you do to move from limited thinking to unlimited thinking both in relation to your company and for your career in general? 3.  Internal — External Legacy leaders have an internal focus: How have we done it so far, and what is it that we are strong at, that we want to offer to our clients in the future? Startup leaders are extremely client-focused, on the other hand; they are great at listening and designing a business that meets their clients’ needs. As usual, a disruptive leader is the one who can do both – honor the legacy and the strengths of the company, while keeping another eye on the external world: clients, competitors, new entrants, emerging risks. See also: Industry Demands an Open Ecosystem   Disruptive leaders keep a close eye on all the players up and down the value chain because they understand that clients of today may be competitors of tomorrow, and vice versa. Value chain disruption is becoming more prominent, so keeping an eye out on the external developments is critical. Reflect: How much of your time are you carving out to observe the market and understand the developments up and down your value chain?

A report by The Insurance Insider last week that AXA won't contribute more funding to its insurtech venture fund underscores just how hard innovation can be for big corporations, even when you have the sort of all-star cast that a fund like XL Innovate can assemble.

Picking winners and losers among investments is plenty hard—the rule of thumb is that nine out of 10 startups fail. On top of that, corporate venture funds typically have conflicted agendas.

To get top talent, you have to pay handsomely for good returns—Silicon Valley titans like John Doerr and Vinod Khosla set the bar, having become billionaires as VCs. Chasing those returns, the VCs want to be able to invest in anything with great promise. Fair enough. But here's where it gets tricky.

The corporation typically isn't just looking for a return on investment. It wants to find a product, a line of business, a business model, a something that could produce a step change for the company or even reinvent the business. Basically, the corporation is looking to be Dayton Hudson, a stodgy family retailer that in 1962 let one of the brothers test an idea for a discount retailer—when I tell you that the name he chose was Target, you realize just how successful he was; his experiment subsumed the rest of the company. 

The XL Innovate early investment in Lemonade illustrates the tension. Lemonade is now a unicorn, valued at $1.5 billion to $2 billion, so the fund has generated a spectacular return. Yet Lemonade's renters and home insurance, even together with its slick interface, aren't likely to move the needle for AXA's life and health lines or its financial services.

And XL's Lemonade experience is for a company being sophisticated about how to innovate. Our chief innovation officer, Guy Fraker, tells of being at State Farm years ago, in the pre-insurtech days, and trying to get the company to invest in Relay Rides. Guy was sure that the peer-to-peer, car-sharing service would succeed, and the $500,000 investment finally happened, but only because a senior executive cut through the review process and expensed it. Guy later learned that State Farm sold its stake in the company (now called Turo) after a year and tripled its money, but it's not as though that extra $1 million moved the needle for the mammoth insurance company.

Historically, the best insurance companies have been run by financial geniuses, who have figured out super-smart ways to use all the capital they amass. Warren Buffett, for instance, has used Berkshire Hathaway's insurance assets to finance much of his wizardry. And there's a lot to be said for the insurance industry's financial sophistication. The industry financed the recovery from Katrina, Maria, 9/11, etc., and is rebuilding sections of California following the devastating wildfires, all without taking on debt. 

But the game is changing, and financial brilliance is no longer enough. The bad news is that the challenges will be tough, as the AXA report shows. The good news is that the industry seems to be coming to grips with the change. A.M. Best's decision to start rating companies on their innovation capabilities, in particular, will not only provide companies with incentive but will help steer them toward the right path.

Cheers,

Paul Carroll
Editor-in-Chief

Artificial intelligence (AI) seemingly has been discussed everywhere over the last few years, and now it’s made its way into the commercial insurance industry. Organizations are using AI and machine learning for everything from streamlining operations to offering more personalized care and better customer service. There is an increasing sense of urgency about getting started on the AI journey. The question is how. Do they develop a custom solution in-house or purchase a third-party solution already on the market? At first blush, the temptation to build can be strong — after all, you can design exactly what you want for your specific environment. In reality, it’s hard to accurately weigh the perceived benefits of a highly customized internal platform against the time and cost requirements compared with purchasing a tested, third-party solution. To help figure out the best course of action for your organization, I’d like to share some criteria that may guide you. Staffing Developing a quality AI-based platform that effectively addresses specific needs requires a dedicated team. To build this team in-house, your organization will need to hire more than just data scientists. Full deployment of a new solution requires product managers, software engineers, data engineers, data scientists, operational experts to develop process and operational workflows, staff to integrate data models into operations, people to manage onboarding and training of the employees who will ultimately use the solution and staff who can quantify value. It’s also important to have all these members operate as one unified team instead of spanning various organizational groups that are not 100% aligned. For some organizations, this may not be a big deal. For others, the process of recruiting, hiring, training, managing and scaling down staff is one of the worst, and often most prohibitive, parts of embarking on the AI journey. If it’s too daunting to put together a team with the necessary skills, opting for a third-party solution that already has this figured out could be the way to go. See also: How to Use AI in Commercial Lines   Data What types and how much data does your organization currently pull? If you can glean industry-leading insights and possess a treasure trove of information internally, you may want to keep it under lock and key, developing new ways to access and analyze it in-house. But this is usually the exception rather than the rule due to the complexities involved in the insurance industry. Even very large organizations with a high number of claims may lack a preponderance of data on a particular feature, injury or litigation scenario. An external vendor, however, could have data aggregated more broadly to cover all situations. External AI vendors draw on a wealth of anonymized and aggregated data from both public and private sources. This means data models can be trained more quickly and accurately. Customization This is an area where in-house development wins. Your organization can build something from the ground up completely specific to your needs at every turn. If you opt for a third-party solution, there are some constraints that you have to adhere to. However, it’s important to think of customization not just at a point in time but also across the entire life of the AI solution. While you might be able to build exactly what you want right now, if you don’t have continued focus, the solution will become obsolete rapidly. This brings us to the next point. Continued Focus Just because an AI-based solution is created and implemented doesn’t mean the work is done. It is, in fact, just the start of a journey that requires a dedicated team focused obsessively on the problem. These solutions need to evolve fast, or they will rapidly get irrelevant. Models need to refresh. And platforms and software need to be updated, maintained and optimized. When planning for this in-house, factor in both the staff and time involved to refresh models, fix bugs or add fields or features. If you go the third-party route, maintenance and improvements are typically included in the cost or subscription. If you feel uncomfortable dedicating an internal team to the project on a continuing basis, it might be better to go to a third party. Security When it comes to security, in-house platforms have an edge because data is not shared outside of the organization. While you still have to ensure that your networks, systems and endpoints are carefully managed, you are in control. While evaluating third-party vendors, it’s important to check their security credentials and processes to handle data. They need to be as good as your internal processes (if not better) with clear evidence of tight controls through certifications like SOC 2 Type II, HIPAA and HITRUST. Time to Capture Value There is a race going on to bring down cost structures dramatically. This is driven by the premium pressures in the market. The primary way to improve combined ratios is by pushing on operational efficiencies. Time matters. It’ll help to think hard about how you could capture value quickly. Ask yourself how much time it will take to:

• Assemble the team
• Receive data and set up a data pipeline
• Design the solution
• Build the solution and create a testing infrastructure
• Operationalize the solution
• Design and implement a way to track value
• Continuously iterate on the solution

Cost Your ultimate decision may come down to some basic math. Once you’ve narrowed the list of potential outside vendors and receive their quotes — which typically include a continuing fee that covers hosting, support, performance and additional improvements — you can compare them with what you estimate for the total of building a solution internally. In calculating this estimate, factor in staffing, training, infrastructure and hosting costs as well as maintenance and continuing improvements, as previously discussed. See also: Leveraging AI in Commercial Insurance   I hope these guidelines assist you in making the decision on how to best bring AI into your organization. There are pros and cons to both building and buying. The trick is to prioritize your needs and what is actually feasible and realistic for your company to ensure that the result more than justifies the means to get there.

I received this email last month: I attended another conference yesterday.... Lots of talk about tech and customer experience. No talk about coverage and language and why it matters. My response: Has there ever been an insurtech conference where someone speaks as a devil’s advocate to point out some of the problems or issues with trying to insure someone in 60 seconds or with dubious “big data”? I just wrote about an insurtech homeowners quote I got last year where my home’s square footage was understated by 1,200 sq. ft. resulting, in part, in the Coverage A limit quoted being at least $200,000 too low. I did another quote a week or two ago at the same site, and my square footage was OVERstated by 1,600 sq. ft., though the quoted Coverage A limit was still below what I know to be the correct replacement cost. I just wonder if the organizers or participants in these events simply don’t want any naysayers to rain on their parade. The thing is, the technology could be used to do a better job than many agents if the insurtech industry would just get away from the misguided premise that what consumers want and need is fast, easy and cheap. What consumers might want and what they actually need are two completely different things. When my son was a few years old, he would have happily subsisted on a diet of chicken nuggets and gummy bears. That was what he wanted, not what he needed, because he was ignorant of nutrition in general and the nutritional value of such "food" in particular. The same is true with regard to consumers and insurance. It’s a combination of ignorance and the perception, fueled by our own industry advertising, that insurance is a commodity differentiated only by price. See also: Insurtech’s Lowest Common Denominator   Instead of easy/cheap/fast, easy/cheap/better is quite possible. There’s a semi-insurtech that provides a commercial lines market. I looked at its application/exposure analysis system a few years ago, and it was VERY impressive. The questionnaire/checklist series of questions involved a lot of exposure analysis. It wasn’t fast by any means, but it appeared to be very thorough.

THIS is where insurtechs could take the industry if they had a clue what they were doing.

Instead, they cater to the base instincts of people because of ignorance or avarice. They’re looking for quantity, booking as many policies with as little effort as possible. Cash flow. The fact that they dishonestly or misguidedly lead people to believe they can really sell them insurance in 60-90 seconds makes me think there is more than just gross ignorance involved. If they actually understood the industry and what is at stake for the public, they would know the Amazon “one-click” approach isn’t suited for what we sell. Insurance policies have lots of endorsements for a reason--unless a lot of those coverage options are being built in, there are people with lots of coverage gaps that don’t have to be there. The insurance industry is founded on good faith, and good faith means a lot of things that don’t seem to be part of the business model of a lot of insurtechs. If we consider ourselves professionals, there are certain characteristics of being a professional that we have to meet. One of those is altruism. I don’t see any real altruism, for example, coming from a company like Lemonade other than the charity perception they like to give lip service to. When I got my online homeowners quotes, the companies never asked me about my boat dock. Assuming they’re using state-of-the-art data resources like satellite imagery, something in their system should have told them that I live on a lake and have a $40,000 covered boat dock. They should also have access to information that tells them the dock is on Army Corps of Engineers property, not MY “residence premises.” As a result, they would have issued me a homeowners policy with a $40,000 gap for that exposure alone. On our neighborhood NextDoor app, someone said they had a slip on their dock that was available for renting. That makes their dock used for business, necessitating another endorsement to cover that exposure. Does anyone at this insurtech know this? Does anyone at this insurtech really care that they may have a book of business full of people who have potentially bankrupting uninsured exposures? I doubt it. Too cool to care. Would a traditional agent ask these questions? Many would not, so I don’t blame this attitude just on insurtechs. There is plenty of room for improvement in traditional channels. That’s where I see the role of technology. Automate processing as best as possible and use RELIABLE information resources to streamline the processes. That should give knowledgeable, caring professionals, with the assistance of AI technology, the ability to devote most of their time to exposure analysis, risk management, advocacy and education. See also: Predicting the Future of Insurtech The industry needs disruption and can benefit greatly from technology, but not the kind being offered by most of the insurtechs I’ve looked at. Everyone knows the U.S. has a great need for rebuilding infrastructure. If we let the equivalent of insurtechs do it, they’d be rebuilding bridges with matchsticks. This message needs to be shared at insurtech conferences, but I’ve not seen any indications that it is.

Monumental changes in how and where work is performed create new risk and safety challenges. This session at the RIMS 2019 Annual Conference & Exhibition examined emerging workplace risks and effective safety strategies to address them. Speakers included:

• Larry Pearlman, senior vice Ppesident, workforce strategies practice, Marsh
• Timothy Martin, global health and safety manager, Steelcase

1. Wearables Ergonomics are a problem across many industries, especially with an aging workforce. Wearable devices measure body stress so that, with injuries, we can determine what happened, how it happened, when it happened and if it will happen again. Different technology like exoskeleton suits are available to help with strenuous activities, which can help retain your aging employees longer than otherwise expected. 2. Robotics Industries have evolved from using barrier robots (kept away from employees), to collaborative robots (good for repetitive tasks but extremely complicated to program) to now using autonomous robots. Autonomous robots are simple to program in an extremely short time, so virtually any employee can control them with little effort. See also: Top OSHA Trends Facing Employers   3. Workplace Violence Employers are still not being proactive enough on workplace violence, despite the increasing frequency. Training does not extend to drills, and mental health problems are going unaddressed. Employers need to shift from reactive policies to predictive and prescriptive policies. Technology has evolved to provide electronic robots that can patrol your workplace, supported by a control center that can interact with employees in real time. 4. Workplace Wellbeing Studies show that employees are stressed and in poor health. Employee wellbeing is a major problem, and employers need to implement support for total wellbeing – physical, emotional, financial, social. There is a certain way to inspire wellbeing that does not seem like you are telling employees what they should be doing, which is ineffective. There are more-effective programs available that will tailor programs to employee preferences. 5. Temporary Workers Temp workers often do not know proper safety basics and company policies related to safety. Employers can reduce the risks related to temporary workers through hiring practices, screening exercises, onboarding and continuous training. If you use a staffing agency, you can partner with it so that it aligns with your safety philosophy. Be transparent and try to match the type of work to the worker based on physical job requirements. 6. Changing Demographics Training methods must adapt to address the changing nature of the workplace. A blended learning approach is now necessary for different generations. Technology is addressing safety learning preferences for the younger, tech-savvy generations. Micro-learning is available to address bite-size info in real time. Geofencing can monitor and message employees at decision points to ensure rules, compliance and hazard awareness. Also, virtual reality is available to simulate situations to manage the rare, impossible, expensive and risky. See also: Connected Buildings and Workplace Safety   7. Marijuana Marijuana use continues to increase as legalization spreads across the U.S. There is no accurate impairment measurement available, so it is very difficult to create employment policies and testing. It may not make sense to test any more but, rather, enhance your fitness-for-duty policies. There is a new technology that will scan an employee’s eye and tell you if he or she is fit for duty. This is a measure that you can put at the time clock to help measure impairment before the employee begins his or her shift.

The transformation journey requires a new lens. This lens provides a clear future-state vision that anchors both the outside-in lens (prioritizing customers and their experience) and inside-out lens (prioritizing operational optimization), which together propel the journey forward. Acknowledging that the world and insurance are changing at an unprecedented pace, the first step to defining our future state is recognizing that the business of insurance may be very different 10 years from now. This more-open-to-the-future view lets us begin to explore possibilities and strategic watch points. It also alerts us to the fact that if we, as an industry, continue to seek only incremental change and do not change our approach to transformation, we will wake up in three to five years to discover that we have fallen behind, have lost our relevance and have missed out on a widening array of opportunities to advance. The second step is bringing the future-state vision and applying it across all initiatives. This means focusing not on the traditional approaches (in areas of standalone investment such as core systems modernization, new portals or business intelligence) but on the transformational “step beyond” tied to the future-state vision. Then inside-out and outside-in views need to be in sharp focus. But at the same time, they must complement each other. Each insurer’s individual transformation journey will draw on both in different orders and along different paths. In our latest strategic research brief, we illustrate SMA’s new approach to insurers’ transformation journeys with a series of use cases and proof points from the Chubb Small Business Marketplace initiative. With a clear future-state vision, Chubb took a multi-pronged approach to transformation from both the outside-in and inside-out perspectives – from creating new internal roles to launching new products and customer research, starting several strategic initiatives, introducing new portals and modernizing core systems … all linked together with the common future-state vision … to provide an amazing customer experience for agents writing small business. The clear but simple vision of Chubb’s future state has guided the company throughout its transformation journey and will continue to do so in future investments. See also: Beyond the Digital Transformation Hype   All transformation journeys require new perspectives and new approaches. Insurers, make sure you develop clarity on your future state, and make sure it is all encompassing. Have a clear vision of where you want your company to be before embarking on your journey toward that future. Think beyond the traditional approaches, beyond incremental change. Approaches that aim for incremental improvements are simply not going to be enough. And ensure that you are infusing every initiative with the future-state vision. The changes in our world and our industry are transformational. Maintain your transformational focus. This is your opportunity to advance your journey. Make sure your focus is always directed toward transformation.