The more informed your employees are about health and healthcare, the wiser and more confident they’ll be when it comes to making the right lifestyle and healthcare choices. Health Literacy Health literacy improves health outcomes, while controlling health spending. The Institute of Medicine (IOM) defines it as: “the degree to which individuals have the capacity to obtain, process and understand basic health information and services needed to make appropriate health decisions.” What does the IOM mean by “basic health information”? It’s the knowledge necessary to understand the impacts and risks of different health-related decisions or behaviors. For example, basic health information would include knowing why you should complete the full dosage of antibiotics prescribed by a doctor. However, an even more informed healthcare consumer would know, or at least ask, whether antibiotics are even necessary for the ailment in question. The Low Health Literacy Rate Health literacy is very low in the U.S. – “proficiency” is pegged at 12% by the Journal of the American Medical Association, well below the level of other nations where citizens have access to technology. According to JAMA, having a “proficient” level of health literacy can mean making consistently good healthcare choices and understanding one’s insurance options. Yet, mere proficiency should not be the goal. At Quizzify, where employees are already “proficient,” we continue to learn something every day. For instance, today we learned that pregnant women should avoid consuming black licorice because it contains a chemical that can harm unborn babies. (In this situation, it’s the high-quality candy-store licorice that is the culprit. The version you buy at newsstands is only licorice-flavored.) See also: New Wellness Plans: for Employee Finances   Low Health Literacy Affects Cost A study conducted by the Veterans Administration (VA) on the literacy-cost correlation revealed that veterans with low health literacy spend roughly 50% more on disease management and medical care than veterans with proficient knowledge, other things equal. Think about what that means for your own healthcare budget, and how much you would save by making even a small dent in that. Low Health-Literacy Affects Employee Wellness Outcomes Health literacy training has far better outcomes than any other employee wellness program. Screenings, for example, do not prevent the utilization of medical care. In fact, they may actually encourage it. In the Health Enhancement Research Organization Outcomes Guidebook, researchers found that only 7-8% of hospitalizations are “potentially preventable” by wellness programs. They also note that many non-hospital expenses increase as a result of these programs. Meanwhile health literacy applies to the vast majority of decisions and behaviors that affect health. In contrast, health literacy applies to the vast majority of decisions and behaviors that affect health. Typically, literate consumers spend less. When literate consumers spend more, it is usually an educated decision and may avoid a bad outcome. Implementing Health Literacy Into the Workplace The Uphill Battle Toward Behavior Change: People who are smokers or overweight already realize they should make changes…and yet, for many complex and (in the case of obesity) poorly understood biochemical reasons, can’t. Encouraging smokers to quit or obese employees to lose weight is a totally uphill, probably unwinnable task for an employer, even as a lot of money gets spent trying to move the needle. It is nearly impossible to make significant dents in these two (and related) health issues through behavior change. Furthermore, employers are not especially well-positioned to bring about these changes. Trying too hard can even feel intrusive and uncomfortable for employees. Knowledge as a Solution: By contrast, in health literacy, most of the effort is in imparting the knowledge, not changing the behavior. Examples:

• Every smoker knows he or she is supposed to quit already for health reasons but doesn’t. However, a few smokers may be motivated to quit when they learn the amount of money they are really spending on cigarettes. ($300,000-plus over a lifetime.)
• People know that radiation is unhealthy, whereas very few patients receiving CT scans realize they will be absorbing as much as 1000 times the radiation of an X-ray. Simply obtaining the knowledge can change behavior while saving money.

See also: Ethics of Workplace Wellness Industry   Achieving a higher level of health literacy is not difficult– it just takes some learning.

No matter how hard you try to improve your company’s customer experience, the reality is that your customers won’t remember much of it. That’s because our brains aren’t wired like a video camera, recording every second of every experience. Rather, what we remember are a series of snapshots. And those snapshots aren’t taken at random. The camera shutter opens to capture the peaks and valleys in the experience – the really high points and the really low points. Most everything else, all the parts of the experience that are just “meh,” fade into the background and disappear from our memory. So, our recollections are less “streaming video” and more “still photograph.” But what does this have to do with the customer experience? Well, creating a great customer experience is a lot about shaping memories. For a business to derive strategic and economic advantage from its customer experience, people need to remember it positively. When a friend or colleague asks you – “what do you think of [Company X]?” – your response is grounded in your recollection of the experience, which is different from the experience itself. That’s because your assessment of the experience, the basis for repurchase and referral behavior, won’t be derived from some meticulous calculation of the ratio between pleasantness and unpleasantness. Rather, you’ll be making that judgment just based on the snapshots that your memory has taken from the encounter. This is why companies that excel at customer experience recognize that they’re in the business of shaping memories, not just experiences. They capitalize on cognitive science to influence what people will remember, strategically creating “peaks” in the experience that will outnumber and outweigh the “valleys.” Their success in this regard is why customers recall the experience so positively, even if every portion of it wasn’t “delightful.” (DisneyWorld’s customers spend a lot of time waiting in line at the park, but when they return home from their vacation, it’s not the lines they remember — it’s the attractions.) There are a variety of strategies that great companies use to positively influence customer memories, but they all essentially involve creating more and higher peaks, as well as fewer and less deep valleys. See also: Who Controls Your Customer Experience?   Great companies also recognize that it’s alright if there are parts of the customer experience that are just average (as long as they don’t involve interactions that are vital to customers). What’s more important is to make certain there are at least some parts of the experience that will generate those positive, memorable “peak” snapshots. Conversely, one must address aspects of the experience that may be leaving customers with memorable (but negative) “valley” snapshots. (Note that those valleys don’t necessarily need to be turned into peaks, but they at least need to be moved closer to “sea level.”) As you work to differentiate your company in the marketplace, keep an eye out for those peaks and valleys. They’re the features of your customer experience landscape that will shape people’s perceptions and, ultimately, their brand loyalty. And that’s something worth remembering. You can find the original published here on WaterRemarks.

Since commercial catastrophe models were introduced in the 1980s, they have become an integral part of the global (re)insurance industry. Underwriters depend on them to price risk, management uses them to set business strategies and rating agencies and regulators consider them in their analyses. Yet new scientific discoveries and claims insights regularly reshape our view of risk, and a customized model that is fit-for-purpose one day might quickly become obsolete if it is not updated for changing business practices and advances in our understanding of natural and man-made events in a timely manner. Despite the sophisticated nature of each new generation of models, new events sometimes expose previously hidden attributes of a particular peril or region. In 2005, Hurricane Katrina caused economic and insured losses in New Orleans far greater than expected because models did not consider the possibility of the city’s levees failing. In 2011, the existence of a previously unknown fault beneath Christchurch and the fact the city sits on an alluvial plain of damp soil created unexpected liquefaction in the New Zealand earthquake. And in 2012, Superstorm Sandy exposed the vulnerability of underground garages and electrical infrastructure in New York City to storm surge, a secondary peril in wind models that did not consider the placement of these risks in pre-Sandy event sets. Such surprises affect the bottom lines of (re)insurers, who price risk largely based on the losses and volatility suggested by the thousands of simulated events analyzed by a model. However, there is a silver lining for (re)insurers. These events advance modeling capabilities by improving our understanding of the peril’s physics and damage potential. Users can then often incorporate such advances themselves, along with new technologies and best practices for model management, to keep their company’s view of risk current – even if the vendor has not yet released its own updated version – and validate enterprise risk management decisions to important stakeholders. See also: Catastrophe Models Allow Breakthroughs   When creating a resilient internal modeling strategy, (re)insurers must weigh cost, data security, ease of use and dependability. Complementing a core commercial model with in-house data and analytics and standard formulas from regulators, and reconciling any material differences in hazard assumptions or modeled losses, can help companies of all sizes manage resources. Additionally, the work protects sensitive information, allows access to the latest technology and support networks and mitigates the impact of a crisis to vital assets – all while developing a unique risk profile. To the extent resources allow, (re)insurers should analyze several macro- and micro-level considerations when evaluating the merits of a given platform. On the macro level, unless a company’s underwriting and claims data dominated the vendor’s development methodology, customization is almost always desirable, especially at the bottom of the loss curve where there is more claim data; if a large insurer with robust exposure and claims data is heavily involved in the vendor’s product development, the model’s vulnerability assumptions and loss payout and developments patterns will likely mirror that of the company itself, so less customization is necessary. Either way, users should validate modeled losses against historical claims from both their own company and industry perspectives, taking care to adjust for inflation, exposure changes or non-modeled perils, to confirm the reasonability of return periods in portfolio and industry occurrence and aggregate exceedance-probability curves. Without this important step, insurers may find their modeled loss curves differ materially from observed historical results, as illustrated below. A micro-level review of model assumptions and shortcomings can further narrow the odds of a “shock” loss. As such, it is critical to precisely identify risks’ physical locations and characteristics, as loss estimates may vary widely within a short distance - especially for flood, where elevation is an important factor. When a model’s geocoding engine or a national address database cannot assign location, there are several disaggregation methodologies available, but each produces different loss estimates. European companies will need to be particularly careful regarding data quality and integrity as the new General Data Protection Regulation, which may mean less specific location data is collected, takes effect. Equally as important as location is a risk’s physical characteristics, as a model will estimate a range of possibilities without this information. If the assumption regarding year of construction, for example, differs materially from the insurer’s actual distribution, modeled losses for risks with unknown construction years may be under- or overestimated. The exhibit below illustrates the difference between an insurer’s actual data and a model’s assumed year of construction distribution based on regional census data in Portugal. In this case, the model assumes an older distribution than the actual data shows, so losses on risks with unknown construction years may be overstated. There is also no database of agreed property, contents or business interruption valuations, so if a model’s assumed valuations are under- or overstated, the damage function may be inflated or diminished to balance to historical industry losses. See also: How to Vastly Improve Catastrophe Modeling   Finally, companies must also adjust “off-the-shelf” models for missing components. Examples include overlooked exposures like a detached garage; new underwriting guidelines, policy wordings or regulations; or the treatment of sub-perils, such as a tsunami resulting from an earthquake. Loss adjustment difficulties are also not always adequately addressed in models. Loss leakage – such as when adjusters cannot separate covered wind loss from excluded storm surge loss – can inflate results, and complex events can drive higher labor and material costs or unusual delays. Users must also consider the cascading impact of failed risk mitigation measures, such as the malfunction of cooling generators in the Fukushima nuclear power plant after the Tohoku earthquake. If an insurer performs regular, macro-level analyses of its model, validating estimated losses against historical experience and new views of risk, while also supplementing missing or inadequate micro-level components appropriately, it can construct a more resilient modeling strategy that minimizes the possibility of model failure and maximizes opportunities for profitable growth. The views expressed herein are solely those of the author and do not reflect the views of Guy Carpenter & Company, LLC, its officers, managers, or employees. You can find the article originally published on Brink.

In today’s insurance marketplace, agencies face heavy competition from digital insurance channels and direct marketers like GEICO and Progressive. So what does the future look like for the thousands of carrier and independent agents --- proponents of human engagement --- who realize that all the digital insurance channels in the world can’t replace the human connection? Independent and carrier agents can enhance and build on their own strengths to compete head-on with the impending rise of the competitive insurance channels. Agents who give personalized advice and advocacy when needed represent the great upside and the future of the agency channel. Insurance is a security blanket. People want to know that they will be covered appropriately in their time of need, and that an advocate will be there to support them when things don’t go quite as planned. Certainly people want to know a live human being can be there when their basement floods, but being a trusted adviser relies on really knowing the policy holder - being in the life of that person with quality, frequency and continuity. The challenge for the agency channel is building a velocity of contact with current and prospective policy holders in the insurance industry, which undeniably has the highest-touch and highest-volume requirement for interactions by its sales professionals. When we accomplish the role of trusted adviser, it results in higher retention, cross-sell and referral business. This is being evidenced by proponents of the agency model who study the insurance industry. See also: Reinventing Sales: Shifting Channels   Bain & Co.’s research shows that agency/agent connection is unique to earn customer loyalty, and that a loyal insurance customer – measured by Bain’s Net Promoter Score – delivers a whopping seven times the lifetime value of a low loyalty customer and three times the value of a neutral customer. And loyal customers reward their agents by buying 25% more insurance at higher prices, staying with and consolidating their insurance with one provider and even referring friends and family. But we are not out of the woods yet! Ernst & Young Global Customer Survey found that 86% of insurance consumers are "not very" satisfied with communications from their provider. A whopping 44% report remembering zero communications from their insurance provider in the last 18 months. So what does all this mean for agents? The most important task for the agency channel is to focus on what they do best, offering peace-of-mind to their customers even over the values of price and convenience , which are offered by direct carriers and other emerging digital channels of the world. To earn customer loyalty, drive growth and attract new customers, agents are adopting and mastering newer technology that can provide continuous engagement — connecting to people on email, text, phone and social media — which are the new ways consumers shop for insurance today. In this way agents are partnering with technology to manage leads and organize marketing programs to guide consumers through an elevated, sequential customer journey geared at building relationships that are very highly valued by future insurance policy holders. Again, research is ahead of this curve. Top insurance executives in a recent Accenture poll on the “Future Insurance Workforce” survey found that artificial intelligence is here to stay and will create workplace opportunities that will help agents work more efficiently to help drive growth and attract new customers. In fact, the only economically feasible way to scale agency-policy holder relationship-building today is through connecting technologies that consumers now use and expect of their vendors. Savvy agents know their customers’ values well – and are in a strong position to deliver original content through technology that best expresses the value of the agency in ways that are most meaningful to each customer. Contemporary insurance marketing automation solutions – integrated with agency management systems that maintain volume and feature sequential and automated practices – will make insurance agents more valuable in today’s market. See also: Global Trend Map No. 9: Distribution   Technology Tips to Compete Head-on With Digital Channels and Engage Customers When it comes to marketing insurance, the agency connections coming from trusted advisers remain invaluable to policy holders who must choose between this and a faceless organization that relies on advertising. An agency equipped with appropriate technologies elevates the message to a much higher level! It grabs consumers and keeps them coming back for years to come.

• Use marketing acceleration programs that induce a repeatable pattern of activity garnered from artificial intelligence and machine learning. This will inform workflows that enable agents to have smarter marketing and more personalized and predictive customer experiences that will lead to better sales outcomes.
• Use technology tools to help meet the Telephone Consumer Protection Act, (TCPA) guidelines where everyone will need to be internationally compliant or face stiff fines for wrongfully filling out forms and other violations.
• Use technology tools to help cope with all applicable laws and regulations of the new General Data Protection Regulation, (GDPR) that took effect in Europe and promises to take on more importance in the U.S. in light of recent Facebook privacy issues.

On some accounts, your commission payments may be too high. On some accounts, your commission payments may be too low. And on some accounts, your commission payments may be juuusst right. When the commissions are too high or too low, you need to make adjustments. And, whether they are too high, too low or just right, you need to be discussing your compensation with your clients. To make the right adjustment, the discussion is going to have to include a conversation about fees. As scary as the thought of finding a bear in your bed might be, it likely pales in comparison to the level of fear insurance advisers experience when thinking about disclosing their compensation. Which is it? On the one hand, brokers complain to the insurance companies that they’re not being paid enough, but, at the same time, the thought of sharing your level of compensation with clients probably causes you to throw up in your mouth a little bit. You know as well as I do, this picture ain’t right. I talked recently about breaking dependence on carrier commissions, and, while that may sound like great advice, I realize it’s not something that’s necessarily easy to do. Getting started is the hardest part, but your business depends on getting it figured out. Not facing account-by-account profitability head-on also leaves your business in a very dangerous place. And, when it comes to the profitability of your business, details matter. If you only look at your business from a simplistic lens of overall profitable vs. unprofitable, you miss out on the crucial details about how you’re achieving profitability. How you get to profitability DOES matter. The viability and longevity of the business DOES depend on how healthy the book of business is that you’ve built. You need to look at it on an account-by-account basis, now more than ever. Agencies can no longer afford to have this laissez faire attitude about the revenue that fuels their business. Just because you have checks in the checkbook doesn’t mean you have cash in the account, let alone a healthy bank account. See also: ‘Agency 2020’: Can You Get There? (Part 1)   You deliver value in two ways You get paid for the value you deliver, right? Of course, one of the ways you deliver value is by recommending the right insurance solutions to address your clients' insurance needs and helping them effectively use those products. But, you also know that distributing insurance products to your clients is only one part of what you need to be competitive. Which leads us to the second way you deliver value: value-added services/non-insurance solutions to help clients address their non-insurance needs, as well. Agencies choose to invest heavily in every value-added service that comes along because you know your clients can benefit from these resources. However, for most of you, the only revenue you receive is the commission from the carriers for the placement of the insurance product. For way too many of you, the thought of charging fees for these non-insurance solutions scares you, and you simply give them away for free. A valuable solution has just been completely de-valued. Profitable should never subsidize unprofitable You rationalize, “As long as I have bottom line profitability, what does it matter if I give services away?” You’re lulled into thinking that it’s not necessary to worry about profitability on an account-by-account basis. But you should. We analyze books of business all the time, and the financial profiles are extremely consistent. The bottom half of a book of business (by case count) typically drives less than 7% of revenue, while the top 5% of a book (by case count) drives about 30%. While you may be satisfied with whatever margin reaches the bottom line, it’s not an equitable path you are taking to get there. Recognize that you are being underpaid on at least half of your book of business while being overpaid by the top tier. You are forcing your best clients to subsidize your least attractive ones. Value delivered to clients ≈Total compensation received This compensation equation must be applied fairly to every client. To do so, you have to be clear about how you deliver value, as well as what fair compensation is for the value delivered. Remember, this equation is about the total value you deliver the client. Just because the carrier pays you commission at a certain level does not mean the client is receiving value commensurate with that level of compensation you receive. Commissions are payment for the value you deliver the carrier by distributing its insurance product; it has nothing to do with value delivered to your client. Here’s the litmus test. If there were no commissions and you had to charge a fee to the client for the placement and servicing of the insurance product, would you be able to charge a fee equal to your current commission? If not, you are being overpaid for that service, at least from your client’s perspective. Establish value for everything you do While it isn’t necessarily easy to do, you need to develop fee schedules. This allows you to establish appropriate compensation for the effort you put forth and the value you deliver for every solution/service you deliver your clients. This schedule should include both insurance and non-insurance items. You may not find this to be an easy task, but it’s simply a requirement in this equation. Establishing reasonable fees for value delivered is one of the most basic elements of running a business. Once you have these schedules determined, it now becomes easier to evaluate if you are being paid appropriately for each client. Add up the value of the services you provide for each client and compare it against the compensation you are receiving. The Three Bears compensation scenarios First of all, realize that just because two clients may have similar profiles (number of employees, structure of benefit program, etc.) doesn’t mean they should pay you the same amount. You may need to charge a “PIA Premium” (yes, pain in the @ss ?) for those high-maintenance clients. However, once you evaluate each client on its own merit, it really is pretty simple. There are only three possible scenarios that exist for any given client:

1. Too Much: You are being overcompensated for the services currently being provided, and you need to deliver more value through additional services to close that gap. (Of course, you could offer to take a pay cut, but none of us want that.)
2. Too Little: You are underpaid for the services currently being provided, and you need to walk away from that unprofitable client, reduce the level of services being provided or ask to be paid more.
3. Just Right: You are being paid fairly for the services currently being provided. (Of course, this means that when your client needs additional services, you MUST be paid more for delivering those services.)

Transparency of compensation You will never get to fair and reasonable compensation with a client until you are willing to discuss both sides of the equation: Compensation and Value. Provide each client with a breakdown of the services/value you deliver (stewardship report) and an explanation of what they are paying in return (directly in fees or indirectly in commission). For the compensation side of the equation, explain how much compensation you are receiving that is baked into their premium. Explain that it is intended to be there for the placement/service of the insurance product, but also be honest as to whether it is too high, too low or just right for the effort you are putting forth on their behalf. For the value-delivered side, explain that, just as there is a value for the placement/service of the insurance product, there is also value associated with the other services you provide them. They will understand your need to balance the equation. See also: Expanding Into Small Commercial   The hardest conversation of all I realize the hardest time to have this conversation is with a client for whom you realize you are overpaid. But they are the most important client with whom to have this conversation. If you don’t have this discussion with them, your competitor will. In this overpaid scenario, you need to close the gap by providing them with additional services/resources, assuming they are needed and will be of value. However, if they have no additional needs you can address, the only fair thing to do is for you to take a pay cut. If you choose to add other services for them, be sure to share the fee you would charge if delivering it on a stand-alone basis. Never tell them that anything you provide is free. This not only protects you right now, it protects your future Once you’ve had this discussion with your clients, you have now begun to establish a healthier relationship. Now, when (not if) commissions get cut, you have established a baseline for the placement/service of the insurance product, as well as establishing the idea there are fees associated with the additional ways you deliver value.  If you start providing additional services, they will now expect to pay you additional fees. It’s not a one and done You must also re-evaluate this equation annually. An account for which you were paid fairly this year but to whom you pass along a 30% renewal increase next year will all of a sudden be overpaying you for your services by 30% if the value you deliver doesn’t change. And that puts you right back in a dangerous situation. This article was originally published on Q4intel.com.

Insurers, I have some good news and some bad news. Insurers have made tremendous progress in core modernization, purchasing and implementing new core systems and beginning to adapt their businesses to take full advantage of modern core systems’ capabilities. This is genuine cause for celebration – insurers that have made or are making these efforts are advancing their companies and our industry in general.

As insurers were engaged in these core modernization efforts, though, the personal lines market and technology itself have kept moving forward. A core system that was top of the line in 2013 may be showing its age unless it has been continually upgraded to serve the capabilities needed in 2018 and beyond. This may not be the most welcome news for those still thinking about core systems with an average lifespan of 10 years or more, but this is our new reality.

This is especially true for personal lines insurers, which are typically the first to catch the core modernization wave. They have also tended to be the leaders regarding new computing capabilities. It was true for mainframe systems, client servers, web-based applications. Now, heading into the new era of computing, it is true with computing trends like microservices and serverless computing coming to the fore. This is not technology for technology’s sake – insurers need to be able to handle an increasing number of transactions, including multi-threaded calls, and that increase is approaching an infinite number.

See also: 2018’s Top Projects in Personal Lines  

Further pressure comes from the insurtech startups active in the personal lines market. The original, widely known insurtech startups in P&C insurance were focused on personal lines. As the insurtech movement has matured, startups’ focus has widened to commercial lines and workers’ comp as well as crossing product lines. However, startups have been active in personal lines the longest, and those insurtechs that have thrived have gained market experience and are beginning to focus on organizational maturity. That means that for incumbent personal lines insurers, their insurtech counterparts tend to be comparatively robust and mature when compared with the commercial lines insurtechs I discussed in my earlier blog.

A key characteristic of insurtechs is that they are digitally native companies. That means that they are natively fluent, with enormous quantities of data and digital interactions, and their technology is geared toward this.

Core systems that can be described as “digitally native” have an edge in the digital market going into the future. Even though digital has been a crucial focus area for years, the insurance industry is still learning what a truly digital business entails – and what technology is needed to support it. Insurtech startups have given the insurance industry new examples of how to operate in the digital world.

Few core systems are built with the digitally native characteristics, but the core systems marketplace is beginning to adapt. Continued evolution toward open APIs and new data sources will provide insurers with the opportunity to interoperate with the new distribution channels and directly with the customer.

Whether you are a large insurer that is trying to support new digital brands and new product models (on-demand, telematics and others dependent on high amounts of data) or a small regional insurer trying to power consumer service portals, the key question is data availability and digital connectivity with the consumer and agent.

So, for insurers asking themselves: “Do we really need to think about modernizing our modern core systems?” the better question may be this: “Are your modern core systems digitally native?”

The Amazon/Berkshire Hathaway/JPMorganChase health care partnership known as ABC announced last week that it had hired as CEO the well-known innovator, author and surgeon Atul Gawande. Count me a fan.

While some note that he has never run an organization anywhere close to the size that will be needed to coordinate the health care of the roughly one million people covered in the partnership, I believe he brings just the right qualities to a job that could create great change in U.S. health care in five to 10 years, slashing costs while improving care. 

He has shown an ability to look at problems through beginner's eyes, even when he has been immersed in the issue for years. His 2009 article in The New Yorker comparing care in two Texas towns showed just how destructive the profit-maximizing culture of his industry has become.

Gawande has consistently shown the sort of empathy that often gets lost when care collides with dollars and cents. His latest book, "Being Mortal," on how life draws to a close, is remarkable. (Here is an interview that provides a look into his thinking: https://onbeing.org/programs/atul-gawande-what-matters-in-the-end-oct2017/)

He has also seen both how important and how hard it is to implement innovation. He devised a checklist for surgeons that is now used in hospitals around the world and that has greatly reduced post-operative infections. But surgeons, as dedicated as they are, bristle when told what to do, especially via something as rudimentary as a checklist, so progress hasn't exactly moved in a straight line.

Even if Gawande succeeds—a big if, given the size and complexity of the issue—you have to figure that progress will take years. First, ABC will have to figure out how to take better care of the million souls in its care. Then the problem really gets hard, as ABC will have to figure out how to roll out its solutions into remote parts of the country, to small businesses, to people older than employees at the ABC companies and so on, or others will have to figure out how to pull ideas out of ABC and implement them more broadly.

A million people is a lot, but it isn't 330 million. And the antibodies working against Gawande will be stronger than any he's ever seen. People will do a lot to protect the going-on $4 trillion spent on health care in the U.S. each year.

Still, I can't think of a better person to tackle the issue.

Have a great week.

Paul Carroll
Editor-in-Chief

Leaders in the insurance industry, like many other industry executives, are seeking routes to profitable growth amid unprecedented economic, financial and regulatory change. No longer can companies pursue top-line growth for its own sake without adverse consequences or rely on cost cuts alone to boost margins. Today, companies must strike a strategic balance that will sustain profit growth and shareholder returns over the long term. This is no easy trick, as tectonic forces unsettle the insurance industry — which is accustomed to measuring the pace of change in decades, not years or quarters. A business-as-usual approach falters in the face of quickly shifting customer needs, rising capital requirements, new regulatory burdens, low interest rates, disruptive technology, and new competitors. Many companies aren’t getting the results they need from textbook moves such as fine-tuning marketing programs, updating products, enhancing customer-service systems or beefing up information technology. That’s because traditional operating levers for executing strategy simply weren’t designed for the challenges confronting insurers today. Strategic success now requires something more: a structural response. A company can’t adapt to 21st-century conditions without modernizing its 20th-century structures. The key is for companies to realize that strategy equals structure. Strategy — the big and important ways that a company chooses to compete — must naturally and intrinsically weave in key operating model dimensions, including legal entity, tax positioning, capital deployment, organization and governance. Finally, once strategy and structure are wed, companies must recognize the role of culture in making new structures work, and use their cultural strengths to promote the changes and ensure that they have staying power. Here’s how: Responding to the Pressures Rapid evolutionary change has rendered time-honored organizational structures ineffectual or obsolete in many cases. Before attempting to execute new strategies, insurance companies need to reevaluate every dimension of their operating model. Structural inadequacies take many forms. Some companies lack the scale needed to generate profitable growth under new capital requirements. Others with siloed, hierarchical organizations lack the flexibility to respond quickly to market shifts. Poor technological capabilities often hamstring old-line insurers facing new digitally oriented rivals. And tax reform and regulation looms as a potential threat to profitability in certain business lines. See also: Why Is Insurance Industry So Small? In our work with insurers, we at Strategy&, PwC’s strategy consulting business, have seen certain common responses to these pressures. Their responses divide these companies into three groups:

• The first group of companies have anticipated the effects of marketplace trends and made appropriate structural adjustments, clearing the way to profitable growth. For example, life insurer MetLife avoided costly regulatory mandates by selling registered broker distribution to MassMutual and spinning off its Brighthouse retail operations. Others, including Manulife and Sun Life, have made substantial acquisitions to consolidate scale positions.
• The second group of companies have recognized the need for structural change, but have yet to carry it out. With plans made, or under discussion, these companies are waiting opportunistically for the right deal to come along.
• A third group of companies, however, have hunkered down behind existing structures, making only minor tweaks and hoping to emerge from the storm without too much damage. For some, this is a rational choice because of constraints that leave them with little or no maneuvering room. In other cases, action is impeded by a company culture that reflexively rejects certain options.

Companies in the first two groups are giving themselves a chance to win. But the response of companies in the third group smacks of self-delusion in an age when strategy equals structure. Time for Real Change Without a doubt, many insurers work diligently and continually to improve their businesses across dimensions. They gather insights into consumer needs and behaviors, nurture unique capabilities to differentiate themselves from competitors, modernize products, update distribution strategies and embrace digitization in all its forms. These are all sound approaches, but they’re inadequate in addressing the unknown facing insurers today. Their belief that they will persist assumes a certain stability in underlying economic and market conditions that hasn’t been seen since the financial collapse nearly a decade ago. Forces unleashed by that crash and its aftermath undermined the pillars of many insurance business models. We’ve seen years of only modest growth, with property/casualty insurers expanding at a 3% pace, and life insurers barely exceeding 1%. The long stretch of sluggish global growth has put pressure on revenues and forced insurers to compete harder on price. Near-0% interest rates that have prevailed since the Great Recession are squeezing profit margins, especially in life insurance. On the regulatory front, tougher accounting rules are driving up costs while heavier capital requirements weigh down balance sheets and dilute returns. Compounding these challenges are the potentially destabilizing effects of tax reform on earnings and growth. Taxes may actually rise for some insurers, an outcome that could force them to raise prices or find other ways to protect shareholder returns. In many cases, the benefits of falling tax rates may be diminished by the loss of deductions for affiliate premiums, limits on deductibility of life reserves, accelerated earnings recognition and a slowdown of deferred acquisition cost deductions. Competitive dynamics are shifting, too, as expanding “pure play” asset managers such as Vanguard and Fidelity block growth avenues for insurers. Established companies and some new entrants are innovating and experimenting with disruptive distribution models. Others, including private equity firms, are looking to bend the cost curve through aggressive acquisition and sourcing strategies. To be sure, some long-term trends could benefit certain insurers, or at least improve their risk profile. Longer life spans and the shift of responsibility for retirement funding to individuals may drive demand for annuities and other retirement products. However, many companies are as unprepared to capitalize on these opportunities as they are to meet long-term challenges. Often the problem comes down to scale. Some insurers lack the resources to build new distribution platforms and customer service capabilities in growing markets such as asset management, group insurance, ancillary benefits and retirement plans. Although offering an individual product may be relatively easy for new market entrants, the difficulty and cost of establishing such platforms creates a desire for scale and increases pressure on smaller competitors. Sometimes, the issue isn’t scale but a failure to respond quickly enough as conditions change. Buying habits are changing as consumers — particularly the younger cohorts — make more purchases online. Yet our research indicates that people still want some personal assistance with larger and more-complex transactions. It takes investment and experimentation to find and refine the right business model for new marketplace realities. But some companies haven’t built the necessary assets and capabilities or adjusted to evolving distribution patterns and consumer behaviors. The proper response to each challenge and opportunity will be different for every company, depending on its unique characteristics and circumstances. In virtually every case, the right solution will involve structural change. Joining Strategy and Structure As companies recognize that traditional approaches to annual planning, project funding and technology architecture may be hindering innovation and real-time responses to changing market conditions, many are rethinking and redesigning their core processes to facilitate change. Recent transactions in the sector show the range of structural options for companies that want to advance strategic goals in a changing marketplace. Below are some examples. Exiting businesses. Sometimes, the best choice is to move out of harm’s way; companies can preserve margins by exiting businesses targeted for higher capital requirements or costly new accounting standards. MetLife’s Brighthouse spin-off bolstered its case for relief from designation as a “systemically important financial institution,” and the associated capital requirements. Exiting U.S. retail life insurance markets also enabled MetLife to focus on faster-growing businesses that are less vulnerable to rock-bottom interest rates. The Hartford recently announced the sale of Talcott Resolution to a group of investors, completing its exit from the life and annuity business. Partnerships and acquisitions. When scale is an issue, the solution may lie outside the company or in new structural approaches. Some insurers form partnerships to expand distribution, diversify product portfolios or bolster capabilities. Companies also adjust their scale and capital structures through mergers, acquisitions and divestitures. Sun Life paid $975 million in 2016 for Assurant’s employee benefits business, filling gaps in its product portfolio and gaining scale to compete with larger rivals. MassMutual’s purchase of MetLife’s broker-dealer network in 2016 enlarged the MassMutual brokerage force by 70% and freed MetLife to pursue new distribution channels. Expanding into new lines and geographies. New product lines offer another path to faster growth or fatter profit margins. Several insurers have moved into expanding markets with lower capital requirements, such as asset management. Voya, Sun Life and MassMutual have acquired or established third-party asset management units to capitalize on investment expertise they developed managing internal portfolios. The Hartford recently agreed to acquire Aetna’s U.S. group life and disability business, deepening and enhancing its group benefits distribution capabilities and accelerating digital technology plans. We also see companies establishing technology-focused subsidiaries such as Reinsurance Group of America’s (RGA’s) RGAx and AIG’s Blackboard. Cutting costs. Some companies have moved aggressively to improve their cost structure. Insurers seeking greater financial flexibility have divested assets that require significant capital reserves. Aegon unleashed $700 million in capital by selling blocks of run-off annuity business to Wilton Re in 2017. An insurer that offloads its defined-benefit plan to another via pension-risk transfer frees up capital and eliminates continuing pension funding requirements. Other cost-saving moves focus on workforce expenses. In addition to rightsizing staff, such measures include relocating workers to low-cost areas or jurisdictions offering significant tax incentives. Prudential and Manulife slashed expenses by establishing overseas operating centers that take advantage of labor cost arbitrage, create global economies of scale and reduce taxes. See also: Key Findings on the Insurance Industry Transformation and Culture Once companies have launched ambitious structural initiatives, they don’t always recognize the role of culture in making the new structures work. But this is a mistake. Culture is a pattern of behaviors, norms and mind-sets that have grown up around existing organizational structures; the two (culture and structure) are tightly linked, and you can’t change one without affecting the other. No culture is all good or all bad. But certain cultural traits are more relevant to structural change than others. Cultural attributes affect a company’s ability to make necessary changes. A company that is consensus-driven and focused on preventing problems before they arise may be indecisive and slow to act. These traits may cause it to wait too long and miss the optimal moment for a structural transformation. Other companies, by contrast, have a tradition of quickly seizing opportunities. When this trait is supported by other important characteristics — more single points of accountability, strong leadership and an aligned senior management team — it can foster the rapid decision making essential to structural change. Culture also comes into play after executives decide to initiate structural change. Most employees have strong emotional connections to the culture — this source of pride, along with a clear and inspiring vision of the future, can motivate them to line up behind the change and can inspire collaboration across organizational boundaries to drive the transformation. Leaders at all levels can generate momentum by signaling the desired cultural shifts and embodying the new behaviors needed to execute structural change. A new structure without a corresponding evolution of culture amounts to little more than a redesigned organization chart. Culture makes or breaks the new structure, influencing factors as diverse as resource allocation, governance and the ability to follow through on a vow to “change how work gets done.” It’s not uncommon for a company to expend tremendous effort and resources on a complete structural overhaul, only to see incompatible cultural norms thwart its strategic execution. For example, a new, streamlined operating model intended to accelerate decision making and foster cross-functional collaboration won’t take root in a culture that exalts hierarchy and encourages employees to focus on narrow functional priorities. Culture also influences a company’s willingness to make the deep structural changes in time to avert a crisis. Those who wait until market conditions have undermined their operating model put themselves at a disadvantage. Nevertheless, few companies attempt structural change in “peacetime.” Absent a crisis, cultural expectations often limit directors to a narrow role monitoring indicators such as growth and profitability, while management concentrates on achieving specific strategic objectives. Under this traditional allocation of responsibilities, emerging structural issues may not get enough attention. Successful companies, by contrast, continually reassess their structure in light of evolving market conditions. They understand that organizational structures aren’t permanent fixtures, but strategic choices to be reconsidered as circumstances and objectives change. Capitalizing on Changes Amid the confusion of today’s insurance industry, one thing is clear: Business as usual won’t deliver sustained, profitable growth. As powerful forces reshape markets, conventional tools for executing strategy are losing their effectiveness. Today’s challenges are not operational, but structural. Many insurers lack the scale, capabilities or efficiency to compete effectively as competition intensifies, regulatory burdens increase and financial pressures rise. Winning companies are meeting structural challenges with structural solutions. Approaches vary from company to company. Some add scale or enhance capabilities, whereas others streamline cost structures or exit lagging business lines. With the right cultural support, these structural responses position a company to capitalize on industry changes that are confounding competitors. You can find the article originally published on Strategy & Business. This article was written by Bruce Brodie, Rutger von Post and Michael Mariani.

In a 2009 interview with Insurance Journal, Juan Andrade of The Hartford ranked “improving operational efficiency” third on a list of essential priorities for P&C insurers, below both customer retention and a systematic sales approach. This ranking made sense 10 years ago. At that time, Andrade’s top two priorities were customer connections and insurance sales, but digital means of providing either one had not fully developed. Today, however, all three of these top priorities can be addressed through a digital platform — and placing operational efficiency first on the list has the power to boost the other two. Digital operations management “is not only about technology,” says Eddy Lek at Schneider Electric. “It requires a holistic approach to transform operations; implementing changes to the existing business and operations models and training employees to effectively operate with new tools – [e]mpowering the workforce to leverage technology for greater efficiency.” Here, we look at how a digital platform improves operational efficiencies for P&C insurers. We also discuss how insurers can identify the top challenges they face and ask the right questions to ensure they implement digital tools that address those challenges effectively. The Digital Future and Its Challenges for Insurers Property and casualty insurers have seen stormy weather in the past few years, literally and figuratively. The need to respond to claims from the 2017 hurricane season, decreasing auto coverage purchases combined with rising claim costs and other factors have resulted in losses across the board, according to a Deloitte report. Customer needs and demands are changing, as well, as Insurance Journal’s Michael Kasdin notes. For instance, younger adults drive less, reducing demand for auto insurance policies and increasing interest in newer, more adaptable tools like pay-per-mile auto insurance. Gig economy work like driving for Uber or Lyft or listing rentals with AirBnB has changed needs in auto and home insurance, as well. See also: Digital Playbooks for Insurers (Part 4) According to Kasdin, insurtech is poised to address many of these problems. Yet concerns about cybersecurity and anticipating the “right” place to invest in digital platforms and similar tools continue to stall many insurers, as Nate Anderson, Pascal Roth and Pierre-Henri Boutot described in a Bain & Co. brief. To address sinking premiums, rising claims and the retention of a customer base shifting rapidly away from old standards of expectation in insurance, insurtech stands out. Improving operational efficiency via digital platforms can improve P&C insurers’ ability to address all three threats simultaneously. Digital Tools for Operational Efficiency A recent Audit and Risk Committee Forum survey by PwC found that 44% of insurance leaders surveyed believe that “most existing insurers will not survive, at least in their current form.” And one of the biggest causes of their demise will be operational inefficiency. Currently, operational inefficiencies in P&C insurance are commonly found in “repetitive, business rule-driven work,” according to a February 2018 PwC white paper. While other inefficiencies exist, the sheer volume of repetitive, rule-driven work sets insurers apart from many other industries. For decades, such work has demanded human intervention because no machinery existed to ensure that the rules were followed and that the task was done correctly each time. Today, however, machine learning, AI and similar tools make it possible for insurance companies to automate much of this work for increased efficiency. “It’s always important to realize that 55% to 60% of all the cost within any given agency is going to be personnel cost,” Andrade told Insurance Journal in 2009. “The key here is making sure that your people, your employees are being as productive as they can.” Digital platforms offer new ways to ensure employee productivity. In an automated world, insurance companies can reevaluate the contributions each agent and employee makes based on the value added to the process, providing a powerful new way to determine and eliminate inefficiencies. How Efficiency and Customer Retention Meet on a Digital Platform The February 2018 PwC report noted that when it comes to insurtech, most P&C insurers are still thinking in an “outward”-facing mode. They’re embracing digital platforms primarily for the platforms’ ability to connect them with customers who increasingly demand easy digital communication, online purchasing and consistent points of contact. Meanwhile, Ben Kerschberg at Forbes identifies three “pillars of change” for digital platforms: customer service, operational processes and business processes. In other words, digital platforms do have the power to improve operational efficiencies in customer service — but customer service is only one of three pillars of opportunity. Insurers who focus here miss the two opportunities to greatly improve operational and business efficiency, as well. Five years ago, big data was big news. Today, it’s a given in most businesses. The ability to analyze vast amounts of data to spot meaningful trends and changes can revolutionize risk analysis and operational efficiency in insurance, but insurers must first have the digital platform necessary to capture and analyze data. Customers are willing to provide more data to get seamless digital service. They’re also willing to pay more for service on a strong, integrated digital platform — up to 21% more to get, it, according to Ameyo’s Shaista Haque. A digital platform also makes it easier for insurers to streamline service, not only to customers but also within the organization itself. For instance, when products are developed in a streamlined digital environment, much of the inefficiency caused by in-person meetings, incompatible or un-editable digital documents, checking details or numbers by hand and other prolongations of the product development cycle can be minimized or defeated. This increased internal efficiency improves the ability to provide customers with products that meet their changing needs on a timetable that encourages customers to adopt them. See also: Digital Insurance 2.0: Benefits   Questions to Ask When Seeking the Right Digital Tools Insurtech developments appear almost daily, which can leave insurance leadership feeling overwhelmed. What are the best tools for the particular challenges you face? How can you identify top inefficiencies, and how will you know you’re choosing the right digital platform capabilities to optimize them? Deb Miller, director of market development for business process solutions at OpenText, identifies four operational efficiency optimization strategies that are being employed by an increasing number of insurance companies:

• Improving operational efficiency by driving for leverage across silos
• Scaling to address demand for specific products and across a broader geographical range
• Expanding distribution channels while improving or maintaining excellent customer service
• Automating case management tasks to reduce time to resolve in claims, as well as reducing paper and other resource waste

Knowing which strategies to prioritize, however, means knowing where your particular organization’s inefficiency pain points lie. A McKinsey & Co. white paper recommends that managers seeking to improve operational efficiency ask questions like:

• How are we delivering value to the customer? How do we do so efficiently?
• How do we work? What are some better ways to perform that work?
• How do we connect goals, strategy and meaningful purpose? How do we communicate these to our teams and to our customers?
• How are we enabling people to lead at their fullest potential?

Questions like these can help insurers find inefficiencies. The answers can also help digital platform providers identify which tools will be most effective for a particular insurer.

From product scandals to data breaches to natural disasters, companies are dealing with constant risk. But how they prepare for those risks can make the difference between riding the roughest wave — or drowning in it. The field of risk management, once an afterthought for many companies, is getting renewed attention with a new book by two Wharton professors who want to help business leaders think more deeply about worst-case scenarios. Michael Useem, management professor and director of the Center for Leadership and Change Management, and Howard Kunreuther, professor of operations, information and decisions as well as co-director of the Risk Management and Decision Processes Center, recently spoke with the Knowledge@Wharton show on SiriusXM channel 111 about their book, Mastering Catastrophic Risk: How Companies Are Coping with Disruption. An edited transcript of the conversation follows. Knowledge@Wharton: How did the two of you come to collaborate on this book? Useem: If you think about the two terms that Howard has referenced, risk and leadership, they go together in this case. Often, we think of those as something separate. Risk — we’ve got to be analytical and disciplined, and it’s often technical. Leadership — it’s all about having a vision and setting a strategy. But we concluded, after talking with quite a few people and companies’ directors, executives and senior managers that the time has come for the conjoining of these two terms. Many companies now are self-conscious about appraising risk, measuring risk, managing risk and ensuring the company is ready to lead through a tough moment the risk has caused. Knowledge@Wharton: Is this a recognition that has developed recently, compared with the executive mindset of the 1950s, ’60s, and ’70s? Useem: Yes. I think what really got us going on the book in terms of the timing is exactly what you’ve referenced. Ten or 15 years ago, no companies had a chief risk officer. Risk was barely mentioned. The term “enterprise risk management” (ERM) was not even around. But if you look at any trend line out there, what do people worry about when they get together at watering holes for senior management? Risk now is on the agenda just about everywhere, for good reason: Because the risk that companies have faced in recent years has gone up. The catastrophic downside of big risk also has increased. More risk, more downside, more people are paying attention. Kunreuther: One of the really interesting issues associated with the study and our interviews with senior management is that, before 9/11, there was very little emphasis by the firms on low-probability events — the black swan events. Starting with 9/11 and continuing through to today, these issues now have become more important, and black swans are now much more common than before. As a result, firms are paying attention. When we interviewed people, they were very clear with us that now that the events have occurred, they are putting it high on the agenda. As Mike has indicated, the boards and all of senior management are now paying attention to it, so it’s a big, big change. Knowledge@Wharton: Certainly, 9/11 was an impactful event on the country, but it was followed a few years later by the Great Recession. How did that change the view of risk? Useem: We raised the question in these in-depth interviews with people inside the company, whether on the board or in the management suite, and they consistently said that four events became a wake-up call or an alarm bell. First, 9/11 got us thinking about the unthinkable. A couple of hurricanes came through, including Sandy, which was a huge event. The recession or the near-depression back in 2008, 2009. Who thought that the Dow was going to lose 500 points in a day? Who thought Lehman was going to go under? But it all happened. And finally, the events in 2011 in Japan with the enormous tsunami after a 9.0 earthquake that left probably 25,000 people dead and set a fire in a nuclear plant. Even if you were a company that was not touched, just look at the four points on a graph. The costs are high. Many companies are impacted. Everybody thought, let’s get on with enterprise risk management. Let’s make it an art. See also: How to Improve ‘Model Risk Management’   Knowledge@Wharton: How have business leaders changed their thinking about risk management because of those four events? Kunreuther:  Leaders are now saying, “We have to put risk on the agenda. We have to think about our risk appetite,” which they hadn’t thought about before. “We have to think about our risk tolerance.” Financial institutions played that role, and they were very clear about that right after the 2008-2009 debacle. They had to ask themselves very explicitly that question. But I think this is now much broader than that. Leaders have recognized that they also have to think longer-term. This is one of the issues. We have a framework that we’ve developed in the book that tries to combine some of the work that has come out of the literature that Daniel Kahneman has pioneered on thinking fast and slow — by indicating that intuitive thinking is the mindset that we often have. Thinking myopically. Thinking optimistically. Not wanting to change from the status quo. Leaders have now recognized that they have got to put on the table more deliberative thinking and think more long-term. That is a change, and they tie that together with risk. One of our contributions, with respect to the book, is to try to put together a framework that really resonates with the leaders and the key people in the organization so that they can respond in a way that makes sense. Useem: We asked a lot of people who are in the boardroom, if they go back 15 years, was risk, cyber risk or catastrophic risk in board deliberations? The answer typically was no. Ask the same people about today, and they say, “Of course.” We watched with horror what has happened with some of the cyber disasters at Target and elsewhere, and no board worth its pay is these days unconcerned about risk. Now, you’ve got to be careful. The board works with management, sets the vision, does not micromanage. But what boards are increasingly doing is saying to management, “Let’s see what your risk tolerance is. Let’s see what your risk appetite is. Let’s see what measures you already have in place. Nobody wants to think about the unthinkable, but let’s think about it.” Knowledge@Wharton: The fake accounts scandal at Wells Fargo and the emissions controversy at Volkswagen are two recent examples of risk that you document in the book. Can you talk about that? Useem: We don’t mean to pick on any company, and we don’t mean to extol the virtues of any company. But we can learn from all. Howard and I took a look at the events at Wells Fargo, which were extremely instructive. No. 1, the company put in very tough performance measures. They told employees, you’ve got to get results, otherwise you’re not going to be here in 12 months. But there was not a recognition that very tough performance indicators without guardrails against excess of performance was a toxic mix. We’ve seen what happened to Wells Fargo. They’ve paid billions in fines. The Federal Reserve has a stricture right now that Wells Fargo cannot accept one more dollar in assets until it can prove to the Fed that it has good risk measures in place. We also document in the book the events with Volkswagen, which had the so-called defeat devices intended to report if a VW vehicle was brought in for an inspection, that the emissions were meeting U.S. standards. In fact, the software just simply was fooling the person looking at the dials. That, apparently, went all the way up to the top. We’ll see what’s finally resolved there. Wells Fargo and Volkswagen took enormous hits in terms of reputation, brand, stock price and beyond. We also document a bit the BP problems in the Gulf…. They’re instructive. Kunreuther: We didn’t interview anyone with respect to Volkswagen, but we did have public information, and it’s included in the book. The reason that we felt it was so important is that VW felt that this was a low-probability event that they would be detected, and they put it below their threshold level of concern. They emphasized the optimistic part of this, which was to say, “Let’s see what we can do as a way of really improving our bottom line.” What we do in the book is give a checklist to people, to companies and to individuals. We see it as a broad-based set of checklists on how they can do a better job of dealing with that. What we really say is: Pay attention to these low-probability events. If you think not only in terms of next year but over the next 10 years, what you can see as a very low-probability event would actually be quite high over a period of time. If you begin to think long-term, which is what firms want to do, you pay attention to that. Knowledge@Wharton: There’s such an economic impact on the company when these issues can’t be resolved quickly. Toyota, for example, has been dealing with its airbag problem for several years. Kunreuther: You tie the issue of getting companies and directors to pay attention to the low probability, and then you say to them, “Construct a worst-case scenario.” Put on the table what could happen if it turns out you were discovered, or if there is an incident that occurs, or an accident, as Mike was saying on the BP side. What’s going to happen to the company? What will happen to its reputation, its survival, its bottom line? Our feeling is that, if you can begin to get people to think about the appetite and tolerance in the context of these low probabilities that could be quite high, then I think you have an opportunity for companies to pay attention. And they’re doing that, as Mike and I have found out in our interviews. Knowledge@Wharton: What about when the disaster is a natural phenomenon, such as the volcanoes in Hawaii and Guatemala? Companies have to be prepared, but they can’t control what happens. Useem: As we’ve watched the events unfold in Hawaii and Guatemala, it’s a great warning to us all that the impact of natural disasters worldwide is on the rise. There’s just no other way to describe it except a graph that’s going up, partly because people are living closer now to some of the places that historically are seismic. Hurricanes are possibly being intensified by global warming. There are more people along the Florida coast. All that being said, natural disasters are obviously in a much bigger class of disasters. [Since] we wrote this book for people to be able to think through their own catastrophic risk management, we offered [examples] from the experience of other large companies, mainly in the U.S. We have a couple of German companies that we focused on: Deutsche Bank, Lufthansa and so on. We suggest that the vigilant manager, the watchful director, ought to be mindful of 10 separate points. One is, be alert to near-misses. What we mean by that is, “There but for the grace of God go I.” If I’m an energy producer, watch what happened to BP in the Gulf. Let’s learn from what they went through. The A-case for me is Morgan Stanley, which had been in the South Tower of the World Trade Center when 9/11 hit. Because of the events eight years earlier — in 1993, a bomb had gone off in the basement of the World Trade Center — the risk officer at Morgan Stanley said, “Who knows what else might happen? That was a near-miss.” Rick Rescorla, [vice president for corporate security,] insisted that Morgan Stanley every year practice a massive drill of evacuating the tower. When 9/11 occurred, the North Tower was hit first. Morgan Stanley is in the South Tower. Rescorla said, “Let’s get out of here,” and he managed to evacuate almost all 4,000 people. He was one individual who did not get out. He went back in to check. He is a hero for Morgan Stanley and many other people, but the bigger point taken from that is: Learn from the world around us, because these developments are intensifying. The threats are bigger. The downside is more costly. See also: 3 Challenges in Risk Management   Kunreuther: Near-misses are important in any aspect. But the other point that I think is important for today is another part of the checklist: Appreciate global connectedness and interdependencies. That point really became clear with Fukushima and with the Thailand floods. We asked each company what was the most adverse event that they faced? They had the complete freedom to say anything they wanted. The death of a CEO could have been one. Kidnapping was another. But as Mike indicated earlier, Fukushima was a critical one, and so were the Thailand floods. These were companies in the S&P 500, but they were concerned about how they were getting their parts, so supply chains were very important. They recognized after Fukushima that they were relying on a single supply chain that they couldn’t rely on for a time. Knowledge@Wharton: How can a company prepare for the unexpected death of a CEO? Useem: From looking at the companies that are pretty far into it, all we’re calling for is getting those risks figured out, then having in place a set of steps to anticipate. It’s like insurance. The best insurance is the one that never pays off because the disaster has not happened. The best risk management system is the one that’s not invoked. In the book, we get into the events surrounding a fatal Lufthansa crash. Within minutes, they were in action. Within minutes, they had called the chancellor of Germany. Within minutes, they had people heading to the scene, not because that’s what they do but because they had thought about the unimaginable, and they had in place a system to react quickly. You have to deal with an enormous amount of uncertainty when disaster strikes. Premise No. 1: Be ready to act. Premise No. 2: Be ready to work with enormous uncertainty, but don’t let that pull you back from the task ahead.