The federal National Flood Insurance Program (NFIP) underwrites the overwhelming majority of residential flood insurance policies in the U.S. As of April 2018, more than 5 million NFIP policies were in force nationwide (4.8 million residential), representing slightly more than $1.28 trillion in coverage ($1.17 trillion residential). For decades, the NFIP has been homeowners’ only option for flood insurance, but over the past several years a small private market for residential flood insurance has emerged. Policymakers are increasingly interested in learning whether the expansion of this market could help meet the policy goals of increasing the number of homeowners with flood insurance or offering more affordable coverage. Stakeholders—in congressional testimony, op-eds, reports and other forums—have offered diverging opinions as to the appetite of the private sector in writing more flood insurance, on the existing barriers to private coverage and on the implications for the NFIP. The present state of the market is unclear, particularly because there is no nationwide database on the companies writing residential flood insurance, coverages offered, policy terms, pricing and any differences between private and NFIP flood insurance. This makes it difficult to evaluate the market’s future evolution and relationship to the NFIP. This report aims to fill these knowledge gaps and has two primary objectives:

1.  to document the current state of the private, residential flood insurance market across the U.S.; and
2. to identify the main factors influencing the number and form of flood insurance policies offered by the private market.

To meet these objectives, we conducted in-depth, semi-structured interviews with 63 insurers, reinsurers, state brokers and other market participants. We also gathered and analyzed current private market data from a range of sources, including public documents, congressional testimony, news articles, state regulators and private firms. See also: Future of Flood Insurance   Key Findings

• The private residential flood insurance market in the U.S. is currently small relative to the NFIP. We estimate that private flood insurance accounts for roughly 3.5% to 4.5% of all primary residential flood policies currently purchased.
• With the exception of Puerto Rico, more policies are written by surplus lines carriers than by admitted carriers subject to state rate and form regulations. This is unsurprising, because surplus lines firms tend to cover new or catastrophic risks for which consumers may have trouble finding coverage in the admitted market.
• Roughly 20% of private residential flood policies (and 40% of admitted carrier policies) are in Puerto Rico; another roughly 20% are in Florida. No data are available to evaluate the size of the total private market in other states or at a substate level nationwide.
• Private market growth to date has largely been driven by the interest of global reinsurers in covering more U.S. flood risk. In the admitted market, reinsurers are assuming most of the risk for primary insurers, often in excess of 90%. In the surplus lines market, Lloyd’s of London has played a major role, backing the majority of residential flood policies.
• Among the small number of policies written by the private sector, we identified three broad policy types. The most prevalent is what we refer to as an “NFIP+” policy within the FEMA-mapped 100-year floodplain, where flood insurance is required for federally backed mortgages. NFIP+ policies have higher limits or broader coverages than NFIP policies. Most are stand-alone policies, although some are sold as endorsements to homeowners policies. A second type is a lower-coverage-limit policy issued as an endorsement in lower-risk areas. The third type, used by only a couple of firms, mimics the NFIP policy.
• There does not exist data to ascertain how many homeowners previously uninsured against flood are purchasing private policies versus how many are switching from NFIP policies to private coverage. Insurers in the market believe their portfolios include both newly insureds and policyholders switching from the NFIP.
• Because the NFIP will provide a policy to anyone in a participating community, private firms can operate only where they can price lower than the NFIP or provide broader or different coverages for which there is consumer demand. In a sense, then, the NFIP is a default benchmark for comparison with private flood insurance policies.
• Companies have identified certain types of properties or risks where they believe they can profitably operate and compete with the NFIP. Those target areas of opportunity, however, vary across firms. For example, some are restricting themselves to areas that FEMA designates as having lower flood risk, and others are focusing on areas that FEMA designates as at higher flood risk.
• The largest U.S. homeowners insurance companies have generally been hesitant to enter the flood market, although a few have begun to enter through subsidiaries. Their caution, we learned, stems from concern about being unable to adjust rating or policy coverages as they gain experience in writing flood because of state regulatory practices; concentration of risk in their portfolio; correlation of flood with existing wind exposure; satisfaction with the current arrangement; and concern about reputational risk should they need to raise premiums or scale back coverage as they explore the potential flood market.
• More private capital is now willing to back private flood coverage in the U.S. Interviewees agreed that, as insurers’ familiarity with flood catastrophe models grows, as underwriting experience develops and as state regulatory structures evolve, the number of private flood policies in force could continue to grow, including among admitted carriers. As of this writing, there were multiple new rate filings in many states, suggesting a continued expansion of the market.
• Whereas the NFIP is required to take all risks, private insurers are selective in their underwriting. All interviewees agreed that the private sector will never be able to write policies for certain properties or locations (e.g., repetitive loss properties or high-tide flooding areas) at a price homeowners would be willing to pay. Substantial public investment in risk reduction, combined with aggressive land-use management, they said, was essential for limiting future exposure and encouraging the private sector to move into those areas.
• The private market participants we interviewed differed as to how much flood risk in the U.S., and storm surge risk in particular, they thought could be underwritten by the private sector. All agreed there would likely remain a large and important role for the NFIP to play, particularly in the near term.
• Acceptance of private flood insurance by banks and financial institutions does not appear to be a major constraint on the market at present. With very few exceptions, private insurers have told us banks ultimately accept their products, though they may have some initial questions or concerns.
• There is a need for expanded insurance agent education about flood risk and flood insurance products, both for the NFIP and private policies. Interviewees disagreed about whether the higher-than-market commissions paid by the NFIP were creating a disincentive for the private market.
• Most interviewees saw limited demand for flood coverage today, whether offered by the NFIP or by a private provider, and said that consumers were price sensitive.

See also: How to Make Flood Insurance Affordable   This report was written by Carolyn Kousky, Howard Kunreuther, Brett Lingle, and Leonard Shabman. You can find the full report here.

As data breaches increase in type, severity and number, more companies plan to purchase cyber insurance. While cyber insurance premiums in 2016 in the U.S. were $5 billion, projections indicate they will increase to $20 billion by 2020. Complex cyber crimes mean insurers find themselves facing contentiously complex relationships with their insureds. To create a resilient business model, both of these parties need to communicate effectively and understand the overt and hidden risks they face. The Underwriting Communication Gap Information forms the basis of strong underwriting. With traditional general liability policies, insurers can easily gather information on a company’s financial solvency by reviewing publicly available documents such as annual financial reports or credit ratings. With cybersecurity policies, attack vectors extend in a variety of directions, making information less tangible for underwriters. With a compounded annual growth rate of 41%, cyber insurers need insight into the full range of their insureds’ risks. The present model relies on questionnaires from applicants; however, when insureds misrepresent or misunderstand their risks, insurance companies suffer billions in losses. Often, the cost of a breach exceeds the limits of a policy’s liability, meaning that even those companies with insurance find themselves underinsured. Because courts generally agree that general liability policies do not cover cyber loss, business continuity plans require appropriate insurance aggregates to fully cover losses. Even the most sophisticated companies find themselves unaware of their biggest cyber risks. When insureds lack data, underwriters cannot effectively write policies. Thus, the communication gap poses a risk for both the insureds that remain underinsured and the insurance companies that may be overextending their books of business. Security ratings act as a tool that allow better communication between insurers and their insureds when establishing a cyber security policy relationship, similar to credit ratings in the general liability arena. See also: Roadblocks to Good Customer Relations   The Claims Communication Gap Insureds use insurance to protect their internal and external stakeholders. However, the communication gap creates a claims problem for insureds. Coverage litigation costs and a sense of betrayal ruin relationships between companies that share the economic ecosystem. The Equifax breach offers a contemporary example. Most recent estimates place Equifax's breach costs at $275 million, but the company retained only $75 million in cybersecurity insurance. A single employee’s failure to patch a known vulnerability in the Apache Struts Java application created an opportunity for hackers. Equifax’s failure to understand its own patching cadence led to its underinsured status and, ultimately, its severe losses. Information Enables Resilience The information security community focuses on resilience. When a distributed denial of service attack causes a company to shut down services for days or weeks, the company lacks cybersecurity resilience. An insurance company’s resilience requires setting aside financial reserves to cover claims costs. Because cyber policies often cover business interruption costs, businesses that lack cyber resiliency too often claim losses and file insurance claims. Security ratings provide insight into an insured’s resilience. Because data breaches are inevitable, even companies with strong security ratings may be hacked, but their continued attention to their environments means they will have strong disaster recovery protocols limiting business interruption. To remain financially stable and resilient, insurance companies need to adequately estimate potential losses so that premiums adequately align with their risk acceptance. Insurance companies and their customers need shared visibility into the protected cyber ecosystem. Otherwise, insurers continue to dissuade financial safety by overestimating premiums while companies risk their solvency by underinsuring their business. This business model promotes neither economic stability nor resiliency. Continuous Monitoring Builds Continuous Relationships Remedying the information and communication gap between insurers and insureds provides the only solution to the current resilience problem. Companies often prove, through audit reports, that they engage in information security, yet those documents show proof of only a single moment in time. Insurers need tools providing visibility into their insureds’ ecosystems on a continual basis, such as security ratings. Organizations face data security threats from both their IT environments and those of their vendors. One breached vendor creates a domino effect of cyber insurance claims as the damage travels through the supply chain. Insurers and insureds need to be able to communicate both visible and hidden cyber risks. Security ratings continuously monitor insureds’ endpoint security, IDS and antivirus, while also providing a shared language so they can effectively communicate with insurers. Insurers, conversely, can use the shared language of security ratings to communicate to insureds the impact that security vulnerabilities have on insurance premiums and coverage. See also: The New Agent-Customer Relationship   In the cyber insurance space, increased claim complexity degrades the symbiotic relationship. As insureds shop around for better premiums, insurers lose valuable business. To promote continued business relationships, the two parties can both benefit from automated tools that enable continuous communication about continuous monitoring. Tools to facilitate visibility help establish metrics for the appropriate pricing of risk to cover potential losses and set reasonable premiums. Insureds must communicate with their insurance companies; however, companies focusing on the daily tasks of conducting business lose track of communication and time. Therefore, insurance companies need to protect themselves by monitoring their insureds. Security ratings are poised to help promote resiliency between, as well as within, industries by offering publicly facing data. With the right continuous monitoring metrics, SaaS platforms can enable continuous relationships that reinvigorate the insurer-insured symbiotic relationship.

Workers’ comp claims teams vary in their performance. Yet there has been no way to clearly identify what superior performance means and what superior performers do. Now we have the summary results of a five-year, 1,700-participant survey project to provide answers. The annual Workers’ Compensation Benchmarking Study, founded in 2013 and published by Rising Medical Solutions, pinpoints what separates the top quarter of claims organizations from the rest. To date, five Study reports have racked up more than 500 pages of text, tables and graphs. In a new white paper – How to Close the Claims Performance Gap – this multi-year data is whittled into the “top three” practices claims that organizations should adopt to join their more successful peers. Here we discuss one of them: Best performers focus more on what’s most important Workers’ compensation claims entail managing a wide array of competencies encompassing legal, medical, workplace, regulatory and psychosocial factors that affect recovery and claims closure rates. Therefore, a first step in comparing performance is to find out what and how claims teams focus on “core competencies.” See also: The State of Workers’ Compensation   Since the Study’s onset, claims executives have been asked to rank in order of importance the 10 core competencies most vital to successful claims outcomes. Survey participants – the majority of whom work for insurers, third-party administrators and self-administered employers – have consistently ranked medical management, disability/return-to-work (RTW) management and compensability investigations as the top three capabilities most critical to claim outcomes. Not that other items on the list, including litigation management and claims reserving, are not important competencies. But survey participants ranked them as having a less significant impact on achieving the best claims outcome – with survey participants defining an employee’s return to the same or better pre-injury functional capabilities as the #1 classification of a “good claims outcome.” This definition of an optimal outcome reflects a shift away from a reactive culture more focused on legal compliance, toward a more proactive, service-oriented approach. The 1,700-plus survey respondents clearly say that this is the business they are in, with upward of one million compensable, new lost-time claims occuring each year. However, there are striking stratifications in this “business” with higher-performing claims organizations outpacing lower performers by factors of five six, and 10 respectively when it comes to measuring their performance within core competencies, measuring claim outcomes based on evidence-based treatment guidelines and measuring claim outcomes based on evidence-based disability duration guidelines. The primary reasons that lower performers cite for not measuring performance within core competencies are: data/system limitations, unsure how to operationalize and, startlingly, it’s not a business priority. The study was able to separate high performers from lower performers by ranking respondents by their claims closure ratio. A closure ratio of 75% means that for every three claims closed, four are opened. Organizations with a closure ratio of 100% run a tight ship, closing claims at the same pace they are opening new ones. Claims experts agree that a claims ratio of 101% or higher is a reliable sign that the organization is managing claims outcomes effectively. For claims executives and system designers, the message is clear: Focus on and measure key core competencies more to succeed. See also: States of Confusion: Workers Comp Extraterritorial Issues  In addition to core competencies, we have identified two more critical practices that claims organizations should implement to join the elite ranks. With only 24% of industry payers achieving top-performer status, this means the remaining 76% need to take action or risk falling further behind. To learn about these two critical practices, as well as viable implementation strategies, read our entire white paper, freely available here.

Apple's market value crested $1 trillion last week, and its big-tech brethren Google, Microsoft and Amazon aren't far behind; all are valued at north of $800 billion. But to justify their valuations the companies need to keep gobbling up other markets.

Might insurance be on the menu?

All have at least dabbled in insurance, and all will go wherever they see major potential -- in the words of omnivorous Amazon CEO Jeff Bezos, "Your margin is my opportunity." At a time when digitization is the key struggle for insurers, all have decades of experience with smooth, efficient, automated processes. All know how to produce a great customer experience. All have extensive data about customers. And all have the size to tackle the mind-bending problems that insurance faces -- by contrast, you'd have to combine AIG, Prudential and Allstate just to surpass $100 billion in market value, let alone $800 billion or $1 trillion. 

There are natural limits to big tech's interest in insurance. The companies -- let's call them AGMA so we don't have to get into a MAGA discussion -- are allergic to heavy regulation. "Move fast and break things" works in Silicon Valley, but no insurance regulator would allow that approach. AGMA also believe in asset-light businesses. None wants to put up the kind of capital that is required in insurance. 

But insurance generates trillions of dollars of business a year worldwide -- a big number even by AGMA standards -- and many incumbents look like easy targets. So, which AGMA company makes a big move first? When? And what will that first move look like?

I hope you'll join me in a discussion to try to answer those questions. Our mantra at ITL has long been, "No one is as smart as everybody," and I think we'll come to a better answer together than we will individually. I set up a discussion two weeks ago to focus on another issue related to innovation, the KPIs that can be used to measure progress for corporate programs, and found the interaction fascinating. I'm now posting for discussion this question about what big tech plans. I've tried to seed the discussion with a fair amount of background on what the companies have done and have said about their plans.  

If you aren't already a member of our Innovator's Edge platform, to join the group you can just click here. Registration is free and fast. Then click here to see the group discussion. The process is painless -- and could be enlightening.

Have a great week.

Paul Carroll
Editor-in-Chief 

For many, the concept of a “smart home” is a futuristic, and perhaps even frivolous, offering where lights shut off automatically once we fall asleep, thermostats are controlled from your phone and security cameras can show you what’s going on in your home from thousands of miles away. However, as I have written in many previous posts, we are only at the start of the Internet of Things (IoT). Significantly more sophisticated devices are already entering the market and soon consumers will see the benefits of both enhanced personal safety and home protection. Forward-thinking insurance companies are not only recognizing the potential for reduction in non-catastrophic loses, they are embracing the potential by filing smart home discounts to create incentives for consumers who use these technologies. Let’s look at a few of these enabling technologies and their potential for loss reduction/avoidance around the core perils of water, fire and theft: 1) Advanced home security products — The professionally monitored home security market has limited penetration in the U.S. — a significant number of home owners don’t feel the need to have their homes monitored for theft. However, many IoT devices enable basic self-monitoring features as a secondary benefit. From video cameras with 24x7 recording, to controllable door locks, to lights that are triggered on with motion, home owners are now getting home security features included with IoT products that might otherwise be purchased primarily for convenience. 2) Leak detection — Traditionally, these products focus on single points of failure, providing coverage in specific locations, such as below a dishwasher or a hot water tank. While providing a lot of utility relative to their cost, it’s been hard to programmatically prove loss reduction with these devices as the location of the sensor has so much to do with catching the leak. That said, more ambitious forms of leak detectors are entering the market, enabling whole-home monitoring, from flow sensors installed on mains, to lightweight stripping that can be installed in floor boards. Additionally, a series of whole-home shut-off valves are also being introduced into the market. Most of these valves require professional installation; however, they are capable of automatically closing the water main with the slightest detection of a leak or abnormal usage patterns. Water losses may be greatly reduced if a home could automatically respond to a burst pipe or an overflowed toilet. 3) Connected smoke alarms and “listeners” — Fire alarms have saved many lives, but the original design was intended to notify occupants of a fire so they could quickly exit. Unfortunately, if no one is home to hear a smoke alarm, there isn’t much that can be done by way of stopping a fire before a total loss. But the new generation of connected smoke alarms and “listeners” (an add-on that hears an alarm and sends a signal) can message not only the home owner but also a third party who can dispatch emergency crews on a homeowner’s behalf. It’s not hard to imagine how dramatic loss reductions will be when all homes have connected fire safety devices. An exciting aspect of all of these enhancements is that they are incremental improvements on already approved safety devices, enabling a fast track of the actuarial analysis/regulatory acceptance of additional discounts. But these improvements are just the start… See also: Global Trend Map No. 7: Internet of Things   Connected devices are particularly special because the “intelligence” doesn’t necessarily need to reside on the device itself, but could also live in the cloud, where processing is getting more powerful and less expensive by the day. As such, there is a tremendous amount of innovation in the data analytics space — and here are a few technologies that will almost certainly result in greater loss reduction: 1) Real-time analytics — the more information that can be analyzed in real time, be it from multiple sensors or devices or historical data, the higher the accuracy in early detection of a potential loss situation. For instance, a sharp rise on a temperature sensor might indicate a fire, but it also could be caused from sunlight striking the device. Long-term tracking of that temperature data might quickly indicate what is normal, what is not. Or perhaps a flow sensor might detect a flow of water similar to shower running, but when paired with alarm system that shows the home is unoccupied and the alarm has been in “away” mode for several days could be a clear indication of a burst pipe. 2) Automated response logic — connected devices lend themselves well for automated responses. Homeowners will be able to create steps that are enacted when emergencies are detected. For instance, when a fire alarm rings, the sequence might be something like: a) snap a picture from each camera and take a temperature read from each sensor in the house, b) email/text all of the family that lives there with the data to confirm or override an emergency call, c) if no response within 60 seconds, forward the notifications to a third party for emergency dispatch. Automation combined with human intervention allows for a more accurate and effective response. 3) Predictive analytics — ultimately the best way to lower losses is to prevent problems before they start. This is where heavy processing power is required — as well as buy-in from consumers on the use of their data. Connected homes provide streams of output data and, with it, anticipated performance. Variances in this data might indicate early stages of problems. For instance, a packaged HVAC system might be showing degradation of airflow in the summer, which could mean trouble for gas heating as temperatures drop. It might be in the best interest of the insurance company to ensure performance is restored as the winter comes, prior to the risk of freezing pipes. Additionally, as we are seeing in telematics and auto insurance, you can bet that consumer behaviors will also have the potential to be analyzed, no doubt showing correlation between “safe” homeowners and reduced loss. While more forward-facing than the device enhancements listed in the first section of this article, it’s these enhanced intelligence features that will truly revolutionize loss models. The more advanced the technology becomes, the less dependent the loss prevention becomes on human behaviors. See also: Insurance and the Internet of Things   Imagine a world where the main perils for homeowners insurance carriers such as water, fire and theft are dramatically reduced through the IoT and smart homes. Yes, consumer mistakes/negligence, even moral hazard, will always be an issue, but at some point it’s very possible the home will become smart enough to compensate even for these factors in a substantial way. We are already seeing rapid advancements in these areas in both telematics for auto insurance and wearables for life and health insurance. Similarly with smart homes, these IoT technologies have significant potential to lower losses from non-cat perils.

One of my friends recently shared this article with me from Harvard Business Review, talking about how male and female entrepreneurs get asked different questions from venture capitalists, and the correlation of the questions and funding. I laughed as I recently had a similar experience. My company, Benekiva, consists of four founders: three men and me. We are diverse in our skillsets and perspectives, which makes our team very strong. We are also very experienced -- not saying we are old :) but we have been in corporations, run multiple startups, managed diverse teams and held mid- to senior-level positions. Being in the technology industry for nearly a decade and a half, as a woman, I've seen that getting "preventive" questions is such a norm, and the more you climb up the ladder the number you tend to become. I have encountered several times where I had to justify or prove my recommendations on a tech architecture or solution while my male counterparts could walk in and have a much shorter conversation. While pitching, I've seen folks look to my male co-founders for confirmation. I'm like: "Dude, do I smell or something? Do I need to throw out my credentials for you to believe me?" Recently, I pitched Benekiva to a couple of seasoned mentors. Benekiva is a software solution to bridge the gap between life insurance companies and their intended beneficiaries through claims automation, beneficiary and policyholder management and asset retention. As I was walking the mentors through the pitch deck, I kept getting interrupted and at one point was told, "I don't believe there is a problem." (Note: There is more than $14 billion of unclaimed property from life insurance policies, and that grows at an annual rate of $1 billion; the claims process is broken.) At the end of the meeting, I was told, "Great job, and they were tough for a reason." I left confused. What do you mean, for a reason? Was this a test? A co-founder, on the other hand, had a conversation with a similar audience and kept getting comments such as, "Wow" and "This is genius." See also: How Technology Breaks Down Silos   Earlier in my startup journey, I was nicely told that I was a pretty accessory, the female touch. The list of demeaning comments could keep going on, even though I've been a chief product officer, a CTO and a CEO. I'm not alone. Many women founders are facing similar problems, especially on the insurtech side. How might one survive? Here are some tips that have helped me not punch someone in the face:

• Come prepared — It is hard to hear statements from your male colleagues about how they can just wing a pitch. We women may, but chances are that we will hear about it. Prepare and practice answers to the questions. The HBR article provides a great point about how to turn a "preventive" question into a "promotion" one.
• Be confident — I don't care about hearing how I am intimidating. I have expertise and come across confident. I also don't have an ego about it -- I am very humble and helping. When facing investors, mentors, prospects, current clients, be confident. Answer with confidence because who knows better than you about your business, product, process, etc.?
• Avoid the impostor syndrome — Especially when getting drilled continuously, it is easy to start doubting your abilities. Don't! Think about your successes and stop the negativity and the voices of self-doubt.
• Find a peer group — Hang out with other entrepreneurs who are in your space. If there isn't a group, create a meet-up! I've started a meet-up in my region for Women in Tech and allies to share experiences and develop a network of tech women that can support and lift each other.
• Be positive — No excuses. Don't put too much energy into the negativity. See what has happened as a chapter in your book. I'm not saying not to address problems, but don't let them fester so much that you are spending time fighting something that is not worth the effort.

See also: Startups Take a Seat at the Table   Finally — Write about your experiences and share with colleagues. Knowledge is power, and perhaps your story can inspire others.

Today, the discussions around insurance distribution channels are in perpetual motion – everyone has an opinion as to where it’s going. But where is it today? What has changed? What hasn’t? And where are the investment dollars going? These are great questions, and most insurance professionals are interested in the answers. With that in mind, SMA conducted research about today’s distribution trends – and the findings are presented in P&C Insurance Distribution: Responding to a Rapidly Changing Ecosystem. Understanding where the current industry trends stand is important so that insurers can benchmark their organizations’ progress relative to competitors and the industry at large. The data is interesting, of course, but several important questions do arise that insurers need to consider and answer. In other words – get under the covers! When asked about digital strategies, 46% of responders indicate they are working on a digital strategy – but it isn’t in place yet. Given that rather significant percentage, one has to wonder if the spending around agent/broker portals (83% indicate it is #1) is for tactical reasons or strategic reasons. One could quickly conjecture that, either way, portals solve a business problem. So, there is value. That’s true … and it’s not. If the portal investment is not aligned with a corporate digital strategy, then the investment could be for naught because it does not support the overall corporate direction and might be throw-away dollars and effort. Perhaps the portal only holds value for a certain group – for example, agents and brokers – but misses the mark for customers. Does that mean that insurers should do nothing until a digital strategy is nailed down? That would not be practical either. The point is that when advancing digital capabilities in a tactical fashion, flexibility must be a core project goal. The technology choices for platform and installation (cloud vs. on-premises) must be capable of responding to strategic choices as they are made and not be unidirectional. A second critical question arising from the digital distribution spending research data relates to the amount of focus insurers are placing on internal processes. Survey results indicate that less than half (46%) are spending on internal operations to meet digital distribution goals. The question that arises is: Are insurers focusing on other technologies because their internal processes are already aligned to digital distribution transactions and outcomes? Or do insurers continue to believe that the corporate external-facing capabilities are most important – and internal processes can continue as they always have? Digital transactions expose internal processes that are holdovers from a manual, paper-based world. Billing is a perfect example of this. If a portal allows a customer to submit payment via a credit card but then advises the customer it will take three to five days to post (as the payment goes through standard internal, manual-posting processes) there is a serious disconnect from today’s digital world and what that customer expects to happen. As insurers assess and advance various digital distribution strategies, it is imperative that internal processes be re-engineered from the outside in so that interactions flow logically from the perspective of the agent/broker and consumer. This is not easy, but it is a critical element for success. See also: How Digital Platform Smooths Operations   In addition to technology spending trends, P&C Insurance Distribution: Responding to a Rapidly Changing Ecosystem explores the changing relationship between insurers and agents/brokers due to changing distribution demands. The report also provides insights into the role of startup insurtech distributors that are responding to changes in the marketplace and making inroads. There are many points that insurers must consider as they move forward with distribution channel decisions. Every insurer is going to be on a different discovery path. As that journey moves forward, it is critical to look under the covers of those decisions. Customers, agents/brokers and employees all have a stake in outcomes. The points of view and levels of involvement will be different – but they must all be considered.

If you’ve got your eyes set on technology that won’t move the needle this year, it’s time to reevaluate what can provide bottom-line results in the short term. AI and machine learning will have their day in commercial insurance. But what are you doing today to drive tangible business results? Insurtech does not have to be a “pie in the sky” endeavor. It can be deployed right now. Just a year ago, the insurtech conversation was all about innovation labs, blockchain, IOT, wearables and, of course, AI. Now, the dust has settled a bit, and the realization has set in that those bright, shiny objects may take years to make a real impact on re/insurers’ bottom lines. While they are still undoubtedly vital to innovation, long-term success and survival, it’s important to strike a balance between “pie in the sky” and practical. Last year’s devastating catastrophes served as a catalyst for more focus on short-term solutions that can improve bottom lines—now. Not years from now. This swing to here-and-now solutions was recently articulated in an article by Ilya Bodner, founder of insurtech startup Bold Penguin, where he notes: “Insurtech is moving rapidly now into commercial lines where the attention and intent is focused on solutions that will deliver a strategic and immediate return on investment (ROI)....Insurers are moving away from bright, shiny, insurtech objects and toward service partners, emerging technologies and solution providers with a return on investment more immediate than promised for five years down the road.” I second this sentiment. P&C risks are changing, as evidenced by 2017’s $144 billion in global insured losses and a commercial lines combined ratio of 104%. And, while a strong market made many insurers whole last year, that is not a guarantee going forward. The next hurricane, flood or wildfire won’t wait for you to innovate. Insurers must find ways to bring innovation to their bottom lines now. Don’t get me wrong, pie in the sky is good—and it is necessary. But insurers must strike a balance between their long games and short gains. You need both. Caution: The hard truth I don’t have to tell you that following last year’s back-to-back hurricanes there was an outcry about how the models got it wrong (of course, it didn’t help that some modelers put out early and grossly inaccurate estimates that incited market confusion and concern). Here’s the hard truth: Insurers also got it wrong. Got it wrong by using a single view of risk; by not taking advantage of innovations in data; by taking too long to operationalize data; by waiting for the perfect, utopian platform (in-house or commercial) to be built or delivered; by expecting legacy analytics software to deliver the scalability, reliability and insight required to act efficiently and effectively. No longer can insurers approach risk The. Same. Old. Way. Risk is changing. You must change with it. And the good news is, integrating insurtech in a way that helps you better assess and manage the evolving landscape of catastrophe risk doesn’t have to be time-consuming or costly, and it can produce immediate results. Here are a few of the challenges that insurers face that insurtech can help them address, in the here and now:

• Reality: Models provide a “framework for thinking; they don’t represent truth.” Evan Greenberg, chairman and CEO of Chubb, recently stated, “Given there have been three one-in-100-year floods in 18 months, how can Harvey represent a 1% chance of occurring, as the models suggested? Models provide an organized framework for thinking; they don’t represent truth.” Now, we all know models serve an important purpose, and our clients can derive insights from modeled data within our platform. But models must be taken with a dose of good old-fashioned human judgment. Models and the outputs are nuanced. It’s all about identifying the right models and model components that best represent your lines of business, geography and business practices. But it’s also about balancing resources and business value with this expensive exercise. You need to have an intelligent conversation about model nuances—and figure out the “so what” questions that models provoke but don’t answer.

See also: Can Insurtech Rescue Insurance?  

• Reality: You can’t handle all the data. There’s a gap between the wealth of data now available and an insurer’s ability to quickly process, contextualize and derive insight from that data. Insurers are generally frustrated by a lack of process and an easy way to consume the frequent and sophisticated data that expert providers put out during events like Harvey, Irma, Maria, the Mexico City earthquake and the California wildfires. Beyond the sheer volume of data, insurance professionals are expected to make sense of it by using complex GIS tools. In reality, you have all this data but no actionable information because you can’t effectively make sense of it. Even insurers with dedicated data teams and in-house GIS specialists struggle to keep up. (SpatialKey tackles this problem by enabling expert data from disparate sources (e.g. NOAA, Impact Forecasting, JBA, KatRisk) and putting it into usable formats that insurers can instantly derive insight from and deploy throughout their organizations. We do the processing work, so our clients can focus on the analysis work.)
• Reality: Your best data is your own, but you’re not benefiting from it. It’s one thing to be in possession of data, and quite another to be able to realize its full value. Data alone has little value. One of our clients, for example, needed a way to re-deploy its own data to its underwriters, so we helped the company integrate an underwriting solution that would put its data, along with expert third-party data, in the hands of its underwriters—all from a single access point that would consolidate disparate sources and drive enterprise consistency.
• Reality: Your customers expect on-demand; you should, too. Your customers don’t want to wait for a quote or go through a lengthy process to submit a claim. Our society is instant everything, and while commercial insurance may not be held to the same real-time pressure as personal lines, it is moving in that direction. When you need the latest hurricane footprint, you need it now, not four hours from now. When an earthquake strikes Mexico City, you need to understand your potential business interruption costs today. When a volcano is erupting and no drones are allowed in the surrounding airspace, you need a geospatial analytics solution that can help you provide advanced outreach to insureds and do the financial calculations to understand actual exposure. Likewise, when your underwriters are trying to win business, you’d rather they spent their time evaluating the risk than searching for information.

Who knows what this hurricane or wildfire season will hold. The question is, are you prepared to handle it better than last year? What changes have you made to strengthen your resilience and that of your insureds? What has been learned and applied for meaningful results? It’s a misnomer that insurtech and disruption go hand in hand. Some insurtech solutions are built to complement—to drive efficiencies, cost savings and underwriting profitability—not necessarily replace existing processes or legacy systems. Data and analytics is an area where insurers, brokers and MGAs can still improve their bottom lines yet in 2018. See also: To Be or Not to Be Insurtech   Take down the pie and dig in My intention is not to dilute the importance of up-and-coming insurtech technologies, like AI and machine learning. They will undoubtedly help insurers compete as risks become more complex. My point is that those longer-term technological investments must be tempered with an understanding of what technologies will help move the needle in the present. You can strike a balance between pie-in-the-sky insurtech and insurtech that works for you now.

Do you think home and contents insurance is broken? Then join us for our Getting the House in Order series on what’s wrong and how to fix it. Part 1 takes stock of the U.K.’s protection gap and its effect on different demographics. I’m sure that at some point in life you’ve faced the too much stuff moment. For me, it was earlier in January, as I sought to escape the post-Christmas blues with a mini-break abroad. Except – the drawer that once contained my passport now appeared to be home to a multitude of still-wrapped DVDs, a large hardback book, some errant Christmas socks and a pack of comedy coasters. I located the passport in the end, several layers down. But I had to think: As a nation, we sure have a lot of household contents. I began trying to quantify the volume of stuff in people’s homes, starting with my own overloaded passport drawer. Then the drawers in the living room, drawers in the kitchen, drawers in my flatmates’ rooms (the mind boggles). Beyond that, the drawers in all the houses along my street. And that’s just drawers. What of the cupboards, floors and lofts? The garden sheds, shelves and trunks? In every city, town and village in the realm … To stave off insanity – at least temporarily – I decided to do a bit of research. It turns out there are 27.2 million households in the U.K., which means that, for starters, we’re looking at:

• at least 26,112,000 TVs
• 26,384,000 washing machines
• 12,512,000 dishwashers
• 4,297,600,000 books

And what about that class of possession wherein modern man delights the most: consumer electronics? The U.K. is apparently home to 41,000,000 smartphones, 37,600,000 laptops and 32,800,000 tablet. Now that’s a lot of expensive silicon knocking about! Today’s contents explosion has not been fueled exclusively by our couch-potato tendencies, let me add. We are a nation of 25 million bike owners, 1.5 million golfers and 825,000 tennis players (weekly), so we’ve got a fair bit of sporting equipment, too. These two recent trends – gadgetry and fitness – have helped to make our “contents footprint” larger than any previous generation’s. In fact, the Association of British Insurers (ABI), in its recent Britain Uncovered study, put the value of contents stashed in U.K. homes at £950,000,000,000 (that’s almost £1 trillion!). That’s £35,000 per home, on average, comfortably outstripping the average U.K. salary of £27,000. So, we’ve established that our small island conceals a scarcely imaginable volume of household contents, which brings us to our principal concern in today’s post: Where on Earth is all the contents insurance? See also: Can Insurtech Rescue Insurance?   The same Britain Uncovered study found that 28% of U.K. households had no contents insurance whatsoever. That leaves 16 million people and £266 billion of household possessions unprotected. — £266 billion of household possessions are at risk in the U.K. — This figure could be higher still. The ABI estimate was based on the number of uninsured households only, excluding those that are merely under-insured. Indeed, the Telegraph reckons that 6.8 million homes (25% of total households) may be under-insured, meaning that only a minority of U.K. homes have appropriate levels of cover. This contents protection gap has different causes – and solutions – for different people. At buzzvault, we’re pioneering an approach that matches contents cover to customers’ individual needs, whatever they own (sign up for buzzvault beta here, we’d love to know what you think). However: tech wizardry on its own never solved anyone’s problems. So it’s more important than ever that insurers truly understand their customers. To help with this, we’ve provisionally identified three demographics whose varying needs aren’t met by today’s providers. Let’s take a look. Contents Insurance: Renters As if only getting one shelf in the fridge weren’t bad enough already, “generation rent” miss out in more ways still. You see, that elusive house purchase isn’t just significant as a first step on the property ladder. A purchase is a major trigger for purchasing insurance, as well. Most home contents insurance is currently sold as a bundle with buildings insurance, which is generally mandated by mortgage providers. So, while homeowners are practically forced to take out contents insurance, little impels renters to even think about it. 81% of “generation rent” lack contents insurance, at least according to the Improving Access to Household Insurance report by the Financial Inclusion Commission (FIC). That means we’re looking at a staggering 10.5 million uninsured renters. That’s more than the entire population of Sweden! No assessment of the travails of renterdom would be complete without a cursory look at our nation’s students. Negative attitudes toward insurance are rife among this demographic. This explains why, despite the average student lugging more than £2000 of possessions along with them to start their studies, nearly half of them aren’t covered. And this, even though students are possibly God’s gift to burglars. Many renters could afford contents insurance, and would buy it, if only the thought crossed their mind for more than a second. So there is less a product failing for insurers than a failure to package and market their product in a relevant, customer-friendly way. Indeed, it’s that adage again: Insurance is never bought, it’s always sold. The Financial Conduct Authority (FCA) classifies two-thirds of renters as potentially vulnerable to harm due to low levels of financial capability and resilience, health issues or risk of life events creating difficulties. Contents insurance could provide a significant umbrella. Status: At Risk Contents Insurance: Poorest Households Only 40% of those earning £15,000 or less each year have contents cover, compared with more than 75% for the highest incomes (according to the FIC’s Improving Access to Household Insurance). And, in an unfortunate co-occurrence, it is precisely these individuals who are most exposed to household risks — be that house fires, floods or burglaries. Lower-income households live with 30 times the risk of arson as more affluent households. They’re also eight times more likely to be on tidal floodplains. To cap it all, socially rented housing is twice as likely to be burgled as owner-occupied properties. These are damning stats. They tell the story of unacceptable numbers of at-risk households having to bear the cost of personal disaster on their own. Covering total loss from savings is bad enough – worse still is the fact that many poorer households aren’t even in a position to do this. More than 7 million UK adults have less than £1000 in savings. And less than a quarter of those in social housing could replace a washing machine from savings and income alone (Citizens Advice Quids in survey). The financial inclusion debate has so far centered on banking, payments services and affordable credit – but accessible insurance has a part to play here, too. Tackling the protection gap won’t eliminate the savings gap, but it will de-risk it. To do this, insurers need to find ways to make lower-premium products economically viable. This will almost certainly require new distribution mechanisms to achieve scale, reduce cost and reach people regardless of their level of financial education. Tenants insurance schemes (sometimes called “Insurance with Rent”) are welcome in this regard but have had limited adoption so far. Status: Highest Concern See also: Why 5G Will Rock the Insurance World   Contents Insurance: Average Homeowners Some better news: More than 80% of those owning their home outright or with a mortgage have some form of contents cover in place (FIC: Improving the Financial Health of the Nation). However, these customers aren’t home and dry. More often than not, they have inadequate cover for the value of their contents. What we have here is endemic under-insurance, where coverage isn’t absent but is still patchy – leaving few people with optimal protection. When taking out insurance, people typically underestimate the value of their belongings by 40%. In the event of a total loss, this means they can recover max 60% of the value of their stuff. And many insurers operate an averages clause, whereby this percentage (representing the degree of under-insurance) is applied to all claims. To give you a flavor: Over the past three years, 6% of people have missed a typical pay-out of £1000 from their home insurance providers because they haven’t bought the right level of cover, according to a poll of 2,000 Britons by insurance broker Swinton Group. The main reason for under-insurance is the steady creep in home contents value. This, we estimate, grows by an average of 24% over a three-year period. While the rhythm for updating insurance policies is generally annual, we update our possessions daily, weekly and monthly. A one-size-fits-all approach to contents insurance doesn’t just lead to poorer households tending to pay over the odds. It can also lead to wealthier households paying too little – and then being hit with the consequences, without warning, when it’s time to claim. Topping up homeowners insurance isn’t as great a social good as providing a financial umbrella for the nation’s neediest households. However, much work for the insurance industry remains to be done here that could justifiably be called low-hanging fruit. These households are, after all, already receptive to insurance and tend to own the most stuff. Status: Vulnerable We will revisit all these themes in greater depth as this series progresses. Next, we’re looking at what can be done about the low adoption and engagement that insurance products have traditionally faced. It’s a certainly a challenge to sell a product no one covets or, in the main, understands. But rather than waiting for the public to start caring, the industry should explore ways to take insurance out to its customers: one approach being to embed it into other services customers do care about.

Active shooter events in the U.S., unfortunately, are becoming more frequent -- so much so that the Wall Street Journal reported this week that school districts are stepping up purchases of insurance against such events. The incidents raise many questions, and a persistent one in a legal context is, “Should anyone besides the shooter be held liable?” According to the Federal Bureau of Investigation, between 2000 and 2017 there were 250 active shooter incidents. They resulted in 799 victim deaths and 1,418 wounded. Often, victims and their families understandably seek to hold someone other than the shooter accountable for failing to prevent these acts of criminality or terrorism. Although this type of litigation is always emotionally charged, the legal concepts of foreseeability, duty and reasonable care are the key factors used to determine liability. In litigation, the concepts generally mean that allegations of liability must be supported by "expert" testimony. Such opinions are formed by using post-event knowledge to reverse engineer some preventative measure that would have allegedly prevented a particular incident. Of course, the entity alleged to be liable is being judged for its pre-event actions and "failing to act reasonably" in the context of a threat environment that includes countless potential risks. Unlike a government, private entities must assess these risks without access to the intelligence that only governments possess and without a government's resources and legal authority to implement an unlimited number of countermeasures. Governments are frequently held to be immune from similar lawsuits, so one can reasonably ask whether it is fair and just for private entities to be subject to a disparate legal standard. See also: Active Shooter Scenarios While there may be some cases where liability may properly attach, perhaps it's time to consider whether concepts of crime victim compensation funds and victim compensation funds similar to that enacted after the 9/11 attacks should be used to provide compensation to victims of mass shootings. Creating a similar fund for individual victims of active shooting incidents could address multiple challenges. Victims could gain compensation quickly and without the financial and emotional expense of litigation. Defendants who had no involvement in the shooting could be spared the costs of defending lawsuits. By authorizing a fund to accept claims over several years, individuals with latent physical injuries or illnesses that take time to develop also could be compensated. Risk cannot be eliminated Thinking about long-term solutions to address the issue of compensation for persons injured or killed by acts of mass violence is important. The real world is not like a post-event lawsuit that focuses only on whether a particular location could have been made "safer." In the real world, the question is really whether the world itself can be made safer. FBI data shows that the vast majority of active shootings 2000-2017 happened in locations that are open to public access:

• Commerce (businesses, shopping malls), 42% of active shooting events
• Schools (pre-K to 12, institutions of higher education), 21%
• Open space, 14%
• Government, 10%
• Residences, 4.8%
• Houses of worship, 4%
• Healthcare facilities, 4%

If active shooter litigation continues to propagate, more and more security measures are bound to be imposed by either governmental or private entities. The risk will never be completely eliminated, but the way we live and interact with each other necessarily will. And the cost for doing so will have additional ripple effects that may have profound effects on all our daily and heretofore routine activities. See also: The New Face of Preparedness   There are no perfect solutions for the societal problem of shootings, but we ought to fix what we can. Sparing victims the burden of litigation and providing fund-based compensation seems to be a logical approach to consider.