Wellness is back in the news these days. The National Bureau of Economic Research’s controlled trial invalidating a Harvard study that has been used to claim major benefits from wellness programs and the surprise decision in the AARP v. EEOC case disallowing large financial inducements for “voluntary” programs both received national attention. Further, WillisTowersWatson’s quiet revelation that most employees really dislike wellness programs marks the first time anyone in the industry has ever acknowledged that, absent bribes and fines, few employees would submit to their HR people playing doctor. By way of background, all these recent “findings” – the lack of savings from wellness programs, need for inducements, and the employee resentment – were quite clear to me in my roles at British Petroleum, Burger King and Walmart over three decades. Along with Al Lewis, I brought this experience (and many others, such as the much more positive and increasingly popular domestic medical travel program) to public view in our book "Cracking Health Costs," which continues to sell – and, more importantly, continues to resonate — five years after publication. Largely because of the news hooks above, there have lately been a flurry of references to a comprehensive, scholarly article by that very same Al Lewis. Al, of course, is well-known for poking the wellness beast with humor, screenshots and eloquence on www.theysaidwhat.com. This article is different. Not as much fun perhaps, but “The Outcomes, Economics and Ethics of the Workplace Wellness Industry” captures all my doubts and criticisms, and much more besides. See also: The Value of Workplace Wellness  Al often says that the wellness industry’s worst nightmare is being quoted verbatim. In this article, he has collected a mountain of self-incriminating verbatim quotes and claims, sourced with roughly 400 linked footnotes, all leading to the inexorable conclusion that, to be blunt, the wellness empire has no clothes. Al presents convincing evidence that what he calls “pry, poke and prod” programs really can actually harm employees. Further, the way wellness vendors typically calculate costs and benefits results in false ROI numbers. This exposé, though generally dry and straight, is not without flashes of Al’s understated humor, albeit delivered in the context of the leading law-medicine journal. In one passage, Ron Goetzel is forced to spin the gaffe that his wellness advocacy group, HERO, accidentally published a chapter in their Outcomes Guide showing that wellness loses money. Ron is sourced as saying: HERO’s board claims that, in creating the guide, they “fabricated” these numbers for the purpose of providing an example. Publicly, Goetzel, a member of HERO’s board, stated that “[t]hose numbers are wildly off . . . every number in that chapter has nothing to do with reality.” Al’s next paragraph: The chapter’s author, however, disputes the HERO board’s and Goetzel’s claim that the numbers were fabricated. He argues that, quite the contrary, his data is real and several board members, including Goetzel, reviewed it prior to publication. Reconciling the example’s data with the HCUP database, which shows almost total consistency between the HERO sample and the population, provides further evidence for the author’s claim that the data is not “wildly off” but rather real, and a representative sample of the privately insured American workforce. Al challenges the credibility of HERO’s board simply by quoting both a board member and the chapter author. After all, when your go-to defense is pretending to have fabricated your own numbers, you lose. And when Al Lewis is on the other end, you lose big. This article, though not a quick read, is a necessary one for all policymakers, pundits and especially employers as they decide how to react both to the new findings by NBER and Willis – which turn out not to be new at all –and how to prepare for 2019. See also: ‘Surviving Workplace Wellness’: an Excerpt   Perhaps the best preparation is to do something completely different – as my book says, perhaps try doing wellness for employees instead of to them. “Pry, poke and prod” programs, especially the coercive ones, may finally meet the demise that I’ve been predicting for about 15 years now. Published in the Case Western Reserve Health Matrix: Journal Law Medicine

For 10 years, I was an instructor of risk and insurance at LSU in Baton Rouge. I’d occasionally be invited to testify before legislative committees as an insurance expert. Often, some of the pending legislation was designed to solve real problems that were not fixable with insurance. In these cases, my testimony was simple. I’d explain: “Ladies and gentlemen, today, this legislative body has the ability to outlaw the effects of gravity on all state-owned lands. If this legislation is approved, a citizen can jump off the observation deck on the 27th floor and will die EVEN THOUGH IT IS AGAINST THE LAW. Gravity is unforgiving like that.” The first three examples below are real and, unfortunately, not sustainable in a long-term insurance model because we can't ignore adverse selection any more than we can ignore gravity. The fourth item is a “scientist” moving from the facts – and becoming (in my opinion) a social engineer acting on feelings. Consider the brief notes below as an introduction to each issue, not a complete discussion. 1. The Affordable Care Act – I’ll remove the emotion of illness and fairness from this discussion and just look at the numbers. From a Jan. 13, 2017, Wall Street Journal article, see the following statistics:

• The most expensive 5% of patients use 49% of health spending.
• The most expensive 20% of patients use 82% of health spending.
• The healthiest 50% of patients use only 3% of health spending.

Ours is a house divided. 50% of the market is perfect for an insurance model -- the other 50% is not, because insurance works when there is a “chance of loss,” not when losses are certain. In a loss-certain model, the No. 1 need is funding -- more and more money. See also: U.S. Healthcare: No Simple Insurtech Fix 2. NFIP (National Flood Insurance Program) – From the Acadiana Advocate (Jan. 26, 2018) see the following headlines: “Hopes for flood insurance deal dim – Another short-term extension expected” The future of NFIP is threatened by adverse selection. A disproportional number of high-risk buyers populate the pool, and an insufficient number of safe buyers (low-risk properties) exist to assure affordability and thus sustainability. 3. Auto insurance (issues of tort) – In the late 1970s in Louisiana, mandatory auto liability insurance became the law of the land. We can debate the wisdom or appropriateness of this, but it is the law. Today, ours is a house divided – those looking to sue and those fearful of being sued. Often, our industry invites (and sometimes deserves) lawsuits by being inefficient or ineffective or unreasonable in claims handling. In other cases, lawyers are searching for incidents and accidents that can do more than indemnify a claimant for a loss by creating wealth or at least “over-indemnification” through the courtroom. Our industry is becoming a tort roulette wheel. On a 140-mile trip from New Iberia to Baton Rouge, I counted 33 billboards for a specific attorney. There were many more for many others. Is this a cost the market is willing and able to pay? How many millions (billions) of dollars are taken out of the risk pool annually for over-litigation? Are we, the premium payers, willing to pay that cost? 4. Fairness in lieu of actuarial science – At its simplest, the insurance process includes four elements. Do these effectively, and you have a green and sustainable business model:

• Identify the risk to be insured
• Define the coverages
• Establish a price (premium)
• Pay the claims

On Saturday, Jan. 29, 2018, I was driving down a flooded Center Street in New Iberia concerned about the aforementioned flood article and the viability of the NFIP, when I heard a brief portion of a TED talk with Cathy O’Neil titled, “The Era of Blind Faith in Big Data Must End.” O'Neil, a data scientist with a PhD., talked about data being accurate but not being fair. Actuarial science demands objective data, but our society is starting to demand “fair.” Can these co-exist? Should bad drivers pay more than good drivers? Should health conditions be considered in underwriting life and health policies? See also: How Advisers Can Save Healthcare   I believe insurance is a risk-sharing process requiring underwriting, but it is rapidly moving to a “social welfare” platform. The market will get what it wants or tolerates, but as shown above our traditional insurance model may be sacrificed in the process. What does this mean in your world? Is it sustainable? What are we as an industry and a society going to do? Address the problems now or wait until these systems collapse or go bankrupt? “A government that robs Peter to pay Paul can always count on the support of Paul.” — George Bernard Shaw “We have met the enemy, and he is us” — Pogo comic strip

Insurance is risk transfer. A consumer has a risk. The consumer wants to eliminate or minimize the financial impact if that risk is, unfortunately, realized. Therefore, the consumer purchases an insurance policy. The insurance company takes the vast majority of the financial risk in return for a relatively small payment. The consumer eliminates the larger risk, however minimal the chances of realizing a loss, for a cost. For example, the consumer possesses the risk that his or her house will burn down. The homeowner wants (or just as likely, the mortgage company wants) to transfer to a third party the financial burden he would have if the house burned down. Let's assume the financial risk is $300,000. An insurance company accepts the risk of losing $300,000 in return for a $1,000 premium. If the insurance company has priced the risk correctly, then on average the company will make about $2 based on the last 10 years of results for homeowners insurance. That is quite a transfer of risk! (It may also qualify as a psychological study in madness because is it really worth $2 to go to all this effort and risk?) Some, maybe even most, people might argue that insurance companies have absolutely lost track that they are in the business of risk transfer. Some companies clearly have taken the attitude they are not in the business of incurring claims. Everyone, of course, claims to understand this, but actions speak louder than words, especially when internally their words echo their actions. They only want to write risks that have an incredibly tiny probability of a claim. As a reminder to all insurance company people, the world does not need you if there are no claims. This is your purpose, your reason for existing. Insurance company people are saying, upon reading this, "What does this author think claims people do all day? Of course, we have claims!" But what do claims people do all day is a valid question. On a broad scale, people do not have claims at nearly the frequency they had prior to 2001, according to A.M. Best data adjusted for more population, more cars, more homes, more businesses, and more drivers. All else being equal then, some claims employees may be twiddling their thumbs. One reason I suspect claims frequency has decreased so much is because agents are continually telling clients to not turn in claims. They do this because companies have conniption fits if they even think an insured has had a claim. Some underwriting is so tight, I am not going to be surprised to see a nonrenewal for an insured who even utters "claim" in a conversation. Again, no one needs companies if no reasonable chance of a claim exists. I understand the underwriting philosophy that once a person has incurred a claim the person is more likely to have another claim. That philosophy is as old as Lloyd's. I am not doubting a high-quality statistical study has been completed that uses an entire universe to prove this point. (I'm sure someone has actually completed this study and it just is not public because I have not seen one in 30 years.) See also: Underwriting, Marketing: Sync Up!   I doubt correlations are universal across lines. I doubt, too, that opportunity does not exist differentiating between types of first claims and types of insureds. Insurance companies, though, seem to throw the baby out with the bathwater. Underwriters and underwriting managers are too scared of a large, second claim occurring. More precisely, they are scared their boss will tear into them for not nonrenewing the account after the first claim, no matter how unrelated the first claim was to the second. So they go scorched earth and nonrenew everyone. Agents know this, so they tell insureds to not turn in claims. Underwriting behavior like this is highly problematic: 1. Agencies are damaged. Companies want their agents to survive and thrive, but they damage those agencies with their underwriting and claims actions.

• When agencies tell clients to not turn in claims, the agents are creating huge E&O exposures for themselves.
• Reputations are dulled and even damaged, especially relative to the new disrupters, because they have clean and better branding with no history.

2. The data used is questionable.

• How good is a particular company's one-loss regression analysis leading to a second loss? What is the true correlation, and is it really a simple regression? I doubt that. I imagine a quality statistical study would discover the correlation is a multi-factor relationship, and, therefore, simple underwriting rules should not be applied.
• If a large percentage of claims, even small claims, are not being turned in, then the database used to draw the correlation is inherently and materially biased.

3. I am not doubting a relationship does not exist between some small claims and future larger claims. One of my first underwriting lessons is that an old man backing out of the driveway and hitting a bike only had a small claim due to luck. The bike could have been a kid. The nature of the claim, though, dictates the probability of the future claim; the issue is not that a claim may have occurred. The industry's reputation is damaged when companies are so tight. If the reader does not see this, I am not going to explain. 4. Premium growth is impaired. One of the reasons premium growth has been so sluggish is that in the last 15 years tort reform, among other reforms, has arguably been too successful. I am not arguing such reforms should be relaxed, because, in my opinion, such reforms have been good for society. However, if fewer claims are filed or claims are settled for less, premiums decline. The fewer claims dollars paid, the lower premiums will be. The price for the risk transfer decreases because the risk decreases. When claims are not turned in, rates do not increase. When claims (not even claims, I’ll call them "incidents") result in automatic nonrenewals or large rate increases that force insureds to find more reasonable companies, rates do not increase. What is the definition of a claim anyway? When does a client's inquiry become a claim? Reputation damage, lower premium growth and increased litigation potential against agents should be enough to open eyes, if not at least slightly modify underwriting behaviors. Some companies wonder why agents do not sell more of their product. The policies are good, the rates are good and yet sales are minimal. What the agents do not say is they do not trust the company to be fair. The last thing agents want is having to deal with a client who has had a claim and is not being dealt with by the carrier fairly. The best solution is to not sell policies of those companies that have this reputation. Please believe me, most companies that have this reputation do not know they do. But look at growth rates office by office. See also: Shifting Balance in Risk Markets (Part 4)   Another bad situation for agents is to rewrite policies unnecessarily. Rewriting policies is a lot of work, and the agents do not get paid extra. So when companies take unnecessarily harsh underwriting positions, agents have to rewrite more policies. It is easier to just not write new business with those companies. For example: A young driver is backing out of a packed parking lot during the holidays. A careless driver is screaming through the rows trying to find a parking space. The two cars touch, but the young driver stops quickly enough to avoid any damage. The dust on both cars is wiped off, but the paint is not even scratched. At first, the simple and novice conclusion is the young driver should be more careful. But I suggest no one is going to see the speeding driver driving any more expediently than the young driver did. Yet, the insurance company canceled the young driver's policy simply for reporting the possibility the other driver might file a claim. The young driver did the responsible thing. The insurance company did the irresponsible thing. This is a true story. An insurance company should at least think these "claims" through or build better algorithms. Otherwise, no one really needs insurance companies, or at least ones that do not think. At the very least, just get rid of the underwriters by 5:00 pm because human underwriting without thinking is pointless and useless. Nothing good comes of increasing rates or nonrenewing accounts for incidents. Nothing good comes from agents telling clients to not turn in claims because insurance companies are taking ridiculous positions regarding incidents. Insurance companies are in the business of risk transfer, not writing risks that are absolutely perfect. If you run an insurance company or underwrite for one and cannot stand the pressure, sell the company or find a different job because absolutely no one needs an insurance company afraid of claims.

The disruption and changes that are reshaping economies, industries and the businesses within them are providing unprecedented growth opportunities for employee and voluntary benefit insurers in terms of new markets, new customers and the demand for new products and services … creating Digital Insurance 2.0. The gig economy, evolving healthcare markets, shifting industry boundaries due to mergers and acquisitions (M&A), cost shifting from employer to employee, new behaviors driven by digital companies as well as new technologies and the growth of small and medium-sized businesses (SMBs) are at the forefront of these changes and opportunities. Familiar Market, Brand New Look While the outlook for employee and voluntary benefits is promising, the market no longer looks like it once did. In our new thought leadership report developed jointly between Majesco and Milliman, A New Age of Insurance:  Growth Opportunity for Employee and Voluntary Benefits Insurance in a Time of Market Disruption, several factors are converging to create change and opportunities in the employee and voluntary benefits landscape, as illustrated in Figure 1. Figure 1: Forces creating opportunities in the employee and voluntary benefits market The two largest generations, Baby Boomers and millennials, are in the midst of rapid transition. Their shifting positions within the general population, the workforce and business leadership are rapidly reshaping the market landscape. The behaviors and attitudes of both generations are substantially influenced by economic conditions, and digital technology is rapidly becoming an integral part in their lives. Gen Z is further intensifying this shift. These factors have helped fuel the rise of the gig and sharing economy, which is estimated to encompass 35% of the U.S. workforce today and is continuing to grow and expand.[i] Together, these and other forces are creating employee and voluntary benefit needs and expectations that present unprecedented opportunities for growth. The growth in new affinity groups; increased demand for benefit portability; and the growing demand for new, non-traditional benefits and services that offer a simplified, satisfying customer experience are just a few of the dramatic shifts in needs and expectations. See also: 4 Good Ways to Welcome Employees   The market landscape will continue to rapidly transform as workers’ and employers’ needs and expectations shift, healthcare reform continues to change, industry boundaries shift with M&A, marketplaces evolve, new products are introduced and new competitors emerge from within and outside the industry. The surge in employee demand for innovative voluntary benefits are an increasingly critical element to attract and retain top talent for companies, particularly as we continue to see unemployment rates decline, as boomers retire and as the fight for technology talent intensifies. Adding fuel to the market shift is the rapid emergence of new technologies like wearables and advanced medical devices and exploding data (among others) that are redefining the insurance market into one focused on well-being, lifestyle and longevity, rather than illness and death. Innovative benefits are increasingly focused on digital health and well-being, elderly care, pet insurance, college loan repayment and the demand for digitally enabled customer engagement. Making the Marketplace and Workforce Changes Work for You Greenfields and startups saw these opportunities early, but existing insurers are now quickly developing strategies and plans to capture this once-in-a-generation opportunity.  Insurtech has fueled significant investment by venture capitalists, spawning companies like Zenefits, Maxwell Health, ZhongAn, Discovery, Allan, Bright Health and Clover Health.  We now see existing insurers begin to focus on the opportunities, such as MetLife focusing on the SMB market. At the same time, the increased demand for portability of voluntary benefits due to the generational acceptance of frequent job change offers insurers a unique opportunity to cost-effectively capture employees as individual customers and to keep and grow individual relationships (and premiums), rather than losing relationships through attrition. The robust, once-in-a-generation opportunity is seeing insurers of all types developing strategies and plans to capture business, including: --Traditional worksite carriers specializing in supplemental products such as accident, cancer, critical illness, hospital indemnity, voluntary STD, term life, universal life and heart/stroke insurance are expanding their portfolios to include voluntary LTD, gap, dental, whole life or vision products. --True group carriers that historically specialized in group products, including term life, basic AD&D, group STD and LTD, dental and vision are expanding their product portfolios to include accident, critical illness, hospital indemnity and gap insurance. --Medical carriers specializing in major medical coverage have been acquiring supplemental benefit carriers or administrators to expand their portfolio with supplemental products. They may have a competitive advantage because of their ability to harness and analyze extensive medical data. --Finally, we are seeing a range of other carriers including multi-nationals, P&C carriers, retiree market specialists, and others that are entering the market with unique voluntary benefits like pet insurance and legal insurance as well as expanded affinity market programs to capture the opportunity. Underlying each of these is the need to respond with innovative products, plan designs, underwriting and pricing as well as new services, distribution channels and customer engagement approaches enabled by modern digital platforms. Thinking about the best strategic approaches to pursue to maximize the potential of these new products, services and processes will be critical for success.  Several approaches that are gaining traction include: --Product differentiation: Insurers can differentiate themselves in a crowded market by offering a complementary portfolio of unique products, services and benefits. Differentiation may be achieved through value-added services (if exclusivity is achieved), creating an integration model across products, aligning products and benefits with a carrier’s identity, etc. --Adjacent markets: Traditional group carriers are developing individual products to compete in digital, direct-to-consumer markets, and traditional individual carriers are developing group products to compete in the gig economy or growing affinity markets. Carriers operating in the consumer market are expanding into retiree markets, and carriers in the retiree market are moving into consumer markets. --Product bundling: The demand for product bundling, or “combo” products, has recently increased. Sample combo products may include a group hospital indemnity product with accident, critical illness and term life riders or a universal life product with a long-term care rider. While these are just two examples, a large number of product combinations may be considered. In all market segments, and in particular the SMB market, combo products can broaden coverage, increase affordability and reduce or eliminate the need for underwriting by limiting anti-selection. --Rapid product development: We are seeing an increasingly quick pace of product development, which is in stark contrast to the long shelf life of products before the ACA. In addition, carriers in the large market are frequently required to customize benefits and rates for distribution partners as well as employers. Keeping up with this pace requires a nimble technology solution for administration, billing, claims and operations. Carriers that are using newer technologies will have a distinct competitive advantage, especially in the large account and broker markets, as these technologies provide increased flexibility and speed to market. This competitive advantage also applies to the bottom line, as more efficient technologies can eliminate manual processes and reduce expense margins. See also: Value in Informal Employee Networks   --Partnering with emerging technology/insurtech: Insurance markets are being flooded with new insurtech startups. Some of these startups provide products or services that complement employee and voluntary benefit carriers’ value propositions. Existing carriers would be wise to identify the key startup companies in their markets and establish strategic, beneficial partnerships. Reap the Benefits of This Unique Market Opportunity There are a multitude of exciting opportunities for employee and voluntary benefits insurers in this rapidly evolving market. The unprecedented pace of change will drive out old business models and allow new ones to flourish with the introduction of products and the offering of new services, plus interesting mergers and acquisitions such as Aetna and CVS, and the emergence of new business models via insurtech and established insurers. There is no longer a doubt or debate regarding the need to digitalize insurance, but this still continues to be an unpaved path for insurers. Not many understand the best way to achieve it. Insurers are still in the midst of legacy modernization of their core systems for strengthening their back-end processing capabilities, but most realize that these initiatives will fall short without digital transformations that will bring meaningful benefits to customers and ultimately to win them. In this new market, insurers will need a single platform to support individual, group, voluntary benefits and worksite across all lines of business and with a design flexible to adapt to new products, workflows, distribution channels and even devices. The platform will need to enable portability of voluntary benefits to individual policies as well as innovation of products where the same product can be offered as an employer-paid, voluntary or worksite product. Platforms must increasingly make it easy to customize plan options for groups. There are a multitude of potential futures for group, employee and voluntary benefits insurers in an increasingly volatile world. The rapid and unprecedented pace of change will drive out old business models and allow new ones to flourish with the introduction of products and the offering of new services, and much more, from both new insurtech startups and established insurers. At the heart of the disruption is a shift from Insurance 1.0 of the past to Digital Insurance 2.0 of the future. The gap is where innovative insurers are taking advantage of a new generation of buyers, capturing the opportunity to be the next market leaders in the digital age. It is a once-in-a-lifetime opportunity for insurers to redefine the market and competitive landscape in employee and voluntary benefits. Be one of them!

While current market opportunities for insurers – and for insurtechs – require a good product to sell, a large part of the story is about accessing customers via their preferred channels. So the topic of distribution is a natural follow-up to our last post on marketing and customer-centricity. The pre-digital era was characterized by more of a captive, sellers’ market, in which customers had little choice but to seek insurance via their agent of choice, who in turn would funnel work to a small number of large incumbents, generally ignoring new entrants. Over the past years, though, we have seen either the outright emergence or the rapid expansion of a number of non-traditional channels, encompassing direct-to-customer channels offered by insurers, new insurtech propositions, aggregator sites and affinity partnerships with major brands and retailers. So how exactly has this sea change in distribution changed the game for incumbents? Since the start of the internet, the insurance industry has invested in and expanded its digital channels from company websites to comparison sites, aggregators, social media and more – all in an effort to capture new business. At the same time, insurance remains a complex product that is hard to research, buy and use. This is an enormous problem for the insurance industry because every gap and point of complexity is a giant bull’s-eye for alternative channels, insurtechs and new managing general agencies (MGAs).

"Those who can make insurance easier for customers to understand and buy stand a good chance of capturing business from companies whose processes remain complex. In today’s new digital world, it is not about any single channel but rather about a multichannel approach that is based on consumer choice." – Denise Garth, SVP of strategic marketing, industry relations and innovation at Majesco

The emergence of new channels has raised the stakes for incumbent insurers, nimble newcomers and players outside of insurance alike, all of whom have an opportunity to capitalize or, otherwise, get left behind. In this installment, on distribution, we examine:

1. The rise of the digital direct channel
2. The expanding role of affiliate partnerships
3. The importance of cross-channel consistency for insurers
4. Carriers' omnichannel strategies
5. The impact of aggregators
6. How distribution is driving disruption

Our stats and outside perspectives are drawn from our Global Trend Map; a breakdown of all survey respondents, and details of our methodology, are included in the full Trend Map, which you can download for free at any time. 1. Going Direct to Customer 72% of insurers sell to customers directly… We can see that the direct channel has become a totally mainstream concern for insurers. Interestingly – and based on our segmented stats – North America appears to trail on this measure compared with our other regions, in conformity with our prediction from the our last installment, on marketing and customer-centricity: namely that channel disruption is potentially less in North America. The strong showing for direct channels in Asia-Pacific is interesting as, from our broader research with contacts in the region, we know the market there to be heavily intermediated, with a strong reliance on agencies and, in particular, bancassurance. For example, recent research from Swiss Re and LIMRA indicated that the direct channel does not exceed 10% of total share in any APAC national market apart from China. We should bear in mind that our stat indicates the existence of the direct channel rather than its volume. Nevertheless, for a healthy number of APAC insurers to have established a direct channel, despite what remain for now relatively low volumes of business, indicates how strategic this channel is perceived to be. We may remember, as well, from our priority tables, that Asia-Pacific led our other regions on distribution diversification, which adds weight to this trend (see Global Trend Map  No. 3: Priorities).

"The reach of this digital transformation goes way beyond the elimination of 'the middle man' from a distribution point of view. The direct digital channel dominates very few markets and deals only with compulsory insurance. In the vast majority of markets, a multichannel-oriented customer continues — with variations from country to country — to choose at least at some point of the customer journey to interact with an intermediary." – Matteo Carbone, founder and director at Connected Insurance Observatory

While many customers in many circumstances may prefer the direct channel to the agency path, insurers should not necessarily place all their strategic eggs in this one basket. Insurance has always been sold, as they say, and never bought, so any portal for buying insurance, however slick, is at a disadvantage by its very nature. See also: Distribution: About To Get Personal   The way to get insurance products into customers’ hands may, in fact, be to integrate them into other products that are bought, whereby the insurance becomes part of a bundle or an add-on. This philosophy has boosted the popularity of affiliate channels, which, in addition to taking even more friction out of the process, also bypass any issues that may exist with consumer trust, by tying the insurance to a trusted brand that consumers know, respect and perhaps already interact with daily or weekly. 2. Expanding Affiliate Channels 89% of insurer respondents are increasing their distribution through affiliate partners … Current examples of affiliate channels are major retailers, such as Tesco in the U.K. and Falabella in South America, but theoretically the affiliate channel could include just about anything, with the insurer effectively becoming an API that other consumer applications can plug into, like for instance ride-sharing and taxi apps for travel insurance. The scale that incumbent insurers can offer in this channel may put them in good stead against their insurtech competitors; large affiliates can benefit from the brand equity of household-name insurers, and the resultant selling partnership will likely prove more successful for all involved.

"We're looking into partnerships with companies from different sectors: how we can plug in, bringing the insurance dimension and being the insurance carrier, while the partner does all the front-end, customer-facing stuff. And as I like to call it, we're just a third-party API." – João Neiva, head of innovation, IT and business change at Zurich Topas Life

Another important indirect channel – but one on which we have not gathered stats – is bancassurance. While the concept is making headway in emerging markets, it has been out of fashion in Western markets over the past decade. The interest expressed this January by Italian bank Intesa Sanpaolo in a tie-up with Assicurazioni Generali shows the concept is not dead – but this deal was nonetheless scrapped the following month. 3. The Omni-Channel Grail: Consistent Multi-Channel Experiences As of today, many insurers operate both direct-to-customer and affiliate channels alongside their traditional agency channels. Whatever the blend of channels that customers ultimately come through, it is important for insurers to offer a consistent experience across all of them (a consistent experience need not necessarily be an identical one). It’s bad enough if one channel offers a comparatively poor or irregular service, this is then compounded because consumers are increasingly – as in retail and e-commerce – using multiple channels as part of their research and decision-making process, and an inconsistent (or in any way confusing) experience will lead valuable customers to bounce or churn. In certain segments, a majority of customers may well come through a broker/agency channel for the foreseeable future, but it would be unwise to ignore the role of the direct channel in prepping them and to neglect obvious re-engagement points during the process that can recall, reinforce and build on the online experience.

"We believe that this is an opportunity for brokers and intermediaries to innovate and continue to create new sources of value for their B2C and B2B segments. For instance, identifying and carving out new and emerging B2C (micro-insurance, flood, non-standard risks, risk pools/schemes, older generation/retirees) and B2B (IP-based startups, cyber, supply chain, cross-border liability, terrorism) needs and creating innovative channels to access them." – Sam Evans, managing director at Eos Venture Partners

While much of insurers’ backroom tech can be aligned across channels, the face-to-face element in indirect channels can prove more challenging to coordinate, especially as we are here dealing with a multitude of different selling organizations with a multitude of different working cultures. This is not to say that the face-to-face element is a tale of lost opportunities and inefficiencies – if it’s put to work effectively, there’s seldom a better way to create lasting customer engagement and up-selling opportunities. So, Is Your Customer Experience Consistent Across Channels?  Customer experience (CX) professionals in insurance are chasing the same omni-channel grail as their analogues in other digitally disrupted industries, like retail/e-commerce, that is: to ensure that customers enjoy the same product and service experience regardless of which channel they come through. Let’s start by seeing how well Insurers currently perform in this regard: Only 23% of insurers believe their customer experience is consistent across channels … There is clearly still a long way to go before omni-channel is the norm in insurance, and the steady addition of new channels will further complicate matters for insurers chasing channel consistency.

"Insurers’ infrastructure, which has been built over literally hundreds of years, never anticipated having multiple channels of communication to support, so insurers are scrambling to learn how to do that." – Stephen Applebaum, managing partner at Insurance Solutions Group

From our regional segmentation, we can reveal that Asia-Pacific trails our other regions on this measure. This is likely a consequence of the pursuit of new channels in the region (as we noted with the prevalence of the direct-to-customer channel): It is more difficult to maintain consistency across a multitude of emerging channels than across a core of traditional ones. 4. Do You Have an Omni-Channel Strategy? The creation of an explicit omni-channel strategy is the first step of many toward being able to offer a consistent customer experience (CX) across channels. 62% of insurers have an omni-channel strategy… It is encouraging to see that the majority of insurers do have formal omni-channel strategies, and this should go a long way toward raising the low percentage of insurers currently able to offer a consistent customer experience across channels. It will likely be a number of years before today's omni-channel strategies yield concrete results, and, as we pointed out, the continuing complication of the distribution landscape through the addition of new channels will mean insurers must run just to stay where they are.

"Most insurers are still focused on e-commerce, but the leaders are developing longer-lasting relationships by using their digital capabilities to gain enhanced customer knowledge and harnessing that information to profile customers more effectively, fine-tune underwriting and deliver customized solutions." – Michael Quindazzi, business development leader and management consultant at PwC

5. Attack of the Aggregators! Our final question on distribution relates to the role of aggregators like U.K.-based comparethemarket.com, U.S.-based comparenow.com and Singapore-based GoBear. These have burgeoned since the millennium, inserting an extra distributional step between insurers and their prospective clients, and have had a major impact on the market (just like comparison sites in other industries) both in terms of the overall business model and from a branding and customer-relationship perspective. By allowing, and encouraging, customers to pit insurers against each other on a price-by-price basis, these sites have further commoditized insurance lines and driven down premium prices and margins.

"The process of buying insurance can be simple – go online, compare the relevant information, select an insurer and pay. But three days later you get a 22-page printed policy at home, written by a lawyer. As a layman, you’re totally lost. What customers really want are simpler and easy-to-understand products so that they regain trust in this industry. Get that trust, and it will drive revenues." – Andre Hesselink, CEO at GoBear

Due to a variety of factors, including marketing budgets and regulation, the effects of aggregators are neither uniform across lines nor across geographies. For example, according to a recent survey of consumers by consultancy Finaccord, more than 40% of respondents in the U.K. had taken out car insurance via an aggregator, compared with only 5% in the U.S. and Canada. The impact of aggregators can be felt across the whole ecosystem, so we asked all our respondents to specify how big an impact they are having on their organizations. Overall, 14% indicated a large impact, 29% a medium one, 37% a small one and 20% none at all. As we can see from the infographic above, a relatively small proportion of the ecosystem is heavily affected, although the impact is being widely felt (more than three quarters of respondents citing some impact). See also: Taking the ‘I’ Out of Insurance Distribution   From our regional segmentation, we can reveal that Asia-Pacific trails on this measure. As we have pointed out, while many insurers there do have digital channels, the overall volume of business being done this way is still quite low – and this potentially explains the lower regional score. However, as insurers in the region actively build and promote their direct capabilities, we expect aggregator impact there to quickly catch up. 6. Distribution: The Fulcrum of Market Disruption? We suggested in our previous post on marketing and customer-centricity that changes to distribution are what fundamentally lies behind today's changing customer expectations and behaviors (specifically the internet and the rise of digital for everything from research to commerce).

"The most important driver of success for insurtech start-ups has been distribution. Distribution in insurance (more specifically in personal lines, but increasingly so in commercial lines) is getting disintermediated as data becomes increasingly transparent between the buyer and seller." – Sam Evans, managing director at Eos Venture Partners

As a result, we predicted that traditional channels might be marginally more intact in North America than elsewhere – as an explanation for this region's marginally lesser prioritization of the customer (as we saw from our priority tables in Global Trend Map No. 3: Priorities). Our reasoning: If new channels are the fundamental enablers of disruption, the more stable the traditional channels are, the less disruption insurers will face and therefore the less forcefully they will have to prioritize the customer. So, what do our regional stats on distribution reveal? ... We noted that the direct-to-customer channel is less prevalent in North America than elsewhere, so it would indeed appear that traditional distribution is – marginally – more intact here. This strength of traditional channels translates into lower levels of lost business for North American carriers. Indeed, in our earlier post on insurtech – Global Trend Map No. 2: Insurtech  – where we introduced the "disruption score," only a quarter of insurers and reinsurers in North America reported losing market share to new entrants (versus 47% in Asia-Pacific). The model we are applying is one in which distribution disruption leads to customer disruption and thereby to a complete re-evaluation of the customer relationship. So, what can this tell us about Europe and Asia-Pacific? Let us start with Asia-Pacific: On the distribution level, we encounter a high incidence of direct channels, low channel consistency and a high priority allocated to distribution diversification (as we saw from our priority tables in Global Trend Map  No. 3: Priorities). And following this through, we find a corresponding degree of disruption on the customer level, with APAC respondents scoring high on measures of customer priority (as we saw in the previous section on marketing and customer-centricity). It is clear, therefore, that APAC insurers know they are in trouble and that they are trying to meet the 21st-century consumer head-on. This is very much in line with our disruption score for the region, whereby 47% of in Asia-Pacific stated that they were losing market share to new entrants, a high score in which fear may well play a considerable role. Europe is an interesting case. In terms of distribution, we note solid adoption of direct-to-customer channels, and the continent has in many ways been a pioneer in its use of affiliate channels and aggregators (we explore these themes in more depth in our regional profile on Europe – read ahead here). The customer relationship here (along with Asia-Pacific) is marginally more problematic than in North America, based on the forceful prioritization of the customer we found here. Does this mean that Europe finds itself in the relatively more disrupted camp, along with Asia-Pacific? Not necessarily. We cannot help but notice Europe’s low disruption score of 23% (much lower than Asia-Pacific's, in line with North America), meaning that, at least in carriers' perceptions, relatively little market share is currently being lost. One way to square this with our foregoing observations on the distribution and customer situation in Europe would be if European insurers were rising better to the challenge of serving customers across a complex distribution landscape than their counterparts in Asia-Pacific are. This would imply that Europe is perhaps slightly ahead of the curve and has had some time to adjust. In line with this hypothesis is the low prominence of the chief customer officer role among recent or forthcoming appointments at European insurers (contrasting with its importance in Asia-Pacific). Our inference from this is not that customer-related roles do not exist in Europe (after all, Europe allocated the highest overall priority to customer-centricity out of all our regions) but rather that they are not of such recent creation. So, we can tentatively conclude that, while Europe and Asia-Pacific are both undergoing distribution- and customer-driven disruption, Europe has entered deeper into this. There is, as such, no wholesale panic regarding lost market share through new entrants. In this sense, Europe would be not so much the most disrupted as the longest-disrupted of our key regions. It will be interesting to observe how the sense of disruption in Europe, North America and Asia-Pacific waxes and wanes as the market develops. The characterization we have attempted here is based on fine gradations, and, with the global market fluctuating as it is, there is no reason to believe development in any region will be linear. We return to these issues – and to the perennial question of disruption – in the regional profiles section with which we close the report (read ahead here).

"Technology is changing more rapidly today than ever, which is changing the nature of risk. The distribution of insurance products and services is poised for rapid change. Agents and brokers will have a role to play as the distribution model changes. Those agents and brokers that are willing to adapt will thrive, those that rely on the old methods will continue to be successful until they wake up one day and they are not." – Steve Anderson, president at the Anderson Network

As insurers around the world pursue customers, we are left with the question of the brokers and agents who hitherto have been the face of the insurance industry. Intermediaries still hold the cards in many customer segments and business lines – especially for complex, high-value products in life and commercial – and can play an important role more broadly as part of the omni-channel mix. And, before we write them off too hastily, we should remember one thing: Although intermediaries no longer own distribution in the strictest sense, it is debatable whether carriers will want to take all aspects of customer-servicing in house just because they can.

"Chatbots and guided conversations – in the not-too-distant future – will significantly change the role of agents and brokers when providing insurance knowledge and resources to policyholders. Expert advice will still be needed, but chatbots and guided conversations will provide much of the basic information to the digital-savvy consumer anytime and anywhere." – Steve Anderson

For insurance players big and small, distribution is the key to getting in front of today's customers, in the sense either of tapping totally new segments or of fighting off competitors' threats to the existing book. However, if you cannot follow up on your promises across the customer life-cycle, then all that top-of-funnel work will have been in vain.  

OK, this time I’m not the one causing the kerfuffle in the wellness industry, though I will confess to being a force multiplier. Not since 2014, when the very unstable morons at the Incidental Economist made fun of the very stable geniuses who give out the Koop Award and also unequivocally concluded that wellness loses money — combined with continued fallout from the Penn State debacle and the Nebraska scandal — has the wellness industry had such a bad year. And it’s only February. Let’s review what’s happened so far in 2018. First, a federal judge ruled that voluntary wellness programs need to be — get ready — voluntary. The EEOC’s responded with the legalese equivalent of:  “Fine, be that way.” Next, Willis Towers Watson did something that might get them in hot water with the very stable wellness industry leaders: They were honest. They published a study revealing that employees hate wellness even more — way more — than they hate waiting for the cable guy to show up. Finally, the very unstable National Bureau of Economic Research conducted a controlled study finding basically no impact whatsoever from a wellness program. More importantly, they specifically invalidated the “pre-post” methodology. Even more importantly, they specifically invalidated 78% of the studies used in Kate Baicker’s “Harvard Study” meta-analysis. Here is an interesting piece of trivia: The lead researcher is an assistant professor at the Harris School of Public Policy. Why is this interesting? Because Katherine Baicker — the Typhoid Mary of wellness, whose THC-infused study claiming a 3.27-to-1 ROI for every dollar invested in wellness is the basis for essentially every subsequent genius wellness outcomes claim — is now the dean of that very same Harris School. I’m just guessing here, but I’d say it’s gotta be a trifle embarrassing when your own subordinate publicly disproves your own study. I mean, it’s one thing for me, RAND, Bloomberg and anyone else with five minutes, internet access and a calculator to do it, but…your very subordinate? See also: The Wellness Industry Pleads the Fifth   On the other hand, the researcher, Damon Jones, just demonstrated not just amazing competence but amazing integrity, as well. In other words, he has no future in wellness. The Wellness Empire Strikes Back How does the wellness industry respond to these smoking guns threatening their entire revenue stream? Apparently, there is little cause for concern on their planet. Let’s start with America’s Health Insurance Plans (AHIP), the health insurance industry lobbying group. Here is AHIP’s oxymoronic Wellness Smartbrief (Jan. 26) on the NBER research. Yes, it summarizes the same wellness-emasculating study as the one above, though you could never guess it from the headline: Healthier employees participate more in wellness programs but still save money Continuing, AHIP said: Offering incentives for completing wellness activities might be more cost-effective than offering incentives for wellness screening, a recent study of a comprehensive program found.  Perhaps AHIP has been infiltrated by Russian trolls, because here’s what the NBER article actually said about “completing wellness activities”: We…do not find any effect of treatment on the number of visits to campus gym facilities or on the probability of participating in a popular annual community running event, two health behaviors that are relatively simple for a motivated employee to change over the course of one year. AHIP continues: Wellness programs might attract mostly employees who are already fitness-conscious, but the potential to attract healthy employees whose medical spending is already low could nonetheless be a boon to employers, the researchers found. And on the subject of “the potential to attract healthy employees” as being a “boon to employers,” the authors actually said: We further find that selection into wellness programs is associated with both lower average spending and healthier behaviors prior to the beginning of the study. Thus, one motivation for a firm to adopt a wellness program is its potential to screen for workers with low medical spending. Considering only health care costs, reducing the share of non-participating (high-spending) employees by just 4.5 percentage points would suffice to cover the costs of our wellness program intervention. In other words, you can apply some workplace eugenics to your company by using wellness to weed out obese employees, employees with chronic or congenital diseases and so on. Good for you! Soon, if AHIP and others have their way, there will be no need for guesswork in eugenics: Employer wellness programs will be able to screen these employees out based on their actual DNA. AHIP’s take on AARP v. EEOC And now, AHIP’s take on this landmark case, their ace reporters scooping everyone with this Feb. 2 headline on the Dec. 20 court ruling: Employers may have to tweak wellness programs after court ruling Here are more typical headlines on that court ruling, headlines that came out the same month that the court ruling came out. Perhaps AHIP used the interim six weeks to use focus groups to test various verbs until they settled on…tweak??? AHIP:  It’s not just the headlines One prominent healthcare executive recently attended an AHIP conference and reports: I just returned from one of the dumbest meetings I’ve ever attended in Washington. Report of a new “study” by AHIP. Turns out people don’t mind health costs all that much, they just want more benefits. And everything is hunky-dory with their health plans, people like them so much. They love wellness benefits and crave more. Prescription drug prices have been nicely controlled thanks to the competitive marketplace (no, I am not making this up or exaggerating for drama). For every $1 employers spend on benefits workers get $4 in value. Priorities for SHRM rep: Fitbits for all employees, solving the outrage that only 20% of her employees got an annual physical. 85 cents of every dollar spent on healthcare goes to chronic disease. Over these same two hours, I’d estimate about a thousand employees were misinformed, harmed or harassed by wellness vendors, roughly equal numbers of  employees got useless annual checkups, employers spent about $200 million on healthcare and 40 people died in hospitals from preventable errors. But I’m being such a Debbie Downer! I’m going home to read Why Nobody Believes the Numbers to remove myself from this alternative universe. Enter the Health Enhancement Research Organization (HERO) HERO’s Prevaricator-in-Chief, Paul Terry, is demonstrating his usual leadership abilities in this crisis, of course. After all, HERO is the wellness industry trade association, and these three items — the NBER invalidating their product, employees hating their product and a federal judge forbidding them to force employees to use their product — represent existential threats to his “pry, poke and prod” members. Here is quite literally his only blog post on any of these three items: Teddy Roosevelt said, “complaining about a problem without posing a solution is called whining.” It’s a quote that also reminds me why I’ve not thought of angry bloggers who target health promotion [vendors] as bullies. Though they relish trolling for bad apples, their scolding is toothless, more the stuff of chronic whiners. I suspect he is talking about me here as the “chronic whiner” who is  “scolding” them. Or perhaps he is referring to the “angry bloggers” at  the Los Angeles Times, the New York Times, Slate or STATNews, because those “toothless” publications seem to be scolding wellness vendors more than I ever have. For instance, I’ve never called wellness vendors’ offering a “scam” or a “sham.” I simply quote these very stable wellness geniuses verbatim, as above or below, or last week. See also: Wellness: An Industry Conceived in Lies, Retractions and Hypocrisy   Being quoted verbatim, not angry bloggers, is their worst nightmare. (One thing I would concede, though, is that “Paul Terry and the Angry Bloggers” would be a great name for a rock band.) Yep, looks like the implosion of his industry is all my fault. Otherwise, I’m not quite sure who is the “angry blogger” he is referring to, other than to note that Mr. Terry himself seems to blog a tad angrily himself, both above, and here… Why I choose to ignore the blogger critics: We’re fortunate to work in a profession with a scant number of vociferous critics. My take is that there is one thing these few angry loners [Editor’s note: the complete “scant list” of the 220 “few angry loners” who have been “vociferous critics” can be found here] want more desperately than attention: that’s to be taken seriously. What they fail to comprehend is that as they’ve gotten ever more farfetched and vitriolic in search of the former, they’ve cinched their inability to attain the latter. Baiting people with misinformation and offensive insults (but just a tad under highly offensive) is a pesky ploy that trolls hope will eventually land a bite that confers credibility where there is none. Even reading such drivel is a form of taking the bait; responding is swallowing it whole. Some say dishonesty should not go unchallenged and I respect their view; nevertheless, I’m convinced responding to bloggers who show disdain for our field is an utter waste of time. I’ve rarely been persuaded to respond to bloggers, and each time I did it affirmed my worry that, more than a waste, it’s counter-productive. …and especially here, a seemingly incongruous decision to “act out” by someone who claims to be “choosing to ignore the blogger critics.” Having read years of my “drivel” alongside Mr. Terry’s posting explaining why you shouldn’t “swallow this bait,” perhaps readers might opine here: Which of us, exactly, is the “chronic whiner”? Coincidentally, when I run live health-and-wellness trivia contests, the first of our three rules is: No Whining. Seems to me that he would have just violated it. Indeed the only rule HERO hasn’t violated so far is #3 below. Not that I want to put ideas in their head.

The article below has been based on a keynote presentation delivered at the Euro Events Life Insurance & Pensions Conference in Amsterdam on Nov. 16, 2017. This is part 3. The previous parts can be found here and here. Summary of Parts 1 and 2 In the previous parts, we discussed that customers do not buy insurance because they like it, but because they have to or there is no better alternative available. We started by asking how you can turn a subject like insurance into something that customers actively engage in? Can, for instance, a pension become an urgent, relevant, integral part of our daily life? We discussed two options. The first option is to offer a broader, more relevant solution with insurance as a component. The insurance product becomes part of a larger, more relevant value proposition. Examples include integrated solutions for risk management and safety, health, housing, mobility or personal financial planning. The second approach to turn insurance into a product customers actually want to buy, is to reconnect with your customers. There’s still a big engagement gap between insurers and their clients. We touched upon a number of relevant concepts, including the Theory of Planned Behavior, the dynamics of inertia and financial anxiety. In this third and final part, we bring the insights from the previous parts together and wrap things up. The relationship between redefining and reconnecting Now, we know that current relationships between insurers and their customers can be improved. We’ve covered two different approaches to make life and pensions more attractive. We started off by investigating how insurance solutions can become better connected to the daily life of your customers. This is all about extending the value proposition with products and services. Logical themes are health, safety, housing, maintenance, mobility and personal financial planning. With these broader solutions in mind we then addressed the need to overcome inertia and financial anxiety to reconnect with our customers. This may give the impression that these approaches were distinct, separate activities. But they are in fact closely related. Consider this: if you successfully redefine your value proposition, you create new and meaningful customer touchpoints that help you finding better ways to reconnect with them. And as your ability to understand your customers grows, you learn more about preferences that help you to in turn to develop better value propositions. See also: Thought Experiment on Life Insurance There is work to do! These considerations will undoubtedly trigger a lot of questions among insurers. Are we going to be in the business of selling and administering policies or are we going to transform towards becoming a risk & income management expert? What will be our position in the value chain, what role are we going to play in this new extended eco-system? How can we develop these new concepts into a viable business model? And what kind of capabilities do you need to thrive in this new world of continuous change? Some key capabilities from existing insurers, like the ability to design and manage complex policy products, may become less relevant in a world demanding attractive risk management solutions. Similarly, having a true customer focus embedded in your organisational DNA is going to bring you further than having just a regulatory imposed customer orientation. Building these skills in an environment that is still dominated by different types of legacy is not easy. This is one of the reasons we see a rise in partnerships between existing insurers and Insurtechs. Organizing the transformation - the 7 habits of effective insurers So let’s assume that first thing tomorrow you plan to start to rethink how to design and implement a wider service proposition around your insurance core. What are some key principles to keep in mind when organizing the transformation? I am not going to try to summarize the many excellent books available on how to foster a culture that embraces organizational change and innovation. Let me just highlight a number of points from my own experience:

1. Be very aware of internal bottlenecks and when increasing agility. Organizations have a tendency to become more complex and bureaucratic - not fit for purpose in the digital world. This could mean that to move fast, you first have to shed some weight and find a solution for your closed books or other legacy infrastructures.
2. Start talking, not just with your customers but also with employees, distributors, partners, regulators, etc. It’s not just insurers that increasingly recognize the need for change – a full range of companies in the value chain are co-depending on a model that is increasingly under pressure. New business concepts will have impact on insurance value chain partners, and service and IT providers just as much (or possibly more!) as they will affect the insurers themselves.
3. Don’t make the mistake of copying concepts from your fiercest insurance competitor, but learn from the best-in-class companies outside your own sector and apply these principles to your own business. Traditional industry boundaries and barriers to entry are rapidly shrinking, and the proper response is to enjoy and learn from the emerging panorama.
4. I’ve always found that the scope and intensity of R&D within Financial Services is quite low, compared to other sectors. Now is the perfect time to change that. The rise of innovation labs is a step in the right direction but now we need to learn how to organize innovation at different speeds and for different aspects of a business model.
5. While I perfectly understand why many insurers choose differently, my conviction is that insurers should organize innovation at the heart of their organization. I’ve heard many arguments why insurers choose to set up innovation in labs or outposts but there are serious limitations and issues when it comes to reconnecting with the main organization. That will be subject of another article. For now my summary is: get back in the building!
6. Invest in your capabilities not just to start up but to scale up a new value proposition – that’s where it becomes really complex. Everybody can create a small scale working model, a MVP or a pilot project. But turning it into a large scale operation that contributes to revenues, that’s something else.
7. And most importantly: If you’re 80% sure that your current business model is future proof (which means you are pretty confident about it!) you should still spend 20% of your change budgets on more fundamental, radical or disruptive types of innovation. Just make sure you’ve got all possible scenario outcomes covered!

In closing The time to repair the roof is when the sun is shining. Has that window of opportunity already passed by or will incumbents be able to adjust their course in time? It is only now, when we see rising costs of doing business, signs of diminishing returns and demographics putting pressure on existing products that we see emerging initiatives. Solutions for managing risks should become urgent, relevant, top of mind and connected to the daily life of customers. Insurers rethinking their value propositions have the opportunity to design a new generation of solutions beyond a singular insurance policy that will transform their relationship with customers. These solutions will have to overcome the key psychological challenges relating to certain or possible events that may be far off in the future. Applying advanced insights and techniques (from the fields of behavioural science, neuromarketing, and applied psychology, etc.) to reconnect with customers ensures that the future is becomes increasingly something that is clear and present and to be dealt with right now. If insurance becomes the means to an end as part of a broader customer need, you need to organize this transformation. It’s not just a product gap – it’s a gap between capabilities present and capabilities needed on different levels: organization, technology, application landscapes, culture: e.g. how do you combine a solid long term investment management function with short term entrepreneurial activities and innovation? See also: This Is Not Your Father’s Life Insurance   Corporate innovation and strategic change initiatives should fix a number of key existing internal challenges and create the right fundamentals to enable more disruptive types of innovation. The traditional product development scope needs to be enhanced to facilitate the creation of hybrid forms of products and services. Addressing these aspects will enable insurers to design solutions and services that bring us closer to their original marketing promise to provide more security and peace of mind.

Cybersecurity insurance appears to be enjoying a heyday. While it’s been around for some time, the perceived need for it has never been greater, as DDoS attacks and major hacks grab headlines and fray nerves. As recently reported in The Hill, Lloyd's of London approximates that “average cloud service events of varying severity range from $4.6 billion in total damages for a ‘large’ attack to $53.1 billion for an ‘extreme’ one. In the vulnerability example, the average costs range from $9.7 billion for a large event to $28.7 billion for an extreme one.” Lloyd’s suggests that we ought to insure cyberattacks as we do natural disasters. Ransomware imposes its own sort of multiplier effect, measured in business loss, damage to reputations and (customer) privacy and, of course, in out-of-pocket outlays paid handsomely in Bitcoin. But in treating cybersecurity insurance as an essential check-off item for organizations, the last thing underwriters, businesses and consumers need is complacency. We rightly regard insurance as protection; we pay for it, and may or may not alter our behavior to actually diminish the threat of the event itself. And that’s the risk that insurance doesn’t mitigate against; indeed, it can aggravate it, by conferring on businesses a false sense of, pardon the term, security. Cloud security isn’t like filling out a job application; it’s not a matter of checking boxes and moving on. Piecemeal approaches to security never work. Patching a hole or fixing a bug, and then putting it “behind” you – that’s hardly the stuff of which effective security policies are made. Because security is a moving target, scattershot repairs ignore the hundreds or even thousands of points of vulnerability that a policy of continuing monitoring can help mitigate. And that insurance can address only after the fact of potentially catastrophic loss. See also: 2018 Predictions on Cybersecurity  Cloud security policies must be in place before, during and after the ink is dry on any cybersecurity insurance policy. Any cloud provider worth its salt brings to the task a phalanx of time-tested tools, procedures and technologies that ensure continuous uptime, regular backups, data redundancy, data encryption, anti-virus/anti-malware deployment, multiple firewalls, intrusion prevention and round-the-clock monitoring. So while data is considerably safer in the cloud than beached on equipment under someone’s desk, no cyberinsurance policy can substitute for active vigilance – accent on active, because "vigilance" is definitely a verb. Absent both the right mindset and proper policies and guidelines, cybersecurity insurance can prove pointless. About that mindset: Sound security planning requires assessing threats, choosing tools to meet those threats, implementing those tools, assessing the effectiveness of the tools implemented – and repeating this process continually. Security is a process, not an event. On the premise that the best defense is understanding the real nature of the offense – or, in this case, offenses, because cybersecurity insurance addresses a multi-front battleground – it may be helpful to think in terms of a basic four-tier model that defines the broad steps businesses can take to maximize their safety. With that model, it’s possible to match the level of protection to the class of threat a given organization faces. Users need to be familiar with online threats and at least somewhat conversant with tools to arrest them; no single system can circumvent vulnerabilities that haven’t been patched. Below, this prototypical four-level gauntlet: First line of defense: The first line consists of a firewall supported by intrusion detection and prevention technology, along with anti-virus and anti-malware software, which is limited to blocking items downloaded over unencrypted protocols. Second line of defense: The second line centers on the trained, educated user – someone sufficiently cognizant of threats to think before executing a link or downloading an attachment: a user, in other words, who is attuned to the real and present danger inherent in viruses and malware, and who acts accordingly. Third line of defense: The third line is composed of patch management and locally installed anti-virus and anti-malware software, working together to effectively block attacks. Proper implementation of third-line defense means fewer bugs and optimized performance. See also: How to Eliminate Cybersecurity Clutter   Fourth line of defense: In the event that malware or ransomware hits a system, it’s possible to restore the server via application-consistent snapshot technology on a storage area network, a rollback process that takes just minutes and restores the server to its exact state prior to the attack. It may be helpful to treat these lines as concentric circles. Remember that the human element remains the most important social engineering piece of this construct. It’s always best to stop a problem early, before it festers and productivity suffers; think smoke detectors vs. sprinkler systems. And just as regular brush clearance in fire zones is a necessary precursor to maintaining fire insurance coverage, so these measures prepare businesses for cybersecurity insurance – and underscore the wisdom of making that purchase.

The insurance industry is all about understanding and taking risk prudently. In other words, it is about assuming risk from individuals or organizations for the right return. Thus, it makes sense that insurers should be excellent at managing their own strategic, financial and operational risk. But is that always the case? Regulators and rating agencies have done a great deal to require robust enterprise risk management at insurance companies and to consider how well they are implementing it in evaluating them. However, their focus is decidedly on capital risk management and to a much lesser extent on other risk categories. Yet, other risk categories can certainly affect financial stability. Are insurers being asked to show regulators and rating agencies how they have measured their risk culture? Are they asked to explain to what extent their strategies have been influenced or revised based on risk-related input? Likewise, is there inquiry into how deep within the insurers’ ranks the risk-identification process goes to gather input? Is there much questioning about how financial targets are set, such as whether non-management or field input is gathered before setting these targets? If the answer is no, then some vital evaluative data is being missed. That is because risk culture, and the things that strongly influence it, can make a huge difference in the financial success or failure of an insurer. What Is Risk Culture? There are various definitions for it, but the best I have found is the one suggested by the Institute of International Finance, “‘Risk culture’ can be defined as the norms and traditions of behavior of individuals and of groups within an organization that determine the way in which they identify, understand, discuss and act on the risks the organization confronts and the risks it takes.” See also: Building a Risk Culture Is Simple–Really   The prevailing risk culture can be one explanation for why some insurers have more negative surprises than others, or why some have a poor track record for reserve increases whereas others do not. or why some experience adverse results from significant growth whereas others can do so profitably. What Influences Risk Culture The things that influence risk culture and help to create a risk-aware culture are:

• Message from the top – board, CEO, senior team
• Behavior at the top
• Existence of board and management-level risk committees
• Existence of risk appetite, risk tolerances that are well-communicated
• How far down in the organization risk identification methods delve
• How unauthorized/excessive risk-taking is handled by management
• Whether there is a risk reporting hotline
• Whether goals are aligned with risk appetite and risk tolerances
• Whether incentives are aligned with risk appetite and risk tolerances
• Whether risk culture is measured

How Management Behavior Can Create Risk and Block Risk Culture There are many ways that management can contribute to a poor or non-existent risk culture. Below are just a few examples. By setting unreasonable goals, management creates obstacles for a healthy risk culture. There is a difference between stretch goals and unreasonable ones. Good managers know this and know how to set a proper goal. Unreasonable goals beget unreasonable behavior, e.g. risky behavior. Such behavior might play out in underpricing business to meet a premium growth goal; it might play out in bad faith claims to meet an average paid loss goal. These things can happen in any environment but are more likely when goals are set too high and the risk associated with that is ignored. Another management action that can produce risk is developing a strategy without input from the field. A strategy that is based only on the ideas in the corporate suite can lead to the risk of failure or the risk of producing negative or unintended consequences. For example, field staff may have more insight about how a change in compensation practices or local contacts may be reacted to by agents and brokers than home office strategy pundits. Getting field input might avoid losing business, losing agents or brokers or some equally undesirable business result. In a study sponsored by the Casualty Actuarial Society, the authors Shaun Wang and Robert Faber state, “In running an enterprise, it is essential to recognize both global and local views: Without inputs from the field, any development of business strategy lacks a solid footing; while the strategic directions are set at the company level, the success and failure of the strategy depends on the local business execution.” Insurers are introducing many types of innovations into their operations to stay relevant in today’s digital world and sharing economy. If it is perceived that management is not taking into account the risks inherent in any new way of doing things, then a strong signal is being sent to the rest of the organization. The signal is that managing risk is not always important. Taking risk into account should never stop forward movement. Instead, it should ensure that innovations are optimized. Management should be able to point to the risks that were identified and how they were addressed, regardless of whether those risks pertain to cyber security, system integration, scalability, customer or distributor satisfaction and any number of other matters. See also: A New Paradigm for Risk Management? How Management Can Create a Positive Risk Culture Management’s behavior becomes the model for the rest of the organization. Generally, each level of management tends to mimic the approach of the level to which it reports. Even when such cascading is not perfectly distributed, the overall tone and modus operandi of top managers tend to influence most employees of the organization over time. Thus, management must be continually aware of what message it is sending about risk awareness by its own actions as well as by designed communications. Where a risk-aware culture is nurtured, there will be many ways in which management reinforces it:

• Rewarding staff when risks are handled well and holding staff accountable when risks are not handled well
• Ensuring that risk is discussed during decision-making not after decisions are made
• Treating those who report a risk as a team player rather than a naysayer or trouble seeker - encouraging the person to become a problem solver by being asked to help address the risk
• Discussing risk and the status of risk mitigation plans in staff meetings or whenever appropriate.

In risk-aware cultures, risk is considered as part of every key decision or action. Thus, the bottom line is improved.