Executive Summary: Time-starved, multitasking executives engaged in drive-by conversations with employees are poor models for employees to emulate when they interact with customers. Instead, executives who give their undivided attention to internal team members embody the customer-focused cultures they seek to create, and subtle gestures of responsiveness can set the right tone for their organizations. Business leaders marvel at the distinctive, customer-focused cultures associated with legendary firms like Southwest Airlines, Apple and Disney. As executives of these companies readily acknowledge, their organizations’ outstanding performance is due, in large part, to the corporate culture they have created. But how does such a customer-focused culture arise? Despite all the talk about culture from leadership gurus and management tomes, it still remains a decidedly abstract concept for most business people. As a result, culture building often gets delegated to human resources or some employee-staffed culture committee. Or executives might invest in the development of grandiose mission and value statements, thinking that mere words on a page will shape workplace behaviors. While these approaches aren’t without value, they often overlook one essential truth: Culture isn’t something you promote. Rather, it’s something you embody. Organizational leaders, by virtue of the perch they inhabit, exert an enormous influence on workplace culture. Employees, whether subconsciously or consciously, take cues from their leaders. They watch them for signals about what “right” looks like—what behaviors are rewarded, which cultural attributes are valued. For this reason, the tools for forging a more customer-focused culture are closer at hand than many executives realize. Indeed, the personal behaviors of those leaders can serve as either an accelerant or a deterrent for the culture they seek to promote. See also: It’s All About the Customer Journey   Herb Kelleher, co-founder and former CEO of Southwest Airlines, would go to Dallas Love Field on Thanksgiving holidays and help load luggage onto aircraft alongside rank-and-file baggage handlers. That simple action sent a strong signal to the workforce about the culture Kelleher was trying to create—a culture grounded in humility and service. Steve Jobs, co-founder and former CEO of Apple, was personally involved in reviewing and approving the design of the box in which the iPhone was packaged—yes, the cardboard box! That sent a cultural signal to Apple executives and staff about the importance of elegant design and attention to detail. Walt Disney insisted that Disneyland executives spend time in the theme park, observing and listening to guests so they’d better understand how to make the park a more enjoyable place. Disney even had an apartment constructed for himself inside Disneyland, overlooking the Town Square, so he could personally watch guests’ reactions as they entered the park. How better to underscore the importance of customer closeness in the culture he was trying to build? What these examples illustrate is that even the most subtle leadership gestures can help shape a company culture in very powerful ways. Are you working to cultivate a more customer-focused culture in your organization? Consider the specific behaviors you’re trying to accentuate, then look for ways to demonstrate those qualities. Let’s take responsiveness as an example. Being responsive is an oft-emphasized cultural trait within organizations that seek to become more customer-focused. What leaders of these organizations must ask themselves, however, is to what degree are they embodying that attribute? If executives take days to respond to their staff’s emails or texts, that creates a disconnect for the workforce. Leadership’s call for customer-focused responsiveness begins to ring hollow, and employees start discounting the importance of that quality. To create a culture that orients around responsiveness, start with the speed of your own replies. The faster you answer (or at least acknowledge) that message from a colleague, the more successful you’ll be in reorienting cultural norms. Another instructive example comes from a hallmark of great customer experiences: strong communication practices. Customers value a company that communicates clearly and transparently. Here again, organizational leaders have an opportunity to model these qualities for the workforce, yet they often neglect to do so. Perhaps you’ve received an email from your boss that appeared to be written in grammar from another planet? We’ve all been there, getting a missive from an executive that raises more questions than it answers, creating more confusion than clarity. Even seemingly insignificant internal communications afford an opportunity for executives to show staff what customer-friendly messaging looks like. The lesson? Spend a little extra time composing that next email and make it a model of clarity that others can follow when they correspond with customers. As a final example, consider the concept of giving customers your undivided attention—actively listening to their needs and responding in kind. This, too, is a cultural characteristic that is commonly emphasized by customer-focused companies. Those that do it well make their customers feel special, almost like a VIP, because in today’s distraction-rich, smartphone-obsessed world, it’s pretty rare that someone gives you undivided attention. That sad reality applies to internal workplace interactions, as well. Time-starved executives are masters of multitasking and drive-by conversations. While they may think those behaviors foster efficiency, they represent the antithesis of giving people your undivided attention and provide a poor model for staff to emulate when they interact with customers. See also: Roadblocks to Good Customer Relations   The next time a staff member pokes his head into your office and asks to speak with you, give that person a master class in undivided attention. Look up from whatever you’re doing, make eye contact, invite him to sit down and place your smartphone aside, out of view. In short, during the few minutes that individual spends in your office, focus your attention on him so intensely that he’ll feel like the only person in the entire world. Imagine the signal that sends to your staff about the customer-focused behaviors you’re trying to advance. With every interaction in the workplace, organizational leaders have an opportunity to show staff what “right” looks like, an opportunity to define cultural norms that others will follow. Leaders who embody and visibly demonstrate the desired cultural characteristics will always be more successful than those who do not. No matter what business you’re in, or how large or small your organization, the journey to a competitively differentiated, customer-focused culture really does begin with you. This article was originally published on Carrier Management.

Sexual harassment lawsuits against another employee are not uncommon, but oftentimes employers overlook harassment of their own employees by customers. A 2014 Restaurant Opportunities Center United report about sexual harassment found that 78% of restaurant workers had been harassed at one time by a customer. Title VII of the Civil Rights Act requires employers to provide a workplace free of harassment. If the employer “knew, or should have known about the harassment and failed to take prompt and appropriate corrective action,” they can be held liable. Many guests don’t expect that their behavior will be questioned; many restaurants don’t want to make customers uncomfortable by correcting their behavior. So what is a restaurant to do when a customer harasses the staff? The first step for restaurants to fix this problem is to have a strong HR department that is serious about preventing and dealing with sexual harassment. It’s clear when employers are using training as a pre-emptive legal defense and when they actually take it seriously. Employees will respond with equal seriousness. If workers don’t feel like policies against harassment will be enforced, they won’t report. Another step that restaurants can take to prevent lawsuits is proper sexual harassment training. All restaurants need sexual harassment training, not just big ones with HR departments. There needs to be something written down somewhere that’s clearly visible — if this happens, this is how we will respond. In other words, employers can’t just say that all their employees deserve respect; they have to go out of their way to show that they won’t tolerate sexual harassment if there is to be any meaningful change. See also: Sexual Harassment: Just the Start   The final way to mitigate sexual harassment lawsuits is through employment practices liability Insurance. Some restaurants consider going without EPLI coverage. Others mistakenly assume they are covered under their general liability policies, which most often have a standard exclusion for employment practices liability exposures. Going without EPLI can be a costly decision. Even if a restaurant only has a few employees, it needs EPLI coverage. You can find the full report here.

Here are the themes I am seeing most often in health and welfare benefits:

Theme: Financial Wellness – Americans are struggling to get ahead, and the middle class is declining. Successful retirement and wealth planning for many people is a simple act of good accounting decisions multiplied over many years. Instant gratification has eroded good decision-making, and large majorities of people have no savings or retirement funds. Smart employers are taking steps to help their people make good decisions and become better stewards. This encapsulates retirement strategy, education, student loan assistance, emergency loan assistance and the like.

Sub-Theme: Student Loan Repayments – Extremely hot benefit right now; it’s one of the most requested benefits by new employees.

Theme: Dependent Care – People are living longer, and in sub-optimal health. Huge portions of the workforce are now having to spend large quantities of time managing the health and care of their dependents and loved ones. Smart employers are looking for ways to relieve this burden and improve the productivity of the workforce.

See also: Dissecting Landmark Decision on Wellness  

Theme: Hospital Department Quality vs. Physician Quality – More and more data is becoming available regarding hospital and doctor quality scores. How do we think about it? How is it used? Which firms are stepping forward to help people access quality? If I contract directly with a hospital, am I hurting patient access to the highest-quality providers who aren’t with that hospital? These questions are important and could be addressed with the right sessions.

Theme: Member Steering and Plan Strategy – The best plans are seeking new and improved strategies to steer members. As more cost and quality data becomes available, proper healthcare procurement begins to depend on the firm's ability to steer members. A few firms are leading the way to get exceptional procurement and steerage, and most employers could learn much from them to save millions and get control of (arguably) the hardest budget item in the firm.

Theme: The Care-Knowledge Gap – There is a devastating time period between when a therapy is discovered and when the therapy is available in most major hospitals. This gap has grown to 17 years; thus, the healthcare of 2035 is available today if you can find it. Smart employers and activist entities are working hard to reduce this wait time to save lives and accelerate the improvement of American healthcare.

Theme: Augmented Primary Care – Primary care has had a rough decade. At worst, it has been vanishing, and, at best, it has been acquired and used as a referral source for hospital systems. Smart employers realize that, for them to get control of their spending, they need to partner with primary care doctors whose interests are aligned with the employer and the member. This interest is to keep members healthy by consuming the minimum effective quantity of healthcare services, from professionals operating at the top of their respective licenses, in settings offering the best value. Direct primary care represents the best approach to achieve this objective, and building appropriate technology into these settings can significantly reduce the dependence on the greater hospital system.

See also: Wellness Works? Prove It–and Win $$$  

Themes Losing Steam: These topics appear (to me) to be losing their luster very quickly:

1. Wellness
2. Medical tourism
3. Price transparency
4. Disease management
5. Private exchanges
6. PBMs and non-specialty Rx

As value-based payment models become more common, payers and providers are realizing that there is value in working together to reach mutual goals. A complete view of healthcare quality and costs is critical when working under models that base payments on clinical and financial outcomes, and not merely on the volume of services provided. Payers and providers are discovering the value of sharing vast amounts of data -- such as that in claims, clinical, social, economic, and more types -- just to name a few. Sharing is just a start, though. What is perhaps even more important is that these organizations need the ability to make sense of all this information. They need to understand that acquiring meaningful data is far more important than assimilating volumes of data. Once organizations have the right data, they can rely on predictive and prescriptive analytics to gain meaningful insight into the data to spot trends, performance outcomes, etc. See also: 2018 Workers’ Comp Issues to Watch   In fact, according to a recent Society of Actuaries survey of 223 payer and provider executives, 90% of respondents indicated that healthcare organizations will not be able to navigate the financial and clinical challenges of the future without investing in predictive analytics tools. The majority of payers and providers participating in the February 2017 poll agreed that predictive insights will be critical for the future of their businesses. More than a quarter of the respondents stated that they expect big data analytics tools to save them 25% or more on costs over the next five years. What’s more, 47% of providers and 63% of payers said they currently use predictive analytics tools. Over the next five years, just fewer than 90% of both payer and provider organizations said they will have adopted some form of forward-looking, big data analytics capabilities. See also: The Current State of Risk Management   A recent webinar presented by SCIO with Oracle Health Sciences, Payer Provider Convergence: Using Data to Strengthen Partnerships & Drive Outcomes, explored how payers and providers can share/analyze to increase collaboration and work toward improved health outcomes. More specifically, the presentation provided insight into how payers and providers can leverage data and analytics to advance goals such as:

• Managing Risk and Revenue
• Optimizing Reimbursement
• Improving Quality and Compliance
• Optimizing Provider Networks

To learn more contact SCIO Health Analytics at info@SCIOhealthanalytics.com or Oracle Health Sciences at healthsciences_ww_grp@oracle.com. This article was written by David Hom and Lesli Adams.

Every year, for the last six years, SMA has completed its Innovation in Insurance research report. Our insights are based on targeted research, experience in the industry and insights from our customers. It is with our unique lens that we investigate and analyze innovation in insurance to share trends and findings that will guide the industry into the exciting new year. This year’s report is called “Innovation is Mandatory.” The findings continually point back to the overall theme of the research: Innovation is happening everywhere, in all insurance segments, and it has expanded to the point that ignoring it is no longer an option. See also: Linking Innovation With Strategy   In the report, we look at who in the company is leading innovation. Innovation leadership is now initiated more and more in business units and less and less in IT. The shift is indicative of the internal innovations that are taking place within the organizations: new roles for innovation, strategic planning offices, c-suite positions, and innovation labs, among others. The research also indicates that, as innovation solutions are maturing, there is a natural progression away from IT and toward business management. While leadership for innovation has declined for IT, the research shows that IT still leads in emerging technology adoption. And that makes sense. Five years ago, innovation was in a similar place. SMA anticipates that the trend for emerging technology will follow the same path that innovation has; it will eventually shift toward management by the business. We are already seeing areas where this is happening. As emerging technology becomes mature technology, the transition will continue. Another interesting discovery from the research is that there is a clear indication that insurers don’t believe they are keeping up with the pace of innovation. The pace of new technology adoption coupled with the explosion of insurtech startups entering the marketplace is changing the competitive landscape. The clear majority of respondents identify themselves as mainstreamers just trying to keep up with the pack. It will be interesting to see where that number heads throughout 2018. See also: Global Trend Map No. 6: Digital Innovation   Finally, we see the importance that the changing customer experience has on triggering innovation. The digitization of the world is another force that drives innovation and has resulted in so many of the changes that have been made over the last several years. Becoming a digital insurer is essential to maintaining a competitive edge and shifting the focus toward the customer – we continue to see more value-in-use products and more incentive-based products. The digitization of the insurance ecosystem will continue and prove that innovation is mandatory, and not just for some. Innovation is for all.

The current low-yield environment creates a major challenge for people who have to save for retirement. At the same time, in many countries, political efforts to limit public pension obligations increase the need for retirement savings. This makes the current low-yield environment especially harmful and raises questions about the efficiency of the pension reforms. Furthermore, there are indications that the combination of low interest rates and a greater reliance on retirement savings contributes to economic inequality. It will be important to address the growing inequality problem, and insurance can significantly contribute to this goal. Why are interest rates so low? Simply speaking, nominal interest rates should equal inflation plus the real growth rate of the economy. The latter could again be divided into productivity growth, which influences the output per person working, plus the growth rate of the labor force. In principle, monetary policy should not interfere with this relationship, as it is looking at these variables as well (e.g. by following the Taylor Rule). However, there is of course some leeway leading to relatively tight (higher interest rates) or expansive (lower interest rates) monetary policy. Hence, we have four main factors influencing interest rates: inflation, productivity growth, growth of the labor force and monetary policy. Inflation has declined in most advanced economies over the past 40 years and is at a very low level. In spite of the digital revolution, productivity growth rates have been rather low over the past years. Due to low fertility rates, the growth rate of the labor force has significantly declined over the past decades in most advanced economies and has turned even negative in some. Finally, monetary policy has become very expansive to support the slow recovery in many economies. Hence, all the driving factors have worked in the same direction, leading to the current low-yield environment. Given that the demographic trend of declining labor force growth rates is expected to continue and that higher inflation would not help to increase real returns, the only -- albeit limited -- hope for higher interest rates is a reversal of the productivity trend as well as a normalization of monetary policy. Impact on retirement funding Besides the low fertility rates, there is an additional major demographic development: an increasing life expectancy. This implies that we are living longer in retirement, and this in turn implies that we have to transfer more money from work life to retirement to keep appropriate living standards. There are basically two ways to do this: via a (public) pay-as-you-go system or via (private or occupational) retirement savings. See also: Buckle Up: Monetary Events Are Speeding   In a pay-as-you-go system, people in working life transfer a fraction of their income to the people living in retirement. In return, they get a fraction of the next generation's labo- force income when they are in retirement themselves. Hence, the implicit return on the pay-as-you-go contributions is influenced by the growth rate of the individual labor income (inflation plus productivity growth) and the growth rate of the total labor force. As we can see, the implicit return on the pay-as-you-go contribution is harmed by the same factors as the return on retirement savings (i.e. the interest rate). However, it is not affected by the very expansive monetary policy, which is only lowering the return on retirement savings. Hence, pay-as-you-go pensions should become relatively more attractive. Nevertheless, most pension reforms lead to a decreasing relevance of public pay-as-you-go pensions. One reason for this might be that politicians fear that a pronounced increase in social security taxes would not be opportune for their political future. It is important to note, however, that as a result people will have lower public pensions and therefore have to put the dollar they are not investing in the one system (the pay-as-you-go system) into the other system (retirement savings). Whether people are happy with this depends on the relative returns on the two systems. Due to the expansive monetary policy, it is far from given that the retirement savings offer the higher return. Social consequences When people have to save for retirement, they are directly affected by low interest rates. Let’s look at a young household that saves $1.000 per year for retirement, which starts in 40 years. At an interest rate of 2%, the household would have a bit more than $60,000 available at the start of retirement. At an interest rate of 0% (currently, real rates are rather negative) it would be only $40,000. Hence, the household would have to increase its annual savings by 50% to $1,500 to still end up with the $60,000. However, not everyone is affected by the low interest rates to the same degree. For comparison, we look at an older household that is saving $1,000 for five years. For this household, a reduction of interest rates from 2% to 0% translates into a reduction of the end sum from $5,300 to $5,000. Hence, this older household would not have to increase annual savings by 50% but only by 6%. For the young household, one way to compensate the strong impact of the low interest rates would be to increase risk taking. Stocks, for example, typically have an excess return of about 5%. This implies that in the current 0% interest rate environment, the young household would not end up with $40,000 but with more than $125,000! Even though there has never been a long period where stocks fared worse than bonds, many people shy away from taking on financial risk and are still looking for guarantees. Richard Thaler associates this with behavioral biases that could be overcome with the right nudges. However, it is also true that richer people tend to be better able to live with income fluctuations and therefore to take on financial risks. There is another reason why richer people might be better able to live with the declined interest rates: By definition, they already have wealth and therefore profit from the increase in asset prices that comes with decreasing interest rates. This capital gain is especially strong for long-term assets like very long-term bonds, real estate and stocks. As a result, for people with substantial wealth, the net effect of decreasing interest rates might well be positive. Richer people also profit relative to poorer from the shift from the public pay-as-you-go system to a greater reliance on retirement savings. First, public pay-as-you-go pensions often include some redistribution from people with a higher lifetime income to people with a lower income. This redistribution is typically not part of private retirement savings. Second, public pay-as-you-go pensions often provide insurance against some biometric risks that are not necessarily insured in private retirement saving products. One major risk is the individual longevity risk, i.e. the risk that a household outlives its savings. If people are rich enough, they never outlive their wealth but rather pass substantial amounts to their inheritor. However, this applies to far from everyone. Another biometric risk is the disability to work and to earn the labor income that is necessary to save enough for retirement. While richer people also have a disability risk, the financial consequences might be (relatively) smaller as they often also have capital income that is not (or less) affected by the disability. Others, however, risk outliving their savings even before reaching retirement age and falling into poverty due to disability. What should be done? As we have seen, the expansive monetary policy in combination with the shift from a public pay-as-you-go system toward a greater reliance on retirement savings affects people differently and will likely foster inequality. What can we do to address this social problem? First, it is important that central banks are aware of and consider the effects of their monetary policy decisions on retirement savings and inequality. In fact, there are also indications that the relationship works in both ways and that inequality also affects the monetary transmission channel as well as financial stability. As a result, several central banks have already started to analyze the relationship between monetary policy and inequality. Second, policy makers should reconsider the efficiency of shifting the focus of retirement funding from a pay-as-you-go system toward a pre-funded system based on savings. Retirement savings will always be an important pillar of retirement funding and a crucial funding source for long-term investments in an economy. However, there are limits to the efficiency of more savings, and we have to be aware that savings are affected by the same demographic factors that harm pay-as-you-go pensions. To make public pensions more sustainable, policy makers should rather aim to broaden the basis of contributors and to increase flexibility of labor markets and the retirement age. Third, individuals should reconsider which risks they want to take and which not. Retirement saving products with a guaranteed interest rate are still very popular. However, by choosing guarantee products, people substantially reduce the return on their savings even though the long-term nature of their retirement savings would put them in a good position to take the risk themselves. Biometric risks, in contrast, are difficult to take individually but lend themselves to risk pooling. Yet many individuals do not appropriately buy insurance protection against biometric risks like disability or longevity. What does this mean for insurers? See also: 4 Insurers’ Great Customer Experiences   By pooling individual risks, insurers not only support wellbeing of risk-averse individuals but also reduce inequality in a society. The degree to which insurers are fulfilling this valuable role depends, however, on the products they are selling to their customers. When it comes to retirement savings products, it is important that products include protection against biometric risks and not protection against financial risks. Given that insurance regulation aggravates the provision of financial guarantees, supply does not seem to be the problem in this regard. It is rather the demand side that for some reason prefers buying protection against financial risks to products that insure biometric risks. It will be important to increase our understanding of why this is the case and how we could overcome this bias. Further research is needed although behavioral economics already provides some first insights in this regard. Nudges to overcome the described behavioral biases are, for example, increasing the availability of risk information, limiting the number of alternative products and having appropriate default options.

I applaud your announcement of a an organization designed to tackle what we believe is the greatest immediate threat to America -- our status quo healthcare system. I have sent your healthcare leaders the new edition of my book, The CEO’s Guide to Restoring the American Dream - How to Deliver World Class Health Care to Your Employees at Half the Cost. This book draws on my decades as an insider in healthcare, first as an Accenture consultant working inside dozens of hospitals, followed by founding Microsoft’s $2 billion-plus healthcare platform business and more recently as a healthtech CEO (WebMD acquired my company). Since my departure from WebMD, my life’s work has been to find real-life, practical solutions to the root causes of our healthcare system’s dysfunction. Through this, I’ve found microcosms of employers everywhere that have already tackled the most challenging problems, restoring for them and their employees the American Dream that healthcare has stolen. The great news is that every fix to healthcare's structural problems has been invented, proven and modestly scaled. With your large employee base and bully pulpit, you are in a unique position to massively scale these fixes. The wisest employers have found that the best way to slash healthcare costs is to improve benefits. We’ve found no company that has a better benefits package than Rosen Hotels, which spends 55% less per capita on health benefits than a typical company despite having a challenging workforce. For example, 56% of their employees’ pregnancies are categorized as high risk. I highlighted Rosen in my TEDx talk. They’ve invested money that otherwise would have been squandered in healthcare to provide free college to their employees, employees’ children and residents of a nearby neighborhood. Crime in that neighborhood plummeted 62%, and high school graduation rates soared from 45% to nearly 100%. The CEO’s Guide provides more details on what Rosen and many other smart employers are doing. For example, Pittsburgh-area schools, with a superior benefits plan, are spending 40% less than typical schools. See also: 3 Innovation Lessons From Jeff Bezos   There are many options to directly improve your employees’ health benefits while slashing costs. Hundreds of us have contributed to the Health Rosetta, which provides a blueprint for how to purchase healthcare services wisely. The Health Rosetta’s foundation is a set of guiding principles that leading thinkers ranging from Esther Dyson to Bill Gates have contributed to. If I were in your shoes, I’d start in the following places: My book can be found on Amazon or downloaded for free.

1. Send employees to Centers of Excellence for high-cost/complexity procedures: Typically, 6% to 8% of your employees consume 80% of spending in a given year. Large employers such as Lowes, Pepsico and Walmart have found stunning levels of misdiagnosis (25% to 67%) and overtreatment at low-value centers. For example, 40% of planned organ transplants diagnosed at community hospitals were deemed medically unnecessary after a second opinion from a high-value center such as the Mayo Clinic. Starbucks and Virginia Mason found that 90% of spinal procedures didn’t help at all and that the problems would have been better addressed via physical therapy. A large tire maker put in a proper musculoskeletal program for their employees and has already created nearly 2% of positive EBITA impact. One of the foremost experts in employer benefits, Brian Klepper, estimates that 2% of the entire U.S. economy is tied up in non-evidence-based, non-value-adding musculoskeletal procedures. [See Chapter 12 for more.]
2. Lead the employer movement to avoid opioid overuse: Every addict needs an enabler. Having deeply studied the underlying drivers of the opioid crisis, I found that employers are the key (unwitting) enabler of the opioid crisis on 11 of the 12 major drivers. The overwhelming majority of those with opioid overuse disorders followed doctors orders, and their drugs were paid for by employers. Unlike other great public health crises, the opioid crisis can’t be solved without significant employer action. You can save money and keep your employees and dependents out of harm’s way by adopting a smart benefits approach. [See Chapter 20 for more.]
3. Root out widespread criminal fraud: The Economist has called healthcare fraud the $272 billion swindle. More than 150 million health records have been hacked and are available for sale on the dark web. At a meeting with former HHS Secretary Tommy Thompson, I heard the stunning levels of fraud. One Fortune 250 company had more than 500,000 claims that were fraudulent (e.g., claims run 25 times and multiple claims for once-in-a-lifetime procedures such as a hysterectomy). In that room, one of the risk management practice leaders from a Big Four firm called the related ERISA fiduciary risk the largest undisclosed risk he’d seen in his career. The industry hasn’t adopted modern payment integrity software/algorithms for this readily fixable problem. [See Chapter 7 and 19 for more.]
4. Ensure employees receive the highest-value drugs: Employers such as Caterpillar have taken matters into their own hands as the pharmaceutical supply chain has become rife with hard-to-follow rebates and other tactics designed to redistribute your profits to them. Caterpillar hasn’t seen healthcare spending increases in 10 years, primarily due to getting their pharmaceutical spending under control. [See Chapter 18 for more.]
5. Establish value-based primary care foundation: As IBM found in a worldwide analysis of their $2 billion healthcare spending, it’s not possible to have a high-performance healthcare system without a proper primary care system in place. More than 90% of what people enter the healthcare system for can be addressed in a high-performance primary care setting (rare in the U.S.). Sadly, most U.S. primary care is like milk in the back of the store to get you to other high-margin and often low-value services. Not only can proper primary care go upstream to address issues before they flare up, it can help their patients navigate complex medical conditions. In fact, Amazon just hired Dr. Marty Levine, who was my parents' doctor in a great Medicare Advantage program. Levine and his team have been invaluable in helping us navigate my father’s Parkinson's journey. Based on what has transpired, I am certain that Levine’s team has saved taxpayers more than $200,000 in likely medical bills. This kind of care is not only outstanding, it more than pays for itself. [See Chapter 14 for more.]

See also: The Key to Digital Innovation Success   The title of my TEDx talk was Healthcare Stole the American Dream - Here’s How We Take it Back. It’s great to see your leadership on this critical issue. The Health Rosetta community stands ready to help your efforts. Sincerely, Dave Chase P.S. We would also encourage you to adopt the Health Rosetta Plan Sponsor Bill of Rights (https://healthrosetta.org/plan-sponsor-bill-of-rights/). In light of your respective backgrounds in financial services, you are likely to be shocked by the lack of disclosure and conflicts of interest that are standard operating procedure in the vast majority of employer health plans. [See Appendix B for more.]

In late 2016, we were as nervous as could be. We were about to launch a challenge to a $3 trillion industry, and it was anyone’s guess how we’d be received. Within hours, feedback from users and influencers allayed our worst fears. But as the hours turned to days, and days to weeks, questions remained. A full year’s worth of data now offers some answers, and what follows are the highlights, and lowlights, of 2017. 1. “Nobody will trust a company called ‘Lemonade’!” A major early question was whether a newborn company, with a juvenile name, could engender the necessary trust. Everything was riding on our contrarian theory: that Lemonade’s newness and uniqueness would make it more trustworthy, not less. You see, traditional insurers often equate trustworthiness with financial strength, which they project by erecting monumental buildings that dominate the skyline. Skyscrapers weren’t within our budget, but in any event we believed such extravagance sends the wrong signal. People worry their insurer lacks the will to pay, not the means. So we established Lemonade as a public benefit corporation, with a view to signaling something very different. We hoped today’s consumers would find our approach refreshing and trustworthy. The data suggest that they have.

Since Jan 1. 2017, Lemonade insured more than 100,000 homes, with our members entrusting us to insure them against more than $15 billion of losses.

See also: Lemonade’s Latest Chronicle   Our total sales for 2017 topped $10 million, with ~5% of our sales materializing in the first quarter, and more than 50% in the fourth. This means our sales are on a strong and exponential growth curve. On launch day, we thought of our team as pioneers and true believers. But after our first year, we know it is our community of more than 100,000 who deserve those accolades. It is they who entrusted billions to a brand new insurer, and it is that trust that is powering the change. Which brings us to the second thing we now know. We know our customers. 2. “Being the cheapest attracts customers — but the wrong customers” The boogeyman in insurance is adverse selection. As an insurer, you set your price based on what a customer should cost you on average. But if, instead of attracting average customers, you attract the kind who switch frequently, or claim excessively, you’re selling at a loss, and your days are numbered. Adverse selection is a particular threat to price leaders. And we were determined to be a price leader. But while we designed our business for value, we also designed it for values – and it was important to us that our customers appreciate both. Value alone selects adversely, but values select advantageously. We breathed a sigh of relief when customers tweeted about Lemonade’s low prices a lot, but about its B-Corp and Giveback even more. The tweeting was an encouraging early data point. As more data came in during the course of the year, our assessment of the adverse selection threat became more rigorous. See, throughout the many decades, the insurance industry has learned that people’s education and job are highly predictive of what kind of risk they represent. If Lemonade’s customers were below average by these measures, we’d have a problem, no matter what our Twitter feed said. Good news: They are not. The stats on Lemonade customers (who, by the way, are 50:50 male and female) suggest our members are more than 100% over-indexed for both graduate degrees and really high-paying jobs. All this notwithstanding the fact that 75% of our members are under the age of 35! The upshot: Lemonade is attracting the next generation of outstanding insurance customers. 3. “Making claims easy will lead to a flood of claims” It’s an open secret in the insurance industry that a painful claims process discourages claims. There’s only so many times you can hear that "your call is important to us and will be answered in the order in which it was received," before you say "to hell with it" and give up on your claim. Instant claims? That could unleash a torrent of frivolous claims. Truth be told, things were hairy for a while. Early in 2017, a couple of large claims arrived in rapid succession. We only had a few customers at that time, and as a proportion of our revenue (known as a "loss ratio") these few claims were daunting. Statistics taught us to expect this kind of lumpiness in the early days, but we still slept fitfully until our business grew and our loss ratio began to normalize. We were in a much healthier place by year’s end (we report our 2017 loss ratio to regulators next month), and the frequency of claims is in line with our modeling. Beyond the noisiness that is a byproduct of small numbers, our system seemed to have improved as we fed it more data. For example, our loss ratio among policies sold in 2016 is more than 2X that of policies sold in 2017. This suggests that our underwriting was pretty shoddy in our early days. Definitely a lowlight. Since then, we’ve taught our systems to be far more careful when underwriting policies, and our bot Maya declined to quote more than $17 million of business in 2017. This has markedly improved the underlying health of our business – but there’s still a ways to go. Early mistakes will continue to drag down our reported loss ratio for awhile. Our knight in shining armor? That’d have to be our claims bot, Jim. When we announced his ability to review, approve and pay a claim in seconds, we surprised a few. Happy to report that, during 2017, AI Jim grew his capacity to pay claims 40X. [caption id="attachment_30120" align="alignnone" width="570"] See also: Lemonade’s New Push: Zero Everything  [/caption] Our algorithms are getting better at flagging attempts at fraud, and we reported several of these to the authorities. Yet overall the data shows that honesty is rampant among our members, and what behavioral economists dub reciprocity is alive and well: About 5% of our customers contact us, after their claim is paid, to say their stuff turned up and they want to return the money. Our team has centuries of combined experience in insurance, but this was a first for them all! A quick look at the instant claims suggests our members spend a lot of time on phones and bikes. But this year had all kinds of losses: big ones like fires and smaller ones like stolen headphones. We are proud to say that we were (and are!) there for our community in times of need. [caption id="attachment_30123" align="alignnone" width="570"] Positive reviews of Lemonade's instant claims[/caption] Stopping to smell the roses 2017 wasn’t all roses. We saw shockingly high loss ratios in the first half of the year, some vicious responses to our stand on guns and knock-off attempts by some of the Goliaths of the industry. At the same time, we saw tremendous adoption by our customers, exciting advances in our tech, licenses from 25 states and a Giveback that amounted to 10% of our revenues. We’re extremely grateful to our team, our customers and our regulators for making 2017 all that it could be. No doubt 2018 won’t be all roses, either, but we will stop to smell them whenever we can. ?

One important trend in society over the past decade is our increasing ability to create and consume a seemingly unlimited amount of digital content. Whether the content is for information, entertainment or commerce, the result is that most people are staring at screens of various sizes and swiping, typing, pinching, voice-commanding or interacting with the content in some other way. The services and our ability to communicate and conduct business has had a major impact on society in general, affecting virtually every segment of our world. While there are many good and positive outcomes emanating from the digital world, there are also negative consequences. One of those is the increase in what I call distracted living.

See also: Distracted Driving: a Job for Insurtech?  

Distracted driving, a well-known phenomenon, has major negative implications for insurers and society. The “need” to send text messages, participate in phone calls, do web searches and interact with the vehicles navigation/entertainment system all take attention away from driving. Insurers are painfully aware of this problem, as it has caused a spike in accidents in recent years. But this is not the only type of distraction that can cause problems. Examples of distracted living that can be just as harmful or even dangerous include:

• Pedestrian accidents. There are many cases of pedestrians walking into traffic, bumping into buildings or falling into fountains due to their rapt attention to content on their smartphones. While YouTube is filled with funny videos of incidents involving the oblivious people, serious accidents have resulted, as well.
• Lost productivity at work. Many studies have been conducted on employees’ use of social media and other internet services during work hours. Although many companies have policies to limit usage, it is still a serious problem for employers.
• Workplace accidents. It is one thing for employees to surf the web, text or watch sports highlight videos while at their desks, but quite another when employees on the move at work sites are staring at a screen. Imagine employees who become distracted on constructions sites, in factories with dangerous chemicals or while operating machines. It is easy to see how more workplace accidents can happen.
• Operators in public transportation. Drivers of trains, planes, ships, streetcars, buses and other types of public transportation must keep their complete attention focused on the task at hand. Yet, there have already been cases of accidents caused by operators who were distracted.
• Mental health issues. Social media has been a positive force for many individuals, fostering community and connection. But for others, the social media world may result in frayed personal relationships or obsessions, or may lead to mental health issues.

See also: Technology Addiction: A Fatal Distraction  

These are but a few examples of how the easy availability of digital content takes our attention away from important activities. Although many of these are insignificant from an actuarial standpoint for insurers (besides distracted driving), distracted living is still a cause for concern and a trend that the industry should continue to monitor.

Executive Summary The U.S. insurance sector announced deal value reached $9 billion in the second half of 2017, down from $24.2 billion in the second half of 2016. Activity remains robust in the brokerage sector, with 232 announced deals, which was 3% higher than in the same period in 2016. Among insurers, megadeals have been limited by uncertainty in terms of the direction of tax and regulatory reforms. Nevertheless, the passing of tax reform at the end of 2017 and postponement of the implementation of the Department of Labor’s fiduciary rule until 2019 will likely improve clarity for deal making in 2018. Insurers are expected to continue to divest capital-intensive or underperforming businesses. Private equity will no doubt continue to pursue U.S. insurance sector assets, which are now more attractive due to a lower corporate tax rate. Trends and highlights

• 271 insurance deals were announced for a disclosed $9 billion deal value in 2H 2017 (of which 248 deals had undisclosed deal values)
• Insurance broker deals remained the most active, composing 86% of deal volume
• For insurance underwriter deals, the life and property/casualty sectors each contributed more than $4 billion in disclosed deal value while property/casualty led in deal volume

Highlights of 2017 deal activity Robust deal activity in 2H 2017 There were four announced deals valued in excess of $1 billion, for a total of $6.1 billion, in the second half of 2017. See also: U.S. Insurance Deals: Insights on First Half   Key transactions and themes The Hartford agreed to two major deals in the last quarter of 2017, including an acquisition and divestiture:

• Hartford Financial Services Group unit Hartford Life and Accident Insurance agreed to acquire Aetna’s U.S. group life and disability business for $1.45 billion.
• An investor group, including Pine Brook Partners, TRB Advisors, Atlas Merchant Capital, Cornell Capital, Basel, J. Safra Sarasin Holding and Hamilton, Global Atlantic Financial Group and Hopmeadow Holdings GP, agreed to acquire Talcott Resolution, a run-off life and annuity business, from Hartford Financial Services Group for $1.6 billion.

Private equity consortiums are exhibiting interest in runoff variable annuity platforms as insurers focus on new risks:

• In December, an investor group, including Apollo Global Management, Reverence Capital Partners Crestview Advisors and Athene Holding, agreed to acquire the closed block variable annuity and fixed annuities businesses from Voya Financial for $1.1 billion.

The other notable deal announced in 2H 2017 of more than $1 billion in deal value was:

• Assurant’s November agreement to acquire Warranty Group from TPG Capital Management for $1.9 billion. Warranty Group provides underwriting, claims administration and marketing expertise to manufacturers, distributors and retailers of consumer goods including automobiles, homes, consumer appliances, electronics and furniture, as well as specialty insurance products and services for financial institutions.

Top 10 US Insurance and Bermuda Deals Announced in 2017 (by value) [caption id="attachment_30075" align="alignnone" width="650"] Source: S&P Global Market Intelligence[/caption] Sub-sector highlights and outlook

• Life and Annuity — This sector has been suffering through the persistent low-interest-rate environment that has weighed on insurers’ investment portfolios. Nevertheless, the U.S. Federal Reserve raised the fed funds rate three times in 2017, and there are expectations of additional increases in 2018. Opportunities remain for insurers to exit capital-intensive or non-core businesses, with investor interest in closed blocks and narrow concentrations. In a recent deal, an Apollo-led investor group purchased the closed block variable annuity and fixed annuity businesses of Voya Financial for $1.1 billion. Also, The Hartford agreed to sell its runoff life and annuity business, Talcott Resolution, for $1.6 billion to an investor group.
• Property/Casualty — Deal activity increased in the sector during the second half of 2017. In addition to traditional M&A, the P&C sector has seen mega insurance legacy transfer transactions, headlined by AIG’s $9.8 billion reinsurance, excluding interest, with National Indemnity to take on long-term risks from legacy commercial policies announced in January 2017.
• Insurance Brokers — The segment continued to be the most active in terms of deal volume in 2H 2017. The most activity came from several serial acquirers buying regional brokers, further consolidating the market. The five most active acquirers were Acrisure, Hub International, National Senior Insurance, Alera Group and NFP.

See also: Insurance 2025: Smart Contracts   Conclusion and outlook Deals in the second half of 2017 ended on a strong note and activity should see further acceleration in 2018 as insurers continue to focus on cutting costs, achieving scale, and enhancing and streamlining or consolidating dated technologies.

• Macroeconomic environment: The economic environment improved in the second half of 2017, although persistently low interest rates and geopolitical uncertainty continue to constrain insurers’ revenues and profitability. Life insurers have used both divestitures and acquisitions to manage the low-return environment and transform business models.
• Regulatory environment: Increased oversight and uncertainty have heavily influenced insurers’ business models and strategies, forcing many to exit businesses, often through divestiture. The current presidential administration favors easing regulation, and the U.S. Department of Labor Fiduciary Rule enforcement has been delayed until July 2019, which may mitigate near-term implications for insurers that use exclusive agents.
• Tax Reform: The passage of the Tax Cuts and Jobs Act is expected to be a mixed bag for insurers. Changes to the corporate tax rate, special insurance company provisions and the switch to a territorial system with anti-base erosion provisions significantly affect insurance companies (including reinsurers), both U.S.-based and companies based elsewhere that do business in the U.S. For some companies, life insurance products and taxation of international transactions changes are costly and outweigh the benefit of reduced tax rates. For other companies (e.g., issuers of short-tail products), changes in the computation of taxable income are more modest. In addition, companies that were chronically subject to AMT under current law may now look forward to an eventual refund of minimum tax credits. The companies that stand to gain the most from reduced tax rates would be U.S.-based multinational companies. See Tax reform insurance alert and Tax reform impact on private equity for additional discussion on the impacts from the Tax Cuts and Jobs Act.
• Technology: Insurers have been slower than many other industries to adopt new technologies, but they are increasing investment in technology and innovative platforms. According to CB Insights and Willis Towers Watson, insurtech funding volume increased 38% year over year in 3Q 2017. In a headline-grabbing deal, Lemonade raised a $120 million Series C funding round led by SoftBank.
• Canada interest: Closer to home, there is evidence of an increasing appetite from Canadian buyers. In the second half of 2017, there were three announced deals in which the acquiring company was Canada-based. The largest deal was Quebec-based Industrial Alliance Insurance agreeing to acquire Columbus, Ohio-based Dealers Assurance and Albuquerque, N.M.-based Southwest Reinsurance for $135 million. Also, Toronto-based Intact Financial completed its acquisition of Bermuda-based OneBeacon Insurance Group from Hanover, NH-based White Mountains Insurance Group for $1.7 billion.
• Public offerings: Several major global insurers have responded to the low-growth environment in the U.S. with significant divestitures or restructuring. MetLife successfully completed the spinoff its U.S. retail business, Brighthouse Financial, in August. AXA also filed preliminary documents for an IPO of its U.S. operations this past November. It seems likely that other large insurance companies will have similar divestiture or restructuring plans.
• Asian inbound interest: The past several years have seen Asian firms expand their global footprint in the U.S. insurance market. While Asian investors maintain a global appetite, regulatory and shareholder skepticism remains a hurdle. A bid by Anbang to acquire Fidelity and Guaranty fell through in April. China Oceanwide’s acquisition of Genworth has yet to close and is still under CFIUS review.

You can find the full report here.