This article was written with Adrian Jones, a #traditionalindustry guy and insurtech investor who writes in his personal capacity. The authors’ opinions are solely their own, and only public data was used to create this article. *** “All the insurance players will be insurtech,” as Matteo titled his recent book, but some insurtechs have chosen to be insurers. Real insurers. Which means they file detailed financial statements. These obscure but public regulatory filings are a rare glimpse into the closely guarded workings of startups. Full-year 2017 filings for U.S.-based insurers were released earlier this month. Here’s what we found:

1. Underwriting results have been poor
2. It costs $15 million a year to run a startup insurtech carrier
3. Customer acquisition costs and back-office expenses (so far) matter more than efficiencies from digitization and legacy systems
4. Reinsurers are supporting insurtech by losing money, too
5. In recent history, the startup insurers that have won were active in markets not targeted by incumbents

We explain and show data for each of these points in this article. Context and Sources The most notable recent independent U.S. property/casualty insurtech startups that operated throughout 2017 as fully licensed insurers are Lemonade, Metromile and Root. Out of hundreds of U.S. insurtech startups, only a few have taken the hard route of being a fully licensed insurer. The lack of interest in becoming a regulated insurer is evidence against disruption evangelists who say that insurers are going to disappear or be killed by GAFA (Google, Apple, Facebook and Amazon). Despite the lack of interest, being a fully licensed insurer may prove to be a more durable business model than the alternatives like being an agency or otherwise depending on incumbents, and the three carrier startups that we analyze all have strong teams with powerful investors. Adrian has previously argued that being a fully licensed insurer may actually be the best long-term strategy – See: Six Questionable Things Said About Insurtech. The filings we reviewed are called “statutory statements.” and only insurers file them, not agencies, brokers or service providers. Statutory statements provide many of the traditional KPIs of insurance companies. Startups may use additional internal measures as they scale their company. Statutory statements typically do not include the financials of an insurer’s holding company or affiliated agencies, and companies have some flexibility in how they record certain numbers. But for all their limitations, statutory figures have the benefit of being time-tested, mostly standard across insurers and measuring critical indicators like loss ratio and net income. See also: Innovation: ‘Where Do We Start?’   Though the public can access statutory statements, it’s not always easy. Some insurers post them online, even private insurers. This is an area for improvement by both the #traditionalindustry and the startups that tell tales of “transparency” but don’t upload their statutory statement. The statistics Here are the key stats on three companies – from top line to bottom line: [caption id="attachment_30864" align="alignnone" width="563"] *The company has gross paid-in surplus of over $31 million so this figure is probably low. **Excludes a write-in for “revenue from parent for administrative costs,” possibly a way of topping up the company’s surplus[/caption] A combined ratio greater than 100% usually means a loss. Combined ratio doesn’t include returns from investing insurance reserves, but the days of double-digit bond yields are long gone. In a low-rate environment, investment income can’t offset poor technical results. The ratios are typically calculated on net earned premiums, but we also show a row where the expense ratio denominator is total direct premiums written, which may be more appropriate for growing books. Observations:

• Lemonade
  • Considering the statutory top line before reinsurance of $8,996,000 of gross premium written, it’s unclear how Lemonade calculated that “our total sales for 2017 topped $10 million.” The premiums reported by Lemonade may already have deducted the 20% fee paid to the affiliated agency – the parent company’s only source of income due to the giveaway model. (This would also explain why there is no commission and brokerage expense showing.)
  • Lemonade claims to have insured “over 100,000 homes.” If we assume that this figure includes rented apartments, then it implies premium written per policy of $90, or $7.50/month, if premium written is based on an annual policy.
  • Lemonade’s giveaway does not appear to be separately disclosed. Nonetheless, one of the brilliant aspects of the business model is the fact that even with a 791% combined ratio, Lemonade still has at least one or two pools doing well and thus enabling the PR of a giveback.
• Metromile
  • As the oldest startup in this group, Metromile has by far the highest premium, but the loss ratio is still nearly 100%. The expense ratio appears to have scaled down to a reasonable number, but the company puts $7 million of expense into “loss adjustment expense,” which may flatter the expense ratio.
• Root
  • As with Lemonade, the loss ratio around 160% is cause for concern – is this a few volatile claims (bad luck) or a problem with pricing? Time will tell.

A few other notable companies are worth a mention:

• Berkshire Hathaway Direct Insurance sells online via biBERK.com but isn’t a venture-backed startup. They wrote $6.4 million in premium last year, their second year of operations, most of it workers' compensation. Their loss ratio gross of reinsurance was 124%.
• Oscar is a startup brought to you by Jared Kushner and others who have plowed in $728 million already, with more funds being raised currently. Oscar shows no signs of profitability in its three main states:

1. Underwriting results have been poor All three companies have a gross loss ratio of near 100% or higher. (For reference, the industry average in 2016 was 72%). That means they have paid $1 as claims for each $1 earned from policyholders in the last 12 months. An insurance startup has to prove two critical things:

• Does the underwriting model work?
• Does the distribution model work?

We’ve been in debates over which is more important, and we always start with underwriting, because it takes no special talent to distribute a product that has been poorly underwritten (i.e. selling below cost). Underwriting quality/discipline is one of the “golden rules” of the insurance sector. Disrupt it at your investors’ peril. Underwriting returns have generally been poor, in some cases awful (double the industry average counts as awful in our book). Poor results are to be expected at first, even for the first several years. A single big loss can foul a year’s results in a small book. It can be hard to tell if that single loss is an anomaly or a failure in the model. Building an underwriting model is like playing whack-a-mole with a year’s time lag. Sometimes it’s difficult or impossible to address even widely known underwriting issues. 2. It costs $15 million a year to run a startup insurtech carrier All three companies incurred right about $15 million in run-rate expenses last year, of which $5 million to $6 million is headcount expense. It may be possible to keep the overall expense total closer to $10 million if one is especially lean, but the cost of operating in a regulated environment and building a book quickly mount. Some startups have organized as a managing general agency instead of a carrier. Thus they pay a “front” a fee of around 5% to produce their policies. However, even MGAs are state-licensed entities that are subject to most of the same regulation as carriers, so the expense saving of being an MGA is only a true savings at small volumes. The upshot: The capital raises of around $20 million to $30 million that we have recently heard about may only be good for around two years of operating expense, before any net underwriting losses. See also: Insurtech Is Ignoring 2/3 of Opportunity   Scale matters in insurance and venture capital, but it’s a double-edged sword in insurance. Scaling too quickly without underwriting excellence magnifies underwriting losses, but staying too small leaves the book volatile and the expense ratio high. Some startups have been active for several years and have not yet scaled, or even saw a reduction of premiums in the last year, but this may be better than scaling without sustainable underwriting results. Future financial statements will tell if any of the new players will gain a sustainable market share in a major business line in the U.S., or at least in a niche. 3. Customer acquisition costs and back-office expenses (so far) matter more than efficiencies from digitization and legacy systems. Insurance investors need to understand back-office expenses and distribution expenses, both of which are typically fixed costs for startups distributing directly to consumers. Here’s a look at what the three property/casualty insurance startups are spending money on. Beware that holding company expenses and affiliated agencies may or may not be reflected in the figures below, depending on the intercompany arrangements in place. [caption id="attachment_30866" align="alignnone" width="548"] *Likely included in commission and brokerage expense, which is net of $2.1 million ceded to reinsurers **Largest write-in item is “other professional services” at $891,000. ***Includes $1,958 of unpaid current year expenses and write-ins like “other technology” and “contractors”[/caption] Observations:

• Lemonade:
  • This startup is spending almost $1 in advertising for every $1 of premium they wrote ($7.7 million of advertising for $9 million of premium written). Again, if we assume Lemonade has insured 100,000 homes and apartments, then the customer acquisition cost (CAC) assuming only advertising expense is around $77. This is probably a measure that encourages the company’s backers, because the CAC of a renewal policy written directly is minimal, and the industry-average churn rate is single digits in U.S.
  • The regulatory and overhead costs are considerable – notice lines like legal and auditing; taxes, licenses and fees; and some of the salary expense.
  • The volumes have to continue to grow exponentially for some years to get the cost base (also net advertising) lower than the 20% of the premium required to make a profit for the parent company (for reference, the market average expense ratio was 28%). Recall that Lemonade’s parent or affiliates take a 20% flat fee up front for their profits and expenses and gives to charity anything left after paying claims and reinsurance.
• Metromile:
  • Has the highest tax expense, perhaps because it is selling the most, with many states charging premium tax as a percentage of the policy value.
  • Their “legal and auditing” expense is probably much higher but is put into “other.”
  • Note the absence of advertising expense but large commission and brokerage expense, partially ceded to reinsurers. Accounting treatments, as ever, can vary by company.
• Root
  • The company’s small volume makes it difficult to run the same absolute expenses as Lemonade and Metromile, but it might not be wise to grow a book running a loss ratio of more than 150%.
  • Has no telegraph expense (woo-hoo!).
  • Unclear why the company has almost $2 million of unpaid expense.

Advertising expense vs. pricing. Old-fashioned insurance agents are a variable cost that scales up with the business – the agent absorbs fixed advertising, occupancy and salary costs in exchange for a variable commission. But in the direct distribution models favored by many startups, variable costs and agents’ costs become fixed costs borne by the startup. (True, some can be kept variable, as we discuss below.) Fixed costs need to be amortized over more premium volume, which requires yet more fixed costs (e.g. advertising) to solve. Insurtech carriers from the dot.com era like eSurance and Trupanion are still investing heavily in advertising and producing losses or barely breaking even. They would probably argue that they could eliminate much of their expense and “harvest” an attractive book of business for years to come – which may be true. The U.S. churn rate in personal auto and home insurance can be as low as single digits, far lower than many Western countries. Because customer-retention cost is much lower than customer-acquisition cost, loyalty is absolutely critical to non-life insurers, particularly in a direct distribution model. (Bain & Co. – both of us are alumni of this consulting firm -- has done excellent work on loyalty in insurance.) It is tempting to acquire insurance customers by underpricing and later transforming them into profitable customers. A loss ratio of more than 100% implies a pricing problem, not a problem with the underwriting model. Insurers with a customer base that came for cheap insurance and expects it to continue will find their market vanishes when they begin repricing to bring loss ratios to acceptable levels, destroying any value from customer loyalty and forcing a pivot to a new value proposition. In some cases, it may be necessary to double prices before underwriting price adequacy can be achieved, even ignoring expenses. (Most U.S. state regulators also have broad powers to disapprove, block or roll back rate increases – for more on the maze of state regulation, see this study from the R Street Institute.) The API approach – a B2B2C model based on distributing the product through the digital fronts of third parties – has become “the new black” to transform fixed acquisition costs in success fees linked to the volumes. This model shows promise, provided that distribution partners do not extract too much value from the competitive insurance market. The point for founders and investors today is to be prepared mentally and financially for a long road to profitability with tens of millions sunk before it becomes apparent whether the underwriting works and whether the relationship between CAC/distribution, fixed expenses and customer loyalty can produce a sustainable and profitable business. 4. Reinsurers are supporting insurtech by losing money, too Some members of the #traditionalindustry have strongly supported the development of insurtech through investment in equity, providing regulatory capital, providing risk capacity and sharing technical expertise. Startup insurers typically are reliant on reinsurance as a form of capital because (1) it can be cheaper than venture capital, (2) startups typically need reinsurance to hold their rating and (3) the strong backing of a highly rated reinsurer shows validation of the company’s business model, just like the backing of the best VCs provides. The carrier model has real advantages concerning reinsurance: reinsurance is easier to arrange and more flexible than an MGA relationship. Many successful agencies find that their economics would be better if they were able to retain some of the risk they produce instead of writing on behalf of a licensed carrier and ceding that carrier all but a commission. Here is a look at results disaggregated for reinsurance: [caption id="attachment_30867" align="alignnone" width="550"] (Source: Schedule P; subject to minor variations compared to prior tables)[/caption] Observations:

• Lemonade seems to have a great reinsurance scheme, but they have to hope that reinsurers continue to take $5 in losses for every $1 in premium ceded to them. The amounts ceded are small, and Lemonade has a big panel of reinsurers.
• Metromile and Root do not appear to get much loss ratio benefit from their reinsurance.

It is a great experience for a giant reinsurer to work with a small and innovative startup. The expected losses in dollar terms are negligible if compared with the value of the lessons learned, the culture created and the halo the reinsurer may partially claim. Startups need to find reinsurers that are both flexible and prepared for losses, potentially for several years. But startups cannot count on reinsurers to take losses forever. 5. In recent history, the startup insurers that have won were active in markets not targeted by incumbents. Since 2000, at least 34 property/casualty insurers were formed in the U.S. without the aid of a powerful parent and earned more than $10 million in premium in 2016. Of these 34 startup insurers:

• 21 specialized in high-volatility catastrophic risk like hurricanes or earthquakes. Incumbent carriers have largely stopped or greatly limited their new business in certain catastrophe-exposed regions, sometimes because they felt that regulators or competitors (often government-run pools) did not allow them to charge adequate premiums.
• Nine were motor insurers, mostly non-standard motor. Non-standard means bad drivers, exotic cars or other risk factors that “standard” carriers avoid.
• Two don’t have a rating.
• Two remain: Trupanion (a pet insurer) and ReliaMax (which insurers student loans).

Adrian readily acknowledges that some carriers aren’t picked up by his screen, such as financial lines companies like Essent. Essent is a Bermuda-based mortgage re/insurer that wrote $570 million of premium at a 33% combined ratio in 2017 after a standing start in 2008 – which might be the most successful U.S.-market insurance startup in the last decade. Other startups were sold along the way, were sponsored by a powerful parent or purchased an older “shell” and inverted into it. The point is that successful insurers have rarely won by attacking strong incumbents in their core markets. They have won by figuring out ways to write difficult risks better than incumbents, have created markets (like pet insurance) or have entered seriously dislocated markets with good timing (like writing mortgage insurance in 2009). This leads to several questions:

• Are urban millennials actually a new market that is being ignored by incumbents?
• Are direct and B2B2C distribution really new markets that incumbents cannot penetrate? Can “platformification” be profitable over the long term?
• How quickly can new/digital systems show cost and pricing benefits over legacy systems that incumbents are retooling aggressively today? How long before the new systems become a legacy for the newcomer that created them?
• Are new underwriting and claims techniques like the use of big data sufficiently disruptive to allow entry to tightly guarded markets?

There are early signs that all of these questions will be answered favorably for at least a couple of startups but not without some bumps along the way. See also: Insurance Coverage Porn   Previous waves of technological changes have allowed new competitors to rise to prominence – think of the big multi-liners that dominated the skyline of Hartford CT with mainframe technology in the ‘50s and ‘60s, the specialists like WR Berkley built on personal computers in the ‘70s and ‘80s and the Bermuda CAT specialists of the ‘90s and ‘00s. Will the next wave of technology-driven insurers include the ones today putting up 150%-plus loss ratios? Perhaps. *** Conclusion Technology changes a lot, but it doesn’t change fundamental facts that make insurance hard. As we said at the start, we admire and support the companies that choose to become fully licensed insurers. They have taken the harder path to market but may be more durable in the long term. We think commentators should be very careful before criticizing startup insurers for not having great performance on the loss ratio and expense ratio in the first few years. We also think companies need to be careful about overselling the awesomeness of their business model too early. To use Matteo’s 4Ps framework to judge any insurtech initiative – from startups or incumbents, we have yet to know whether/how new challengers can leverage technology to outperform incumbents on technical profitability, productivity, proximity with the clients and persistency of the book of business. Whoever is capable of doing this will survive and may be the next big winner in insurance. Insurtech startup carriers, their investors and their reinsurers need to be prepared for a long and expensive startup phase. Insurance is a get-rich-slowly business, but it is also a durable business that rewards patience, wise risk-taking, data analysis and operational excellence. And for the futurists, disruption evangelists, black swan hunters and anyone who just learned more about insurance than you ever wanted to know, we hope these dispatches from insurtech Survival Island have been informative for examining startup financials in insurance or other markets where you operate. Please follow Adrian and Matteo on LinkedIn for future posts.

Industry events, like the recent Reinsurance Association of America’s (RAA) Cat Risk Management conference, are always a great way to take the pulse of the industry and connect with people. I’ve been attending RAA’s conference on behalf of SpatialKey for years, and I generally come away invigorated by my conversations with clients and prospects. This year, however, the energy among these conversations was a bit different. That energy had more urgency and emotion behind it. It’s clear the unprecedented events of 2017 have taken a toll on people, and there’s a compelling need to do something about it. Individuals and teams alike have worked tirelessly; while the events have passed, the emotional fatigue is left in their wake. I can empathize. While insurers worked diligently to serve insureds during back-to-back events, at SpatialKey, we worked around-the-clock to serve up timely, expert data to our insurance clients. The job of 24/7 data put an enormous strain on our own employees—and we have a dedicated data team! Insurers, which lack the expertise or resources to consume and work with the sheer volume and complexity of data that was being put out by multiple data providers, may have found it grueling. That exhaustion still lingers in the faces of the people I spoke with at RAA. And, what’s bubbling to the surface now is the underlying problem:

There’s a ton of data and no easy way for insurers to consume it and act on it.

Put more eloquently, there’s a gap between the wealth of data now available and insurers’ ability to quickly process, contextualize and derive insight from that data. Not just an event-response problem While this transforming-data-into-insight problem was illuminated by 2017’s catastrophic events, this is not just an event-response problem. This is not an underwriting problem. This is not a new problem! Events like those of 2017 touch the entire insurance community—insurers and solutions providers alike. And together we need to solve the problem. What I heard time and again at RAA is that everyone is generally frustrated by a lack of process and an easy way to consume the frequent and sophisticated data that expert providers are putting out during events like Harvey, Irma, Maria, the Mexico City earthquake and the California wildfires. Insurance professionals are expected to use legacy or complex GIS tools to extract and consume expert data from providers. Yet, I didn’t speak to a single GIS expert. It doesn’t make sense. See also: 5 Ways Data Allows for Value-Based Care There’s an opportunity cost to the productivity that employees could be generating elsewhere Nobody has the time to teach himself a complicated GIS solution to look at data while working to deploy help to customers in the wake of catastrophe.

No underwriter has the time to get up to speed on a GIS solution that takes years to learn while trying to win business quickly.

It’s like giving your star quarterback a basketball and expecting him to win the Super Bowl with it. He’s talented, he can throw that ball, but he’ll never throw a winning pass with a basketball. It’s clunky, it’s cumbersome and it just doesn’t fly as fast. In the same way, folks across claims, exposure management and underwriting can’t quickly consume and understand data with legacy or complex tools that weren't created for their specific uses. With all the data comes challenge, and a call for ways to interpret information more efficiently We’d all like to think 2017 was an anomaly. That we won’t have a replay of such extreme events. However, 2017 may only be a precursor of what’s to come. Even so, the insurance industry is poised to handle events like these better than ever before because there’s now a wealth of expert data and models. That’s a good thing, and it energizes me! Data quality and modeling is becoming better all the time—more accuracy, better science, higher resolution—as we can attest to because of working with providers like NOAA, USGS, KatRisk, JBA, RedZone, Swiss Re, Impact Forecasting and HazardHub. But, with all this data choice comes challenge. And a call for ways to interpret information more efficiently. We know it’s possible because we see our insurance clients succeeding every day when it comes to accessing, analyzing and interpreting data within SpatialKey. While late 2017 was exhausting and overwhelming, I’m inspired to see so much data come to life in platforms like ours at SpatialKey, and energized to see how empowering it is for the people using it. See also: How to Earn Consumers’ Trust   Insurers, don’t try to solve this problem alone The solution is collaboration: partnering with experts who have technology purpose-built to consume data quickly and produce intelligence that insurers can readily act on. I’m not advocating collaboration because I’m at the helm of a company that fills the data gap. I saw a lot of pain at RAA in the faces of my insurance friends, and there’s quite honestly just a simple way to solve this.

Processing information is a basic need that has become incredibly complex and time-consuming for insurers.

This can be easily outsourced, so insurance professionals can go about analyzing, managing and mitigating risk. Insurers have an opportunity right now to empower underwriters with the intelligence they need to keep losses on the scale of 2017 from happening again — and to empower them to understand data without complex GIS solutions. Start now. Your shareholders will thank you later.

The Berkshire Hathaway annual report is one of my favorite reads. I always find a mountain of wisdom coupled with humility from one of my mentors, Warren Buffett. He doesn’t know he’s my mentor, but I treat him as one by reading and reflecting on what is in these annual letters. I would recommend you do the same; they’re available free of charge online. There was a doozy of a sentence in the latest—right there on page 8—discussing the performance of Berkshire’s insurance operations, which make up the core of Berkshire’s business: “We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured losses is about 2%.” Sorry, Mr. Buffett, I have some questions for you on that one. See also: Whiff of Market-Based Healthcare Change?   After reading those words, I quickly ran a CATRADER industry exceedance probability (EP) curve for the U.S. My analysis included the perils of hurricane (including storm surge), earthquake (including tsunami, landslide, liquefaction, fire-following and sprinkler leakage), severe thunderstorm (which includes tornadoes, hail and straight-line wind), winter storm (which includes wind, freezing temperatures and winter precipitation) and wildfire. I used the latest estimates of take-up rates (the percentage of properties actually insured against these perils) and took into account demand surge (the increase in the price of labor and materials that can follow disasters). Bottom line, we believe that the probability of $400 billion in insured losses from a single mega-catastrophe in a given year is far more remote—between 0.1% and 0.01% EP. Buffett is putting this at a 2% EP (or a 50-year return period), which is a gulf of difference. In fact, it is worth noting that, by AIR estimates, the costliest disaster in U.S. history in the last 100-plus years—indexed to today’s dollars and today’s exposures—was the Great Miami Hurricane of 1926. Were that to recur today, AIR estimates it would cost the industry roughly $128 billion.  So, what is Buffett basing his view on? In 2009, he famously said “Beware of geeks bearing formulas.... Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors.” Obviously, this was a reference to the 2008 financial crisis and the use of models by banks. His view on catastrophe models, however, has never been made public. See also: Why Risk Management Certifications Matter  Assuming Buffett’s point of view was not model-based, it would be good to know his methods. For example, was it based on some estimate of insured exposures and a PML%, as was common in the pre–catastrophe model days? But he didn’t get to that level of detail. It would be interesting to know if this is also the view of Ajit Jain, his head of insurance operations, and now vice chairman of Berkshire? I have lots of questions, and I am not holding my breath for Buffett to respond to this blog. But it would be great to get your thoughts below.

Competition nowadays for a space on a consumer’s smartphone screen is fierce. We all hear stories of the so-called “killer apps” — they seem to be on everyone’s device, set record download numbers and propel their creators to fame and, quite often, fortune. So, the killer question: Is it realistic for an insurance organization to aspire to create such an app? Nope. Insurance organizations should instead aim to develop app(s) that strategically integrate a platform of services related to the sphere of the insured’s policies. For example, if your customers chiefly insure vehicles and property, a smart app idea may involve trackers for fuel/energy consumption, combined carbon footprint, asset depreciation and include insurance options such as online claims. See also: What Is the Killer App for Insurance?   Want to provide a useful app to your policyholders? Consider the two key concepts of user context and use frequency. Insurance solutions on their own rarely, if ever, clear competitive thresholds on these two measures; hence the requirement to leverage related services and technologies. An app must solve a problem for users, but it must also clear a contextual hurdle. Context is about time, place, convenience, user activity and preferences. An Uber user needs transportation right here, right now, just as a Starbucks customer wants immediate access to her favorite latte. If apps are merely about solving a problem, then a public transit app could solve a user’s transportation problem just as an app for Joe’s Coffee Hut could meet his refreshment needs. But neither public transport nor Joe’s Coffee Hut clear the contextual hurdle of time, place, convenience or preference as capably as app-enabled Uber and Starbucks seem to do. Read the full article in the Digital Edition of the February 2018 Canadian Underwriter.

A conservative investment. An aggressive investment. If you’re like me, you can readily define those terms—or at least give examples. A Treasury note indexed to inflation? Conservative. Stock in a small company in an emerging market? Aggressive. But what makes an insurance company’s overall portfolio conservative or aggressive? And however you describe your or your organization’s risk tolerance, how do you know your portfolio is in line with your perception of risk? If those questions are harder to answer, they also merit more thought than the relative riskiness of any single security. Exploring portfolio-level risk and risk tolerance in ways that go well beyond labels should help your investment team come to a shared view about how much risk you are—and should be—taking in your portfolio. Define investment risk While it is imperative for you to understand and adhere to regulatory risk definitions and constraints, it is equally important for you to clearly define investment risks and your own risk tolerance. To explore conservatism and aggressiveness through the lens of an insurance CIO, let’s consider a hypothetical insurance company—call it Insure-a-Co. Insure-a-Co is a small/mid-sized property and casualty insurer that invests core portfolio and surplus assets in search of income and a stated return target. Like most of Vanguard’s insurance clients, the company’s chief investment officer describes her approach as conservative. Naturally, Insure-a-Co faces liquidity needs dictated by claims and operational expenses. Risk-based capital regulations also come into play. Liquidity and regulatory concerns help to explain why Insure-a-Co historically has favored individual U.S. government bonds for safety, as well as individual municipal and investment-grade industrial and financial corporate bonds. That said, because of historically low yields and its fairly high return target, the insurer is considering owning more equities. Risk is situational, not absolute A central fact about risk is that it isn’t absolute. Rather it’s relative, or situational. A suitable level of risk for Insure-a-Co, given its operational needs, underwriting and investment objectives, and state regulatory influences, may be irresponsibly excessive, or inadequate, for another insurer. See also: Cognitive Biases and Risk Management   Important business-line differences might include the extent to which a P&C insurer’s book of business concentrates on lower-risk policies, such as homeowners’ coverage in regions where natural disasters are rare, or higher-risk policies, such as auto coverage for operators with poor driving records. The extent of any reinsurance may also affect judgments about investment risk. Volatility is an incomplete risk measure Certainly, Insure-a-Co executives go beyond labeling themselves and their portfolios as “conservative” or “aggressive.” They often distill investment risk as volatility—specifically, as the standard deviations of the total returns of their individual holdings and overall portfolio. But even as the standard deviation of returns tries to neatly summarize volatility, it may obscure crucial factors that contribute to performance swings. These include market risk, concentration risk, manager risk and interest-rate risk—which is especially important for Insure-a-Co, given its large fixed-income exposure. Other significant risks may be only loosely related to volatility. Inflation risk and shortfall risk are examples. Complicating life for Insure-a-Co is the fact that seeking to minimize one type of risk may raise other risks. For example, market risk and shortfall risk are more or less inversely related, so taking less of one necessarily means taking more of the other. For Insure-a-Co, holding more equities raises market risk and boosts risk-based capital requirements, but holding fewer equities raises the risk of not meeting its return target. All other factors being equal, we believe a better-diversified portfolio is a more conservative portfolio. As such, we’d likely suggest that a real-world Insure-a-Co consider venturing beyond a collection of individual U.S. government, municipal and corporate bonds. While such a portfolio may be perceived as conservative, it may leave an insurer exposed to substantial inflation or shortfall risk—hazards that may be limited by more diversified exposure to bonds of various maturities, sectors and credit qualities, as well as professionally managed, diversified equity exposures. International holdings may also be appropriate. What to do? At this point, you may be wondering how Insure-a-Co can possibly calibrate its portfolio for risk. The multi-dimensional and changing nature of risk obviously renders inadequate a decision to seek “conservative” or “aggressive” investments and means it is a mistake to rely on volatility as a standalone risk proxy. However, there are steps an insurer can and should take:

• Create clear, measurable, appropriate goals. To zero in on goals, start with a keen focus on your investment policy statement.
• Develop a suitable asset allocation. We believe in balance across asset classes, within the parameters of insurance regulation, and diversification within asset classes.
• Minimize the cost of investing. In our experience, cost is one of the biggest drivers of portfolio performance.
• Maintain a disciplined investment approach. Even sophisticated institutional investors can change course at the wrong times, allowing market or economic changes to spur misguided investment changes.

See also: Global Trend Map No. 13: Investments Labeling an investment or your risk tolerance as conservative, aggressive or something in between means little to nothing if your risk tolerance and the risks of your portfolio are misaligned.  Notes:  

• All investing is subject to risk, including the possible loss of the money you invest.
• Investments in bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
• International investing is subject to additional risks, including the possibility that returns will be hurt by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region. Diversification does not ensure a profit or protect against a loss. 

When a young reporter at the Wall Street Journal would get excited about the seemingly unlimited growth prospects of a company or a market, an old hand would say, "Just remember that trees don't grow to the sky." That advice proved wise plenty often -- think Enron, Theranos, pick-your-favorite-bust. But healthcare in the U.S. is sure trying to prove the old wisdom wrong.

After a stretch where price rises had slowed at least a bit, the Centers for Medicare and Medicaid Services predict that spending on healthcare will climb 5.3% this year and an average of 5.5% a year through 2026. At that point, CMS expects spending to total $5.7 trillion, or 19.7% of the U.S. economy, up almost two percentage points since 2016. Spending on drugs is expected to climb even faster than the rest of the healthcare-industrial complex, increasing an average of 6.3% a year.

Tree, meet sky.

The spate of mega-mergers, such as the Cigna deal to acquire Express Scripts, will supposedly make healthcare more efficient and lead to lower prices, but don't hold your breath. Somehow, I don't think Cigna is paying $67 billion so it can cut Express Scripts' revenue.

Meanwhile, the horror stories keep mounting. A student in Texas had back surgery and, months later, was asked for a urine sample to make sure she had stopped using pain medications. Then she got a bill for $17,850. Her insurer said it would have paid roughly $100 for such a test, but she was personally on the hook, and the lab wouldn't back off its fee. Her father, a retired physician, eventually negotiated the lab down to "only" $5,000 and paid the bill.  

While the focus in Washington continues to be about who should pay for healthcare, the bigger problem continues to be that those of us in the U.S. pay far too much -- roughly twice what other major countries pay, while consuming the same amount of care and having the same quality of health. 

Not being any more optimistic about Washington than I am about mega-mergers, I continue to look to big employers to drive change by simply refusing to put up with the current state of affairs and by using their muscle in the marketplace. While waiting to see what Amazon, Berkshire Hathaway and JPMorgan Chase can do, I look to examples like Walmart and its Centers for Excellence as the way forward. Change won't come quickly, but maybe it can actually come if we starve the tree long enough. 

Have a great week.

Paul Carroll
Editor in Chief

P.S. I mentioned last week that we were working with our friends at The Institutes to develop curricula that will help insurers leverage approaches and programs that will deliver measurable growth through innovation. Here is the formal release on that initiative. Let me know if you have any questions, or if we can help.

Following on from last week's post on investment management, today we tackle that omnipresent question for carriers old and new: regulation. Regulation affects absolutely every part of the insurance business, from how customer data is held and used to how insurers reinsure themselves and invest the premiums they gather. The time and money cost of complying with regulation is often significant, with recent estimates suggesting that 10% to 15% of the total workforce in financial organizations is currently dedicated to governance, risk management and regulatory compliance. The opportunity for greater efficiency here is so large that a whole new tech-powered industry – regtech – has sprung up around it. And, with demand for regulatory, compliance and governance software expected to reach a massive $120 billion by 2020, this is a space to watch. The following stats and perspectives are taken from our Global Trend Map; a full breakdown of our survey respondents, and details of our methodology, are included as part of the full report, which you can download for free at any time. See also: New Regulations for Disability Claims   Assessing the Impact of Regulation Regulation is a serious issue not just for (re)insurers but for the insurance ecosystem more generally. Out of all our survey respondents (unfiltered), 20% indicated that regulation had impeded progress "a lot." As we see from our our burden chart below, the impact is evenly spread across different ecosystem players.

#regulation remains a burden across the #insurance industry. See whether it's growing in the #InsuranceMap: https://t.co/QH8z3aYH7y#regtech pic.twitter.com/kimsBHWrgN

— Insurance Nexus (@InsuranceNexus) July 26, 2017

Here, 24% of brokers and agents state that regulation has impeded progress "a lot" within their organization, along with 17% of technology partners and 22% of insurers. The trend is the same when we use a weighted score (one point for "a little," two points for "somewhat" and three points for "a lot"), giving us an overall "burden score" of:

• 186 for brokers/agents
• 159 for technology partners
• 175 for insurers

While regulation is a concern for insurance companies across the whole globe, it manifests itself differently in different regions. Our stats suggest that regulatory burden is above trend in Europe and below trend in Asia-Pacific (in terms of respondents answering that regulation is impeding progress "a lot"). Regulatory compliance certainly remains a daily issue in APAC but may, for structural reasons, be easier to deal with there on a big picture level. In Asia-Pacific, industry participants have the advantage of dealing, in the main, with large national markets (bigger than any U.S. state, for instance) but without the complexities of an overarching regional regulator (like we find in Europe with the E.U. and Solvency II). That said, carriers wishing to be active across the region still have a multitude of different regimes to comply with. Additionally, we asked survey respondents to indicate, via an open-text response, which regulations were currently the greatest cause for concern. There were too many responses to list everything, but some that stood out were Solvency II and the Insurance Distribution Directive (IDD) from respondents in Europe, and the DOL fiduciary rule from respondents in North America.

"Currently the focus is on protecting personally identifiable information, personal health information and personal credit information. Regulations in the future may evolve, requiring companies to ensure that they are using information in a fair and just fashion. For example, much can be inferred from the data from an individual’s smartphone, but it may not be fair and just to act on those inferences." — Cindy Forbes, EVP and chief analytics officer, Manulife Financial

Regulatory Burden: A Growing Challenge There is a marked trend toward rising regulatory burden, and we found this to be consistent across our different ecosystem players and regions. 89% of insurers and reinsurers believed regulation was posing a greater challenge to their organizations than during the previous 12 months. "Increased regulation" was one of the external challenges we explored in our industry challenges section, coming in sixth place out of 12 (based on all respondents). Drilling down into different carrier departments reveals that its impact is not evenly distributed across the business: "Increased regulation" was among the top three external challenges for carrier staff working in actuarial, analytics, capital management (where it took the top slot), investment, risk, senior leadership, strategy and treasury. The overall balance of these departments suggests the greatest burden from increased regulation within (re)insurers is falling on the investment and risk-modeling side of the business. Europe has certainly been a case in point over the past couple of years, with Solvency II subjecting carriers to more rigorous capital requirements. See also: Aggressive Regulation on Data Breaches   Regulation’s growing prominence in the eyes of high-echelon staff (senior leadership) indicates just how seriously it is viewed within the ecosystem. This, along with the other measures we have presented in this section, creates a perfect storm for the rise of regtech over the coming months and years.

A customer purchasing auto insurance lives somewhere, in a house or an apartment that needs homeowners’ or renters’ insurance. A customer seeking homeowners’ or renters’ insurance might have a vehicle or two parked out front. And how many of these individuals also run their own business ventures? Carriers have been becoming more mindful of the need to own customers, meeting all their needs. The idea of keeping your insurance customers under your roof for all their needs is appealing from a business perspective. After all, if your auto insurance customers need to insure their dwellings, as well, why shouldn’t they avail themselves of the coverage you already provide? But owning the customer isn’t just about money. It’s also about service, as Blue Cross Blue Shield notes. An insurer that covers a client on multiple fronts, even with products the insurer doesn’t underwrite itself, is poised to provide a level of service that can meet a customer’s needs over an entire lifetime — if the insurer’s own systems support this goal. Enter omni-channel. Omni-Channel 101 The goal of an omni-channel presence is to provide a single, seamless experience for insurance customers. From the customer’s perspective, buying property and casualty insurance should be a “one-stop shop”: everything they need, reachable through a single interface, says Bryon Morrison at Nectarom. Most carriers currently fall short of that customer expectation. If one-stop shopping sounds like a rebranding of multi-channel without any real substance, think again, says Kathy Hutson of IBM Analytics. Multi-channel marketing was a stopgap solution, a way to allow customers to reach multiple products while still keeping those lines siloed. With omni-channel tools, insurers break down the silos — allowing their teams to provide the specific solutions customers want and need. Frost & Sullivan offers an elegant definition: An omni-channel presence offers “seamless and effortless, high-quality contact experiences that occur within and between contact channels.” Instead of directing customers to “the folks over at ___,” an omni-channel presence puts all of an insurer’s “folks” into a single line of approach for customers. Omni-channel and similar tools are shaking up the insurance industry, according to a 2016 Majesco white paper. Omni-channel approaches provide exciting opportunities for both insurers and customers, Mark Breading says, and we are only scratching the surface of their potential. The first of the big carriers to embrace omni-channel, Progressive, is already seeing early returns on this investment, as we will touch on below. See also: Where a Customer-Focused Culture Starts   Keeping Customers in the Fold An omni-channel approach offers several opportunities for P&C insurers. Here’s how omni-channel helps maintain customer ownership. Meeting Customers Where They Are While good customer service and relationship management has always been about meeting customers where they stand, their position continues to shift in the digital age. Consider:

• 84% of U.S. households own a computer, according to Andy Serowitz at Insurance Thought Leadership.
• 80% of shoppers use digital tools at least once during their shopping process, including while they shop for home, auto and other forms of P&C coverage, according to a recent McKinsey study.
• 53% of consumers have tried a new-to-them financial or insurance brand in the past year after finding it online, according to the program for the 2017 Digital Marketing for Financial Services Summit.
• 25% of shoppers now buy things like insurance via a mobile app — and that number is increasing. Millennials and the coming Generation Z are far more likely to buy insurance online, Serowitz says, and the percentages track their presence in the population. As today’s children and young adults grow, the use of these tools will increase.

These digital natives are well-informed and expect a seamless experience, Kamna Datt at Ameyo says, and these changing demands are shaking up the insurance industry. Once the domain of local friendly faces making personal connections with clients, insurance companies must now contend with customers who want to do their shopping online. The demand for online connections is more than a whim. One Accenture study discovered that 78% of insurance customers are happy to share personal information with their insurance company, if it means better coverage or service. Customers want to hand companies their info — and the value of that info can only be leveraged by companies with the omni-channel infrastructure to unlock its potential. Customers expect different things from their insurance experience in today’s world, as well. Once, a core concern for consumers was whether a P&C insurer underwrote the products it sold. Today, however, customers are more interested in convenience, says Progressive Product Manager Carolyn Wald. Progressive’s home advantage program bundles other carriers’ homeowners’ and renters’ insurance offerings with the company’s own auto insurance plans. The result is big business for Progressive, benefits for the insurers that underwrite the non-auto portions of the policy and convenience for customers that keeps them coming back. Whose Customer Is It, Anyway? In 2011, Andres A. Zoltners, PK Sinha and Sally E. Lorimer posed an important question in the Harvard Business Review: Do your customers “belong” to your salespeople, or to your company? “In a complex ecosystem of intermediaries and agents, ownership of the end customer can sometimes be lost,” says Dennis Vanderlip, industry solutions director at Microsoft’s Worldwide Insurance division. When communication channels are siloed or confusing, ownership becomes harder to maintain. And with every intermediary who enters the picture, ownership becomes even more muddled. This also shines a light on a frustration that customers experience. Customer want to be loyal, a 2016 Bain & Company brief found. Or, more precisely, they don’t want to juggle multiple insurance providers. Instead, they prefer to “simplify their lives and do business with a single company that gives them reasons to stay.” Omni-channel platforms offer a solution. When customers can carry out most or all of their insurance business needs through a single user interface — and when that interface connects to all the core systems of a P&C insurer and even to core systems of other carriers products — the customer’s experience becomes one seamless dealing with the insurer. Even when the underwriter changes, the customer can stick with the insurer of her choice. Planning Throughout the Lifespan Because customers are willing to provide information through digital systems and find it easier to keep using a single familiar interface, an omni-channel approach makes it easier than ever to maintain customers by anticipating their needs. A well-designed system can use customer data to anticipate needs and provide personalized alerts and service to customers who are buying a car or home, opening a business or passing through other major life stages. One of the biggest questions that arises when “insurance” and “lifespan” are paired is that of life insurance — an area that stands to be upended by omni-channel approaches, according to an EY white paper. While life insurance has long been hands-off in its approach, an omni-channel approach both make it easier to meet customers’ needs in this area and to bundle life insurance with other insurance solutions, e.g., auto, homeowners, etc. Building Your Omni-Channel Presence: A Quick-Start Guide While an omni-channel presence can go very well for both customer and insurer, it can also be a disaster that causes customers to eschew the company permanently. In an article for The Financial Brand, Jim Marous describes an experience with his own auto insurer that left him cold, mainly due to major mistakes in the company’s uses of its omni-channel system. Marous breaks down the major problems into several categories. The insurer’s system, he says, made communication harder, was essentially a multi-channel approach overlaid on still-siloed product systems, created redundancies that resulted in broken promises and made it difficult to view customer data across channels. Such negligence is a surefire way to weaken relationships between existing customers and their agents — to the point that neither the agent nor the company can claim ownership anymore. See also: How to Enhance Customer Service   How can insurers avoid these pitfalls? Vinod Muthukrishnan, co-founder and CEO of customer experience management company CloudCherry, recommends keeping the following points in mind when seeking an omni-channel platform that boosts customer ownership:

• Know your brand. The customer-facing end of an omni-channel presence must communicate a unified look, feel and vision. No matter how your customer connects to your company or through whom, the experience should consistently sell the company’s brand, vision and coverage. By doing so, you can differentiate your brand to promote ownership, as well, as one IBM white paper notes.
• Understand your customers. Tracking how customers interact with you and what they prefer can help ensure your company doesn’t waste time and energy on tools that customers ultimately won’t use — or overlook communication channels customers crave.

In addition, choosing platform provider and other professionals to build and service your omni-channel presence should be done with care. Look for companies with an eye toward customer experience and ownership; they’ll already be thinking about how to unify your brand and connect with the people you serve. Finally, realize that a true omni-channel experience should enable a customer to complete a single application for all of their insurance needs, even if the last mile of the application process takes place at a call center. And this is true whether you underwrite all of the products you offer or not. The key, which we will explore in a future piece, is to have alternatives and robust offerings to meet all of your customers’ needs.

There is a culture clash in the construction industry. Employers and lenders want their contractors on the hook for any insurable losses as long as possible, whereas insurers want to switch from the construction phase to operations, where they usually have rights of subrogation against the contractor as soon as the facility has achieved commercial operations date (COD). This can cause a mismatch where either a project may be uninsured but does not realize that is the case, or the employer is in breach of its contract with the contractor. Both these potential situations can produce an excellent payday for lawyers, with a cost to the litigating parties far higher than the premium and advisory expenses to ensure it didn’t arise in the first place. See also: Strategies to Master Massively Big Data   Most construction underwriters aim to have their policies cease once the project insured is able to operate and thereby achieve its (COD). Part of their desire for this is that they can then issue operational policies, which exclude some parties previously insured during the construction phase and thus ensure that insurers have rights of subrogation against those parties, primarily the engineering, procurement and construction (EPC) or turnkey contractor and major original equipment manufacturers (OEMs). This approach may resonate and align with a concession agreement or power purchase agreement (PPA)-type contractual structure because these agreements often allow commercial revenue generation at the earliest possible time to facilitate usage of the project by the public, whether it be a hospital, power station or road, etc. But the employer, which has the exposure to the availability and efficiency risks, wishes to receive a project of unquestioned quality, so many modern construction contracts demand a more stringent process for reaching a point where the employer will accept risk of loss back from the EPC contractor. These policies require the contractor to perform numerous tasks beyond simply helping achieve commercial revenue generation before a form of "completion" is awarded to the contractor and risk of loss reverts back to the employer. Indeed, terms such as COD are rarely found in construction contracts. A recent example from a project where Aon is the broker involves a contract where the contractor is required to provide confirmation of the successful finalization of more than 20 items in addition to completing a testing regime to allow for the COD to be issued. Therefore, the issue is essentially about a disparity between insurance industry practice and the risk allocation in the main contracts that create and drive projects and especially in public-private partnership (PPP, or P3), build-operate-transfer (BOT), build-own-operate-transfer (BOOT), build-own-operate (BOO)-type deals where greater lifecycle risk remains with the private sector stakeholders even during operation. The disparity can lead to a situation in which:

• COD has been awarded under a concession-type agreement, and therefore commercial revenue is being generated,
• So the construction-period insurers are looking to come off risk,
• But the EPC contractor still has risk of loss (for at least a part of the project), which, contractually, is still considered as being under construction,
• And the owner has agreed within the construction contract to maintain insurance on behalf of the contractor until completion, however defined, in the construction contract
• Which can create confusion as to the date of commencement of any defects liability or maintenance or warranty period insurance cover.
• Plus, there are situations in which through this initial period (i.e. until the contractor has demonstrated that the project can meet the performance criteria required by the EPC contract, which may have some differences to the owner’s agreement with their client), it is the EPC contractor that operates the plant, thus ensuring the need for that entity to remain an insured.

See also: Why to Refocus on Data and Analytics   Therefore, it is essential that your construction risk and insurance adviser is:

• Involved early enough in the procurement process to become fully versed in the contractual terms, clauses and nuances of all the project agreements (i.e. not just the construction contract),
• Able to engineer an insurance solution that both meets the contractual requirements that the employer desires (or has agreed to) and leaves no stakeholder exposed to an uninsured loss that could result in legal action against the employer and even become an event of default under the loan agreement, and
• Able to explain the contracts and their ramifications to the insurance market to ensure that no gaps in coverage are created and that no insurer can subsequently say: “we weren’t told about that.”

Policy administration systems (PAS) replacements and expansions remain top of mind for property/casualty insurers. Carrier goals include: improving time to market, advancing business intelligence and analytics capabilities, improving customer and distributor service, increasing operational efficiencies and eliminating technical risk and debt. To reach these goals, insurers are investigating and considering the impact of several trends on core systems: the increase of SaaS/cloud, advances in microservices, the rise of insurtech and shifts in implementation strategy. Software as a Service Increasingly, insurers are willing to consider or implement core PAS in the cloud through a software-as-a-service (SaaS), or cloud, model. The adoption of cloud for ancillary services is commonplace in the insurance industry, and within the past few years the trend has expanded to include core systems, as well. These numbers are expected to rise even more now that some high-profile Tier 1 insurers are migrating to a cloud model. Novarica expects that 50% of insurers will license a PAS for new books of business though a cloud-based or partially cloud-based approach within five years; many are considering cloud for their existing books, and we expect to see more migration to the cloud over the next few years. Numerous vendors and insurers are using different but overlapping definitions for hosting and SaaS. As the line between the two grows increasingly blurry, vendors are trending toward offering more robust options with some level of enhancements and upgrades included, in addition to operations and basic maintenance services that are expected with every cloud offering. Microservices and Headless Core Systems “Headless” implementations entail implementing core systems capabilities by leveraging an underlying, commercially available core system with a carrier’s own user interface built on top of it. Therefore, instead of relying on the core system for the end-user experience, it is reduced to a set of services, transactions and business logic. Headless implementations offer carriers the flexibility to develop a differentiated user experience for internal and external users while leveraging core transactions that are configured and maintained in a single core transaction engine. Some solution providers are building out microservices to enable this flexibility, improve reuse within their own solution set and address concerns voiced by carriers over the difficulty of accessing functions with more limited Web services. There are few offerings with a full set of proven microservices, but the availability and granularity of the services is rapidly increasing. This modern architecture approach will bring future core system implementations flexibility and longevity as back-end transaction platforms. See also: Policy Administration: Ripe for Modernizing   Insurtech Silicon Valley’s insurtech investment boom (with outposts in insurance hubs like Des Moines and New York) is inspiring both excitement and fear in insurers across the country. Insurtech startups include software, data and service providers that could be invaluable partners to carriers, as well as new industry entrants that may become competitors. Whether viewed as a threat or an opportunity, insurtech is teaching the industry important lessons on how to optimize and prioritize the customer experience and how to make the most of underserved markets. Despite insurtech developments, insurer IT budgets are still mostly dedicated to the maintenance, modernization and replacement of core systems. Many insurers are still busy laying the modern, flexible core system foundation necessary to take advantage of many emerging technologies. There is little movement in the vended core systems market to incorporate insurtech capabilities within core. Instead, vendors and insurers should consider how the architecture of a new core system can provide the flexibility needed to take advantage of future technology and allow integration with future partners. Implementation Strategies Until recently, a typical PAS implementation involved an initial release that addressed two to three lines of business, a handful of states and renewal on conversion. Subsequent releases would deliver the remaining lines of business and states in a multi-year program. Today, insurers are reacting to the perceived extended time frames, large scope and significant investment by taking an approach to accelerate delivery of the first release. It is becoming more common for insurers to implement PAS with a greenfield line of business in the first release, adding in legacy lines and data conversion in later releases. It is also becoming more common for insurers that implement legacy products to go live with new business only for a significant pilot period before introducing conversion on renewal. Finally, extended full-suite implementations (PAS, billing, claims, reporting and portals) are becoming a more standard approach for smaller insurers, where they deliver more within the traditional implementation timelines. See also: Microinsurance: A Huge Opportunity   As major portions of IT budgets are dedicated to PAS and the surrounding core components, insurers need to keep these trends in mind when considering PAS providers from the increasingly rich vendor market. While challenges still exist with conversion and with managing overall project risks, insurance carriers are realizing benefits in time to market, efficiency of operations, improved functional capabilities and better data management. PAS replacement projects are extremely complex, risky and all-consuming, but they are also extremely necessary.