It's official! The ability to innovate will play a key role in determining the future success, even viability, of insurers. 

Why is it official? Because A.M. Best, the rating agency that is the industry's gold standard, says that "companies need to innovate to protect their ability to generate profitable business, and improve operational efficiencies and customer service" and that it "will be reviewing its Best’s Credit Rating Methodology to consider the inclusion of innovation in the assessment of a company’s business profile."

We know it's official because we have entered into an exclusive, multi-year arrangement with A.M. Best so it can draw on our Innovator's Edge platform to track the tens of thousands of insurtechs and other companies that will drive innovation in our industry. The need to innovate isn't exactly a surprise to anyone who has followed the insurtech explosion of the past two-plus years, but it's exciting that we're going to get to work with A.M. Best to help identify and measure the best of insurance-specific innovation practices for the benefit of established insurers, and to help A.M. Best to refine its projections.

Even though we live in turbulent times, we think that the insurance industry has unprecedented resources to draw on as it transforms. At ITL, we already have, in the aggregate, decades of experience setting up innovation programs, and that's just the start. The Innovator's Edge platform delivers the world of innovations and innovators relevant to the insurance industry in an online virtual community. The result is we all make each other smarter and can draw on the collective wisdom that the tens of thousands of innovators generate. 

To codify that knowledge and to make it as widely available as possible, we've been 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. More on those as they become available. Stay tuned.

Have a great week.

Paul Carroll
Editor in Chief

Personal observations have demonstrated that some insurance companies have some very serious misunderstandings about the attorneys they hire. I. The company's defense attorney is not its adjuster. Let's say the first notice of a claim was via a lawsuit against an insurance company and that the insurance company immediately hires a defense attorney to respond to the suit — but the insurance company does nothing thereafter to investigate the claim because it thinks that, somehow, its attorney will investigate the claim and then tell it what to do. This type of thinking may ultimately provide a great reason for the lawsuit to be amended to include the company’s bad faith.

1. Hiring an attorney to handle the claim does not shield the claim file (based on attorney-client privilege) from discovery.
2. The insurance company is, in this case, the attorney’s client, and the attorney does not owe the insurance company’s policyholder the duty of good faith and fair dealing in handling the claim.
3. The insurance company owes its policyholder the duty of good faith and fair dealing, and the duty can't be delegated.
4. Every state has rules set up regarding who can be licensed as an adjuster, and, invariably, attorneys are exempt for limited purposes — it is not a blanket exemption for attorneys. For example, in Oklahoma, persons not deemed adjusters or required to obtain license include: “a licensed attorney in Oklahoma who adjusts insurance losses from time to time, incidental to the practice of law, and who does not advertise or represent that he or she is an adjuster" and "a person employed solely for the purpose of furnishing technical assistance to a licensed adjuster, including but not limited to photographers, appraisers, estimators, private detectives, engineers, handwriting experts, and attorneys-at-law.”

See also: A Key Point on Limiting Attorneys’ Fees II. The defense attorney the insurer hires for the liability lawsuit against its policyholder is not “your” (the company's) attorney, even though “you” (the company) pay his bill. The attorney the insurer hires generally has fiduciary duties to the policyholder, not the insurer, even though the insurer is footing the bill. I have heard managers say, “Well, why did our attorney not tell us that the policyholder was not really covered?” I'd say, “Because he or she is not our attorney. Telling you that his client, our policyholder, was not covered would violate attorney-client privilege.” While the insurer can get raw information from the attorney, do not expect him to point out coverage weaknesses that may allow the insurer to withdraw from paying for the policyholder’s defense costs. Even if the insurance manager would really like to know this information, don’t expect a competent attorney to set himself up for a legitimate complaint to the bar and to subject himself to sanctions for his ethical violations to his client, your policyholder. III. The coverage attorney should not be the insurance company's defense attorney. Perhaps the coverage opinion given by a defense firm may be based on developing its defense business. Lawyers are human, so, to avoid any appearance of conflict, use different sources for coverage opinions and defense. Getting a coverage opinion from the same group that will be defending the suit based on the denial (which was based on the coverage opinion) is not only a poor claim practice, it is a good way to increase the company’s defense costs. Lawyers who defend insurance lawsuits are no more experts in insurance than lawyers who defend doctors are medical experts. Hire your defense lawyer to perform in what should be his area of expertise: court. See also: Top Reasons Why Injured Workers Seek Attorneys   IV. Insurance company corporate counsel is not its defense. Corporate counsel is generally an employee of the insurance company, and he or she holds the law license; the insurance company does not.

1. Insurance companies are not authorized to practice law, not even pro se.
2. The corporate counsel is not very likely to be on the “panel counsel” list of the insurer’s E&O carrier.
3. The insurance company is not protected by any legal malpractice coverage under the insurance company’s E&O policy.
4. Such coverage is likely prohibited by the language in the insurance company’s E&O policy, and it is the E&O carrier that will choose the insurance company’s defense counsel.
5. Corporate counsel did not attend law school and obtain a law license so the insurance company may get a cut-rate deal on its legal defense fees.
6. Defense fees are a part of defense costs, while salaries are generally not. Corporate counsel is generally paid a salary as an exempt employee and not an hourly defense fee.
7. Corporate counsel may be called as a witness or representative for the insurance company.
8. Good defense attorneys (trial lawyers) are a specialty, different from corporate counsel. Treating them as the same would be like hiring an ENT physician for a kidney infection — yes,  he or she is licensed to practice medicine, but that is not his or her most competent area of practice.

Corporate counsel is not the proper attorney for an insurance company's proper attorney to respond to a suit against the insurance company.

As web-first rapidly becomes the norm for today’s businesses, a new bogeyman is lurking: cybersecurity. With IT systems no longer an adjunct but the central pillar of most organizations, cyberattacks have come to represent an existential threat. No less serious is the risk to the vast repositories of customer data that today’s businesses sit on top of, which have grown far faster than security architectures can keep pace with.

According to PwC’s 19th annual CEO survey, 61% of CEOs are concerned about cybersecurity, with everything from phishing to denial- of- service attacks on the rise.

For the insurance industry, cybersecurity represents both an opportunity and a threat: an opportunity in that enterprises are crying out for coverage against the cyber risks they face, a threat because carriers, of course, hold large amounts of customer data and are hence targets for cyber-attacks and hacks themselves. A theme across this content series, and one we explored specifically in our feature on marketing and customer-centricity, has been the imperative for insurers to better engage with customers’ needs – before customers start taking those needs elsewhere. On the commercial side, cyber risk is therefore an enticing opportunity for insurers, as their clients’ businesses are only going to get more online, not less, and security risks abound (especially with anything IoT-related). However, cyber events are particularly challenging to insure against due firstly to their manifold knock-on effects, which range from barely quantifiable reputational damage to share-price collapse, and secondly to the lack of historical data. Substantial focus will therefore be required for insurers to fully realize the cyber-coverage opportunity.

"Insurers just don’t have the capability or the skillset to produce things that customers want to buy, particularly with so-called cyber products that mostly don’t cover the specific risks that the clients are concerned about. There’s a total disconnect there between the reality of business for all the Fortune 500 companies in the world and what insurers think they’re going to provide them by way of services and products." — Steve Tunstall, CEO and co-founder at Inzsure.com

Cybersecurity is a sprawling area, so this part of our series is primarily aimed at cybersecurity as threat, as opposed to cybersecurity as opportunity: What are carriers doing to protect their customers’ data and to mitigate against the threat of data breaches? We start with a look at carriers' attitudes to cyber threats like data breach, followed by a look at how – and how confidently – they are addressing these. To finish off, we cast an eye over the longer-term evolution of cybersecurity as carriers pressing forward with digital transformation seek, at the same time, to future-proof their systems. The following stats and perspectives are drawn from our Global Trend Map; a breakdown of all respondents, and details of our methodology, are included in the full report, which you can download for free at any time. 1) Assessing the Scale of the Cyber Threat 69% of carriers are "very concerned" about information security breaches.

#databreach is the Achilles Heel of the #BigData economy, and insurance is no exception. More in the #InsuranceMap! https://t.co/QH8z3aYH7y pic.twitter.com/Ac9fbLOPaK

— Insurance Nexus (@InsuranceNexus) July 26, 2017

While (re)insurers are open to the same sorts of attack as other large enterprises, the event we choose to focus on here is data breach. There is nothing that strikes so much at the core of the insurance business, which has been a data business since the very beginning; at the same time, (re)insurers – as professional data stewards – ought to be relatively well-placed to defend themselves. The harm that could come from a cyber breach at a carrier is multifaceted: Stolen data could cause customers direct commercial damage, whereas tampered-with data could render carriers’ risk models worthless, affecting both them and their customers further down the line. It is no surprise then to see the overwhelming majority of (re)insurers registering concern with information security breaches (94%). Cyber-attacks affect other players in the insurance ecosystem, too, and there are plenty of weak points in the "water cycle" of customer and company data; so we also encounter a majority concern among the other ecosystem players that contributed to our survey. See also: 2018 Predictions on Cybersecurity   Our broader research suggests that data breaches are particularly high up the agenda in Asia-Pacific. We reached out to David Piesse, chairman of IIS Ambassadors and ambassador Asia Pacific at the International Insurance Society (IIS), based in Hong Kong, to understand more about what is happening in the region: "Digitization is leapfrogging in Asia, and so are industrial parks with smart devices and machine learning running the processing. Because of global supply-chain issues, this makes the need to mitigate and protect data integrity an urgency even without regulation where best-practice risk management must be implemented." Piesse continues: "Asia Pacific is only starting to look at regulations for data breach as opposed to data privacy laws, which have been around for some time. This leads us into the debate of the difference between privacy (encryption) and data integrity, which are two different arms of the cybersecurity triangle that must be embedded in all cyber risk management approaches. "The time from compromise to discovery in Asia is now on average 580 days, according to statistics. Therefore, we must assume compromise of data across time, as there have been no notification laws and hence no catalyst to mitigate. This is why there is concern in Asia Pacific. The take-up of cyber insurance in Asia is fairly low as compared with the U.S. and U.K. for this reason." 2) Filling the Breach

3/4 of insurers are confident about customer #datasecurity & #privacy. More on #cybersecurity in the #InsuranceMap! https://t.co/QH8z3aYH7y pic.twitter.com/81JPs7Qch1

— Insurance Nexus (@InsuranceNexus) July 26, 2017

Our respondents’ data-breach concerns are matched by high confidence that data security is adequate, and this probably has a lot to do with mitigation planning across their organizations. As we see from our graphic, three-quarters of carriers are confident in their security, and we find a similar level of confidence among respondents from the broader ecosystem. While these figures are encouraging, a quarter of respondents lacking confidence on this important measure is still cause for concern when we consider the number of customers that any one company can have. Even just a few percentage points of the ecosystem still represents rich pickings for online criminals and massive disruption for thousands, and potentially millions, of customers.

"Insurers have been very early adapters of computer technology. Given this maturity, one might think they should be able to control technology security on all layers, but the opposite is usually the case." — Oliver Lauer, head of architecture/head of IT innovation at Zurich

When we turn to look at concrete mitigation plans, we observe that these are relatively commonplace.

According to the #InsuranceMap, 11% of carriers lack plans for #databreach. Get the latest on #cybersecurity here: https://t.co/QH8z3aYH7y pic.twitter.com/oHVspQ7rb6

— Insurance Nexus (@InsuranceNexus) July 26, 2017

However, 11% of carriers having no plan is concerning, given the absolute amount of business interruption this potentially represents (6% answered "don’t know"). Another factor to bear in mind is the potential fallibility of mitigation plans, so the proportion of carriers that are actually safe from security breaches will certainly be less than the 83% quoted above. We should also remember that data breach is just one type of cyber-attack and consequently just one aspect of (re)insurers’ overall cybersecurity strategy, which needs to be comprehensive.

"Insurers are very late in the game of opening their systems for the digital age, and most of their software systems are 25 years old and older, and are "secure by nature" due to their legacy walled garden architectures. And now they are modernizing their systems at the speed of light, and their security architectures and capabilities can hardly follow." — Oliver Lauer

We expect carriers – and all businesses for that matter – to continue ramping up their cyber defenses over the coming months and years, especially given recent high-profile incidents like the Wanna Decryptor attack in May 2017, which hit nearly 100 countries around the world. When assessing the full spectrum of cybersecurity risks, it can be difficult to know where to start and what to prioritize, so we asked financial services influencer Michael Quindazzi, business development leader and management consultant at PwC, for five key questions every insurer should be asking itself, from the board down:

— Who are our adversaries, what are their targets and what would be the impact of an attack? — What are the most important assets we need to protect? — How effective are our processes, assignment of responsibilities and systems safeguards? — Are we integrating threat intelligence and assessments into cyber-defense programs? — Are we assessing vulnerabilities against emerging threat vectors?

As with building on unstable foundations, the risks from getting one’s approach to security wrong at the outset only get bigger the further down the road you go. We spoke to Oliver Lauer, head of architecture/head of IT innovation at Zurich, who frames the security conundrum in the following terms: "Insurers are implementing digital cores with full connectivity to everything, omni- and multi-channel and open API architectures, and usually they have no real idea what these new implementations mean for their security systems – they are still handling security like they did in the past with their ‘closed shop’ approaches. "This will lead – in my eyes – to very dangerous threats in the future. And even if they have recognized these risks and have the money to invest, it’s very difficult to hire the necessary resources. Everybody is looking for security experts at the moment.…" What is clear is that today’s digital platforms introduce a fundamentally new security dynamic requiring a different way of thinking from security professionals at carriers. 3) Longer-Term Evolution 58% of carriers have updated their security strategies to reflect the rise of new digital platforms. As we can see from the chart below, the majority of insurers and reinsurers have made adjustments to their security strategy to reflect the rise of digital platforms, and we get a similar figure when we consider our other ecosystem players.

Most (re)insurers have updated their #cybersecurity strategies for new digital platforms! More in the #InsuranceMap: https://t.co/QH8z3aYH7y pic.twitter.com/b3ro6W1tV7

— Insurance Nexus (@InsuranceNexus) July 26, 2017

For now, though, this is a small majority (58%), less than the 83% who had mitigation plans for data breaches. As the industry gets savvier about cybersecurity as a whole, we expect this figure to rise sharply. "With customer data-protection and privacy rules becoming more scrutinized across Europe and the globe, it is not a surprise that the chief information security officer is taking such a prevalent position within enterprises. The role will need to ensure appropriate usage of customer data and overcome digital privacy and security issues." — Sabine VanderLinden, managing director at Startupbootcamp

This is the third in a four-part series. The two first parts can be found here and here.

It’s well established that insurers understand the need to innovate. Accenture’s Technology Vision for Insurance 2017 revealed that “86% believe they must innovate at an increasingly rapid pace simply to retain a competitive edge,” and a full “94% of insurance executives agree that adopting a platform-based business model and engaging in ecosystems with digital partners are critical to their business.”

See also: 10 Insurtech Trends at the Crossroads  

Increasingly, insurers are turning to insurtech, whose digital products and platforms can help them in their quest to innovate quickly and at scale. While the bulk of global investment in insurtech is still coming from outside the traditional insurance space, we do see a significant increase in investment from insurers over the past two years. Which technologies are attracting the biggest investments? Accenture’s report, The Rise of Insurtech found three key areas which accounted for more than half of the overall investment in 2016:

1. Analytics
2. Artificial intelligence (AI)
3. The Internet of Things (IoT)

Let’s look at a few interesting examples of how insurtechs are leveraging these digital technologies to help them connect with customers in new and innovative ways.

U.S. insurance startup Lemonade uses AI as an intermediary at multiple touch points throughout the customer journey. At the beginning of the client relationship, the homeowners and renters insurance company has an algorithm to assess a new customer’s risk level (by cross-referencing neighborhood data, past claims and other factors).

While most insurance claims still require some level of human interaction, the bots are improving. Lemonade’s “AI Jim” helped the insurer set the standard for the fastest processing time when the bot reviewed, ran multiple anti-fraud programs on, then settled a claim for a policyholder’s stolen winter coat in three seconds. It typically takes traditional insurers 30 to 45 days to close a similar claim.

Lemonade launched quickly and attracted $60 million in stable investment by the end of 2016; insurers and investors are watching the company closely.

SPIXII is both the insurtech business and the name of its chatbot, a virtual blue parrot that “sits on the customer’s shoulder and talks to you.” It’s an automated digital agent that assists customers on their retail journey via a chat window on their smartphones. As with other AI tools we’ve seen, SPIXII learns from its customer interactions and can offer personalized insurance products in real time.

SPIXII’s interactions are friendly and conversational, making for a customer experience that is convenient and even pleasant.

Digital Fineprint uses analytics and social media data to provide insurers with insights into customer risk profiles and relationships. The startup uses digital technology to connect with customers where they are online, via social media, providing convenient and customized offerings and increasing sales by targeting a larger network. After receiving initial seed investment from venture capital, the insurtech is attracting attention from Allianz, which invited the company to its accelerator initiative.

What makes these startups such interesting entrants into the insurance space? They’re using digital technology to interact with and reach their customers where they are. They’re offering a customized, personal and interactive service, and investors and incumbents alike are paying attention.

See also: Top 10 Insurtech Trends for 2018  

If you’d like to read more about insurance innovations, I recommend this series on the 2017 Efma-Accenture Innovation in Insurance Awards winners. You can register to read Accenture’s report The Rise of InsurTech here.

Aside from the "not," wouldn’t that have been a nice headline to see when the U.S. tax reform bill was passed and signed in December? Unfortunately, it wasn’t. The days and weeks leading up to the eventual passage and signing of the tax reform bill were exhausting. I actually stopped following too closely because, as with the health discussions, there were too many iterations to keep track of. Once the tax bill was signed and put into law, though, many people, including me, were eager to find out what the eventual impact would be for our individual and company wallets. One of the biggest pieces of the tax reform bill was the change of corporate tax from 35% to 21%. This is a huge break for companies and will give them a lot of extra cash to use to better their businesses. This is for all industries, not just Insurance. A huge tax break should equal more spending by companies. This article takes a look at what announcements were made, how our industry is currently viewed and some tips for insurance carriers when they make their next statement linking back to the tax reform bill (or any statement for that matter). See also: Tax Reform: Effects on Insurance Industry?   What were the big announcements after the tax bill was signed? Here is a sample of some of the headlines I have seen: Companies are rushing to announce special bonuses and pay hikes after the GOP tax plan This is just the start of companies handing out bonuses, raising wages and increasing spending Whoa: Over 1 Million Workers Have Received a Bonus Since The Trump Tax Bill Became Law Visa and Aflac boost 401(k) match after tax overhaul About 29,000 Nationwide employees to get a $1,000 bonus How is the insurance industry viewed in the market? From a consumer standpoint, insurance is not the most-liked industry. Take a look at the chart below, showing average net promoter scores (NPS) within the U.S. insurance industry. This chart was taken from Bain’s Customer Behavior and Loyalty in Insurance: Global Edition 2017. There are also a number of other charts in the report, which are quite alarming. The chart above points out two things to me:

1. The average NPS for U.S. insurers is pretty dismal, far worse than I would have thought.
2. Ecosystems are extremely valuable in engaging customers. (I write about this in my 2018 predictions.)

Many insurtech startups are capitalizing on the unhappiness of customers with their current insurance, even going so far as to make statements that insurance companies are in conflict to even do what they are intended to do, which is pay out a claim when a customer needs it. The combination of these two facts builds on the negative perception of our industry, which means that insurance incumbents should tread a fine line in exactly what they advertise in the market. Case in point is AXA U.K.’s showcasing of how much in claims they actually pay (see image below). Perception can often become reality The perception of the insurance industry from a consumer standpoint can be summarized loosely with the information above. This perception ends up becoming reality for many consumers when they have more bad experiences with their insurance as well as when they see an insurance company spending money on things other than the actual consumer. See also: Why Fairness Matters in Federal Reforms   I was having an e-mail conversation with a friend the other day about investing in the stock market vs. cryptocurrency. While we weren't talking about the insurance industry specifically, I thought his reply related well to what we do and how customers view us. ‘Maybe it will be a good year for the market, but the real reason I’ve enjoyed cryptocurrency investing is that it’s not these old, rich, greedy, corrupt fat cats who control the market and know more than I do. And for the record, I know nothing about crypto. Even if it’s hackers that are scamming people, I’d rather play with money there than bet on companies. It’s this idea of the old guard that I was talking about, and anytime something new comes that threatens to disrupt and change the way something is done people will always say it’ll never work and try and discredit it.’ Read that again. Replace cryptocurrency/crypto with insurtech startup. Summary I am fully onboard with rewarding employees if a company has a windfall of cash. This is how you retain and make happier staff. The same should be done in respect to consumers. Though it is from the utility industry, look at the headline from Baltimore Gas & Co.: Baltimore Gas & Electric Co. wants to pass on $82M in tax savings to customers after federal tax reform. Can you imagine seeing an insurance carrier make an announcement like that? Being the risk-averse business that we are, perhaps not. However, for the one that is willing to make an announcement like that, I’d be interested to see the direct impact to their NPS. This article first appeared on Daily Fintech. 

Mergers and acquisitions (M&A) insurance solutions are effective tools to facilitate the closing of mergers and acquisitions and finance transactions when parties require additional comfort on a variety of issues. Proven strategies to achieve certainty of closing, these solutions are used by buyers and sellers to bolster both the decision-making process and approach to risk allocation at times when traditional legal opinions/expert advice, indemnity, escrow or sales price reductions do not provide adequate financial comfort or could impair the economics of the deal. Representations and warranties insurance, specifically, has emerged as a common tool in the current M&A market – serving as a means for sellers to effectuate a clean exit and for buyers to ensure they have a viable source of recovery if the business ultimately is not what it was represented to be. Typical R&W coverage generally extends to most, if not all, of the representations and warranties provided by the seller or target company in the purchase agreement, including fundamental representations such as title and authority as well as the full suite of business representations, including financial statements, tax, intellectual property and undisclosed liabilities. Of course, the scope of coverage varies deal to deal depending on the operations of the target company and industry risk profile, as well as the depth of the buyer’s due diligence process. Carve-outs to coverage are often limited and, when proposed by the insurer, are narrowly tailored to the specific known issue causing concern. One area that can be challenging to insure is environmental risk. Insurers’ ability to cover an environmental representation within the R&W policy is case-specific and depends on not only the environmental footprint of the target but also what issues are uncovered during diligence. Deals involving target companies with a relatively light environmental footprint or a positive claims history are often successful in achieving coverage of environmental representations – those that fall outside this category may confront exclusions for specific environmental conditions or, in the most severe case, an exclusion of the environmental matters representation itself. Subject to underwriting, coverage for “paper” environmental risk such as licenses and permits can often be preserved. In any circumstance, however, R&W policies are not designed to provide coverage for known contamination, active remediation or toxic tort allegations. For dealmakers grappling with limitations to coverage of environmental matters in the R&W policy, all is not lost -- acquisitions of target companies without a clean bill of environmental health or involved in a risky class of business are not left without options. Stand-alone environmental insurance can be an effective complement to an R&W policy to help plug the gap in coverage around the environmental representations. Depending on the nature of the transaction and the complexity of the target company’s site(s) and operations, a properly designed environmental site liability policy, which is also known as pollution legal liability, can complete the R&W placement. This can be accomplished by providing essential first- and third-party coverages including defense costs addressing known and unknown environmental conditions, with certain restrictions, with or without an environmental representation contained in the underlying purchase agreement. As a complement to the R&W policy, a customized environmental policy may also be able to replace or supplement an escrow or indemnity, becoming a value-accretive tool for future deals involving the insured site/operation by the careful addition of policy assignment provisions. R&W policies similarly afford assignment of rights to a future purchaser of the stock or substantially all of the assets of the target company, providing an attractive value-add for future divestment. See also: The Environment for M&A in Insurance Environmental site liability policies do not rely on establishing a breach of a representation and its subsequent damages. They are designed with a relatively low retention, as compared with an R&W policy, and are responsive to changing environmental regulations that can give rise to a loss. Written on a “claims made” basis for policy terms up to 10 years, environmental site liability policies can provide first-party clean-up and third-party protection for clean-up, bodily injury or property damage claims for known and unknown environmental conditions. This product has the broadest application of any single environmental product line due to its flexibility of wording and risk specific underwriting. From an operational standpoint, the environmental policy can be structured to either cover an entire corporation’s operations or a single site. Extensions of coverage for ancillary current or historic operations can also be covered including divested locations, waste disposal, transportation and business interruption. Coverage offered may be tailored to all historic operations pre-closing and extended to continuing operations for the target company post-closing. Additionally, the environmental site liability policy provisions are flexible enough to be used in lieu of an indemnity or to support indemnity requirements of a purchase and sale agreement by responding to an indemnified party for payment under the terms of the purchase and sale agreement if the indemnitor fails, or is unable, to honor its indemnity. This coverage extension is known as an “excess of indemnity” and is carefully underwritten with counsel and a comprehensive review of the purchase agreement. The placement of comprehensive environmental insurance may also help avoid carve-backs to coverage under the R&W policy by providing insurers comfort that the R&W policy is not the first line of recourse on environmental issues. In those instances, the R&W policy specifically sits excess of the underlying environmental policy, responding only after such policy limits are exhausted (or loss incurred equivalent to the underlying limits if the environmental insurer is unable to satisfy the claim). Careful drafting of the “Other Insurance” provision in the R&W policy is needed to ensure the smooth function of such a structure. Consider a buyer looking to acquire a nine-facility target engaged in wood treatment operations since the 1960s. Two facilities are currently the subject of an indemnity included in a 1980s purchase agreement with remediation continuing at those locations. The buyer has negotiated for the indemnity obligation to continue through the current transaction, but there are seven sites without any such indemnity. Although the R&W underwriter recognizes the environmental representation and associated indemnity with respect to two of the sites, the absence of protection on the remaining sites and long history of operations creates concern and thus the need for environmental issues to be insured separately. The environmental broker designs a tailored solution including two policies to provide a comprehensive risk management solution: Policy 1: Properties that are the subject of the indemnity receive a policy dedicated to the scope of coverage under the indemnity; the coverage matches the indemnity obligations and applies on an excess basis; the policy is triggered by failure of the indemnitor to perform on their obligation, in excess of the policy self-insured retention (SIR). Policy 2: Provides coverage for new conditions and unknown pre-existing pollution conditions at all nine locations; known conditions at sites without the indemnity are excluded for remediation costs Both policies carry a 10-year policy term, with exception of the new conditions coverage policy that is limited to three years. Policy 1 responds if the indemnifying party is unable to perform. The seller was able to limit the scope of the indemnity solely to known and quantified clean-up obligations. Any additional indemnity for unknown conditions or tort liability associated with known or unknown issues was not required because the insurance program provides that coverage. Both Policy 1 and 2 also contained assignment provisions that are beneficial in the event of a future sale. In another instance, a transaction stalls when the R&W underwriter declines to insure the environmental representations of a large global equipment manufacturer because due diligence demonstrates that the target locations likely have significant environmental impacts due to long-time solvent use. The environmental insurance broker is called in to design a solution: Policy 1: Provides coverage for all pre-existing conditions, known and unknown, where the most challenging locations assume a higher self- insured retention and the policy restricts coverage for remediation by applying a capital improvement and voluntary site investigation exclusion coupled with a third-party trigger for any remediation claims. A 10-year term applies, and the other insurance provisions are modified to primary coverage; most importantly, the policy does not specifically exclude any constituents. Policy 2: Is written on a three-year term and provides coverage for new conditions from date of sale forward for the continuing operations. Coverage is restricted in a similar matter to Policy 1. The environmental program structure described above was quite beneficial to the seller because it did not contain any constituent exclusion. This solution also allowed the R&W underwriter to provide coverage for the seller’s environmental representations on an excess basis. As these examples suggest, the current environmental marketplace is competitive, resulting in favorable coverage terms, conditions and premium for many transactional risks. Limits of up to $50 million are potentially available from a single carrier, and total limits of $500 million are potentially available for layered programs involving multiple carriers. Significant capacity is similarly potentially available for R&W insurance with limits available of up to $50 million-plus from any one carrier and close to $1 billion on an aggregate basis per deal. The significant increase in demand and use of R&W policies over the past few years has also translated into a very competitive marketplace, resulting in decreased pricing and broadening coverage and appetite for challenging deals. See also: Developing A Safe Work Environment Through Safety Committees   The strategic use of R&W insurance coupled with an environmental policy can be indispensable in helping buyers and sellers move a transaction forward to a smooth and successful close. Dealmakers and their advisers should carefully consider the environmental risks posed by the operations of the target company early in the deal to determine how such risks will be apportioned between the parties and if insurance, whether a R&W policy, environmental policy or both, provides an opportunity to secure protection against such risks while maximizing the economics of the transaction. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

This is the third in a five-part series. The first two parts can be found here and here. If you’ve been to a home improvement store lately, your experience may have depended on a few factors. For example, the process of buying a lightbulb is incredibly complicated. What’s the difference between a watt and a lumen? More to the point, does it matter, when all I want is to be able to read the newspaper at my dining room table? In addition, if you’ve purchased anything that needed assembly, you may have turned to YouTube for a video—ideally, that video should have been produced by the retail chain and used as an extension of its customer experience. Home improvement company—or media company? Insurers can learn a lot from the retail sector, which is under direct pressure from e-commerce, Amazon and other customer-centric, online-first organizations. For example, consider the role of video as part of the customer experience. Any home improvement store that wants to stay in the game will realize that it’s actually a media company, and that it won’t win customers with just its ability to attractively display nails, lightbulbs and 2x4s. Instead, its future hinges on its ability to produce high-definition video and to manage, promote and publish useful content. In action: Brilliant Basics and Cutting New Ground Accenture worked with a home improvement chain to support its digital transformation. This chain has more than 1,100 stores and about 80,000 employees. We started with a hard look at the Brilliant Basics it needed to get right. For example, it took nine seconds for its website to load, and online customers needed to click five times to make a purchase. It’s easy to dismiss these as trivial, but customer expectations are set by online giants like Amazon, whose customer-centric data capabilities can make tailored recommendations and one-click ordering (never mind one-day shipping) its standard. In comparison, nine seconds is an eternity. See also: Why Fairness Matters in Federal Reforms Next, we identified areas for Cutting New Ground: what it meant for the home-improvement industry, and where the opportunities lay for this retailer. It meant going back to some fundamental value propositions. I mentioned earlier the complexity of buying a lightbulb—the same goes for nails. That was the nexus of one Cutting New Ground initiative. We visualized the Shazam of home improvement parts, fueled by AI and visual search. Customers simply take a photo of the part they want and are directed to it online or in-store. That’s just one of eight innovations that the retail chain put in place. Three billion reasons to be brilliant Importantly, the retailer needed do both Brilliant Basics and Cutting New Ground. Brilliant Basics effectively transforms the core of the organization (enabling it to serve its customers better), contributes to the organization’s overall health and supports a more stable foundation. It also reduces the cost to serve and releases capital for Cutting New Ground. This particular project generated opportunities worth $3 billion, and the new initiatives generate 23% of the retailer's sales. This sales boost is new revenue, not produced by shifting customers from one digital channel to another. See also: Medical Homes Change the Game   Convinced? With this case study in mind, it’s time to think back to the insurance industry. Next, I’ll look at some of the Brilliant Basics opportunities for our industry, and how they can be a blueprint for digital transformation.

In the first of my four blogs on insurer playbooks, we looked at the consumer market from the vantage point of a pre-game analysis. This week, we’ll once again be taking a pre-game approach to playbook development, but we’ll focus instead on scouting out this highly coveted small-medium businesses market for opportunities that may lie in understanding SMB ownership and size. Playbooks are the core of game strategy. As many watched the Super Bowl, they saw well-honed playbooks in action, with some unique plays to leapfrog the competition and keep momentum — remember Nick Foles’ trick play touchdown! A playbook accomplishes several things at once. First, it gives the coach a group of testing plays that it will run against any team that it encounters. Once the coaches have a feel for the opposing team’s response to those plays, they are then free to quickly adapt their playbook to capitalize on opportunities the rest of the game. Every team’s playbook is different, and for good reason. Certain plays that work for one team will not be compatible with others. The universal truth behind playbooks, however, is that they are forward-focused. Understanding the NEXT opponent is always more important than looking at your past opponents. In insurance, the same holds true. Understanding where the market is going, rather than where it has been, will help insurers efficiently use their time in preparation. Playbooks unify the insurer’s teams behind the best responses to industry change, ensuring they are in the game to win. See also: Do You Really Have a Digital Strategy?   In today’s blog, we’ll focus on pregame analysis, and in our next SMB blog we’ll look directly at ideal offerings that insurers can use to target SMB businesses. SMB Segment Playbooks — Pregame Analysis An important first step in any pre-game analysis is to obtain a thorough understanding of the background and context within which the game is occurring. The context has been shifting dramatically and rapidly. Insurance 1.0 business models of the past 30-plus years have been based on the business assumptions, products, processes and channels primarily for the Silent and Baby Boomer generations, who built traditional small-medium businesses (SMBs) such as flower shops, retail and automotive repair. As the millennials and Gen Z mature and increasingly become entrepreneurs of new businesses or take over existing businesses, we see the next generation of SMB owners whose influence is growing and intensifying. They are shifting the fundamental business models of all businesses, including insurance, by demanding the use of digital technologies, new products and services that align to their demographics, needs and expectations … creating Digital Insurance 2.0. This will fuel tremendous growth for both SMBs and insurers. Adding to this growth momentum are unprecedented expansion opportunities for commercial, specialty and group/voluntary benefit insurers in terms of new risks, new markets, new customers and the demand for new products and services. So, having a scouting report to capture these opportunities before others, including new competitors from insurtech or greenfields launched by existing insurers, is more important than ever. Scouting Reports Driving that point home, the results from this year’s SMB research underscore an acceleration in changing behaviors and interest in using new business models and technologies that are reshaping insurance. When it comes to experience with these technologies and trends, there is a clear, strong interaction between business owner age (generation) and the size of the company (number of employees). Cumulative participation rates in the behaviors we asked about increase with company size; but within each company size category, they also are at their highest levels with the Gen Z/millennials group and decrease with increasing age for older generations. Given the strong interaction effect caused by these two factors, we grouped the SMBs in our survey into eight segments based on three generation groups (Gen Z & millennials, Gen X and pre-retirement Boomers) and three business sizes (1-9, 10-99 and 100-499 employees). Similar to our companion consumer research study highlighted in our last blog, we categorized our analysis of the segments’ participation in these behaviors into six key areas: gig economy, connected devices, payment methods, products, channels and other emerging technologies. Here are some of the highlights:

• All segments are actively engaged in the gig economy, both as providers and consumers of independent contractor/freelancer services – averaging between 36% and 40%. The smallest companies are most likely to have been an independent business based on working as an independent contractor.
• There is strong, widespread use of apps and connected devices in buildings across most of the segments, with the highest use of 44% by Gen Z/millennials and Gen X in companies with 10-99 employees, followed by a third of those in the largest companies.
• Use of connected devices in company vehicles is less prevalent, but nearly a third of Gen X/millennials with 1-9 employees and Gen Z/millennial and Gen X in companies with 10-99 employees are actively using this technology.
• Use of ApplePay and SamsungPay is strong among all segments except pre-retirement Boomers with fewer than 10 employees. Overall, the increased use of digital payment capabilities is heightening growing expectations across these segments for all types of purchases, including insurance.
• On-demand insurance was particularly strong, with 13% to 41% already purchasing it for a specific event, and with high rates of usage among Gen X and pre-retirement Boomers. Between 30% and 50% of the Gen Z/millennial and Gen X segments are experienced with cloud-based subscription products, highlighting their comfort in purchasing products with this business model approach.
• Most segments have had experience purchasing insurance from a website, with Gen Z/millennials leading the use of this channel at 19%-39%.
• The Gen Z/millennial segments slightly lead the older generations in their use of drones and 3D printers (or items produced by one) with usage at 10%-13%. Interestingly, 30% of the Gen X/Boomer 100-499 employee segment reported the use of a 3D printer. These are two rapidly-growing technologies that create new risk implications and, as such, require new products and services.
• The behavior and expectation increases for Gen X and pre-retirement Boomers coupled with the already high levels for Gen Z and Millennials are driving significant interest in innovative products and channels for insurance, with millennials and Gen Z leading the way.
• A strong appeal among SMBs for reducing costs and risks through value-added services and social networking options stood out.

As new companies emerge and the leadership of companies, both large and small, continues to move to the Gen Z and millennial generations, use and expectations around digital technologies and activities will continue to accelerate, influencing new behaviors, needs and risks that require innovative insurance products and services represented by Digital Insurance 2.0. Time to Up Your Game Both traditional business insurers, intent on keeping pace, and startup insurers, intent on staying ahead, are grasping the tremendous gap in SMB coverage and its corresponding opportunities for growth. Digital Insurance 2.0 models are proving themselves to be more valuable and relevant to today’s SMB owners. To look more deeply at model impact, Majesco tested four business models within our survey group to find out which models would resonate with business owners. We also went one step further and examined 30 attributes that can be used to build Digital 2.0 models. Suffice it to say, the responses across these models reached 50%, and with the swing group up to 80% or more across many of the segments, highlighting the competitive threat posed by these new business models. See also: Linking Innovation With Strategy   In my next blog, we’ll look deeper at the survey results and see how our SMB segment playbooks confirmed the need for different market and product strategies. We’ll tie the most popular of the 30 attributes to specific SMB segments and suggest ideal offerings for insurers hoping to reach those segments. For an in-depth look at Majesco’s findings, download and read Insights for Growth Strategies: The New SMB Insurance Customer. Digital playbooks are essential to accessing the hard-to-reach SMB customers. Without shifting to a Digital Insurance 2.0 framework, they will be even harder to capture … let alone retain in the coming years, putting insurers stuck in Insurance 1.0 at risk. Are you ready to move to Digital Insurance 2.0 and capture your share of the $80 billion to $100 billion SMB opportunity?

This is the second part of a four-part series. The first part was "Investment in Insurtech Continues to Surge." 

Rather than viewing emerging insurtechs as threats, insurers are increasingly seeing economic opportunity with exciting startups. Strategic partnering with new players can yield benefits and challenges for traditional insurers.

Accenture’s recent report, The Rise of Insurtech, offers key insights and the latest thinking on how insurers are exploring opportunities presented by these disruptive new entrants onto the insurance landscape. In my last blog post in this series, I discussed the steady growth in insurtech investment in recent years and noted indicators that its rise is now a global trend. Our research indicates that, rather than viewing these emerging players as threats, innovative insurers recognize exciting new opportunities to work with insurtech startups to reach into new markets. With their expertise in emerging technologies, such as artificial intelligence (AI), the Internet of Things (IoT), blockchain, big data and analytics, insurtechs represent potential solutions for the kinds of challenges insurers are facing in this increasingly digitized and competitive space. The challenge lies in how to best take advantage of the opportunity. See also: Startups Take a Seat at the Table With their digital expertise, insurtechs can help insurers leverage emerging and cutting-edge technologies to reach their customers where they are—online, mobile and 24/7. There is also a cultural benefit to traditional insurers partnering with smaller startups that may be even more valuable in the long run. Startup culture generally eschews hierarchical, bureaucratic structure in favor of innovation and collaboration and may point the way forward for incumbent insurers to foster a top-down culture of innovation across their companies. The very factors that make insurtechs such exciting players on the insurance scene—agility, creativity, risk-taking—can potentially make for a challenging culture “fit” with traditional insurers. Insurance has been assumed to be slower to innovate across all levels of the enterprise and can be, by its very nature, a risk-averse industry. But Accenture research reveals that many conventional insurers have more in common culturally with startups than they have differences. Successful, smart partnerships between cultures can be mutually beneficial, if approached strategically. While insurtechs bring significant advantages to the table, traditional insurers don’t arrive empty-handed, either. What they may lack in technological innovation and hyper-agility, they make up for with deep institutional knowledge of the complicated insurance sector. They know common pitfalls and industry challenges and have experience navigating the complicated set of regulations that govern the sector. Our research also shows that cultural differences are not necessarily company-wide. Staff at large institutions tend to be aligned along similar values as employees of non-traditional startups, especially when it comes to entrepreneurship. My next blog post will explore some interesting examples of insurtechs that have recently emerged and the specific digital technologies they are leveraging to set themselves apart. See also: Solving Insurtech’s People Challenge   Read our full report: The Rise of Insurtech: How young startups and a mature industry can bring out the best in one another. You may also enjoy David-Goliath Culture Gaps: Accenture Strategy 2017

In our previous post, on claims, we highlighted the importance of claims as a customer touch-point – a poor claims experience is indeed a leading cause of customer churn. However, fraudulent claims are also a massive area of carrier losses. There is a tricky balance to be struck here. Treating every claimant like a potential criminal is an obvious no-no, but objective scrutiny must exist at some point in the policy lifecycle. Fraud is the dark matter of the insurance universe. Discovered cases cost insurers (and ultimately policyholders too) millions every year, and its full hidden extent can only be guessed at – it is in some sense the gap between how risk models should work and how they appear to work on the ground, with undiscovered fraud ultimately getting priced into premium costs. Derek Brink, VP and research fellow in information security and IT GRC at Aberdeen Group, recently estimated the cost of fraud at between 5% and 10% of insurers’ annual revenue, noting also that it takes firms a median time of 20 months to detect continuing fraud. Every penny saved on fraud is an additional penny back onto insurers’ bottom lines, and what defeating fraud would ultimately mean is that they could offer their policyholders more competitive prices.

"Fraud concern is no newcomer to the insurance industry, especially in the healthcare and motor lines of business. The fact that the internet is not attributable has made the fraud situation even worse as digitization proceeds at a pace." — David Piesse, chairman of IIS Ambassadors and ambassador Asia Pacific at International Insurance Society (IIS)

In this post, we assess both the size of the fraud problem and a range of approaches for containing it. The following stats and outside perspectives are drawn from our Global Trend Map; a breakdown of all survey respondents, and details of our methodology, are included in the full report, which you can download for free whenever you please. Download your complimentary copy of the full Trend Map here ... Who Wields the Sword in the Battle with Fraud? People most readily associate insurance counter-fraud with the claims department, because this is where fraudsters cash in and has historically been the point in the cycle where most frauds get unmasked. However, there is a limit to how far reactive approaches to fraud can take insurers, and stopping fraud closer to its roots is certainly preferable to focusing exclusively on the "final mile" (namely claims) for its interception. See also: Global Trend Map No. 5: Analytics and AI   It’s clear that the next generation of counter-fraud will be cross-functional, tracking potential fraud indicators across the entire insurance lifecycle. We asked insurance carriers to indicate which departments were currently involved in combating fraud within their organizations. Understandably, we see a large role attributed to dedicated fraud departments as well as to claims departments, and this is unlikely to change moving forward (the less than 100% figure for fraud departments may be due to the counter-fraud function sometimes being subsumed elsewhere). Other departments that stand out as having central roles are senior leadership, operations, analytics, underwriting and risk.

"If you stop fraudsters coming into the business in the first place then you have to spend less from the beginning, enabling you to improve the journey for other, genuine customers. But it’s difficult to get that balance in a competitive marketplace as the investment isn’t so obvious. It requires a change of mind-set." — John Beadle, head of counter fraud and financial crime, RSA

The fight against fraud is by no means limited just to carriers. Indeed, with the shift toward more active counter-fraud approaches, greater attention is being brought to bear on indirect channels. Historically, brokers and affiliate partners have been given incentives primarily on a volume basis and have directed plenty of bad business toward carriers. Insurers can therefore make substantial savings by educating their brokers and affiliates on best practice, to root out fraud at the application stage before it ever enters their wheelhouse – although they obviously need to tread a fine line between on-boarding bad business and turning away good customers.

"Part of the problem is the appetite for fraud detection in the broker channel. We’ve had to convince brokers to protect us against fraud because, by sending us that business, they ultimately end up suffering, too. Brokers see sales as a volume and growth business rather than one built on quality, and, as a company, we are always interested in quality." — Steve Jackson, head of financial crime at Covea Insurance.

A couple of general stats

• An overwhelming majority (92%) of our carrier respondents believed fraud is increasing, and we saw a similar level of concern from the rest of the industry.
• 29% of carriers believe that the majority of insurance fraud goes undetected, and 59% believe that some insurance fraud goes undetected (12% don’t know). The rest of the industry are in line with this assessment.

Slaying the Dragon: Approaches for Defeating Fraud We don't have scope here to explore specific counter-fraud solutions in detail. However, we did ask our respondents and industry contributors about different high-level approaches. These include before-the-claim strategies, data-sharing coalitions, the Internet of Things (IoT) and blockchain technologies.

"We can look at using smart technologies that look at probability and profiles of individuals’ past behaviors. If someone fits a certain profile, there is a higher probability they will be a fraudster. It’s an interesting area but also dangerous." — Steve Jackson

i. Before-the-Claim Strategies By identifying policies intended to facilitate fraud at the time of underwriting, insurers can prevent fraud advancing to the point of a claim being made; as a general rule, the more relevant data that can be pre-populated, the fewer opportunities there are for opportunistic fraudsters at the application stage. This directly reduces the amount of fraud that gets through the lines and helps also to unburden the claims department. Encouragingly: Two-thirds of insurers and reinsurers indicated that they had a before-the-claim fraud strategy. ii. Data-Sharing Fraudsters do not just recycle specific items of (fraudulent) data but also deploy the same distinctive methodologies against multiple targets. Effective data-sharing in counter-fraud means that, once unmasked, a fraud tactic is truly disarmed. Reassuringly then, we registered universal approval for this sort of initiative from the entire industry. 94% of insurers and reinsurers are in favor of a data-sharing coalition to prevent fraud. iii. Internet of Things When it comes to IoT, much of the attention is on preventative and value-added services (check out our earlier post on the topic). However, one of the more immediate boons of the technology is its role as a fraud deterrent. Take workers' compensation insurance in a factory or construction environment, for example. Installing IoT devices onsite for monitoring purposes makes it much more difficult to dress up instances of non-compliance for the purpose of inflating a claim (or making one in the first place), and means compliant clients can be treated accordingly. IoT also applies to personal lines: With full transparency over where a car has been and what motions it has undergone, auto customers are, generally speaking, less likely to lie about or exaggerate what has happened. At the same time though, IoT can also be a new attack vector for fraud. By hacking an IoT device, you could in theory spoof whatever behavior you want, to deceive your insurer – which would be particularly attractive if target-based discounts were in play. Imagine hacking your FitBit to show 10km of jogging a day while you remain safely ensconced before your television awaiting your health-insurance rewards. So cybersecurity is as important for the insurance aspect of IoT as it is for every other. See also: Global Trend Map No. 6: Digital Innovation   iv. Blockchain Another multi-faceted technology with clear applications for counter-fraud is blockchain: a distributed ledger for recording transactions between different parties without relying on a trusted (though oftentimes untrustworthy) central authority for verification. We spoke briefly to David Piesse, chairman of IIS Ambassadors and ambassador Asia Pacific at the International Insurance Society (IIS), to find out more: "The emergence of the new internet, commonly called the blockchain, means we no longer have to trust the internet but in fact can make sure it tells the truth. In Estonia, they wrapped the internet with a blockchain technology that has removed digital fraud from the healthcare sector in that country, and this is now being applied elsewhere. "It’s possible to map the blockchain protocol over the insurance combined ratio, with fraud and expense reduction on the top line and an increase in earned premium on the bottom line via new product and operational efficiency. This can give the C-suite an opportunity to see the effect of the new technology on their profitability before investment income." Blockchain continues its march into insurance apace. Indeed, Munich Re and Swiss Re last October founded the B3i Consortium with the express intention to "explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services." Blockchain clearly has massive implications for all forms of data and monetary interchange, and we look forward to seeing its continued application both in counter-fraud and more widely. This year's Global Trend Map did not contain a dedicated section on blockchain, but we look forward to including one in our 2018 edition, so stay tuned!