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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Model risk management (MRM) continues its rapid growth in the insurance sector. More insurers are adopting MRM programs and are looking to increase the efficiency and effectiveness of existing programs. Developing and using an effective MRM system will promote better MRM performance. A basic MRM system should provide a platform for managing MRM activities, in particular tracking and managing validations. As insurers accumulate information about their models through scoring and validation processes, we believe that they can enhance their systems to gain beneficial insight across their model inventory, especially commonality of components and interactions between models. Based on recent client work and recent industry surveys, we share below some thoughts on the key characteristics of an effective base platform, cross-inventory opportunities, and how risk managers can enhance MRM processes and systems to take advantage of these opportunities. Basic characteristics of an MRM system An essential starting point for insurers initiating an MRM program is to develop an inventory of their models. Because MRM programs typically encompass all of an insurer’s models (not just actuarial or risk or financial ones), the inventory can be quite large. A survey we conducted early last year indicated that more than half of respondents had more than 150 models in their inventory; a quarter had more than 450. Another survey we conducted later in the year found that MRM systems’ primary task at all insurers is to catalogue all these models. Once catalogued, an obvious next step is to populate the system with information that helps manage the MRM process. Typically, we see the following functionality in effective systems: 1. Model documentation repository. Model documentation is the starting point to conducting a validation. Providing access to that documentation is important for validation and continuing risk management of the model. Sometimes (typically for older models undergoing their first validation), comprehensive documentation is not available and needs to be developed. Sometimes validations point out the need for documentation to improve. Keeping track of the need to update validation either because it is inadequate or because the model has changed also should be a part of the systems’ functionality (see item 4 below). 2.  Model validation document repository. This is the most self-evident functionality. Ninety percent of respondents in our survey who had a multifunction system (i.e., systems that do more than just catalogue models) reported that it was a repository for validation or model documentation. Also of importance, as programs mature, the system needs an appropriate mechanism to update the repository with documentation from subsequent validations (presumably without losing earlier versions). See also: Changing Business Models, ‘New’ ERM   3. Model risk scoring repository. Though not as universal as documentation storage, storing model risk scores and the details about the model that were used to develop its score is a feature present at about two-thirds of surveyed respondent companies. Model risk scores are often used to prioritize and sequence validations, so the first score is likely developed before the model is validated. Not surprisingly, validations often shed new light on a model and can often lead to a change in score. Also, we have found some insurers have begun to revisit their earlier scores and scoring algorithms, often placing greater emphasis on models that permanently affect cash flow. The system should be capable of tracking the development of the model’s risk score because it may change over time. 4. Tracking findings needing attention and due dates for that attention. Managing hundreds of models is likely to lead to an extensive list of findings needing attention. Keeping track of these, the party responsible for addressing them and their expected completion dates seems a natural choice for an MRM system feature. As models are being built or undergoing significant modifications, the system can be used to keep track of their progress and validation needs. 5. Emailing notification to model owners and others of coming or missed tasks. It seems a short step from tracking as we describe above to emailing notifications and follow-ups, as required. Our survey showed that only slightly more than half of the multifunction systems have this functionality. 6. Reporting. As with any process, reporting on MRM activity, particularly the progress of validations and issue resolution, is a necessary antecedent to managing the process. About three-quarters of the respondents have this functionality built into their system. Though only a few have developed this as a real-time reporting dashboard, the rest are working on this or planning to do so. Cross-inventory commonalities and connections Recognizing that MRM is still a relatively new program at many insurers, early emphasis has been on developing a system that supports initial validation efforts. However, as programs mature and systems’ basic functionality has been established, insurers should consider enhancements that could increase the overall value of their MRM program. We believe these enhancement opportunities come from better using the information in the system. In particular, they come from working across the inventory rather than one model at a time. Different models are likely to have many assumptions in common. The system could compare assumptions across models in the inventory. If two models use different values for the same assumption, for example different values for future interest rates, it would be instructive to investigate the sources and implications of these differences. Potentially, differences are not appropriate and, if not corrected, could cause increased risk across the model inventory. A single-source model for this assumption could apply to all cases, thus reducing overall modeling costs. Different models frequently use common parts. For example, both stress testing and ALM models may use common cash flow projection engines. Although both models should undergo their own validations, some elements of the work can be reused. In particular, with proper safeguards, multiple replication of the same calculation algorithms would be unnecessary. Often, the replication element of a validation is one of the most resource-intensive and costly aspects of the work, so avoiding duplication here could meaningfully improve efficiency. Few if any models exist completely on their own, isolated from others in the inventory. Typically, models are fed some input from upstream models and often send some output downstream to other models. This web of connectivity can be hard to visualize, but the raw material for doing so could be available from the MRM system. Typically, systems will need some enhancement to allow insurers to mine this material, however. Enhancing the system to enable cross-inventory gains The next significant step in MRM’s development can come from a holistic look at the whole model inventory. Some process and system enhancements that can enable cross-inventory perspective include: 1. Model documentations standards. Most insurers have developed a playbook or template that they expect validators to follow in conducting validations and completing validation documentation. It is not often though that we find the same attention to standards in documenting models. Standardization can benefit both the model documenters and MRM cross-inventory analysis. 2. Terminology standards. Because many different model owners and users have developed models independent of each other over several years, it’s not surprising to encounter inconsistent terminology. Different terms often describe the same thing, and sometimes the same term describes something else. As the MRM system becomes more densely populated, a thorough review can identify inconsistencies and enable greater standardization. 3. Upstream and downstream precision. Many validation report guidelines (and presumably good model documentation guidelines) require identification in input and output of upstream and downstream models. It would seem a modest step to require that these identified models are cross-referenced to their place in the inventory, presumably using the same model number identification tag. See also: Top 10 Insurtech Trends for 2017   Next steps for insurers Insurers should bring their MRM systems up to baseline capabilities by enabling the functionalities we describe above. As validations and model risk management activities populate the MRM system, insurers should use that information to standardize model documentation formats and develop consistent terminology. Model and validation documentation should reference upstream and downstream models using the system’s identifiers. Insurers can then mine information contained in their MRM system to:

• Ensure consistency where required,
• Eliminate duplicative validation tasks and,
• Map their model web, eliminating unused models, improving models that need updating and carefully nurturing and managing the models that are of greatest value to the organization’s success.

The cycle of doing more with less is starting to catch up with the insurance industry. This year, 25% of insurance professionals are expected to retire, says David Coons, SVP of the Jacobson Group. Further, by 2020 the industry will need to fill approximately 400,000 positions to remain fully staffed. Even among the largest insurers, talent is a problem. Brian Duperreault, who joined a struggling AIG as CEO in May, drew a sports analogy to mind when he noted during the company’s Q2 2017 earnings call in August that he wanted to focus on rebuilding the insurer’s formerly deep bench of talent. “There is no question AIG lost talent, but it was also blessed with a strong bench,” Duperreault said. “The job now is to rebuild that bench.” To me, the “bench strength” analogy speaks to insurance leaders today from companies large and small who are responsible for keeping their “players” engaged, and ensuring every position on their team is filled or ready to be filled at any given point with capable talent, despite players dropping off the team for whatever reason. See also: 10 Insurtechs for Dramatic Cost Savings  February has been designated the 3rd Annual Insurance Careers Month, and it serves to remind us that, before we can fortify our benches with talent, we face a couple of uphill battles. First, the industry continues to suffer from false yet pervasive negative perceptions. People mistakenly tend to think that the typical insurance company’s value proposition is to take advantage of policyholders with premium spikes while finding ways to negate or reject legitimate claims. And because many insurers continue to struggle with inadequate systems to facilitate top-notch customer service, that perception continues. Negative perceptions contribute to another mistaken belief: that insurance is a boring industry. Therefore, young and vibrant talent avoid it in favor of other industries such as banking. These negative perceptions tend to have the largest impact in IT, where many workers are retiring from key technology positions, leaving those remaining without the necessary legacy systems knowledge to “keep the lights on.” This is especially critical for smaller insurers with older or outdated legacy systems, because young, innovative technology workers want to be challenged with new technologies, not outdated ones. The dynamic in IT reinforces the need to evaluate your current technology platform and related policy management systems. Moving to a Software as a Service environment is cost-effective, fast, secure and reliable. Consider your underwriting program or customer service efforts—are they best served with outdated technology? What about your distribution network—are your agents able to communicate with you in real time using portal technology, or are they forced to conduct business manually? Are you in a position to employ analytics to improve your business outcomes? See also: Solving Insurtech’s People Challenge   As we move into the next generation, it’s becoming very clear that our industry is anything but boring. Insurtech disruption is affecting companies of all sizes, and our business models are changing as a reflection of the ever-evolving needs of the customer. To best respond to these changes, insurers need to adopt current technologies that will improve the business operations that allow for accurate and agile responses. That same attitude toward modern technology adoption will attract the right talent in all of your organization’s functional business areas. You don’t have to be a company the size of AIG to realize that, without modern technologies, you can’t court the best possible talent. And without the best possible talent, your bench strength will weaken, making it even more difficult to rebuild and successfully compete.

Revisiting research we published on the 54 companies we cited as Innovators to Watch during 2017, we've identified seven we believe are Exponentials. These are the companies most likely to produce growth measured not in percentages but in multiples. 

Guy Fraker, our chief innovation officer, and Paul Winston, our chief commercial officer, file this report on the Exponentials drawn from our Innovator's Edge platform, which tracks 40,000 companies with some direct link to risk or risk management:

Each of the seven, selected from those that have completed profiles on IE and were recognized in 2017, best meet these criteria:

• It produces an original solution by leveraging a "domain technology," one that can result in a redefinition of the nature of risk.
• It states a bold, inspirational mission describing a transformation for an industry or even for humanity.
• It achieved an exponential outcome in 2017.

The 2017 Exponentials are, in alphabetical order:

AppBus, founded in 2014, integrates in a single environment all the enterprise applications that an insurer might use. The approach makes it easier for employees to securely access the information tools they need while avoiding duplicate data entry. AppBus can combine standard business applications like CRM software with tools being created by insurtech innovators. AppBus augments those services with a library of key content and information to make users more productive. Users can create role-based interfaces to provide the specific tools that individuals need, especially when in the field. 

The firm has a mission that is relatively easy to summarize but that embodies stunning ambitions: increasing security while simultaneously enhancing productivity, ease of access and transparency across business units. That may seem like the natural state, but the world has actually been evolving in the other direction. Insurers have added layers upon layers of new capabilities, but they have largely reinforced existing structures. Insurers may have increased the availability of information, but that has generally not led to greater shared understanding.  AppBus, by enhancing access and security simultaneously, is a quantum leap forward. 

In 2017, the insurance industry became one of the fastest-growing verticals for AppBus. 2017 also saw AppBus achieve a 4X increase in funding and continue their string of technology awards, including a "Best in Show" at PACT Phorum 2017.

Aquaai has a mission to "save the seas by providing intelligence under the surface." It has never been short on inspiration. The robotics firm, founded by Liane Thompson and Simeon Pieterkosky in 2014, never figured risk management would be their first adopter, but in 2017 they agreed to provide robotic fish to a farm that is the lead source of salmon for Whole Foods. The farm uses the robotic fish to assess the integrity of their containment facilities, as well as the health of the salmon, without causing stress for the fish. 

Firms often invent the equivalent of a hammer and then view everything in the world as some sort of nail, but Aquaai adapts its technology to whatever is out there. It creates robots modeled on biology that can be customized to the requirements of the customer. Aquaai's designs can, for instance, perform loss-mitigation tasks routinely associated with flying drones, in conditions far more hazardous. So, risk-management opportunities should abound, from the very small and specific to the very broad and aspirational. 

ClearCut Medical minimizes cancer patients' pain by mitigating repetitive procedures while improving diagnosis, sharply reducing critical treatment timeframes and improving patient survival. Initially focusing on breast-conserving cancer surgery (BCS, or lumpectomy), the team at ClearCut aims to reduce the number of repeat surgeries by at least 75%. The company, founded in 2010 in Rehovot, Israel, has developed a mobile MRI that a surgeon uses in real time to establish that all cancerous tissue has been removed, rather than having to rely on pathological confirmation weeks after surgery.

In 2017, Clearcut made the jump from theoretical to the first stages of commercialization, after clinical trials in 2016 and 2017 that resulted in multiple, well-received publications in medical journals. ClearCut, which has raised roughly $6 million, estimates the total available market to be $1.2 billion for their initial target market of breast cancer patients. One can readily identify additional treatment protocols and opportunities that could benefit from ClearCut's technology, with implications for both health insurers and life insurers.

elevateBenefits tackles a major problem: that navigating healthcare and other employee benefit choices has become, let’s say, confusing over the past few years. Founded in Alpharetta, GA in 2016, elevateBenefits was born from the belief that employee benefits are of profound importance to employers and employees—but that employers often know little about what value their company and employees receive from their benefits.

But even identifying keen frustration doesn't necessarily mean there is a market. elevateBenefits initially found acceptance in the market to be frustratingly slow. It made a major pivot, developing SHRM Broker Finder, which provides simple tools that employers can use to find a broker that is right for them. Brokers signed up because the tool gives them visibility with potential clients. elevateBenefits had found the Holy Grail: a so-called two-sided market. A series of significant alliances and partnerships ensued, with Northern California Human Resources Association, then Citrix, followed by Great Place to Work, culminating with adoption by Society for Human Resource Management. In less than six months, elevateBenefits went from a few new users a month, to around 40 a month, to more than 400 every 60 hours.

GeneYouIn, founded in 2012 out of Toronto, identified a job to be done with such profound implications that quantifying them would be an AI exercise of significant proportions. GeneYouIn has developed a genome analytics and reporting platform called PillCheck. It interprets a patient’s genetic variants to help clinicians better understand how that patient may tolerate a medication in advance of making the prescription decision. In addition to improving the effectiveness of healthcare, including among mental health patients, this technological platform holds promise for aligning pain management treatments with propensities toward addiction. If successful at scale—admittedly a big if for an effort this ambitious—GeneYouIn holds promise for reducing healthcare-related class action lawsuits, for sharply reducing prescription costs and for speeding the development cycle for new pharmacological treatments. Because the firm uses a direct-to-consumer model, patients have the results for their use as they see fit for their healthcare decisions.

Jamii could easily top this list if it weren't in alphabetical order. It aspires to provide a mobile platform for micro-health insurance to African families earning less than $70 a month. Providing such coverage by networking more than 400 hospitals, while partnering with telecom providers for delivery, at a premium of $1 per month stretches the imagination. Jamii was founded in 2015 by Lilian Makoi, out of Tanzania, after a close friend lost her husband, who could not afford medical care following an accident. Tanzania alone has a population of 47 million earning less than $70 per month, and statistics published by Jamii state that approximately 4.2% of the population has health insurance. 

Makoi began with a long series of one-on-one conversations that gave her a deep dive into the problems and insights into possible solutions. She then formed partnerships with established insurer Jubilee and telecom provider Vodafone, and built a cashless and paperless healthcare management platform enabling enormous reductions in cost. 2017 was a breakout year. Jamii won entry to accelerators including Barclay’s Techstars and Disrupt Africa, won the Efma-Accenture Insurance Innovator of the Year award and captured support from the Bill and Melinda Gates Foundation. In mid-2017, Jamii secured their first round of funding, of $750,000, after growing adoption to more than 20,000 users. By the end of January 2018, Jamii had an estimated user base approaching 700,000. 

RiskGenius takes a sort of meta approach to innovation in insurance: Its innovations help the innovators innovate. When the insurance industry embraces a breakthrough technology, it accelerates improvement at a societal scale, but, for all of the insurtech activity, actual product innovation is dfficult, given the matrix of regulatory models, mix of tort law models and complexity of policy language. Creating new products, services and markets and enabling new industries would be significantly easier if tested policy language could be categorized, made searchable and made accessible. Such a capability would enable an exponentially faster policy development cycle.

Enter Chris Cheatham, Doug Reiser and the team at RiskGenius of Overland Park, KS. Chris and Doug launched in 2011 with a better claims management system. In 2014, user feedback during a specific claim raised the idea of a policy forms library. 2015 was the year of exploration, development and leveraging artificial intelligence and machine learning to provide policy analysis. In 2016, RiskGenius launched, then quickly followed with a seed round of funding. By 2017, growth was on an exponential growth curve; highlights included presentations at the World Economic Forum.

A closing observation: After we selected these "2017 Exponentials," we took one last look to better understand what they have in common. It wasn't location: The seven firms are located in the U.S., Israel, Tanzania and Canada. It wasn't technology: The seven span artificial intelligence, machine vision, networking and distribution and human genome sequencing. We found one, only one, aspect in common: Seven of the seven firms have women on their senior-most leadership teams or were founded/co-founded by women, even though only 7% of venture capital in 2017 went to firms launching with gender diversity and even though roughly 17% of all tech startups include women on management teams. 

Hold that thought. ITL is finalizing a free addition to the Innovator's Edge platform: the ability of individuals to join groups for discussion, feedback and collaboration. "Women in Leadership" will be among the first groups to launch. Given the importance of the team when vetting opportunities with early-stage firms, we at ITL want to support the role of women. We'll provide more details shortly.

Have a great week.

Paul Carroll
Editor-in-Chief

#The Affordable Care Act requires every health plan to offer benefits free from most annual and all lifetime dollar limits. If you have a self-insured plan, you may feel the direct impact of this a little more immediately (although many employers still do not recognize it). Even employers that are fully insured should realize they are the insurance company anyway. The only benefit those employers get is delaying the impact of employees' healthcare spending until their next renewal date. But employers pay dearly in the form of a complete lack of information on exactly how that money is being spent. As a result, companies should start to look at the health plan ID card as an unlimited corporate credit card. Which then raises the question: Who is monitoring that spending? That unlimited credit card rings up charges like a $444 box of Kleenex (described on the hospital bill as a mucus collection device) and $1,000 toothbrushes, and those are the trivial problems, the ones that can draw a chuckle. Those trivial things need to draw attention to a much broader problem, such as $10,000 surgeries that employers blindly pay $180,000 for. With the majority of the workforce having a high-deductible plan, every day that goes by it's less and less "other people's money" and more of the employee's, so we're starting to see legal activity -- even before a formal declaration from the Department of Labor that health benefits must be managed by employers with the same level of scrutiny as retirement benefits. [For more detail, you can download “ERISA Fiduciary Risk Is the Largest Undisclosed Risk I’ve Seen In My Career” -- a chapter that was added to the recently released new edition of the CEO's Guide book.] Most employers use networks as their primary strategy to control that spending. Carrier networks love to tout their average discounts. “We save plans 60% on average off billed charges!” Well, there are two major problems with networks. First, what is that discount off of? Generally it is off the “ChargeMaster” rate. What is the ChargeMaster, you ask? The ChargeMaster, also known as charge description master (CDM), is a comprehensive listing of items billable to a hospital patient or a patient’s health insurance provider, with highly inflated prices -- several times that of actual costs to the hospital. The ChargeMaster typically serves as the starting point for negotiations with patients and health insurance providers of what amount of money will actually be paid to the hospital. It is described as “the central mechanism of the revenue cycle” of a hospital. We have seen a billed charge of $1,000 from a hospital for a manual toothbrush. 60% off that is still one expensive toothbrush. We found a $444 charge for a “mucous collection device” later found to be a box of tissues. Not to mention, the billed charges vary so dramatically, even within the same facility that a finite percent off an infinite number has zero credibility. While one ex-hospital CEO describes the ChargeMaster as archaic fiction, it does play into the general obfuscation designed to keep healthcare costs growing. [Please add your comments below if you have other real-world examples like the $1,000 toothbrush, $444 box of tissues, etc. Or share on social media articles and examples with the hashtag #PPOGate, which people are using to highlight how blind faith in PPO networks has inflicted pain on the working and middle class.] You might think that all hospitals have similar Chargemaster prices. Nothing could be further from the truth. The Huffington Post did a story when treatment costs were first made publicly available from a federal database in 2013, in which they found the cost to treat COPD (chronic obstructive pulmonary disorder) in the New York City area can range from $7,044 to $99,690. Herein lies the fundamental problem: Back when we had richer health plans, patients didn’t care about the cost, as long as insurance covered it. Now that we are being left with these crazy-high deductibles, we are blaming the insurance company for the plan design (and the cost thereof) that leaves us with this exposure. See also: Medicare Set Asides: 10 Mistakes to Avoid   Every facility that participates in Medicare and Medicaid is required to file their actual cost, all in, with the Centers for Medicare and Medicaid Services (CMS), and anyone can access this data for a subscription fee. In Charlotte, N.C., the two largest hospitals systems file their cost for a CT scan as being between $75 and $90. Their average billed charge to a health plan? Between $1,800 and $2,700! The hospitals claim they have to charge higher prices to private insurance plans because of the below-cost care they provide to Medicare and Medicaid patients and the “free” care they provide to the uninsureds through the emergency room. Well, uninsured ER rates have dropped significantly under the ACA (and actual ER usage has gone up), and ER rooms are highly profitable to the hospitals for those who have insurance, so shouldn’t there be a positive overall impact on the private insurance pricing? Also, if I go a buy a car, and get a super deal from the dealership, will you be OK being the next customer in the door and being told you have to overpay because the dealer gave some stranger before you a really good price? I think not. The second problem with PPO networks is that nearly every network contract prohibits the plan (and the employer, by extension) from auditing a bill. The contract actually prohibits the plan from even requesting an itemized bill! All they can get is what’s called a UB, or a universal bill. You can see the form here. Other than the information on who the patient is and whom to pay, the UB only shows total charges and diagnosis. As long as the diagnosis is a covered condition under the plan, the discount gets applied, and the bill gets paid. Bills on this form can easily be hundreds of thousands of dollars. When we have asked for an itemized bill (that the insurance company can’t ask for), we have found pregnancy tests on men and charges for 16 surgical screws when only four were used, just to name a few “errors.” We have heard firsthand stories where an insurance executive sat down with hospital executives and said, “We need a bigger discount from you guys,” and the execs said no way. So the insurance exec said, “I don’t think you understand…you can bill us more, and it can even net out to more than we pay you now, we just need to say we have a bigger percent off.” Another perverse incentive to be aware of that came as a result of the ACA is called the medical loss ratio. Under this provision, insurance companies must spend between 80% and 85% of the premiums they receive for medical care for the insureds. If they spend less than that, they must provide a refund. Prior to this law, carriers could keep the difference for profit, so they had stronger encouragement to keep costs down. Now, the only way they can charge their customers more, and thereby boost profits, is if the underlying cost of care also goes up. We're not blaming the insurance companies. They had to bow to the pressure of their customers (employers) because, if that big local hospital system left their network, they thought customers would leave in droves. (Pittsburgh schools are proving that assumption wrong with a good plan design and collaboration with their teacher union -- details are in the CEO's Guide book that you can download free.) The insurance companies are in a tough spot. If they try to “manage” the care -- i.e. pre-certification, tiered drug formularies and narrow networks -- their customer base gets ornery. And employers are loath to be seen as getting involved in their employees’ healthcare. I bet most employers don’t want to tell employees where to sleep or what car to drive, either, but I imagine they nonetheless have parameters around how much can be spent for rental cars and hotels when traveling on the company dime. Fortunately, there are employers all over the country that have wised up and tamed the out-of-control healthcare cost beast. They are spending 20% to 55% less than a typical employer on a per capita basis. Paradoxically, they are finding the best way to slash healthcare costs is to improve health benefits. There are several examples in the CEO's Guide book that range from school districts in the Rust Belt to a municipality in the Midwest to a small manufacturer in the heart of oil country to a hotelier in Florida. Another statistic carriers love to tout is their auto-adjudication rates (in other words, automatic and prompt payment of claims as they come in). After all, higher auto-adjudication means the providers get paid quicker. And that means fewer headaches for providers and employees. But that also suggests that a 94% auto-adjudication rate means that 94% of the time no one is looking at the bill even to the limited level the contract permits. The same company will reject an expense report submitted by an employee missing a $62 restaurant receipt and then blindly pay a $100,000 medical bill without any detailed review. So let’s review:

1. Although carrier networks have some influence over the discount, they have little over the starting price.
2. Hospital charges are filed on a UB (universal bill), and the plans are contractually prohibited from asking for an itemized bill.
3. If the plan requests any audit at all, they are required to pre-pay the claim, often at 100%, and are then subject to the hospital’s own audit procedures.
4. Networks are forced to accept these terms, or their customers will leave because they do not have a broad network.

See also: Healthcare Data: The Art and the Science   Sounds like the fox is watching the henhouse. The abuses that can and do exist under this model are egregious (see Chapter 6 from the book, PPO Networks Deliver Value -- and Other Flawed Assumptions Crushing Your Bottom Line). Different strategies are just starting to take shape and mature that expand whom your employees can see by removing the network completely and letting them go wherever they want. When the network contract is gone, the plan sponsors can deploy much more aggressive strategies to not only reduce the fraud and abuse but significantly reduce costs on the legitimate charges. Some employers are contracting with providers directly and, more often than not, with a local hospital looking to compete against the behemoth health systems. Under ERISA, plan sponsors (the employer) have a fiduciary responsibility to protect plan assets. Because many network contracts prohibit the plan from auditing the bill, and the few that do require 100% of the allowed charges to be paid before an audit can begin, how can a plan sponsor meet its fiduciary requirement under ERISA to be good stewards of plan assets? Old-line benefits brokers continue to advise their clients to sign such egregiously one-sided contracts -- those benefits consultants are going the way of the dodo bird but leave their clients exposed in the meantime. I can say with 100% certainty that plaintiffs' attorneys are gathering their ammunition for these ERISA cases. When you combine the fact that healthcare's hyperinflation has been the overwhelming driver of 20-plus years of wage stagnation and decline and look at the impact on household spending in the graph, the pain inflicted on the working and middle class is palpable. Smart employers and their benefits consultants are avoiding having a target on their back by taking action now. By applying the best practices captured in the Health Rosetta and various other tools that will be highlighted in the forthcoming book CEO's Guide to Restoring the American Dream - How to deliver world class healthcare to your employees at half the cost, there are many tools to provide employees a world-class health benefits package without giving a blank check to the healthcare industry. Written with David Contorno, President, Lake Norman Benefits