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. The title for this article has been chosen for a number of reasons. It's meant to be a mildly funny reference to the original Star Trek TV series, about boldly going where no man had gone before. This article is doing something similar, but specifically in insurance. We are going to discover new, unfamiliar ways to manage customer risks. There is another reason for the tiel. There is a case of misattribution to be found here. Many of us may remember the phrase, "It’s life, Jim, but not as we know it" from the original Star Trek TV series. However, this specific sentence was actually never a part of the series. Instead, it was introduced in a parody single – Star Trekkin’ – released in 1987 by British group The Firm. There seems to a bit of a similar misattribution when it comes to insurance in general, and life and pensions insurance, in particular. On the one hand, we all have clear customer needs: We are looking for a safety net for ourselves or for our loved ones. Or, we want comfortable living after retirement, being able to buy a holiday home or provide education for our kids. Or, we want to make sure we have sufficient income even in case of illness or unemployment. Insurance marketing has been playing on these needs for decades, strengthening the notion that, to manage our lives, risks and ambitions, we need to buy an insurance policy. We are all policy holders ourselves, so we know this is how we are being seduced. While our need as customers is this safety net for ourselves or for our loved ones, reality unfortunately is a little bit different, and we have to settle for an insurance policy that provides only a partial solution for these needs. The limitations are often legally required; still, we always wind up meeting a crude approximation of our actual needs. See also: Thought Experiment on Life Insurance   I suspect that if you’re really honest, nobody ever really wanted to buy an insurance policy. Either you have to or there is no better alternative available. So we end up buying a product that doesn’t really cover our needs in the first place, and, on top of this, processes and interactions around it are not really helping us to become engaged, happy customers. Now, insurers are increasingly aware of this gap between the products offered and customer expectations, fueled by the digital revolution. We see how other sectors have been disrupted by concepts powered by the latest tech, allowing us to manage our lives increasingly through easy, friendly, highly integrated apps and digital infrastructures. People are actually waiting in long lines to buy the latest Apple product! So, here are a couple of challenging questions: Can insurance become as hot and sexy as an iPhone? Can it become something that customers actively engage in? That seduces people to actively manage future risks? That becomes urgent, relevant, an integral part of your life, even fun? As an optimist, I would like to say: Yes, you can. But it’s going to take some changes from current insurance practices. Let’s address two approaches to make this happen. Redefine your value proposition The first approach is to redefine your product and shift to a value proposition that takes a broader view on your customer risks and builds new solutions. Now, of course, insurers have an excellent position to support customers with managing their risks, through a contract, by transferring this risk to a large group of individuals or businesses and investing in future income. We already know the limitations of this approach. But what if you use all available expertise to design other solutions to manage or reduce risks? All you need to do is realize that there are other options besides an insurance policy. Once you take on that view, a wide range of opportunities arise, offering new way to interact with customers. As an insurer, you can build your expertise on risks, impact, behavior and probabilities and support your customers with individual risk assessments. New technologies allow you to make this assessment much more granular, incorporating individual behavior and internal and external data. Using these advanced data analytics, you can use these insights to build awareness among stakeholders and create new value propositions. You can offer customers a choice between different mitigation strategies – assuming, reducing or transferring risks. Now, some of these activities may already be in place for specific business lines or customer segments. But this is different – we’re not assessing risks to set the right premium or clauses on a policy. We are investigating risks to reduce them. Take the Discovery Vitality solution, rewarding clients for healthy living. With this health and wellness program, participants can save on their premiums and earn valuable rewards and discounts by simply living a healthy life. The more active your lifestyle, the more you’ll save and the greater your rewards. You can earn a $300 Apple Watch for $25 by exercising regularly. This may imply that insurers need to redefine their role as part of an extended eco-system as they are broadening their insurance offering to increase customer relevance. Examples include integration with health, safety, housing, mobility and personal financial planning. Life insurance may become a part of the client’s broader financial plan, including healthcare requirements or housing arrangements after retirement. But there are approaches to increase customer relevance. While we may have life or funeral insurance, there are still a lot of difficult, complex financial and legal items to manage. Especially at a time where you really don’t want to handle that. So how can you help your customers? By offering them a solution to prepare. The startup Tomorrow. from Seattle, recently received $2.6 milliion of funding from VCs, angel investors and Allianz Life. The company's solution provides an easy way for families to prepare themselves for the future, both financially and legally, making arrangements for when a relative passes away. The app helps to set up roles like guardian, executor or trustee, to create a will or a trust -- and to buy life insurance. Another example is Afternote, providing a digital platform where you store your life story, leave messages and make last wishes known for your funeral and legacy. The purpose is to help customers to reduce the complexity and fuss when preparing for a funeral, managing digital legacies and honoring last wishes. Both Tomorrow and Afternote provide a broader service than a life or funeral insurance. We expect these kinds of solutions over time to become more and more integrated with service partners and other functions or platforms (e.g. healthcare, support groups, notaries, public records) creating integrated work flows reducing complexities and inefficiencies we have around these events today, that make a difficult time just a bit easier in a difficult time. That’s where the added value is going to be. See also: This Is Not Your Father’s Life Insurance   Of course, you can apply these concepts to pension insurance, as well. If you understand all the complexities of pension insurance, the real challenge can be to translate this into clear communications and interactions with your customers, not only digitizing channels but creating attractive, interactive environments where customers can increase their awareness and involvement. Digital solutions offer the opportunity for real-time notifications or attractive simulations for advisers, employers or private customers. This way, you can offer new services and new ways to strengthen the relationship. The second approach to change insurance into a product that customers actually want to buy will be covered in Part 2.

The best way to defeat or at least largely mitigate hackers is with a dynamic defense system. When combined effectively, anti-virus software, NGFWs and the products and services from cybersecurity companies like CyberArk and FireEye can provide an organization with a resilient cybersecurity framework. However, such security measures are expensive and are dependent on companies that employ IT professionals, which is why many organizations try to fend off cyber attacks only with anti-virus software and a NGFW. Yet there is another method with which to mitigate or prevent cyber breaches, and it is a method that cyber liability and technology E&O insurers need to understand and immediately employ: human psychology. The most common meeting of psychology and the binary world is the door to the binary world: the password. Most, if not all, underwriters have read an article or heard a lecture about how “password” and “123456” are the most frequently used keys when people attach a password to anything. Moreover, the commonality of those two keys has been a fact for decades, but the insecurity of using commonly known passwords as a passport remains virtually immune to change. The longevity of weak keys is due to many factors, but at the heart of all the factors is human psychology. It is a behavior that does not want to be bothered with memorizing a multitude of passwords, and one that tries to find the easiest way to meet a password requirement instead of trying to create a strong passport. Most importantly, it is risk and reward psychology that governs the creation of any password. Who cares in the professional world what a person’s password is as long as the work gets done and a person gets paid? Yet current cyber liability and technology E&O wording does not even try to tackle this most basic insecurity, one that costs insurers large amounts of currency time and again. Insurers will continue to lose vast amounts of money due to the insecurity of a key like “123456” until insurers decide to tackle human psychology and work with technology companies to create a safe path forward out of the current mess with which the digital community finds itself. See also: How to Identify Psychosocial Risks   If passwords were the only element of enterprise cybersecurity that needed to be reformed, then, to a high degree, the issue would not have far-reaching implications. However, the fact is that the weakness of keys is only a symptom of a larger problem. Cybersecurity may be a topic that crops up in news headlines on a regular basis, but it is a topic that also is generally viewed as a fringe area of thought. At the enterprise level, this can be seen in one prominent way beyond dysfunctional passports, and that is in individual cybersecurity responsibility. Cyber breaches have cost the global economy no less than $400 billion each year since 2013, have affected essentially every part of the professional sphere, and are bringing governments around the world into conflict with their taxpayers as represented, in one way, when a government, like the U.S. government, tried to force Apple to make its products less secure. Nonetheless, to this day a majority of the companies around the world do not put part of the onus on individual employees for a company’s cybersecurity posture. Most companies do not include, in annual employee reviews, an area that deals with how the individual contributed to the strength or weakness of the company’s cybersecurity approach. Did the employee use a strong password over the past year? Did the employee lock her computer each time she stepped away from her desk? Was the employee’s company computer linked to any cyber attacks? If the employee’s computer was linked to a cyber attack, then had the employee shown an appreciable improvement of her cybersecurity awareness? By not enforcing the need for every employee to contribute to the cyber safety of the company, employees at all levels are allowed to have a carefree outlook, which is clearly detrimental to the cybersecurity posture of every organization. Even potential employees are not vetted for their sense of healthy cybersecurity. Companies ask numerous questions when interviewing a potential candidate, but very few companies try to assess the individual’s sense of responsibility when it comes to cybersecurity. If employees, and even applicants, are not expected to carry part of the responsibility, then what reason does any employee have to be responsible from a cybersecurity standpoint? Perhaps more disturbing than the previous issues is that cyber liability and technology E&O insurers do not account for how human behavior influences the development of computer hardware and software. From about 1990 to the present, there has been a relentless movement by technology companies to get products to market at breakneck speed. While a hardware company like Intel has produced some products of dubious quality, like trying to push its Pentium III processor beyond the 1Ghz level and the Rambus fiasco, hardware producers have largely avoided major mistakes. However, software developers are almost entirely responsible for the creation of a binary world where security has almost always been an afterthought, and human psychology is at the heart of this issue as well. Since 1990, constant pressure has been placed on software engineers to meet deadlines set by a management system that is focused on everything but cybersecurity, which means that quality is almost always sacrificed to include a flashy software feature or simply to get a product to market quickly. Windows Me, Windows Vista, and Windows 8 are the results of a management system that showed great disregard for the safety of the end user. Moreover, software engineers themselves also have the psychological outlook that, if an issue does comes up after a piece of software is released, it can always be patched at a later date. Perhaps the most obvious example of the patching system in overdrive is that of smartphone operating systems and applications. It is not uncommon for one smartphone application to receive updates two or three times each month. However, the present wording of technology E&O policies and the questions asked in technology E&O applications continues to demonstrate a severe lack of understanding on the part of insurers as to how human behavior gives rise to technology E&O claims. When it comes to human psychology, it seems that the most egregious lack of understanding by insurers is not comprehending their most prominent adversary: hackers. However, hackers are not all the same, which means that they are driven by different attitudes, thought processes and rewards. More than that, hacking is an art and, just like any other art, there are “newbies,” and there are actual artisans. In the first of the four hacker tiers are elementary hackers, meaning those people under the age of 14. For the most part, elementary hackers are going to focus on their local geographical community. This is partly due to the experimenting nature of such a young hacker, because a 10- or 12-year-old is still trying to figure out how to hack. Therefore, locally geographical targets present the best chances to hone a person’s skills. After all, the basic educational system, especially in the U/S., but elsewhere, too, spends very little on defensive technologies of any kind. The local courthouse and sheriff’s office spend only slightly more than the educational system, and local merchants still largely maintain the attitude that they somehow do not appear on the radar of any hacker. Therefore, local venues often are the best targets because they often have the least security, in all forms, and consequently are the easiest ones on which to test a person’s skills. However, insurers largely ignore this first tier and appear to have the mindset that these hackers are unworthy of recognition and that no solution as to how to engage with this group is needed. The next tier contains the rookie hackers. These are the hackers who successfully “graduated,” unopposed, from the elementary group and who are generally 14 to 22 years old. For this next tier, the motivation is still whether the individual is capable of a hack, but now the target of the hack is going to extend, with ever greater frequency, beyond the immediate geographical location. It will also increasingly encompass working with and learning from others. This is often the stage where hacktivists are going to begin to form and where the psychology of the hack is going to extend to obtaining items like currency and prestige. As hackers in this group encounter other hackers, they often start to form a set of ethics that make sense, but that are hard for a majority of people to understand. This same group is also going to start to attack national law enforcement institutions, yet even this tier is largely ignored by insurers around the world even though attacks from this group often involve PII, PHI, and payment card data. Tier three is the first tier that has widespread acknowledgment from all insurers, and this tier encompasses both artisan and professional hackers. The hackers in this tier are often going to be 23 years old and older. One factor that makes this tier of hackers so effective in entering systems where they are not welcome is that they have been able to hone their skills from the age of 10 to 23. Most people who build and hone a skill set over the course of 13 years will be fairly capable. Another factor is that this tier is composed of people who have a sense of identity, which means that this group has formed its own moral compass and conforms to ethics and outlooks that often fall outside of the global mainstream. This sense of identity and associated ethics gives rise to groups like the FireEye branded FIN6 group, or the hacktivist group Anonymous. A group like FIN6 is capable of inflicting hundreds of millions of dollars in damage on the global economy, but, because cyber liability and technology E&O insurers have ignored the first two tiers of hackers, they are unable to appreciate the depth and abilities of tier three hackers. The fourth tier of hackers have been known to insurers for years now ,as well as law enforcement organizations around the world. This tier is also composed of hackers who work for effective cybercrime groups, like FIN6, or larger cybercrime groups, hackers who are ardent supporters of a sociological or political philosophy (hackers for ISIS are a current example of this) and hackers who work for nation-states, whether directly employed or occasionally contracted to work. These hackers have narrow views of the world, their ethics often fall outside of the norm of most hackers, and they are constantly trying to expand ways by which to wage cyber warfare (Stutnex is a recent successful example) and are the embodiment of ghosts in the network. Tier four hackers are almost always the hackers who cause the most damage while leaving virtually no trace of their activities, and they are beyond insurers' ability to engage with in any reformative manner. Human behavior is at the core of every single data breach initiated by a human. In perhaps the most recent egregious example, the hacking of Equifax is a foul example of this. The Equifax hack occurred because of a psychological company mindset of complacency as well as the hackers' own psychological reasons. Complacency is clearly demonstrated in the cybersecurity posture that the company was maintaining: It can be done later. The hole that allowed the hackers to gain access and successfully acquire copious amounts of non-public data had a fix that was released in March 2017, but by May 2017 Equifax still had not patched the vulnerability. There is also evidence that Equifax was notified as early as December 2016 that its systems were not secure. With the PII that a credit rating agency has, such a delay in updating critical data is unacceptable. However, with no government or market pressure to behave responsibly, Equifax and its ilk will continue to suffer data breaches time and again, and time and again consumers, and ironically insurers, will continue to exist in a world of ever-increasing uncertainty as to which direction financial harm will arrive from. See also: The Costs of Inaction on Encryption   While the undeniable importance of accounting for human psychology is a severe oversight on the part of insurers, the path forward is equally undeniable: Engage with as many tier one and tier two hackers as possible and ensure that cyber liability and technology E&O applications allow insurers to assess the psychological outlook an applicant has with regard to cybersecurity. In the April 2016 edition of the PLUS Journal, it was argued that insurers need to work with other companies involved in technology, marketing and lending and in other parts of the private sector to create an international competition. This competition would give students a creative outlet to display their skills whether they be in coding, design or writing. By establishing such a competition and working with educators, world wide insurers and other companies can give potential tier one and two hackers a creative outlet for their skills as well as an affirmation that their skills can lead to healthy career paths. By finding these individuals through an international competition, not only can insurers reduce the risk to their insureds of being hacked by the reduction in numbers of hackers, but they can also find the people who are capable of creating next-generation products. Without spending the needed effort, though, insurers will continue to lose money at unsustainable levels to cyber liability and technology E&O claims, claims that could have been avoided by investing in adolescents, who, after all, are the future, but who also are the most vulnerable to negative influences. By also asking the right questions in a cyber liability and technology E&O application, insurers can assess the psychological outlook of a corporate applicant and make a far more informed decision as to whether to underwrite the risk. Had insurers asked Equifax questions that appropriately gauged its perception of the importance of cybersecurity, they could have avoided the risk of underwriting the firm. Surely, asking eight psychological questions to save $100 million is better than accepting $300,000 in insurance premium and all the uncertainty attached to that premium. Over the past four thousand years, battles and wars have often been won by the continued incorporation into the battlefield of new technology, whether the technology was metallurgical or mechanical, but understanding the psychological mindset of the enemy has also been a determining factor. The ever-present value of human behavior has not been lost on most of the private sector, either. Psychology is at the core of a multibillion-dollar industry like advertising, and it is represented daily in the greed and fear index on Wall Street. Understanding the psychological mindset of a company as it concerns its cybersecurity posture and understanding hackers without question must be embraced by insurers. However, until insurers realize the virtual relevancy of human psychology they, and their insureds, will continue to lose substantial amounts of currency, time and sense of security, and the stability of the global economy will continue to be destabilized.

In my last blog, we established the rationale for group and voluntary benefits providers to consider new business and technology strategies. The market is changing. Market drivers should be pushing carriers to recreate themselves to meet the needs of employers and employees. As a part of that blog, we touched on group and voluntary benefits for the small-to-medium business market. Nearly every group insurer recognizes that there is opportunity within the SMB market segment, but they need confirmation that: a) They understand what SMBs really want from group and voluntary benefit providers, and b) they grasp how they can employ technology to meet those needs. So, in today’s blog, we will look at the answers to those issues in greater detail. What do SMBs really want from their group insurance providers? SMBs want insurance without huge costs. They care about premiums, and they pay attention to how much it costs to simply administer benefits. It takes time to educate employees, enroll them and handle their day-to-day benefit issues. SMBs recognize when an insurer is taking steps to remove administration hurdles and headaches, and they appreciate a streamlined, automated process that will reduce internal administration. SMBs see innovative voluntary benefits as a differentiating employee acquisition and retention strategy. The unemployment rate is at a record low 4.1% in the U.S., plus we are seeing an increasing move of millennials starting new businesses and a shift of many into the gig economy.  This means that job seekers have options and choices. So, employers must have competitive and compelling voluntary benefits packages that meet the needs and expectations of a changing workforce. Wearable technologies make a great addition to SMB employer offerings. Employers want health-focused, wellness incentives for healthy habits and exercise to keep costs low but also to align to changing expectations. In our new consumer research, The New Insurance Customer – Digging Deeper, we found that all generations use fitness trackers like Fitbit and that using a fitness tracker is one of the top three digitally performed activities that will have an impact on insurance. So, group and voluntary benefits providers that can integrate products with wearables or mobile tracking may get a second look. SMBs want to have a wider selection of voluntary choices from their benefit providers. With the emergence of a new set of employee expectations and a competitive marketplace for talent, particularly for millennials and Gen Z, many companies are recognizing the value of voluntary benefits and the potential to offer options that appeal to the unique needs of different employee segments. Each segment has different needs and expectations, and a one-size-fits-all offering does not necessarily work. See also: SMBs Need to Bulk Up Cyber Security   Millennials and Gen Z are carrying large student debt loads, and many Baby Boomers are delaying retirement and are facing rising healthcare costs and low wage growth. In line with these issues, there are several voluntary benefit options that are expected to grow in popularity for these different generational groups among mid- to large-sized employers, according to Willis Towers Watson:

• Long-term care – 30% now, 52% by 2018
• Student loan repayment – 4% now, 26% by 2018
• Pet insurance – 36% now, 60% by 2018
• ID theft – 35% now, 70% by 2018

Self-funding is an area of interest for SMBs. SMBs that have carefully weighed the risk of self-funding, and that have a reasonably healthy employee base, stand to save a tremendous amount of money. Self-funding, however, still requires a carrier of some kind for administration purposes. Insurers that design self-funding plans into their overall offering stand to gain, because they can offer it as a “future” option for employers that may want to change or as an instant option for those that are ready today. Group insurers can also look to the consumer market for preference and demand trends. In Majesco’s report, The Rise of the Small-Medium Business Insurance Customer, we found that, “insurers should reevaluate their digital and business strategies for small business owners and align them more closely to personal lines.” We also found that:

• SMBs are thirsting for products that will lower their risk. SMBs are highly risk-conscious, and very in-touch with their employees, making them an excellent market for group products. The desire for lower risk also makes them likely to be open to technologies that will assist.
• They are not unwilling to share relevant data if it gives them discounts or added protection. This will allow insurers to better control risk over smaller employee populations.
• They are ready for easy-to-understand and easy-to-purchase solutions. The smallest businesses, those with one to nine employees, represents the largest share of the SMB market, yet they find it much harder to research, buy and service insurance. New insurers or MGA startups are capitalizing on this gap in service.
• They are willing to break from tradition. SMBs have extremely low loyalty rates across all lines of insurance, and they are highly receptive to insurers with non-traditional offerings or value-added products.
• They long for personalized service. This doesn’t mean that they need face-to-face service. It means that they need an organization that can customize products to fit the business need and have easy-to-use touchpoints for administration and communication.

What should group insurers seek from technology to meet the needs of the SMB market? Here are some high priorities that group insurers should consider when they are looking at technology options: Digital front end In all of Majesco’s research, we have found that the most important driver for SMB buyers is ease of research, purchase and servicing. A digital front end will provide engaging, easy enrollment. It should come with claims technology and tracking that makes the process simple. It should somehow manage a process of continual engagement. It should provide service options that make it simple for SMB HR departments to administer the products, plus it should offer self-service administration options for employees to remove simple tasks from HR. Speed to market with new products Open enrollment happens every year, and it is on a fixed schedule. New products can’t simply be rolled out at any time. Insurers need quick methods for defining and testing new products, so they can offer and be ready when employers are putting together their benefits packages. Technology can help. Today’s cloud-based group product alternatives include pre-built rates, rules and products that can be up and running in a very short time. Group insurers can use these outside of core systems to add new products, services or whole new lines of business. This is especially effective when considering the development of new personal property and casualty insurance as voluntary insurance. Many group insurers can’t consider these new types of offerings without first acquiring the technology to make it happen. Speed-to-market solutions are now far easier to implement and use than with traditional group systems. Actionable data and consumer insights down to the individual consumer Group products, and even SMBs, aren’t all governed by HIPAA-level data constraints that amalgamate individual data into company or community pools. Many types of voluntary products will yield individual data that can help employers and insurers manage risk. Actionable data, such as social data, wearable data and behavioral data, should be gathered and analyzed. Insurers need a data framework in place that will add value to employers and employees. An ecosystem for benefits administration Group insurers should avoid burning their IT budgets with over-customization, or intensive integration or the maintenance costs of trying to keep obsolete technologies alive. An ideal technology solution leverages the best solutions in the market by building an ecosystem of best-of-breed solutions coupled together with a framework that will allow the ecosystem to accept plug-ins for today’s and tomorrow’s services and technologies. The digital era shift is realigning fundamental elements of business that require major adjustments from insurers for them to survive and thrive. 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. See also: Cyber Insurance Needs Automated Security   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. The next wave of growth is expected to come from their ability to provide superior customer experience – not just in comparisons with other insurers but also in comparisons to all companies with which their customers interact. There will be constant pressure from startups backed by venture capital, the M&A between traditionally different businesses like CVS and Aetna, the entry by big tech such as Apple, Amazon and Google into insurance and the digital transformation of existing insurers in the digital race to meet those needs and capture more share of the enormous opportunity in the market. The time for understanding, planning and execution is now to capture these new opportunities for group, employee benefit and voluntary insurance. Those who recognize and rapidly respond to this shift will thrive in an increasingly competitive industry. This article was written by Prateek Kumar.

I recently sat with Nick Gerhart to discuss the regulatory environment for U.S. insurance carriers. Nick offers a broad perspective on regulation based on his experience: After roles at two different carriers, Nick served as Iowa insurance commissioner, and he currently is chief administrative officer at Farm Bureau Financial Services. Nick is recognized as a thought leader for innovation and is regularly called on to speak and moderate at insurtech conferences and events. During our discussion, Nick described the foundation for the state-based regulatory environment, the advantages and challenges of decentralized oversight and how the system is adapting in light of innovation. This is the first of a three-part series and focuses on the regulatory framework insurers face. In the second part, Nick will provide the regulator’s perspective, with a focus on the goals and tactics of the commissioner’s office. Finally, in the third installment, we will cover the best practices of the insurers in compliance reporting. Part I: The Regulatory Framework You served as the chief regulator in Iowa: How do regulatory practices in Iowa compare with other states? Every state essentially has the same mission. Iowa has one of the largest domestic industries, so we have to focus a lot on the issues that go along with having a lot of domiciled companies. We have over 220 companies domiciled in Iowa. I believe that is the eighth most in the country; therefore, we are a top-10 state in the number of domiciled carriers. So, how we focus may be a bit different than if we only had a handful of domestic carriers. Due to the number of companies domiciled in Iowa, we must have a technical skill set and ability to completely understand the all facets of the industry. Level-setting: What are the goals of the office of the insurance commissioner? First and foremost, the goal is to protect the consumer. You do that through monitoring a company’s solvency and financial status. You also make sure that companies are following rules and regulations and all the laws on the books. A lot of folks don’t recognize how complex that regulatory framework is, so you really spend your time not only on financial solvency but also on the market side, making sure that rules are followed. See also: Time to Revisit State-Based Regulation?   Even if a state has fewer companies domiciled, is it still interested in solvency? Or is this outsourced to the state of domicile? That’s a good question. There are two sides – the financial side and the market side. On the financial side, there’s great deference to the lead state. For instance, if you are the lead state regulator of a group that is doing business in multiple states, there will be great deference to that regulator and his or her team that is reviewing those financials and that file. Any regulator can check and have their own views, obviously. But, there’s going to be great deference to that lead state. Is this the same for market conduct? On the market side, there’s not nearly as much deference. In fact, while I was commissioner, the NAIC was undertaking an accreditation standard for the market side. On the financial side, every state is accredited by the NAIC. And through this process, there’s much more cohesiveness and deference to that lead state. That doesn’t exist as much on the market side. So, backing up a second, I’d like to touch on the topic of state-based regulation vs. federal regulation. Is this the right way to regulate this market? I think it’s a good thing, because it’s local. A lot of insurance is local. The feds have done a lot of work – whether it’s CMS, the Department of Labor or Treasury – that encroaches on state insurance regulators. I submit that this encroachment creates confusion and is counterproductive. I personally do not believe a federal regulator is going to do a better job and, in fact, believe it would lead to poorer results and hurt consumers. In my opinion, the federal government did not do exemplary work during the financial crisis, and I believe insurance regulators actually performed and executed quite well during that financially stressful time. In looking at that crisis, I have concluded that I do not want federal regulators or prescriptive banking standards forced upon the insurance industry. State insurance commissioners are either elected by the people they serve or are appointed by a governor or other official or agency head. Those are held accountable at that local level and are part of the communities they serve. On countless occasions, I was stopped by people and asked about insurance issues. It would be very difficult to get that accountability or access if insurance were regulated at a federal level. Are there areas where the states could improve? There are some areas: They can do a better job of working together on the market side. But that’s why the National Association of Insurance Commisioners, the NAIC, exists – to create model laws that will create more uniformity across all states. And again, the states have done a tremendous job on the financial side. The market side has more room to improve –  at least as far as coordination. Regulators have made tremendous progress in recent years, though. In the last six years, by collaborating and coordinating through the NAIC, monumental modernization has occurred. As an example, annuity suitability, ORSA, principal-based reserving, corporate governance, credit for reinsurance and now cyber model laws have all been created and passed in numerous states. Passing a model law out of the NAIC is important because it provides a state a solid model to guide through the legislative process. What is the downside of state regulation? There are certainly challenges with the state-based system. One is, at the state level, having resources to do the job. The state of Iowa is really an international regulator as we’re the lead state for Transamerica/Aegon and group-wide supervisor for Principal Financial. We have firms in Iowa with significant international footprints, so Iowa regulates alongside international peers from all over the world. I believe it is critical that Iowa resource the insurance division appropriately, as limiting resources too much ultimately hurts the ability to regulate effectively. After resources, I think the biggest challenge for states is uniformity issues. An emerging challenge is keeping up with all the technological advances and innovation emerging from the insurtech and fintech area. Is regulation keeping up with innovation? Whether or not the old regulatory framework is still relevant today – I believe we will soon have a debate around that and how to modernize. The use of data is going to be a challenge for regulators, whether it’s genetic testing in life insurance or some other topic. There are a lot of issues in the innovation space that regulators are going to have to step up and meet because, if consumers demand change, the answer shouldn’t necessarily be, “We can’t do that.” Maybe we need to look at the rules and the laws and make a concerted effort to modernize. Over the years, a number of people have come into my office frustrated at the limitations of the current rules and said, “That law’s stupid.” I have to inform them that just because it is illogical doesn’t mean that you can get rid of it. That’s not the commissioner’s job. The legislature passes the laws. The commissioner interprets and enforces the laws. Commissioners do not pass the law, so, when individuals are frustrated, often that frustration is misplaced. See also: The Coming Changes in Regulation   All in all, you would say that state-based regulation is the better answer? I would put the state system up against a federally based system any day. At the same time, we are the only country, to my knowledge, that has 56 different jurisdictions regulating insurers. Every other nation has a federal one. This poses challenges for international groups; certainly, some reinsurers are facing these issues. It is for that reason that we must coordinate better and speak with a unified voice. As I have said, I do think the state system is remarkably better for consumers. When I was commissioner, the phone number on my business card went right to my office. I talked to consumers every day who called me directly. I would answer my phone, and they would be shocked that I would answer. There is genuine appeal in that. When something goes wrong, insurance quickly becomes very personal. Sometimes, it’s bad things happening intentionally or willfully, while other times it’s just misunderstandings. Insurance is incredibly complex. I’d much rather have a system where there is accountability at the state level. You have people working for their citizens whom they go to church with and see around the state. That’s a much better system than a federal bureaucracy that might have 10 regional offices where it’s impersonal and you have no idea who in the heck you’re talking to. Continued….

While 2017 saw lots of progress in insurance, as the year winds down we’re going to put a stake in the ground and predict that 2018 will be the year that ushers in the amazing season of innovation and transformation that so many of us are hoping to produce. 

For the last few years, the insurance industry has seen the rise of an idea-rich insurtech movement focusing on how new technologies could potentially disrupt or even replace the traditional insurance industry. It has been exciting to see the spread of ideas on how to reinvent insurance, but so far the reality hasn’t lived up to the hype.

In 2018, reality can catch up to the hype partly because more mature thinking is leading innovators to shift their focus away from disruption and replacement and toward what we consider to be transformation—in other words, using innovation and technology to help the industry to adapt, evolve and improve.

How will the industry be transformed?

Many of the early insurtechs were directed at distribution, because it is the consumer-facing part of the industry, and technology has reshaped customer preferences and attitudes. People sometimes refer to the “Amazoning” of commerce. Consumers now expect, even demand, the sort of one-click convenience that Amazon provides, even in industries far afield from Amazon. Examples of distribution-focused insurtech include comparison engines for buying insurance, direct online sales of personal and small business insurance, and on-demand insurance.

Increasingly, we see the insurance industry moving away from an emphasis on how technology alone can drive innovation. Instead, the industry is focusing more on where its needs are, then looking to see where technology can make processes more efficient and can solve problems, including the need for growth.

This shift might seem to create obstacles to insurtechs, which often tout the technology breakthroughs that they’ve engineered, but the focus on transformation creates opportunities for insurtechs to be successful, too. Insurtechs and insurers will, however, have to get more specific about what the needs are and how innovations can fill them. Insurtechs and insurers are drilling a tunnel, starting on opposite sides of a mountain, and they have to make sure they meet in the middle.

Simple objectives like improving “claims” are not enough—are you focused on first notice of loss, claims analysis, fraud detection, claims processing, claims payments or what?

To find the right solution, the industry must ask the right questions. A classic line in business literature is that a consumer doesn’t want a quarter-inch drill; he wants a quarter-inch hole. So, what quarter-inch hole does the consumer want or an organization need? What is the specific job to be done for an insured? What is the specific strategic domain that can be improved to help an organization grow?

When the right questions are asked, and executives in the insurance industry recognize that true transformation is a path to growth and greater profitability, we believe the industry will increasingly find that integrating with insurtech solutions leads to meaningful innovation.

For their part, insurtechs can’t create new technology applications in isolation and will need to work more closely with the insurance industry to identify opportunities for innovation.

This will become more urgent as insurtechs seek additional investment. Most of the investment so far in insurtech has been at the seed or early stage, and most of these companies are still working their way through their initial funding. But as their second or later rounds come up, there will be some consolidation, as always happens in a hot, new space. Insurtechs will wash out if their technology is not easily integrated by customers and partners or does not clearly contribute to profitable growth. The market will weed out underperformers because insurance is a results-oriented business.

As the insurance industry increasingly embraces innovation, we will continue to do all we can to provide insights, context and perspective, helping the industry—including insurtech innovators—to discover and hone technologies and solutions that can be a catalyst for growth.

Wayne Allen
CEO - Innovator's Edge, Insurance Thought Leadership

The Internet of Things (IoT) is a new concept for most people. The term, and the industry, have gained relevance through wearables like FitBit, and IoT’s presence in the home is slowly starting to become more mainstream (though the concept has been around for decades, especially in the industrial space). In the last five years, IoT has quickly gained traction among early adopters and is positioned to be an integral part of the homeowner (and renter) experience. Not only are IoT products becoming commonplace, they are smarter, integrating with each other and providing data that’s never been obtainable. Within the insurance industry, this integration will not only make life easier for the homeowner – from catching water leaks before they cause damage to getting an alert should an alarm sound when no one is home – it will change the way providers interact with customers, ultimately reshaping how properties are protected and insured. This adoption is defining a new IoT – the Insurance of Things. Current State of the Industry While insurance providers document information like when a home was built, where it’s located and what the crime rate is in the area for each of their policyholder’s homes, traditionally very little is known about the actual activities happening inside and around the home, and almost never in real time. See also: Sensors and the Next Wave of IoT   An agent might know that a particular policyholder’s house is located in a ZIP code that experiences a high frequency of burglaries, but the agent has no idea if that policyholder leaves his garage door open regularly – something that’s been shown to leave a home especially vulnerable to intruders. This is just one of many examples of where connected devices present an exciting opportunity. What the Future Holds The data that IoT solutions capture will alter the home insurance industry, allowing the market to move away from passive insurance and claims processing and into a more active approach focused on avoiding loss altogether. This transition is already starting to take shape with auto insurance. As more providers implement devices and mobile apps that report driving habits to capture a driver’s level of risk, behaviors and patterns can be analyzed to tailor coverage for each individual customer. Over time, these types of insights will empower insurers to identify and build new risk models and to anticipate and eventually predict incidents based on people’s habits and other trends. And, just as the auto industry has clearly defined the characteristics of a safe driver, eventually home insurers will have enough data to define what it means to be a “safe homeowner.” As IoT’s loss reductiions become more definable through mass adoption and more data, it could very well become a requirement to have certain smart home technologies installed in your home to get insurance coverage. A number of new entrants using data from IoT devices and other sources in creative ways are aggressively pushing this agenda, including Lemonade and Hippo. A final point to consider – IoT products themselves will dramatically reduces losses, and it will be interesting to track consumers’ selection bias over time as adoption rises. In the coming years, it will be interesting to see if homeowners who install IoT devices in their homes have fewer claims despite the devices they install. There is little hard evidence to support this notion today, but over time will this group prove to be more active, thoughtful and generally safer homeowners even before they installed IoT devices? What Policyholders Think of IoT (and Why Insurance Providers Should Care) Consumers are buying IoT devices for many reasons, but one motivation in particular is the same reason they buy insurance: peace of mind. For the insurance provider, there’s even more at stake: loyalty. NTT Data found that 87% of insurance carriers believe the installation of IoT devices in the home will improve customer relationships, and 83% believe IoT devices will open the door for personalization of policy offerings – something that consumers desire. The same study also found that 64% of surveyed consumers are open to investing in IoT devices, and are even willing to switch carriers if it means they’re eligible to receive policy discounts for installing these devices. The insurers that figure out how to capitalize on consumer intrigue of IoT devices will have the upper hand in obtaining new clients (and, as mentioned, potentially lower risk clients, as well). Offering smart home technologies will provide insurance companies with the competitive advantage they need to maintain positive engagement with both new and existing policyholders, and will contribute to increased retention. Where to Start So, how can insurers leverage these devices to differentiate their offerings, reduce losses, increase customer loyalty and mine user data for greater insight into the safe homeowner?

1. Be purposeful when choosing who to work with. Start with an IoT company that has experience partnering with other insurers so you can quickly learn from them.
2. Keep it simple. Don't overcomplicate the success you can have with IoT by focusing on complex data too soon. This will come with mass adoption and will take time.
3. Make it appealing to your customers. Insurance doesn't have to be a commodity. Make it clear to customers why your new IoT offering is innovative and invaluable to them vs. your competitor's offerings.
4. Be nimble and willing to optimize programs. Knowing what doesn't resonate with customers is just as important as knowing what does. Notice that your customers aren't installing devices? Ensure the messages your customers receive from agents are clear so that they fully understand how the technology works, the benefit to them, and the incentives they’ll receive. Realize that customers aren't using a device in the way that you'd like to have the biggest impact on loss reduction? Experiment with other communications, like how-to videos or step-by-step infographics, to better instruct customers how to install their new device and educate them on various use cases.

See also: IoT: Collaboration Is Now Mandatory   What other challenges and opportunities lie ahead for the Insurance of Things? I’m excited to see how insurance providers and technology companies will work together to define the safe homeowner and the future of insurance!

Key Highlights External influencers: mixed macroeconomic signals

• Uptick in global growth and rebound in employment levels, if sustained, will have favorable implications for the sector.
• As central banks turn cautious, bond yield improvements are likely to slow in the near term, implying limited investment yield upside for insurers.

Sector trends: hurricanes to set course

• Supported by a strong bull run, global insurance stocks continued to rise as several large insurers saw improved investment and underwriting results.
• Pick-up in long-term buy recommendations for U.K. and E.U. insurers reflect improved analyst expectations.
• Natural catastrophe (NatCat) losses: Active hurricane season is expected to halt the relatively benign period of losses and limit further pricing weakness that has persisted after 2012.

See also: Insurance Technology Trends in ’17, Beyond   Tech disruption: blockchain rising

• Addressing the evolving nature of risk through innovation is a key imperative for insurers.
• Blockchain has now progressed beyond pilot stage, with early adopters looking to gain significant advantages.
• EY has taken a strong lead in helping insurers create a blockchain-based new-age information infrastructure.

Regulatory landscape: insurers prepare for impact

• Insurers need to initiate implementation plans to effectively address the changes introduced by the new accounting regulations (including IFRS17 Insurance Contracts).
• General Data Protection Regulation (May 2018): With more than half of the two-year post-adoption grace period now over, insurers will have to act fast to address the impending challenges.

You can find the full EY report here.

Insurtech and artificial intelligence (AI) have become the new buzz words and mantra in the insurance industry. Creativity and innovation are thriving in Silicon Valley with more than 1,600 technology companies in the insurtech space for underwriting and claims. If you remember, back in the 1990s, experts predicted that if your company was not an internet company, you would not be around for long. That prediction came true, but what about the current prediction that artificial intelligence for claims will change the insurance industry? I believe that it will, and now is the time to stake your claim for the future. For the last few decades, insurance companies have yielded massive amounts of data. We know that a robust AI system for insurance claims needs a lot of data to thrive and perform. Because you have the data, how can you start to leverage it and improve your business performance and outcomes? Insurance is now ready for an analytics platform such as Infinilytics' smartCTM that can help minimize claim costs, and improve customers’ claims experience. See also: Strategist’s Guide to Artificial Intelligence   One of the most contemporary AI solutions for claims is fraud and litigation prediction. Imagine the capability of predicting with a 90% accuracy rate if a claim is going to fall into litigation. Your claims team would be able to take immediate steps to mitigate the litigation, customer service would be greatly enhanced and your claims costs would be reduced. Insurance companies need to embed A.I. solutions along with their human intelligence so there's an effective feedback mechanism. Such AI-based claims SaaS solutions aim to:

• Lower loss-adjustment expenses
• Reduce the time to settle a claim
• Identify suspected fraudulent claims with AI pattern matching
• Use sentiment and emotion analysis for litigation predictions

AI solutions using machine learning require careful deployment and breathing time to achieve the return on investment. Machine learning can cause data biases and hide the context of predictions, which makes it unusable by claims organization. Claims organization need to become super users of such AI solutions and understand the context of these predictions and continue to contribute through continuous feedback. Most successful companies have combined human intelligence with AI to change labor-intensive, pattern-driven processes such as claims. See also: Insurtech: Can It Help Claims Experience?   Insurance companies have a vast amount of data. We need to leverage the data and transform the claims process into an efficient and cost-effective business model by quickly bringing artificial intelligence into the claims process.

Each year, Congress adopts a concurrent budget resolution setting net spending, revenue and debt limits on legislation emerging from each committee during the current session. This year, the path to tax reform began on Oct. 5 when the House passed its budget resolution, followed by the Senate passing its fiscal 2018 budget on Oct. 19. On Oct. 26, the House adopted the Senate’s version of the plan, allowing tax reform to increase our deficit by a maximum of $1.5 trillion over a 10-year budget period. The House passed H.R. 1, the “Tax Cuts and Jobs Act” on Nov. 16, and the Senate Finance Committee (SFC) approved its version on the same day. The Joint Committee on Taxation (JCT) estimated the bill would cost approximately $1.414 trillion over the 10-year period. The bill contains reconciliation instructions that allow it to pass the Senate with a simple majority. However, any senator may challenge proposed amendments if the instructions are not met. For example, an amendment made in reconciliation must be limited to provisions having more than an incidental effect on revenue spending and may not increase projected deficits in fiscal years beyond those covered in the measure. This is the feature that is behind the eight-year sunset in the SFC’s version. We suspect the reconciliation instructions will shape current tax proposals. Below are snapshots of specific SFC provisions affecting charitable giving, House counterparts and estimated costs. Keep in mind that a large portion of SFC’s provisions will not apply after 2025, when these changes will revert to pre-2018 law. We will conclude with the possible next steps in the legislative playbook, and some charitable planning observations. Executive Summary: The Impact of Tax Reform on Charitable Giving The most important item in each bill is the absence of language eliminating the charitable income tax deduction, limiting the deduction to a percentage (i.e., 28% effective rate as in President Obama’s proposals) or limiting the deduction to tax basis (rather than fair market value). These are huge considerations in reviewing this proposed legislation and should not be overlooked. See also: Tax Reform: Effects on Insurance Industry?   Unfortunately, the overall tax restructuring of the House and Senate bills produces an unfavorable result for the charitable world, whereby charitable giving may be significantly reduced, as set forth below. Tax Reform Snapshot Many exemptions, deductions and credits have been eliminated, curtailed or adjusted. For example:

•  The personal exemption is repealed.
•  The mortgage interest deduction is significantly curtailed and is now limited to the principal residence alone. The mortgage deduction on new acquisition indebtedness is limited to $500,000 (effective Nov. 2, 2017).
•  State and local income tax (or sales tax) deductions are eliminated, except for a deduction up to $10,000 for real property taxes.
•  The AGI limitation for charitable contributions of cash made by individuals to public charities is increased to 60% (from the current 50%).
•  The 3% limitation on itemized deductions (including the charitable deduction) – known as the “Pease limitations” – are repealed.
•  Personal casualty losses are eliminated.
•  Wagering losses are limited.
•  Tax-preparation deductions are eliminated.
•  Medical-expense deductions are eliminated.
•  Alimony deductions are eliminated.
•  Moving-expense deductions are eliminated.
•  Medical Savings Account deductions and exclusions are eliminated.
•  Employee-trade or business-expense deductions are eliminated.
•  The alternate minimum tax is repealed.

The SFC version of the bill has similar limitations, reductions or elimination of deductions, all of which must be resolved in one bill, probably during a conference committee. For example, the SFC retains the current seven tax brackets, lowering several rates, while the House’s version reduces the tax brackets to four. Both versions double the standard deduction while eliminating personal exemption deductions and most itemized deductions. The JCT estimates repealing the personal exemption deductions will increase the budget revenue by approximately $1.2 trillion, and repealing itemized deductions will add another approximately $978 billion over 10 years. In early November 2017, the Joint Committee on Taxation released a memorandum, which reflected the impact of these changes on the charitable income tax deduction: “For tax year 2018 [under current law], we estimate that 40.7 million taxpayers who itemize will deduct charitable contributions totaling $241.1 billion. Under H.R. 1, we estimate that approximately 9.4 million taxpayers who itemize will deduct charitable contributions totaling $146.3 billion in 2018.” The memo confirms a study released earlier this year by Indiana University’s Lilly School of Philanthropy: A doubling of the standard deduction alone will reduce charitable giving by $11 billion, and the increase of the standard deduction, along with other provisions in the House bill, will cause the claimed charitable deductions to fall by $95 billion, or 40%. This does not mean charitable giving will fall by $95 billion, but the amount claimed as a charitable deduction will fall by $95 billion. Both versions of tax reform permanently reduce the corporate tax rate to 20% (from the current 35%). However, the House version is effective in 2018, while the SFC version is effective in 2019. Both versions alter pass-through business income (PBI): The SFC bill allows a 17.4% rate deduction, while the House version caps the PBI tax rate at a flat 25% rate with the rebuttable presumption that 70% is wage income (taxed at regular rates) and 30% is PBI; service providers are taxed on 100% of PBI. Both versions modify rules for expensing capital investments. The SFC bill increases Section 179 expensing to $1 million (from the current $500,000), with a phaseout range beginning at $2.5 million (from the current $2 million), and expands the definition of qualified property. The House bill increases Section 179 expensing to $5 million, with a phaseout range beginning at $20 million. Both versions of the bill double the estate, GST and gift tax exclusion amounts to $10 million, adjusted for inflation. The JCT estimates this provision would decrease revenue by approximately $83 billion over 10 years. The House bill completely repeals the estate tax after 2024. The Tax Policy Center estimates completely repealing the estate tax alone would reduce giving by $4 billion in the long run, while altering behavior of lifetime giving by reducing charitable bequests by approximately 27%. SFC’s Permanent Provisions for Exempt Organizations Exempt organizations will be affected by the reduced 20% corporate income rates, changes to the various fringe benefits and tax-exempt bond reform. SFC’s bill proposes additional permanent changes to exempt organizations which include, in part:

•  A 20% excise tax will be imposed on employees who receive more than $1 million in compensation or “excess parachute payments” (producing $3.6 billion of additional revenue over 10 years; a similar provision is in the House version).
• Charitable deduction will no longer be allowed for amounts paid in exchange for college athletic event seating rights (producing $1.9 billion of additional revenue over 10 years; there is a similar provision in the House version).
• Donee organizations will no longer be allowed to provide a contemporaneous written acknowledgement (CWA) by issuing statements for all donors on a report to the government; instead, a donor making a gift exceeding $250 will need to rely on a separate or individual CWA (this has negligible revenue effects; there is a similar provision in the House version).
• A 1.4% excise tax will be imposed on net investment income earned by private colleges and universities with at least 500 students and non-exempt use assets with last year’s value of $250,000 per full-time student (producing $2.5 billion of additional revenue over 10 years; a similar provision is in the House version).
• Name and logo royalties will be treated as unrelated business taxable income (producing $2 billion of additional revenue over 10 years; there is no House corollary provision).
• Losses from one unrelated trade will not be allowed to offset income from another unrelated trade, thus unrelated business taxable income must be separately allotted for each trade or business activity (producing $3.2 billion of additional revenue over 10 years; there is no House corollary provision).

House Provisions for Charities (not part of SFC bill)

•  A flat excise tax rate of 1.4% will be imposed on investment income of private foundations (rather than the 2% or possible 1% tax rates).
• Charitable organizations sponsoring donor-advised funds (DAFs) must disclose their policies with respect to inactive DAFs and average amounts of grants.
• All charities (that is, Section 501(c)(3) organizations) will be allowed to engage in “de minimis” political activity (this is a change in the so-called “Johnson Amendment”).

Next Steps in the Legislative Playbook The Senate is expected to debate the SFC bill, potentially stripping, replacing or incorporating various House provisions during the week of Nov. 27. Following approval by the Senate, both chambers must resolve differences between the two versions of the bills before submitting one final bill to the White House, to be signed by President Trump. The proposed deadline is Dec. 12. Given the uncertainty on the horizon, donors who wish to make their charitable contributions must donate this calendar year (2017) to take advantage of current charitable giving tax benefits. Those unsure about how to allocate gifts in 2017 may nonetheless secure current benefits by using charitable giving vehicles. Donors should print out this article and consult with their advisers to explore their options. See also: Do We Face a Jobless Future?   Charitable Planning Observations

•  Many exclusions from income, exemptions, deductions and credits have been eliminated under the bill. For a vast majority of all Americans, the bill simplifies the income tax laws.
• Given the elimination or reduction of many deductions, exemptions and credits, a person with a home and a $400,000 – $500,000 mortgage may well have deductions that exceed the new standard deduction of $24,000. If this is the case, the only remaining income tax planning option is charitable giving. Charities should be alert to this opportunity and should promote outright and planned gifts during life with itemizers.
• With the anticipated reduction in charitable income tax deductions due to the increased standard deduction, charities should be aware of the danger of reduced funding and should enhance communicating their missions to donors who take the standard deduction.
• Under current law, taxpayers have tried to avoid treating business activities as “passive,” preferring them to be “active,” so that losses from one business activity can be offset against income earned as compensation. This trend may see a 180-degree turn.
• Almost all serious proposals in the past decade for repeal of estate and generation-skipping taxes have included a corollary: the imposition of carry-over basis at death, rather than a step-up in basis to fair market value at death. The Joint Committee on Taxation has scored the repeal of death taxes in conjunction with a carry-over basis regime as a revenue enhancer. This “omission” may be remedied in the final version of the bill, and, if this occurs, split-interest gifts will receive a significant boost.
• The world of mergers and acquisitions (M&A) will be changed radically. Sellers will want to sell assets because the corporate tax rate will be significantly reduced (from 35% down to 20%). Buyers will want to buy assets because the expensing of acquisition costs will be significantly increased. Charitable planners aware of this potential trend will be able to offer donors/clients the opportunity to avoid two levels of taxation, by suggesting charitable split-interest vehicles such as a gift annuity, pooled income fund and charitable remainder trust. In this manner, those selling a business may find they are only paying a 20% tax and are able to benefit the charity of their choice!

Having completed the exploration of our global trends in our previous post on services, investments and job roles, we now turn to our key themes. In our next round of posts, we will explore 11 key functional and technological areas within insurance, starting with today's installment on analytics and AI. The following statistics on big data, analytics and AI are drawn from the extensive survey we conducted as part of our Global Trend Map; a full breakdown of our respondents, and details of our methodology, are available as part of the full Trend Map, which you can download for free at any time. Insurance, relying as it does on predictions about complex future events, has always been a data-hungry, data-driven industry. The big-data explosion of the past decade is therefore something that insurers have followed with keen eyes:

According to IBM, the world generates 2.5 quintillion bytes of data every day, with 90% of the world’s data having been created in the last two years.

While insurers, and most companies for that matter, have for a fair while had more data than they’ve known what to do with, analytical and machine-learning models are now sufficiently mature and sophisticated for them to start reaping the much-heralded rewards of the big-data revolution. This is not without its challenges, though, with silos and legacy systems in particular acting as a drag on innovation. Analytics is being deployed pretty much everywhere, and by everyone, in the insurance ecosystem, so this post covers:

• Analytics and data usage across various insurance ecosystem players
• Overall data strategy
• Issues with silos and legacy systems
• Contrasting flavors of analytics in use: descriptive, diagnostic, prescriptive, predictive, behavioral and, of course, AI!

"Causing the greatest stir out of all today’s analytics tools is AI, which stands to revolutionize the whole insurance industry over the next 2-5 years, from robo-advisers and chatbots through to claims automation and mitigating fraud. While analytics teams retain the greatest degree of oversight, AI capabilities are currently being embedded across the whole insurance organization." – Helen Raff, head of content at Insurance Nexus

As we shall see, the leadership on many of these measures is provided by reinsurers. This is evidence of their driving the whole ecosystem forward, and in this they often take the lead over insurers. We also see this more generally; for example, the giants Swiss Re and Munich Re have been particularly active in accelerator-based innovation over the past two years. See also: 10 Trends on Big Data, Advanced Analytics   Is your investment in/focus on analytics increasing? 84% of all respondents are increasing their investment in analytics. This conforms to the stats we presented in our earlier post on services, investments and job roles, where analytics was second only to digital innovation for increased carrier investment. Drilling down further into the responses of different company types, we see that similar proportions of insurers (82%), brokers and agents (76%) and technology partners (85%) are increasing their investment. Of interest is the clean sweep by reinsurers, exemplifying the leadership trend we pointed out. Analytics has applications across all the major lines. Health and auto are two obvious examples given the ready availability of connected health devices and in-car sensors, which make data easier to capture and, as an extension of this, models easier to feed. This facilitates usage-based insurance (UBI), which we explore in more detail in our forthcoming post on Internet of Things, whereby actual living/driving habits inform policy prices (read ahead straight away by downloading the full Trend Map for free). Analytics also has obvious applications for predictive maintenance and security in commercial, auto and P&C/general lines, particularly where valuable assets (like property) are in play. Analytics is also growing in home insurance thanks to the increasing prevalence of connected-home devices, with Berg Insight estimating that there were approximately 18 million smart homes in Europe and North America by the end of 2015.

"There will be much more data from structured and unstructured data sources in the future – a huge challenge! 'Past developments are a good representation of future uncertainty' will not be replaced but solutions with AI-tech (big data) in combination with smart data strategies will enable insurances to make decisions based on models and evidence." –Andreas Staub, managing partner at FehrAdvice

Is your analytics strategy coordinated across your organization? The uses and advantages of analytics have been obvious for a long time, and we have seen analytics initiatives sprouting up in nearly every corner of the insurance business, from underwriting through to counter-fraud. An ad-hoc approach, often inevitable in the early days of a technology, quickly becomes unwieldy, and the benefits from coordination are substantial. It is encouraging therefore to see 57% of all respondents indicating that their analytics strategy is coordinated across their organization. The trend across our different company types is similar to the one we saw in the investment/focus question above – unsurprisingly, as coordination is vital to gain maximum value from increasing investment and focus, and often represents a large investment in and of itself. We thus see 59% of insurers coordinating, 54% of brokers and agents and 55% of technology partners, with reinsurers once more taking the lead (77%). Are you utilizing external data sources? Plenty of data is available for analytics use beyond that directly captured by insurance companies themselves, both publicly available (like social media) and for-purchase (from third-party aggregators). There is no clear trend across our ecosystem players on this measure, with 77% of insurers, 67% of brokers and agents and 81% of technology partners affirming their use of external data sources (reinsurers had a small though insignificant lead). Segmenting by region, we can tentatively identify Asia-Pacific as trailing on this measure, and our broader research and industry engagement does indeed suggest that the third-party data culture is less-well-developed here than it is in North America and Europe. That said, public sources of data remain available, from unstructured social media through to data generated/collected by incipient smart-city infrastructure (like in Singapore). More details to follow in our forthcoming regional profile on Asia-Pacific, or read on straight away by downloading the full Trend Map here. Do you have a formal data-governance strategy? Insurance companies are being borne along on an exponentially growing tide of customer data, which has brought data governance to the forefront of people’s minds; yet, as of today, only 57% of insurers, 51% of brokers and agents and 58% of technology partners possess a formal data-governance strategy. We expect this figure to rise sharply in the years to come. Reinsurers once again appear to lead (with 77% affirming the existence of a data-governance strategy). Are legacy systems and silos a problem for your business? Capturing data is only the first part of the story to building out an analytics-based business. In many cases, analytics and big-data projects within insurance companies come unstuck not because of a lack of investment or strategic focus but for more prosaic reasons: silos and legacy systems. If infrastructural bottlenecks strangle rather than feed analytical models, preventing them from operating at scale across all the relevant data pools, then the output will be etiolated and limited in use. We asked respondents whether legacy systems and silos represented "somewhat" or "very much" of a problem for their businesses, and then created a "burden score" based on a weighted combination of these two figures. Insurers clocked up a burden score of 138, brokers and agents 103 and technology partners 105. (Reinsurers score 123.) There are two key takeaways from this. Firstly, that silos and legacy systems are a problem for the entire insurance ecosystem. And secondly, that carriers are generally harder-hit (comparing insurers and reinsurers to the rest of the industry), which may well reflect their position as the central node of the industry into which all the other players feed. From descriptive analytics to AI: What's your flavor? With all new technologies or methods, there is generally a gap or lag between what is theoretically possible and what finds its way into commercial practice. We asked insurers and reinsurers what forms of analytics they were deploying out of a possible six options: As we can see, every form of analytics has attained at least a modest level of penetration, and we can tentatively construe from this an adoption curve of different analytics formats running roughly from predictive, descriptive and diagnostic (high degree of current adoption) through to behavioral, prescriptive and machine learning/artificial intelligence. So, while most respondents have developed capabilities to describe and predict, only a minority have advanced beyond this toward prescriptive and AI capabilities.

"The rise of insurtech, the analytics explosion and the new face of insurance has created a birth of new roles and impact points across the industry. No longer is analytics and data relegated to just information technology and actuarial — we are now seeing it being integrated into the business culture and DNA of insurance organizations." – Margaret Milkint, managing partner at the Jacobson Group

Analytics is a very broad category with applications across almost every part of insurance, from underwriting and marketing through to fraud and claims, as well as on the investment side of the business. For the sake of clarity, we have chosen to focus in on two areas of insurance work, underwriting and claims, to capture a snapshot of analytics maturity at the start and at the end of the policy lifecycle. The donuts above indicate the share of analytics work (as a proportion of the whole) being undertaken by respondents working in the areas of underwriting and claims – this is an intuitive way to compare the prominence of different flavors both within, and between, these two areas. A larger proportion of the analytics work undertaken by underwriting respondents appears to fall at the early stage of the adoption curve (descriptive and predictive) and a smaller proportion at the later stage (moving toward machine learning and AI), when compared to respondents working in claims. This implies that claims either encourages more advanced analytics than underwriting – which may be oversimplifying things – or that, for whatever reason, it leads underwriting on analytics maturity. See also: Why to Refocus on Data and Analytics   Join us for our next post, on digital innovation, where we talk about the rise of mobile and the many flavors of digital strategy. Or, if you'd like to access all 11 key themes straight away, simply download the full Trend Map free of charge. For any inquiries relating to the Insurance Nexus Global Trend Map, this content series or next year's edition, please contact: Alexander Cherry, head of research and content at Insurance Nexus (alexander.cherry@insurancenexus.com)