On June 26, Waymo (Google’s autonomous car firm), signed a deal under which Avis Budget Group will provide “fleet support and maintenance services” to Phoenix-area Waymo vehicles. Waymo uses Chrysler Pacifica minivans to autonomously shuttle Phoenix residents around town. Its first fleet of 100 minivans quickly grew into an order for 500 more. The Waymo/Avis agreement may only be a pilot, but the implications are enormous. Not unlike standard cab companies, Waymo realized that a fleet of autonomous vehicles would need cleaning and maintenance throughout the day and storage throughout the night. When practical matters like auto cleaning and storage become news enough for a press release, something big is going on. Here are some fun facts:

• According to USA Today, Avis’ stock rose 14% on the news.
• The Chrysler Pacifica was chosen, in large part, because it could close its own doors. Waymo usage experts theorized that riders might often hop out and forget to close the door.
• Within hours of the Waymo announcement, Apple likewise unveiled a deal where Hertz Global would manage its autonomous fleet.

Autonomous vehicles have picked up the pace of disruption over the last two years. What will life be like when the Autonomy of Things takes on many of our everyday behaviors or occupations, like driving? Will we be safer? Will we need insurance? Will auto manufacturers cover accidents via product liability? Who will cover bodily injury or property damage? How will risk products be changed to fit this new model? Is there an insurance right-road to surviving autonomy? See also: The Evolution in Self-Driving Vehicles   Is Autonomy Impact Still Underrated? There has been a lot of talk and certainly a wealth of words written on the impact of auto autonomy, and safety is at the top of the concerns and promises of autonomous vehicles. Insurers are, of course, focused on how autonomous vehicles might cause a decline in the need for auto insurance. The pace of development, rollout, experimentation and expansion of autonomous vehicles has far exceeded original expectations. In his blog, Peter Diamandis (XPrize Founder) noted that a former Tesla and BMW executive said that self-driving cars would start to kill car ownership in just five years. John Zimmer, the cofounder and president of Lyft, said that car ownership would “all but end” in cities by 2025. The Wall Street Journal reported in July 2016 that auto insurance represents nearly a third of all premiums for the P&C industry, with projections that 80% could evaporate over the next few decades as autonomous vehicles are introduced, some of them replacing legacy vehicles and some created for shared transportation. At the same time, U.S. government support strengthened in September 2016 when federal auto safety regulators released their first set of guidelines, sending a clear signal to automakers that the door was wide open for driverless cars and betting that the nation’s highways will be safer with more cars driven by machines instead of people. Those statements, among others, might cause some scrambling. Manufacturers are working frantically to partner with AI providers, cab services and ridesharing services such as Uber, Lyft and Waymo. Naysayers will note that rural areas will be highly unlikely to use autonomous vehicles soon, and it’s true that the largest impact may be in urban areas. But if car ownership were even cut by 5% by 2030, a tremendous number of auto manufacturers and auto insurers would be affected. Autonomy and its insurance impact isn’t limited to personal autos. Truck company Otto is testing self-driving commercial trucks — a necessary automation that could help alleviate the growing lack of truck drivers. Husqvarna has several models of autonomous lawn mowers on the market. Yara and Rolls Royce are among companies working on autonomous ships. Case, John Deere and Autonomous Tractor Corporation have all been developing driverless tractors. In nearly every one of these cases, there are safety benefits and disruptive insurance implications, but there are also revenue growth opportunities for those that think more broadly and “outside the box.” From developing partnerships with automotive companies to leveraging the autonomous vehicle data for new services, each offers alternative revenue streams to counter the decline of traditional auto insurance. The key is experimenting with these technologies to find alternative “products and services” and develop an ecosystem of partners to support this, before the competition does. Share and Transportation as a Service — Insurers May Like In our report, A New Age of Insurance:  Growth Opportunity for Commercial and Specialty Insurance in a Time of Market Disruption, we cite a report from RethinkX, The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, which says that by 2030 (within 10 years of regulatory approval of autonomous vehicles), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transport-as-a-service” (TaaS). The report says the approval of autonomous vehicles will unleash a highly competitive market-share grab among existing and new pre-TaaS (ride-hailing) companies in expectation of the outsized rewards of trillions of dollars of market opportunities and network effects. Welcome to the adolescence of the sharing economy and transportation as a service. Autonomy isn’t the only road for vehicle progress. Vehicle sharing is growing and will remain in vogue for some time. Just as Airbnb and HomeAway have given rise to new insurance products, Zipcar and Getaround and Uber have given rise to new P&C products. At the same time, a merging of public and private transportation and a pathway to free transportation is in the early stages of being created in the TaaS model. This will shift risk from individuals to commercial entities, governments or other businesses that provide the public transportation, creating commercial lines product opportunities beyond traditional “public transportation.” Vehicle users, whether they are riders, borrowers, sharers or public entities, are going to need innovative coverage options. Tesla and Volvo may be promising some level of auto coverage for owners of autonomous vehicles, but that kind of blanket coverage is likely to mimic an airline’s coverage of passengers and cargo — it will be limited. Those who lend their vehicle, through a software-based consolidator, such as Getaround, will need coverage that goes beyond their auto policy. In the past few weeks, we’ve also seen how cyber attacks can undermine freight and shipping, not to mention systems. Nearly all of these service-oriented options will require new types of service-level coverage. Autonomous freight may be safer in transit, but in some ways it may also be less secure. The lessons appear to be found in brainstorming. Technology is breeding diversity in service use and ownership. There will be new coverage types and new insurance products needed. See also: Will You Own a Self-Driving Vehicle?   Up Next … Flying Vehicles Remember the movie "Back to the Future" and the Jetsons flying cars that were so cool? Well, they are quickly becoming a cool reality. A June 2017 Forbes article says flying cars are moving rapidly from fiction to reality, with the first applications of flying vehicles for recreational activities in the next five years. The article says that, in the past five years, at least eight companies have conducted their first flight tests, and several more are expected to follow suit, indicative of the frenzied activity in this space. Companies such as PAL-V, Terrafugia, Aeromobil, Ehang, E-Volo, Urban Aeronautics, Kitty Hawk and Lilium Aviation completed test flights of their flying car prototypes, with PAL-V going further by initiating pre-sales of its Liberty Pioneer model flying car, which the company aims to deliver by the end 2018. This sounds like Tesla and its pre-sales move! Not to be left behind … ride-sharing companies are aggressively entering the space. Uber launched the Uber Elevate program, with a focus on making flying vehicles transport a reality by bringing together government agencies, vehicle manufacturers and regulators. Google and Skype are entering the space by investing in start-ups: Google in Kitty Hawk and Skype in Lilium Aviation. Not to be left behind, Airbus has unveiled a number of flying car concepts, with plans to launch a personal flying car by 2018. Airbus also plans to build a mass transit flying vehicle…the potential next TaaS option. So, it pays for insurers to keep their attention on autonomous vehicle trends … because it is more than the personal autonomous vehicle … it is the transformation of the entire transportation industry and will have a significant impact on premium and growth for auto insurers. As we recently found in our commercial and specialty insurance report, the transportation industry is rapidly changing and new technologies may be lending themselves to safety, but the world itself isn’t necessarily growing any safer. Risk doesn’t end. Insurers will always be helping individuals and companies manage risk. The key will be using the trends to rapidly adapt to a shift to the new digital age. Insurers will need to understand and value new risks and offer innovative products and services that meet the changing needs in this shift during the digital age.

The startups are the talk of the town today. Fintech, insurtech, retailtech, regtech, autotech, edtech are the new vocabulary for enterprises. Innovation is on the priority list of most executives globally. Many are getting worried about the risks, disruption and impact of startups. With more than $80 billion of investment funding already injected into the startup ecosystem in the last three years, it would be foolish for companies to overlook startups. There are more than 4,000 startups globally active at the moment across various categories that are challenging incumbents across industries. A good number of companies across financial services, insurance, retail, travel and healthcare segments are already exploring partnership with startups. But many executives are confused about how to deal with startups. Buying a startup not the right answer for innovation There are still questions on how effectively companies can leverage and integrate startups into their ecosystem. A few companies are exploring selective startups for purchase while many others are keeping their options open. While buying a startup may sound like a good move, it does not guarantee success. Companies can buy a startup -- but not the innovation. Companies must innovate internally first. While startups can help to bridge the innovation gaps to some extent, they cannot solve the basic innovation challenges. There is a need to build innovation culture. See also: Startups Take a Seat at the Table   Many large organizations today struggle with innovation. If a startup coming from nowhere can innovate, drives passion within teams and delivers incredible value, what is stopping the large companies to excel? The problem is with the traditional, tactical approaches. Many executives, used to stringent financial measurements, measure innovation with a similar yardstick. The results are obvious. When innovation initiatives fail to deliver quick results, executives back away. It is time for executives to revisit their approach on innovation. Get the basics right before fixing the organization Innovation demands commitment, agility, perseverance, collaborative culture, hard work and passionate teams. Innovation is mostly achieved as a result of failures and continuous learnings. There is no company in the world that has delivered disruptive innovation without witnessing failure. 90% startups fail, proving that innovation is not easy. Today’s dilemma is that executives hate failure. The quarter-on-quarter pressure, macro-economic conditions and competitiveness in business hinders them from committing 100% to innovation. Organizational complexities, silos, bureaucracy and rigid culture add more pain in delivering innovation. Startups are no longer a bubble, but an ongoing challengers Many see the growth of startups as a bubble that may bust soon. But startups are not going away, so companies must exercise caution and develop a symbiotic relationship with startup ecosystems. The best strategy is to partner for co-existence. While many startups operate on the periphery of business, they will move into the core part of business across industries. We are already seeing many examples in banking and insurance, where startups are getting licenses to manage end-to-end business. London-based startup Monzo, Berlin-based Number26 (N26), Atom and Tandem in the U.K. and Klarna in Sweden signal the backing of banking regulators for startups globally. Similarly, Lemonade in New York, Oscar in New York, Zhong An in China and Acko in India are examples of insurtech startups licensed for business. Soon, companies will find startups snatching portion of their business. The only way to respond is to become a startup. Companies must start thinking like startups and act and deliver value like startups. Without building an innovation culture, this is not going to happen. Innovate or pay the price: Choice is yours Startups will continue to be a challenge for companies of all sizes. Companies must innovate continuously and develop tailored strategies to manage the growing influence of startups. While partnership with startups or even a purchase of a startup can fast-track innovation efforts, these are not sufficient to transform a company or ignite its culture. Companies must simplify complexities and structure and invest in people to develop an innovation-centric culture. See also: Innovation: ‘Where Do We Start?’   Innovation is not a commodity that can be purchased using financial muscle. Innovation will never be up for sale and cannot be purchased or mimicked. It has to be built from the ground up.

In our previous post, we addressed the reasons for transforming producer management and compensation processes. In this post, we will cover key considerations when planning a transformation. The transformation process begins with defining a clear and comprehensive compensation strategy to confirm the key functions of producer lifecycle and compensation management. Licensing, reporting hierarchies, contracting, commissions plan rationalization and debt management are some of the most critical functions that require enterprise level alignment and can lead to a significant change in the producer experience. Early discovery of such complexities can help you identify areas that may require strategic enterprise alignment and business champions. It also can help you identify your organization’s top priorities and pain points. Take the contracting process. At face value, onboarding producers to sell your products is seemingly straightforward: recruit, onboard, appoint and help sell. However, upon closer examination, many organizations find this process cumbersome for both field and back office employees because it burdens them with a highly manual, paper-based data entry workflow that is subject to human error and inefficiencies. See also: Agents: Here’s How to Differentiate   One of the the first touchpoints with your organization for producers is the onboarding process, which sets the tone for the field’s expectations of how easy it is to do business with you. Looking just a little beyond the producer experience, onboarding and contracting processes are anchored by licensing and appointment criteria that have immediate compliance implications. When taking into account the regulatory and state-specific rules governing insurance producer eligibility, as well as your organization’s own requirements and offerings (e.g., backdating appointments, just-in-time appointments), the contracting process typically is quite nuanced and complex. Neither a technology solution nor an operating model adjustment is a silver bullet to improve vague, inconsistent, poorly documented or non-compliant rules and processes. The same concerns hold true for other aspects of producer lifecycle management, like reconciling producers’ debt or maintaining a producer’s reporting and compensation hierarchy. For example, when a producer is advanced for business with one line of service, do you recoup earnings from other lines of service to repay company debt? Is there a time window or debt threshold before cross-company recoupment occurs? Are there legal limitations? And, at an even more basic level, how do you want to manage debt, and is it something the field is interested in or concerned about? And, for hierarchies, do production and compensation follow the same arrangement? What exceptions do you currently allow, and what will you permit in the future? Without first answering such questions, incorporating field perspective or the organization’s long-term roadmap, you run the risk of 1) limiting the impact and quality of transformation you will ultimately undertake and 2) replicating current functionality in future-state platforms as a quick fix. Before looking to the vendor marketplace for ideas on available products and services, take the time to fundamentally understand how your organization operates today and, perhaps more importantly, how you’d like to operate in the future. In doing so, you can first define where your organization is going and how you will differentiate yourself with producer servicing before selecting the best solution to get you there. Transformation partners can be especially helpful during this strategic phase, offering market insights that can help your organization plan for the future while promoting enterprise alignment and exceeding market parity. This type of holistic, forward-thinking, business-led exercise can prepare your organization to make the most of a transformative journey without feeling rushed into strategic decision making in the midst of implementation. See also: The New Agent-Customer Relationship   In summary, the entire insurance industry is undergoing disruption from changing producer demographics, decreasing agent population, tighter margins, greater pressure on expense reduction, increasing producer expectations for service resulting from digital disruption and evolving customer segments that are always on the lookout for the “cheapest and best” way to buy insurance. Accordingly, the need to differentiate yourself with producers is more crucial than ever and managing the vital producer and compensation management function is critical. After all, doesn’t a happy producer get you a happy customer? What are the other key areas within producer management and compensation that you think will improve your producer experience?

Very short note this week, as I've been on a wonderful but chaotic vacation with my seven siblings and families at the Jersey shore.

Although we all are still enjoying summer, time goes quickly and we are only about 8 weeks out from InsureTech Connect 2017, which is the world’s largest insurtech event, offering unparalleled access to the largest and most comprehensive gathering of tech entrepreneurs, investors, builders and forward thinking insurance industry companies.If you care about insurance innovation, plan to attend to increase your knowledge and connections at this event, scheduled for Oct. 3-4 in Las Vegas. As an official partner of InsureTech Connect, we are happy to provide our subscribers with a discounted registration link. Use the link to save $300 on the cost of registration. 

As another benefit of attending, ITL’s Innovator’s Edge and InsureTech Connect are planning several enhanced experiences before and during the 2017 conference that are exclusively for members of   Innovator’s Edge.  The enhanced experiences include:

• "Meet the Market," a pre-conference opportunity for Innovator’s Edge innovators and insurance industry incumbents to have in-depth meetings that advance their relationship.
• In collaboration with the National Assn. of Insurance Commissioners, a panel of regulators will provide informal, non-binding feedback for Innovator's Edge members on their innovative business plans. This pre-conference session will provide a great chance to identify any potential issues that could trigger regulatory concerns and impact market adoption.
• And throughout the conference, Innovator's Edge and InsureTech Connect will also be conducting live video interviews of insurance innovation thought leaders and luminaries.

For any questions about the above opportunities, please contact us at   info@insurancethoughtleadership.com.  We hope to see you in Las Vegas this October!

Cheers,

Paul Carroll,
Editor-in-Chief

We are in the midst of the shift from the information age to the digital age, which is realigning fundamental elements of business that require major adjustments to thrive, let alone survive. As we noted in our new report, Greenfields, Startups and InsurTech: Accelerating Digital Age Business Models, new greenfield and startup competitors are rising from within and outside of every industry, including insurance, to capture the post-digital age business opportunities of the next generation of buyers. By shifting to meet the forces of change, these companies are positioning themselves to be the market leaders in the post-digital age. Those that do not make the shift risk not only the loss of customers but also market share and relevance in the coming new age of insurance. See also: 6 Charts on Startups, Greenfields, Incubators   Sometimes, the next big thing isn’t easy to spot. The disruption of the insurance industry is in the early days, so predictions are difficult. Will the new greenfields and startups become the next market leaders? If history is a guide, the answer is yes … some will. Just consider Progressive and how many dismissed it early on. Now it is a top 10 insurer in the U.S. Or consider what has happened in other industries with companies that are defunct because they missed the shift:

• Streaming video: Blockbuster failed to see this trend. It filed for bankruptcy in 2010 and Netflix is now worth more than $61 billion.
• Mobile games: In 2011, the president of Nintendo North America suggested that mobile game apps were disposable from a consumer perspective. Today, Pokemon Go has 65 million users. Is that disposable?
• Apple iPhone: Former Microsoft CEO Steve Ballmer reportedly commented that the first Apple iPhone would not appeal to business customers because it did not have a keyboard and would not be a good email machine. Apple iPhone single-handedly disrupted and redefined multiple industries and continues to do so.
• Autonomous vehicles: In 2015, Jaguar’s head of R&D stated that autonomous vehicles didn’t consider customers’ cargo. Since then, Jaguar Land Rover has invested $25 million in Lyft to join the autonomous trend.
• On-premise enterprise software vs. cloud-based SaaS platforms: In 2003, Thomas Siebel of Siebel Systems said Microsoft would roll over Salesforce in the CRM market. In 2005, Oracle acquired Siebel Systems for $5.85 billion. Salesforce’s market cap, in contrast, is more than $60 billion.

Insurance Industry Change and Disruption At no time in the history of insurance can we find as many game-changing events and a rapid pace of advancement occurring at the same time. At the forefront is the increased momentum for insurtech, and the greenfields and startups within, creating high levels of activity, excitement and concern on the promise and potential of insurance disruption and reinvention. When you add it all up, the insurance industry has many characteristics that make it an attractive target for aggressive investments in innovation. First, its size is enormous – based on industry data, it is estimated that premiums written are more than $4.7 trillion globally. Second, it faces multiple challenges that offer opportunities for exploitation by nimble, efficient and innovative competitors. Insurtech advancements and the forces of change see no significant slowdown. The momentum for change that has been building is unstoppable. Industry advancements, cultural trends and IT reactions are gaining speed as they gain strength and a framework for stability and growth. It is pushing a sometimes slow-to-adapt industry by challenging the traditional business assumptions, operations, processes and products, highlighting two distinctively different business models: 1) a pre-digital age model of the past 50-plus years based on the business assumptions, products, processes and channels of the Silent and Baby Boomer generations and 2) a post-digital age model focused on the next generation including the Millennials and Gen Z, as well as many in Gen X. Greenfields and Startups Make the Boardroom Agenda The market landscape is rapidly changing. During 2016, Lemonade launched. Metromile decided to become a full-stack insurer, leaving its MGA days behind. New MGAs entered the picture, including Slice, TROV, Quilt, Hippo and Figo Pet Insurance, to name a few.  Existing insurers made market debuts with new startups including Shelter’s Say Insurance with auto insurance for millennials, biBerk from Berkshire Hathaway for direct small commercial lines and Sonnet Insurance as the digital brand from Economical Insurance in Canada, among others. Add to this the projected shrinking of insurable risk pools due to the emergence of autonomous vehicles, connected homes and wearables and the domino effect of these on other industries, and it’s not hard to imagine a future with traditional carriers fighting over a much smaller pool of customers where only the most efficient, effective and innovative will survive. As a result, discussion surrounding greenfields, startups and insurtech moved into the board room of every insurer and reinsurer trying to understand how to leverage the shift to the digital age and develop strategies and plans to respond. Yet some insurers have a blind spot in recognizing the competition both from outside and within the industry, and the critical need to begin planning a new post-digital age business model. The result is a growing gap between knowing, planning and doing among leaders and fast followers or laggards, which is rapidly becoming insurmountable due to the pace of change. Closing the Gap with Greenfield and Startup Business Models Assuming that most insurers grasp the need for a greenfield and startup mentality to grow, what remains is to aim all efforts toward accomplishing an organizational shift. How do you move your company from the pre-digital age to the post-digital age and close the gap? It requires leadership to build consensus. It requires vision to aim in the most market-ready direction. And it requires a new business paradigm that will allow for change. We must redefine and re-envision insurance to enable growth and remain competitive. While many have made progress in replacing legacy systems and traditional business processes, this is not enough. These systems, while modern, were built around pre-digital age business assumptions and models, not to support the range of needs in a post-digital age model driven by a new generation of customers. Like other industries, today’s insurance startups and greenfields need and want options that do not require investment in significant infrastructure or upfront costs and therefore seek a cloud business platform solution to maximize options and minimize costs and capital outlay. See also: How to Plant in the Greenfields   A modern cloud business platform provides an advantage for greenfields and startups, breaking down traditional boundaries, IT constraints and age-old business assumptions about doing business, while building up the ability to rapidly develop and launch new products and services. The platform is a robust set of technology, mobile, digital, data and core capabilities in the cloud with an ecosystem of innovative partners (many insurtech technology startups) that provides the ability to launch and grow a business rapidly and cost effectively. Will established insurers suffer at the hands of tech-savvy, culture-savvy competition? Some may, but only if they allow themselves to. There will be constant pressure from greenfields and startups to outdo each other in the race to better meet the needs and demands of a new generation of buyers in a post-digital age for insurance. For traditional insurance companies, the need to re-invent and transform the business is no longer a matter of if, but of when.  Insurance leaders should ask themselves: Do we have a strategy that considers transformation of both the legacy business and creation of a new business for the future? Who are our future customers and what will they demand? Who are our emerging new competitors? Where are we focusing our resources…on the business or on the infrastructure? A new generation of insurance buyers with new needs and expectations creates both a challenge and an opportunity that a greenfield and startup business model can capitalize on to incubate, launch and grow. The time for plans, preparation and execution is now — recognizing that the gap is widening and the timeframe to respond is closing.

Many critical infrastructure systems, such as those that control the electric grid, oil and gas refineries and transportation, are now getting linked to the internet. That makes them easier to manage and maintain but also could put them in the line of fire for cyber attacks. I recently discussed the issues involved in upgrading and protecting these critical industrial control systems with Patrick McBride, chief marketing officer at Claroty, a startup that intends to secure the operational technology networks that run companies’ infrastructure systems. A few big takeaways from our conversation: Old systems, new protections When industrial systems were built, sometimes decades ago, no one considered the need for digital protections. “The systems were never designed, especially 10, 15, 20 years ago, with cybersecurity in mind,” McBride told me. Their primary design goals were the safety of the workers and the resilience of the systems, he said. “Security wasn’t even an afterthought. It wasn’t a thought.” See also: How Tech Created a New Industrial Model   Now, a new class of tools is coming online to help monitor these legacy systems. Using behavior analysis and anomaly detection, they are designed to catch intruders early in the attack life cycle. “Monitoring technology is going to play a huge part in this environment,” McBride said. Mishmash of systems leaves exposures Big industrial plants are careful about what they put on their networks, but some are putting wireless and other access points on systems as time-saving techniques to gather data more efficiently. When organizations began to recognize the need for cybersecurity, some traditional IT security vendors repurposed existing technology, McBride said.That didn’t work particularly well, because in the industrial control systems, the networks speak to other kinds of protocols.“You’ve got a whole set of overwhelming business value from pulling data out of those plant systems and being able to provide that information back to the executive,” McBride said. For example, there are a lot of Windows XP machines in industrial environments that keep air conditioning going, or run chemical manufacturing plants and refineries. Potential for escalating industrial attacks In December 2016, attacks on the Ukrainian power grid cut off a fifth of all electrical power in the capital city of Kiev. The purposeful takedown was attributed to Russia. The troubling fallout: Threat researchers around the world have found indications of the type of malware used in Ukraine on other energy and industrial companies’ networks, McBride said, showing that hackers are at least probing for vulnerabilities. See also: It’s Time to Accelerate Digital Change  

But threats from nation-states are only one issue. “There are other categories that people are really starting to worry about. If you combined the ease at which it is to gain a foothold on these networks and the relative ease you can attack these systems, it’s not hard,” McBride said. “You don’t have to squint too hard to say … ‘Terrorist organizations might want to do this or buy expertise to help them do that.’”

This post originally appeared on ThirdCertainty.

WannaCry was a wake-up call. Petya is a wake-up call. Last I checked, wake-up calls were meant to bring about change. After WannaCry, we saw a massive surge in patching around the globe, not to mention a 22-year-old “accidental hero” in the U.K. who helped halt the malicious software. It’s proof that beating the drum continuously to public and corporate institutions about serious cyber defense tactics doesn’t seem to do the trick, and once again we will see a tangible drop in cybersecurity activity until the next big attack. It will only keep getting worse. See also: 5 Best Practices in Wake of WannaCry   The question is quite simple—why aren’t organizations doing more about this? We witness the answer every day: Most organizational leaders refuse to support their internal teams when asked for procedural change or proper funding for cybersecurity defenses—which cuts their bottom line. In practice, it’s quite easy to see the lack of emphasis given to cybersecurity when it warrants only 3-6 percent of IT budgets, and oftentimes that number includes risk management. Moreover, our community just now is scratching the surface of providing tangible cybersecurity reports to the organizational board level, meaning its level of import is still not equal to that of numerous other reporting requirements. There are strict physical safety measures imposed on numerous industries, like seat belts and airbags, yet we need look only at the current U.S. administration and its public stance on cybersecurity to see an instance of unbelievably insufficient governmental policy. The entire intelligence community and the cybersecurity community that supports the government knows and has known the Russians have sophisticated teams and methodologies that have been used to attack us for years. This administration seems to have turned a blind eye on our national defense given their consistent refusal to admit Russia’s complicity. See also: WannaCry Portends a Surge in Attacks   This makes a bold statement that the White House has no intention of preventing, at a policy level, cyber attacks. There are still gaping holes in the federal CISO and White House CISO positions and we haven’t received any movement in policies or executive orders of any substance. This article originally appeared on ThirdCertainty. It was written by Paul Innella.

Insurance companies have long faced obstacles in optimizing their asset portfolios as the balance sheets of highly regulated, complex operating companies providing various financial products. Traditional one-size-fits-all methods to solve agency problems and hesitancy toward adopting new technologies have held them back. Over- or underutilization of quant models as well as the absence of a clear process to manage multiple tradeoffs have also prevented insurers from achieving optimal returns and customization. On the other hand, investment professionals and third-party managers have avoided insurance company asset management due to strict and multiple layers of industry regulation, and their complex capital/liability structure. The pressure to get better returns, along with structural changes and emerging financial technologies, has caused insurers and asset managers to reassess their strategies and look for ways to transform their old ways of investing. That’s where the practice of Enterprise Driven Investing can help. See also: A New Way of Thinking on Assets   Enterprise Driven Investing (EDI) for insurers is a business management process that attempts to address several pitfalls, improve decision-making and enhance results. The goal of EDI is to achieve a high level of portfolio customization in the most financially efficient manner. This is done through a four-step process. Step 1: Establish the full set of financial variables and set priorities EDI begins by establishing and prioritizing the complete set of financial considerations. The fact that there are multiple business factors that affect each other is the principle characteristic that distinguishes Enterprise Driven Investing from Liability Driven Investing and creates this first step. These considerations include form of ownership, liabilities from a global encyclopedia of risk, actuarially complex policy terms and product options, taxes, liquidity requirements, colliding capital objectives, affiliate structures, competing rating agencies and several regulatory regimes that are rarely coordinated and, in combination, are the most complex in business. EDI’s first step captures the complete set of these variables and then challenges the board and senior management team to establish those that are primary, secondary and less relevant to their organization. Step 2: Design a portfolio objective, and related performance measures, from the financial priorities Insurance asset management in any form is as much a design challenge as an investment one. Careful design of the primary objective is the gatekeeper to successful EDI. Portfolio objectives for these entities are no different than for other portfolios in that they are two-dimensional measurements of risk and return. The definition of each, however, has financial attributes linked to an operating company. Return can be total, net investment income (NII), cash flow, a combination or something else entirely. Risk can be portfolio volatility, CVaR, TVaR, economic shortfall, Solvency II capital charges, etc. Even the best selection will have shortcomings. A poorly conceived objective alone can offset, entirely, the talents of a high-performing investment team. Success in the design phase will occur if four guide rails are in place:

1. Company-specific customization – Investment objectives should be dictated by market segment based on lines of business, ownership structure, scale and domicile.
2. Clarity of timeframe – This should be longer term but explicit (e.g. three years).
3. Proper selection and calibration of constraints. Sensitivity analysis is the radar that is used to navigate through changing circumstances and costs.
4. Establishment of investment skill metrics - Legitimate performance evaluation of both internal and external managers remains one of the most challenging and increasingly important design requirements in insurance asset management.

Step 3: Establish a strategy to meet the portfolio objective with full consideration of the impact on factors not directly expressed in this objective A portfolio objective expresses an insurer’s most important return and risk measurements. The challenge is balancing the portfolio objective with other dynamic financial parameters. One response to this challenge has been portfolio optimization with multiple constraints. While helpful, relying on a single output from these analyses has weaknesses. For example, it introduces black box risk and naïve precision. It also fails to consider important variables and masks the relative significance of various assumptions and financial relationships. As a practical decision-making tool, EDI avoids these weaknesses by highlighting the collateral impact on key trip wires from changes motivated by the portfolio objective. While all companies estimate the changes in portfolio strategy against the portfolio objective, many do not grasp the shadow-pricing sensitivity of the objective to variation in constraints or, conversely, are blind to the impact of rebalancing on the full set of financial variables. For many companies, this sensitivity is both substantial and unknown. Managing sensitivity, to self-imposed limits, in particular, advances EDI from a passive to an active philosophy. Step 4: Explore ways to improve tradeoffs through higher order changes EDI begins by creating a comprehensive set of company-specific financial considerations, then establishes priorities (including the portfolio objective), and forms investment strategy after highlighting relationships between these variables regarding direction and leverage, through sensitivity analysis. In its most advanced form, creative reengineering resets trade-offs to a more favorable state and forms new ones. A few categories for these ideas are summarized below, but the opportunities are by no means confined to these topics:

• Improved capital and tax efficiency – Developing strategies to increase returns, reduce volatility, improve portfolio diversification and reduce capital charges.
• Bifurcation of assets based on line of business volatility rather than asset class volatility – Organizing the balance sheet by reserves and capital based on the volatility lines of the business.
• New approaches to asset/liability management (ALM) - Structured finance experts should create bespoke products that improve ALM, in the same way they have used their expertise for capital efficiency.

See also: How to Manage Strategic Relations  While EDI is the future of insurance company investing, it is also a framework for all investors to manage the tradeoffs of hyper-customization and pure investment efficiency. Also, because EDI explicitly recognizes, rather than avoids, the full set of enterprise variables, it represents a major advancement in balance sheet management from LDI and one-size-fits-all quantitative methods. As such, EDI reveals otherwise hidden paths to significantly better results. Finally, as a stable, but dynamic business management process, EDI principles accommodate the full spectrum of emerging financial theories and technologies.

Recently, I wrote about a startup called Aviva. (My comments were based on an article I read.) Aviva's CEO said, “What’s our long-term goal? To go from ask-it-once to ask-it-never — so customers don’t have to answer any questions at all.” How can coverage be booked without asking ANY questions? Why, using big data, of course. Wouldn’t a better goal be to first ask the necessary questions to assist consumers in identifying their unique exposures to loss, then match those exposures (where possible) with the proper insurance package to minimize the likelihood that a consumer will experience a serious or catastrophic financial loss? At my semi-annual checkups, my doctor asks me a lot of questions. Would it be an improvement if he didn’t ask me any questions? Maybe for his bottom line, but not for mine. Who can’t spare an hour once a year to prevent financial ruin? See also: Forget Big Data; You Need Fast Data   In another blog post, I wrote about the startup Slice, which apparently plans to write on-demand home-sharing and ride-sharing insurance without an application. How? Presumably by using big data, of course. In still another blog post, I wrote about Lemonade, which writes homeowners insurance using a phone app without a lot of pesky questions that are designed to identify exposure gaps of individuals and families. Lemonade, too, seems to be relying on black-box algorithms and our friend big data. Let’s take Slice. It claims: “All the information that insurance carriers ask you is all publicly available. So instead of taking up your time to give us this info, we use our clever SliceBots to collect it.” So, ALL of the information that Slice needs to properly insure all of your unique exposures to loss is publicly available? At one time, I saw a Zillow logo on a startup’s web site. Is that where, for example, homeowners' information might be obtained? Or might such a startup go directly to tax and other records where this information is obtained? How reliable is this “big data”? Is it vetted at all if customers are not asked any questions? Still another startup is Hippo. Backed by a number of investors, including Trulia, this is how Hippo's big data approach works, according to an article from Forbes: “According to the company, with Hippo, consumers can go from quote to purchase in minutes, as quotes are delivered in 60 seconds after answering three simple questions. Customers can get a personalized Hippo quote online, by phone or even through Facebook Messenger. The company leverages technology and data from multiple sources (such as property records, permit filings and aerial photography of roof conditions) to streamline the application process and provide ongoing risk monitoring. By leveraging data, Hippo saves customers time, while also garnering more accurate information that cannot be provided from subjective human answers alone. By cutting out the middleman, more accurately assessing risk and increasing technology efficiencies, Hippo is able to pass savings on to consumers.” There happens to be a home for sale in my neighborhood. Out of curiosity, I checked it out on both Zillow and Trulia. Zillow says it’s a 1-story home, Trulia says it has two stories. Zillow says two-and-a-half baths, Trulia says three-and-a-quarter baths. Zillow says the lot is 1.6 acres, Trulia says it's 0.48 acres. Zillow says the home is 2,968 sq. ft., Trulia says it’s 3,891 sq. ft. Just in the replacement cost valuation of the home alone, think these discrepancies might make a difference in coverage limits? See also: Healthcare Needs a Data Checkup   In my case, I owned a home that was 1,000 sq. ft. larger than the country tax records showed. Over the course of 30-plus years, attic space had been converted to living space, but the records from which “big data” might be drawn were never updated. When discussing this issue in an online forum, one of the participants said Zillow showed his home being 2,400 sq. ft. (the same size in the tax rolls), whereas it’s actually 4,683 sq. ft. Big data is one thing. Big, BAD data is another. Who is vetting the information, bots and algorithms? Certainly not regulators, given the open-arms welcome one startup got from a state insurance department. Is anyone listening? Does anyone care?

One of the most basic lessons you learn in first year business school is the SWOT analysis - strengths, weaknesses, opportunities and threats. And it's a great framework to apply to your business to understand what you do well, what you can improve on and where the greatest threats to your company lie. But how about a SWOT analysis on ourselves? Where are our blind spots? What do you struggle with? Here's a simple framework to give it a go: Strengths: What are your strengths as an entrepreneur? What do you do particularly well? Or, in the words of Chris Sacca, what's your "unfair advantage?" Perhaps you're great with product design. Or perhaps your distinguishing characteristic is your ability to sell. Or maybe you can work a room like nobody's business. Knowing your strengths tells you what added value you can uniquely bring to your business. See also: The Need for Agile, Collaborative Leaders   Weaknesses: You might be a terrible planner. Or you might procrastinate like nobody's business. Or you might dread making sales. You might also feel uncomfortable admitting it or talking about your weaknesses. But unacknowledged weaknesses are business killers. They slowly eat away at the core of your business, with little hope of ever changing the situation. So pay particular attention to weaknesses as you do your personal SWOT -- and be as honest as possible with yourself as you do. Opportunities:  Opportunities can be chances to build on your strengths and rectify your weaknesses - either through self-improvement or by adding additional members to the team with complementary skills. But of course, opportunities can only be leveraged if weaknesses are recognized and acknowledged -- yet another reason that honesty is so essential in the process of conducting your personal SWOT. Threats:  Finally, threats can come from multiple places. Your skills may no longer fit the needs of the business you're in. You might face competition from others who do have these skills -- and if you're unable to acknowledge (and work on) your weaknesses while at the same time leveraging and accentuating your strengths -- you could find yourself in a precarious professional position. Along these lines is the threat that you as the leader might lack the self-awareness or courage to look yourself in the mirror and conduct an honest, self-reflective SWOT analysis in the first place. Doing an honest, self-reflective personal SWOT analysis is useful for anyone at any stage of a career. But it's especially useful for entrepreneurs, who need such a wide-ranging set of skills to achieve their goals and find success in their business. Have you conducted a personal SWOT analysis? If not, what's holding you back? See also: Where Are All Our Thought Leaders?   Visit here to receive my free guide to 10 cultural codes from around the world, and here for my very best tips on stepping outside your comfort zone at work. Andy Molinsky is the author of Reach and Global Dexterity.