As life insurance and annuity carriers pursue greater market share and growth, a potential solution sits before them: M&A activity. This transactional path, leading to deep consolidation in the life insurance and annuity (L&A) sector in the U.S., is stoking much debate and discussion in company boardrooms. The hunt for elusive growth and profitability for carriers in the U.S. has many players, creating a crowded marketplace for possible consolidation. The multi-headed acquirers come in three dominant forms: large insurance companies, private equity (PE) investors and foreign acquirers, driven largely by the Chinese and Japanese. Insurance carriers intimately know about their competition and what companies in the sector would mesh well within their operations. Executives have the greatest amount of specific industry expertise and therefore can understand the pros and cons in a specific combination. See also: How Life Insurance Agents Can Be Ready Private equity investors have been turning to the life insurance and annuity field for several years to provide consistent returns, as these companies have predictable cash flows. Through these investments, investors can strengthen their returns for assets under management with steady growth. One caveat to this investment approach is the concern of the increasing regulatory state and federal pressures, as navigating through 50 individual state regulatory guidelines can be burdensome and difficult if a company moves out of a state and into a new one. Foreign countries like China and Japan continue exploring opportunities to increase their presence in the U.S., the world’s largest insurance market. Reasons abound: Japanese insurance companies have found U.S. acquisition targets appealing to offset the aging of Japan’s population and to provide a more attractive interest rate environment. Chinese companies have been snapping up foreign companies, including in the U.S., searching for yield on their capital and economic growth. Several reasons exist for this trend of M&A activity.

1. Buyers are motivated by the current low-interest-rate environment and the opportunity to expand their assets and book of business. This has always been an essential piece of the M&A discussion as market conditions must be favorable to make any transaction worth its while.
2. Sellers are suffering from the low return on their capital. By exiting less profitable lines of business, they can reallocate their capital for use in other capacities. As contemplation of one’s business clarifies, many carriers may conclude that selling, rather than buying, assets is the chosen path. Selling could stabilize or enhance a company’s bottom line as the capital obtained in a sale can be reinvested in its existing operations or be put to use for another potential acquisition.
3. Increasing regulations are restricting the ability of companies to productively run their businesses; thus, they are looking for exits. Companies are often stymied by the sheer weight of complying with and managing regulations. Exiting businesses can become appealing.

Regardless of which direction is undertaken, one aspect paramount to success is the importance of ensuring that business continues to operate smoothly. In today’s environment, the role of technology, specifically at a time when companies are implementing and managing digital transformations, can be a beacon of light. And as acquirers delve deeper into possible transactions, increasingly they are employing an outsourcing model to extract more value. See also: This Is Not Your Father’s Life Insurance   Safeguarding a company’s operations and maintaining its continuity through powerful technology and servicing solutions, or what we call “future proofing,” has additional benefits besides the desired functionality. Companies must first build their vision and plans and then bolster them with end-to-end operational services. This step will then enable rapid expansion into new market segments, faster product launches and seamless servicing of open and closed blocks of business. By future-proofing through technology, carriers can drive greater efficiencies, lower costs and produce higher levels of customer satisfaction.

The natural disasters of the last week-plus bring to mind the old chestnut: "Other than that, how'd you like the play, Mrs. Lincoln?"

The other-than-the-"assassination" reports have been good, thus far, in the wake of Hurricane Harvey and Hurricane Irma. Irma took an ever-so-slightly unexpected path, so, while electricity is out for millions and will likely be a problem for weeks, the storm visited much less destruction on Florida than expected. Local, state and federal authorities have seemed to react well. Insurance companies are on the scene, trying to pay claims and get people back to their regular lives as soon as possible. Citizens have risen up to to help themselves and others—the drive that I mentioned last week that was led by Houston Texans defensive lineman J.J. Watt has now passed $31 million in donations, not counting the enormous gifts of supplies and transportation he's received.

But we're still left with the "assassination" parts of the hurricanes, and those are dreadful. For instance, our chief innovation officer, Guy Fraker, knows that the eye of Irma passed directly over his key in Florida and that the bridges on both sides of the key have been wiped out. It's not clear when he'll even be able to get back to check on his home. People in Florida and the affected parts of Texas and Louisiana will need months or years to recover. 

As it happens, in the midst of the storms, Fortune put out a list of 50 "Change the World" companies that are turning "doing good into good business." The 50 were chosen based on their social impact, financial results and degree of innovation. I looked eagerly to see how many insurance companies made the list and found...two. Insurance Australia Group was ranked #29, and Allstate was #39. Having two isn't bad representation, given all the other industries competing for just 50 spots, but, with everything the industry is doing to pull Florida, Texas and Louisiana back together, I had certainly hoped for more.

The Fortune list comes at a time when a backlash has developed against the idea that the sole purpose of a corporation is to serve the shareholders by increasing profits and stock price as much as possible. The idea, formulated in 1970 by Milton Friedman, a Nobel-prize-winning economist who was the leader of what's known as the Chicago school, stoked the fever that led to accounting fraud and scandals such as WorldCom and Enron. More generally, a sense is developing that companies have responsibility to all sorts of stakeholders, including employees, customers, communities, the environment and, in the case of our favorite industry, insureds. 

A company to watch is Unilever. It has explicitly taken a "change the world" approach, to the point that it recently faced a takeover attempt by Kraft Heinz, which promised to stoke shareholder returns. Unilever fended off the attempt, the board committed to its more-balanced approach to long-term gains for all stakeholders, and Unilever is certainly reaping PR rewards.

Given the business we're in, I have to believe that there are opportunities for insurers to take the lead in this "change the world" movement. Insurers seem to be off to a good start in the aftermath of Harvey and Irma. Let's hope that continues. Publications like Fortune will notice.

Cheers,

Paul Carroll,
Editor-in-Chief

Cliff Treese of Association Data brought some statistics to my attention involving earthquake (EQ) insurance in California. Going back as far as 2001, the percentage of properties without EQ insurance were: Homeowners       84-88% Dwelling               95-97% Commercial         89-93% So, only about 15% of homeowners, 10% of business owners and 5% of dwelling owners buy EQ insurance. Why? Lots of studies and surveys have been done. It’s too expensive. It doesn't pay much, especially for partial losses, because of percentage deductibles. “It’ll never happen to me.” The government will take care of me. “I thought my regular insurance covered this.” And on and on. One of my favorite quotations is from Gen. Jimmy Doolittle, who said, “The problem with Americans is that we’re fixers rather than preventers.” This is so true in so many ways. Following Hurricane Harvey, it was widely reported that only about 15% of flooded properties had flood insurance. We’ll see what happens, if anything. See also: Harvey: First Big Test for Insurtech  While we can’t prevent earthquakes and hurricanes, we can prevent, to a large extent, their financial impact by buying catastrophic insurance. Private insurers sell EQ coverage and, underwritten by the NFIP, flood insurance. Yes, in many cases, it’s expensive, but what are the alternatives when the exposure is so real? As I posted last week, is it time that such coverage was mandated and included, with a federal terrorism-like backstop, in standard policies covering property damage? Such a solution would be complex and difficult, but what are the alternatives? And, while Gen. Doolittle’s quotation is so often true, it may be even more true that, increasingly, the problem with Americans is that we’re not preventers OR fixers. In the meme I used for last week’s post, I used another quotation from the German philosopher Hegel, who said, “History teaches us that man learns nothing from history.” This may be illustrated in a recent USA Today story about repetitive flood properties with this excerpt: "Instead, NFIP embraced a “flood-rebuild-repeat” model that has spawned an almost $25 billion debt. The National Wildlife Foundation estimated in 1998 that 2% of properties covered by federal flood insurance had multiple damage claims accounting for 40% of total flood insurance outlays, and that more than 5,000 homes had repeat claims exceeding their property value. A recent Pew Charitable Trust study revealed that 1% of the 5 million properties insured have produced almost a third of the damage claims and half the debt." NFIP paid to rebuild one Houston home 16 times in 18 years, spending almost a million dollars to perpetually restore a house worth less than $120,000. Harris County, Texas (which includes Houston), has almost 10,000 properties that have filed repetitive flood insurance damage claims. The Washington Post recently reported that a house “outside Baton Rouge, valued at $55,921, has flooded 40 times over the years, amassing $428,379 in claims. A $90,000 property near the Mississippi River north of St. Louis has flooded 34 times, racking up claims of more than $608,000.” See also: Time to Mandate Flood Insurance?   Wow. Fully 2% of properties insured for flood account for 40% of all flood insurance payments. A $120,000 home was rebuilt 16 times in 18 years at a cost of almost a million dollars. Another home has allegedly flooded 40 times and still another property 34 times, racking up combined payments in excess of a million dollars. WHY? Apparently because we’re not fixers OR preventers AND we learn nothing from history.

Healthcare meets Network. That is the one-sentence summary of Dave Chase’s new book, A CEO’s Guide to Restoring the American Dream: How to Deliver World-Class Healthcare to Your Employees at Half the Cost. Dissecting the title, the “restoring the American Dream” reference is as follows: While wages have barely budged in the last 20 years, employee compensation has risen quite a bit — with most of the increase being the health benefit. Dave’s observation is that if the health benefit were managed much more tightly, wages could climb noticeably for the workforce without increasing the total employee compensation budget. As for “half the cost,” that number may be overstated…but not by much. For instance, I just saw a wellness vendor send 2/3 of a company’s employees to the doctor because they have “conditions” they didn’t know about, that this vendor “discovered” by — you guessed it — screening the stuffing out of them by flouting clinical guidelines. This employer could save about 3% simply by firing the vendor and not consigning all those employees to the treatment trap. (Of course, there has been no measurable improvement in outcomes from all these doctor visits.) This employer and others could save another 0.5% simply by not insisting that their employees and spouses get annual checkups (and “well-woman” visits) because as readers of this site know, they have no value. The good news is that checkups are not likely to harm employees, which is more than can be said for many wellness programs. See also: Wellness Vendors Keep Dreaming   So we are already saving 3.5%, and we haven’t even done anything hard yet, where “hard” is defined as “something that does not delight employees, like getting rid of ‘pry, poke and prod’ programs.” In other words, “hard” isn’t really hard. Slightly harder opportunities In addition to an expose on wellness, Dave Chase exposes some scams that make wellness look like child’s play. (Wellness is child’s play, in the sense that any fifth-grader knows more arithmetic than a wellness vendor. And a 14-year-old knows more about BMI.) In no particular order, we’ll start with PBMs. Their stock prices have exploded — literally, 300-fold — in the last 30 years.  You think they achieved that growth honestly? They make wellness vendors look like Boy Scouts. They obfuscate everything, with “rebates” and “formularies” and under-the-table payments from drug companies, and all sorts of other things that we probably don’t even know about. Here is a New York Times article that casts just a little light on the subject…but more than enough light to indict the entire industry. It isn’t easy to ditch a PBM, but increasing numbers of alternatives are popping up. A good rule of thumb is, the thicker the contract with your PBM, the more you are getting ripped off.  I invite folks who offer one of these new alternatives to add a comment at the bottom of this posting or on LinkedIn following this posting. Then there are the carriers, who typically make more money, the more money gets spent. The number of scams is mind-boggling. For example, consider Dave’s explanation of what happens when a claim is overbilled: Another fee opportunity is so-called “pay and chase” programs, in which the insurance carrier doing your claims administration gets paid 30-40 percent for recovering fraudulent or duplicative claims. Thus, there is a perverse incentive to tacitly allow fraudulent and duplicative claims to be paid, get paid as the plan administrator, then get paid a second time for recovering the originally paid claim. Good luck trying to ferret your own claims data out of carriers so that you can do your own analysis on them and change policy accordingly. I do quite a bit of work for top-flight carriers, measuring their wellness-sensitive medical events. They always seem to have the data at their fingertips. We can complete the analysis for the year within weeks after claims run-out ends, meaning sometime in April. Meanwhile, I’ve got a Fortune 50 client whose carrier, Optum, still hasn’t managed to provide them (at an extra fee!) with their own event rates for 2016, a delay which more than coincidentally will make it impossible to implement any cutbacks in Optum’s services for 2018 if the event rates show that — hang onto your hats — Optum didn’t achieve anything. Don’t get Dave started on providers, who find highly creative ways to snooker employers and employees.  Like staffing in-network facilities with out-of-network doctors, who then bill patients ridiculously high charges. You need to re-contract with your carrier and put that one on them.  Or, if you’re large enough, recontract with the hospital. And speaking of hospitals, why have Leapfrog D- and F-rated hospitals in your network at all? If a geographic necessity, then at a minimum educate your employees that it might be worth the extra drive to avoid some major complications. Providers also bill companies what they think they can get away with, rather than what a buyer would expect to pay given what others in the area are charging. Because the company is generally not the decision-maker (the employee or doctor generally decides where to go, not based on price), providers often get away with it. An entire chapter is devoted to provider pricing scams and the importance of transparency. See also: A Wellness Program Everyone Can Love   Or, my own personal favorite provider scam, disguising emergency rooms as urgent care centers. (A rather naively idealistic Colorado legislator tried to make freestanding ERs disclose that they are not urgent care centers, but the provider lobbyists prevailed.) A sidebar: Quizzify trains employees to be on the lookout for these scams, which is helpful for the 0.1% of the 150,000,000 commercially insured employees who actually have access to the quizzes. The other 99.9% are on their own. And yet it all comes back to wellness Employer obsession with wellness has caused them to take their eyes off these many other balls, because wellness was supposed to solve everything (including industrial waste, according to HERO stalwart Bruce Sherman). Truly, wellness has been the Maginot Line of healthcare cost containment strategies. While a vastly disproportionate share of resources has gone into wellness, PBMs, carriers, providers and various middlemen simply circumvented these efforts, to dig right into your pocketbooks. I can only scratch the surface here — just go out and buy the book, and then you’ll understand both why when it comes to scamming employers and employees, wellness vendors have a lot to learn, and also why you should be mad as hell and not take it any more.

There’s a popular word this year that I’m really tired of. It may not be bothering you so much, but I’ve read it so much that it’s become this year’s “it is what it is” for me. "Disruptive"; adjective; relating to or noting a new product, service or idea that radically changes an industry or business strategy, especially by creating a new market and disrupting an existing one: (dictionary.com, definition of "disruptive") Every insurance startup or insurtech company is telling us how it's planning to disrupt the insurance industry. They’re going to single-handedly turn the insurance world on its ear by the magic of big data, custom apps and chatbots. Here is what their story seems to be, “The insurance industry has been asking you crazy questions, ripping you off and enriching themselves at your expense. We’re here to stop all of that.” See also: Harvey: First Big Test for Insurtech   Over the next few weeks, I’ll give you a few statements, their implications and (I hope) a reasoned response to them. After a couple of hours of writing, I looked down and saw how long this had gotten. I decided that it would be serving you best by making this a short series, rather than a (very) long article. You’re welcome. Here we go. Statement #1: We do good! Lemonade wants you to “forget everything you know about insurance.” They are going to give you: instant everything, killer prices, big heart. They made a big splash recently announcing their 2017 giveback. Implication: The insurance industry does not do good. Insurance companies take your money, give you nothing in return and, to top it all off, don’t do any good for you, your community or your planet. We’re the good people. Buy insurance from us and be a good person, too. Response: I reviewed Lemonade's website, and I have determined that they’re not doing any more good than other insurance companies. You might argue that other insurance companies are doing even greater good than they are. A quick thought about their “forget everything” mantra before we move to the meat of my response: I reject their “forget everything” statement. I sat at my desk with a friend of mine who’s an underwriter, and we walked through the application process. It feels a lot like other personal homeowners’ applications. So let’s park that forget everything bit. The biggest difference is that I don’t have an agent to talk to; I have a chatbot and a website. On to my response on their statement: The rest of the insurance world does good, too. Let’s look at a few ways that insurance does good.

1. The insurance policy is a good thing. People may doubt that when they buy their insurance, especially if they never have a claim, but just about the time you think you won’t need your insurance and wish you could cancel it, that’s when you have a claim. My son had an accident about two months ago in his new (to him) car. The accident did about $8,000 of damage to Sheila (his car; his second love. Stop laughing.) Because he’s making payments on the car, do you think he could pay for the repairs and the two months he had the rental car? I don’t think so, either. When you can’t retain the loss, the insurance policy is a really good thing.
2. Insurance people are good people. Having been in the insurance industry this long, I’ve met a lot of insurance people. They are constantly doing good. Some volunteer on boards of universities, colleges and non-profits. Many volunteer with different non-profits, like churches, the Humane Society in their area, hospitals, etc. My prior company hosted monthly blood drives; gave to the USMC Toys for Tots program; and had a community program that gave employees time off to serve our community. Another company that I worked for participated in the adopt-a-highway program in central New York. Fun days, in the median of Interstate 81, cleaning up bag after bag of trash. My current company is a big supporter of IICF. What’s that? The Insurance Industry Charitable Foundation. Take a look.
3. Search “insurance company charitable giving.” That search makes this final point. I don’t need to elaborate any further. The industry makes it clear that we’re interested in helping the world around us.

See also: 10 Insurtechs for Superb Engagement   Can we stop with the rhetoric that insurance companies don’t do good? Next time, we’ll discuss statement #2: It’ll just take a few seconds! This article first appeared at www.insurancejournal.com.

A couple of conversations with data leaders have reminded me of the data wrangling challenges that a number of you are still facing. Despite the amount of media coverage for deep learning and other more advanced techniques, most data science teams are still struggling with more basic data problems. Even well-established analytics teams can still lack the single customer view, easily accessible data lake or analytical playpen that they need for their work. Insight leaders also regularly express frustration that they and their teams are still bogged down in data fire fighting’, rather than getting to analytical work that could be transformative. Part of the problem may be lack of focus. Data and data management are often still considered the least sexy part of customer insight or data science. All too often, leaders lack clear data plans, models or strategy to develop the data ecosystem (including infrastructure) that will enable all other work by the team. Back in 2015, we conducted a poll of leaders, asking about use of data models and metadata. Shockingly, none of those surveyed had conceptual data models in place, and half also lacked logical data models. Exacerbating this lack of a clear, technology-independent understanding of your data, all leaders surveyed cited a lack of effective metadata. Without these tools in place, data management is in danger of considerable rework and feeling like a DIY, best-endeavors frustration. See also: Next Step: Merging Big Data and AI   So, what are the common data problems I hear, when meeting data leaders across the country? Here is one that crops up most often: Too much time taken up on data prep I was reminded of this often-cited challenge by a post on LinkedIn from Martin Squires, experienced leader of Boot’s insight team. Sharing a post originally published in Forbes magazine, Martin reflected how little has changed in 20 years. This survey shows that, just as Martin and I found 20 years ago, more than 60% of data scientists' time is taken up with cleaning and organizing data The problem might now have new names, like data wrangling or data munging, but the problem remains the same. From my own experience of leading teams, this problem will not be resolved by just waiting for the next generation of tools. Instead, insight leaders need to face the problem and resolve such a waste of highly skilled analyst time. Here are some common reasons that the problem has proved intractable:

• Underinvestment in technology whose benefit is not seen outside of analytics teams (data lakes/ETL software)
• Lack of transparency to internal customers as to amount of time taken up in data prep (inadequate briefing process)
• Lack of consequences for IT or internal customers if situation is allowed to continue (share the pain)

On that last point, I want to reiterate advice given to coaching clients. Ask yourself honestly, are you your own worst enemy by keeping the show on the road despite these data barriers? Have you ever considered letting a piece of work or regular job fail, to highlight technology problems that your team are currently masking by manual workarounds? It’s worth considering as a tactic. Beyond that more radical approach, what can data leaders do to overcome these problems and achieve delivery of successful data projects to reduce the data wrangling workload? Here are three tips that I hope help set you on the right path. Create a playpen to enable play to prioritize data needed Here, once again, language can confuse or divide. Whether one talks about data lakes or, less impressively, playpens or sandpits within  a server or data warehouse — common benefits can be realized. More than a decade working across IT roles, followed by leading data projects from the business side, taught me that one of the biggest causes of delay and mistakes was data mapping work. The arduous task of accurately mapping all the data required by a business, from source systems  through any required ETL (extract transform and load) layers, on to the analytics database solution is fraught with problems. All too often this is the biggest cost and cause of delays or rework for data projects. Frustratingly, for those who do audit usage afterward, one can find that not all the data loaded is actually used. So, after frustration for both IT and insight teams, only a subset of the data really added value. This is where a free-format data lake or playpen can really add value. They should be used to enable IT to dump data there with minimal effort, or for insight teams to access potential data sources for one-off extracts to the playpen. Here, analysts or data scientists can have opportunity to play with the data. However, this capability is far more valuable than that sounds. Better language is perhaps "data lab’." Here, the business experts have the opportunity to try use of different potential data feeds and variables within them and to learn which are actually useful/predictive/used for analysis or modeling that will add value. The great benefit of this approach is to enable a lower cost and more flexible way of de-scoping the data variables and data feeds actually required in live systems. Reducing those can radically increase the speed of delivery for new data warehouses or releases of changes/upgrades. Recruit and develop data specialist roles outside of IT The approach proposed above, together with innumerable change projects across today’s businesses, need to be informed by someone who knows what each data item means. That may sound obvious, but too few businesses have clear knowledge management or career development strategies to meet that need. Decades ago, small IT teams contained long serving experts who had built all the systems used and were actively involved with fixing any data issues that arose. If they were also sufficiently knowledgeable about the business and how each data item was used by different teams, they could potentially provide the data expertise I propose. However, those days have long gone. Most corporate IT teams are now closer to the proverbial baked bean factory. They may have the experience and skills needed to deliver the data infrastructure. But they lack any depth of understanding of the data items (or blood) that flows through those arteries. If the data needs of analysts or data scientists are to be met, they need to be able to talk with experts in data models, data quality and metadata, to discuss what analysts are seeking to understand or model in the real world of a customer and translate that into the most accurate and accessible proxy within data variables available. So, I recommend insight leaders seriously consider the benefit of in-house data management teams, with real specialization in understanding data and curating it to meet team needs. We’ve previously posted some hints for getting the best out of these teams. Grow incrementally, delivering value each time, to justify investment I’m sure all change leaders and most insight leaders have heard the advice on how to eat an elephant or deliver major change. That rubric, to deliver one bite at a time, is as true as ever. Although it can help for an insight leader to take time out, step back and consider all the data needs/gaps – leaders also need to be pragmatic about the best approach to deliver on those needs. Using the data lake approach and data specialists mentioned above, time should be taken to prioritize data requirements. See also: Why to Refocus on Data and Analytics   Investigating data requirements to be able to score each against both potential business value and ease of implementation (classic Boston Consulting grid style), can help with scoping decisions. But I’d also counsel against just selecting randomly the most promising and easiest to access variables. Instead, think in terms of use cases. Most successful insight teams have grown incrementally, by proving the value they can add to a business one application at a time. So, dimensions like the different urgency + importance of business problems come into play, as well. For your first iteration of a project to invest in extra data, then prove value to business to secure budget for next wave – look for the following characteristics:

• Analysis using data lake/playpen has shown potential
• Relatively easy to access data and not too many variables (in the quick win category for IT team)
• Important business problem that is widely seen as a current priority to fix (with rapid impact able to be measured)
• Good stakeholder relationship with business leader in application area (current or potential advocate)

How is your data wrangling going? Do your analysts spend too much time hunting down the right data and then corralling it into the form needed for required analysis? Have you overcome the time burned by data prep? If so, what has worked for you and your team? We would love to hear of leadership approaches/decisions, software or processes that you have found helpful. Why not share them here, so other insight leaders can also improve practice in this area? Let’s not wait another 20 years to stop the data wrangling drain. There is too much potentially valuable insight or data science work to be done.

When it comes to the list of disruptive technologies, are we giving chatbots enough credit? Chatbots are only beginning to show their potential, garnering initial headlines primarily due to Lemonade and its chatbot called Maya. That is interesting, considering that chatbots and AI will likely have a greater overall impact than many of the up-and-coming technologies we have grown to accept, such as autonomous vehicles. How is it possible that chatbots are silently sitting on the sidelines? It’s simple. They aren’t sitting silently. Chatbot development and use is in full swing. The headlines are picking up. Research organizations are putting forward more predictions about chatbots than ever. Chatbots are easier to implement than many technologies and, operationally, they will provide real value. Text-based or voice-carried artificial intelligence and service-focused functions can readily swap with current human-based adviser/service functions. As complex as they are on the back end, chatbots don’t require major hardware investment, such as sensors, and they don’t require an inordinate amount of coding. So, for all of their disruptive potential to the way we do business, they may be far less disruptive to operations and IT, though operations and IT (and customers) stand to benefit from chatbots. See also: Chatbots and Agents: The Dynamic Duo   In an era where impatience is growing and speed is rewarded, chatbots can dramatically improve service levels and meet or exceed expectations. They can also make the economics work for providing service and executing transactions for the growing ranks of high-volume, on-demand, low-premium risk products coming to the market. They are the future of nearly all personal business transactions. For insurers, chatbots can be their own distinct channel as well as augmenting existing channels, supporting a multi-channel world. Chatbots are growing in use and importance In Majesco’s Future Trends 2017 Report, we discussed the impact and potential of chatbot growth. Chatbots aren’t growing merely because they have service potential — they are growing because automated non-human service is gaining acceptance among the Gen X, Millennial (Gen Y) and Gen Z cohorts. Chatbots’ appeal and growth will likely make them one of the technologies to break out of age-based stereotypes. WeChat, China’s most popular chat app, is a great example. With nearly 1 billion users (889 million people), its impact is felt across generations and is even spurring older generations to adopt mobile technology. WeChat is popular — its users interact for an average of 90 minutes per day. Because it uses voice commands, it is also learning from conversations, illustrating the potential of chatbots to gain something from each interaction. Business Insider said that 80% of businesses will be using chatbots by 2020, with 42% believing that chatbots will improve the customer experience. In addition, 29% of customer service positions in the U.S. could be automated with chatbots or other technology. Chatbots offer immense potential for customers to interact with an insurer, through direct interactions within messaging or other social media apps. Other technologies and their impact on chatbots The “automated home” race between Amazon’s Alexa, Google’s Home, Apple’s HomePod/Siri and many other technology providers will enhance chatbot adoption and use. The more people become comfortable with interactions that are non-human, the easier it will be for people to feel comfortable in a chatbot purchase and service environment. Insurance is already adopting chatbot use and ramping up chatbot availability. In the past year, for example, insurtech saw a rapid rise in the use of chatbots within startups ranging from Elafris, which enables customers to download auto ID cards and pay bills, to Denim, which markets to consumers and links them with insurers or agents for renter or homeowners insurance. Robo-advisers represent a chatbot with real AI integration and rules management that can go beyond outside customer service and well into day-to-day executive assistance. In July 2015, Zurich shared how it was using robo-advisers in two ways: First to accelerate and improve policy processing and issuance that improved quality and accuracy for international casualty programs. Second, Zurich used them in the U.K. to conduct routine diary reviews for open claims that traditionally required attention by human operators. In the quest for improved customer service, quality, accuracy, speed and efficiencies, robots and robotics have significant opportunity for insurers. From automating processes to interacting with customers, the potential seems limitless, as well as creating a starting point for cognitive applications. A natural link: AI and Chatbots Cognitive systems help visualize, use and operationalize structured and unstructured data, pose hypotheses based on data patterns and probability and understand, reason, learn and interact with humans naturally. As a result, the systems help organizations create knowledge from data to expand nearly everyone’s expertise, providing continuous learning and adapting to the environment to out-think the competition and the market. AI and cognitive computing technologies like IBM’s Watson have been touted as the link between data and human-like analysis. Because insurance requires so much human interaction and analysis regarding everything from underwriting through claims, cognitive computing may be insurance’s next solution to better analyze and price risks using new data sources, while adding an engaging and personalized advisory interface to their services. A savvy insurance technologist can easily begin to draw the lines between that kind of intelligence management and its potential when linked to chatbot advisory and directive services. Just as many of today’s advisors and agents have experience in underwriting, tomorrow’s chatbot may carry with it the ability to market, gather data, quote, underwrite, issue policies and settle claims without human intervention. Putting one face on an insurance company probably couldn’t get more complete than that. See also: Hate Buying? Chatbots Can Help   For now, we can see the seeds of this complete chatbot value chain in its beginnings. At the recent SVIA InsurTech Bootcamp in August that we were involved in, we saw and discussed the array of opportunities to leverage chatbots, AI and cognitive … highlighting the opportunities unfolding. In June of this year, PolicyPal, a Singaporean startup, announced the launch of its AI-enabled mobile app, which includes a chatbot supported by IBM Watson Conversation technology. The app not only helps prospects through the insurance selection process, it explains complex insurance concepts to consumers to enhance their overall insurance knowledge. The AI, having educated itself, is in effect giving back through chatbot interactions. That is the future of insurance interaction, a market where both parties have something to learn and gain from the insurance relationship. When Gartner asserts that, “Chatbots will power 85% of all customer service interactions by the year 2020,” that may be enough to drive some business leaders to look into all that chatbots have to offer.

The massive data breach suffered by Equifax has both serious consequences for consumers and potentially profound long-term implications for commerce and the nascent cyber insurance industry. In the three days since Equifax’s press release announcing the breach potentially exposing names, addresses, birthdates, Social Security numbers and other information for about 143 million U.S. consumers, both the federal Consumer Financial Protection Bureau and New York State Attorney General Eric Schneiderman have criticized the giant credit bureau’s response and, in particular, an “arbitration clause” that may severely curtail the legal rights of any consumers who take advantage of free credit monitoring offered by Equifax. The arbitration clause is included in the terms of service for Equifax’s credit monitoring program and, as reported by the Washington Post, bars consumers from participating in class action law suits, requiring instead that all disputes be settled by “binding individual arbitration” and limiting consumers’ rights to discovery and appeal. Equifax has stated the arbitration clause won’t apply in this case, but some have warned that the company’s statement may not be legally binding. Consumer beware. See also: VPNs: How to Prevent a Data Breach  The harm to consumers may last a lifetime as people have the same birthdate from cradle to grave, most will have just one Social Security number and many will use but one name. Yet, Equifax is offering just one year of credit monitoring. For now, it appears that Equifax is failing crisis response 101. Instead of impressing consumers, clients and public officials with its transparency and earnest desire to make things right, the company has attracted criticism that undermines efforts to limit damage to its reputation, rebuild trust and inspire confidence. The gold standard in crisis management remains Johnson & Johnson’s handling of the 1982 Tylenol tampering case that led to seven fatalities in Chicago. That is playbook for business. But the Equifax breach and its response raise several other critical issues. Most obviously, what should consumers be doing to protect themselves? (See “The Equifax Data Breach: What to Do” at the Federal Trade Commission’s website for a number of useful suggestions, including checking credit reports.) The less obvious but perhaps more profound issues raised by the massive data breach at Equifax pertain to the future of commerce and cyber insurance. With the breach exposing several of the data elements typically used to verify people’s identities, one must wonder what will happen if businesses and financial institutions lose confidence in their ability to confirm we are who we say we are. Imagine a world in which merchants can no longer accept credit cards. Imagine a world in which banks and credit unions can no longer make loans. Imagine a world in which one can no longer bank or trade securities online. And, lest one succumb to the notion that advanced biometric security measures will save the day, understand that biometric data is stored in computer files that can be hacked just like birthdates, Social Security numbers and the like. Changing stolen user IDs and passwords is easy, but what is the fix when hackers steal retinal scans, fingerprints and the like? The hope is of course that bright minds will find ways to protect us from criminal hackers and other nefarious parties who would do us harm, and yes — bright minds are already on the case. Witness in particular the rise of cyber insurance, and focus not on the compensation paid by cyber insurers in the wake of cyber incidents but rather on the underwriting done when cyber insurance policies are written and insurers’ work with clients to prevent and control losses. In many ways, this is emblematic of a larger movement in insurance and risk management from indemnification to loss prevention as the application of advanced analytics to big data enables intervention before losses occur. But while this might seem a new model, it is actually one that has been with us for quite a long time. People don’t buy boiler and machinery insurance because they want to be paid after boilers explode. Rather, people would prefer that boilers don’t blow up, and they want the benefit of the engineering and inspection services delivered during the underwriting process. See also: Aggressive Regulation on Data Breaches   Nonetheless, there will be times when cyber losses occur, and cyber insurers will be called upon to respond. The Equifax breach provides a mere hint as to the coverage limits insureds may require and the amount of capacity, or capital, cyber insurers may need to cover the risk. Insurers that can figure out how to price and underwrite cyber risk have a tremendous opportunity to do well by doing good. One key will be successfully quantifying and managing aggregation risk (the accumulation of risk as a result of covering multiple insureds using the same or similar systems, etc.).

Oh, hey, Walmart. Look at how you're winning at branding today. I used to work with brands that were sold at Walmart. I know from experience that the "Own the school year like a hero" tagline and point-of-sale sign was never designed to market firearms. With two clicks of a mouse, I confirmed that the sign is part of a campaign featuring back to school clothing items featuring superheroes. Unfortunately for Walmart, this "display" -- likely the work of a cheeky sales associate who did it for the laugh -- got lots of negative attention. See also: Will Brandless Become the Biggest Brand?   With more than 3,000 stores, the retailer has a tough job keeping tabs on its brand across all touchpoints. This speaks to the need for training and empowerment of all store employees to deliver on the company's brand promise -- every day, with all their actions. This one brand transgression has already thrust Walmart into the spotlight with some negative publicity -- at a critical time when families are flooding back to retail to restock for the new school year. A company's people are probably the most important part of their brand. In the age of instantaneous news, non-news and social sharing -- one bad decision on the part of a single employee can cast a negative impression on the entire brand. This is almost the same as was happened to United Airlines a couple of months ago, when line employees weren't truly empowered to do right by their customers. As was the case with United, I don't suppose that Walmart's brand will take a significant financial hit because of this one incident, no matter how awful we think it is. The strategic brand construct consists of two parts: 1) the part the company owns: the "identity," and 2) the part that customers own: the "image." One of the goals of branding is to ensure these two aspects match. That requires a 360-degree focus on the brand and requires everyone in the company to be a steward of the brand, from the most junior sales associate on the floor, all the way to the CEO, and everyone in between. When one oblivious sales associate makes a split-second decision to do something off brand, and that image is captured on social media and subsequently shared at the speed of light, that single action speaks for the entire brand. See also: Lessons From 3 Undisrupted Brands   For all brands, regardless the industry they're in, employees are the primary stewards of the brand experience. Train employees on your brand's vision, its core DNA and the essence of how every customer should feel when he or she interacts with the brand at any stage of the customer journey. Create incentives for employees to deliver an on-brand experience. And correct them -- or even dismiss them -- when they don't.

To drive operational effectiveness and capital deployment efficiency, leaders of captive insurance companies are increasingly in need of improved methods for performance evaluation and tools that go beyond simple financial ratio analysis or industry benchmarking comparisons. This need includes validation of the risk management program relative to the captive’s purpose, strategy and goals, as well as transaction and decision process transparency, performance tracking, formal decision-support analytics and informed disclosure to oversight groups. For many organizations, captives offer considerable strategic and financial value; consequently, they play an increasingly significant role in the overall risk management program. Additionally, captives often compose an integral element of an organization’s strategic planning efforts. Captive growth and business strategies can be more fully supported by an enhanced ability to monitor, analyze and track performance relative to the captive’s existing risk portfolio and new coverage opportunities. The benefits of these measures can include improved risk transfer and control decisions, as well as validation of risk and insurance management practices, activities and decisions. By improving decision-support information, the leader of an organization’s captive may gain increased recognition and commitment from senior management, which in turn leads to greater ability to write new coverages and enhance the existing program. The following method for improving decision processes for a captive offers a new approach for measuring its current performance and evaluating its potential. Strategic Captive Opportunity and Utilization Technique The strategic captive opportunity and utilization technique (SCOUT) is a performance evaluation methodology that consists of a performance scorecard and a reporting dashboard. It provides a framework to evaluate, rank and prioritize current and potential business/risk opportunities and a foundation for improving decision-making and enhancing strategic utilization and planning. The scorecard is a database that captures strategic and tactical factors while the dashboard consolidates the scorecard data for monitoring, analysis and reporting. Together, these tools support decision-making capabilities. As a technique for measuring captive opportunity and utilization, SCOUT conveys meaningful information with simplicity, converts qualitative benefits into quantitative terms and delivers a formal process that is consistent and reusable. The SCOUT process involves evaluating the performance of each coverage underwritten by the captive, as it relates to the original purpose, strategy and goals for captive formation. It also provides a framework for assessing the potential success of proposed coverages, including pro forma financial analysis, volatility considerations and risk profile changes. See also: Innovation: Not Just for the Big Firms   Performance Scorecard The scorecard represents a model to evaluate quantitative and qualitative metrics through a consistent scoring methodology (see below). The metrics, or key performance indicators (KPIs), include strategic goals, operational objectives and expected economic benefits. Specifically, the model assesses five primary KPIs: 1) achieve operational excellence; 2) reduce costs; 3) build surplus; 4) maximize return on invested funds; and 5) improve the risk management function. Each KPI is broken down into critical components to fully capture economic and non-economic performance evaluation criteria. Accordingly, the KPI structure builds from strategic performance goals to detail-oriented tactical objectives. The KPIs provide a framework for monitoring the effectiveness of the organization’s captive strategies, including identifying gaps between actual and targeted performance, as well as assessing overall organizational effectiveness and operational efficiency. KPIs can also help track progress toward a desired outcome. Specific KPIs are selected based on their ability to determine if a strategy is working, gauge performance changes over time and focus management’s attention on what matters most. The KPIs also allow measurement of accomplishments, provide a common language for communication, help reduce intangible uncertainty and can be validated and verified. Using the SCOUT process, each coverage underwritten by the captive is analyzed separately using selected KPIs. Input data is obtained through annual financial statements, actuarial analysis and internal and external captive and coverage specialists. Each KPI component is rated based on the priority of the goal or objective (mapped on the x axis) and performance evaluation of the goal or objective (y axis). Ratings criteria range from a score of “1,” which represents “minimal importance/not met” relative to goal/objective priority and goal/objective performance evaluation, through “5,” which represents “critical/exceeded” for goal/objective priority and goal/objective performance evaluation. Additionally, each KPI component can be rated as quantitative or qualitative. When a dollar figure can be used to support the performance evaluation, the KPI component is quantitative; when benefits are more intangible and difficult to quantify, then the qualitative selection ensures these benefits are included in the performance evaluation process. Components of the Key Performance Indicators The five KPIs are made up of critical components that offer enhanced measurement detail. For example, the components within the “achieve operational excellence” KPI include current and historical loss ratios as well as premium materiality. Components of the “reduce costs” KPI are based on loss versus non-loss costs. Loss costs refer to lower insurance premiums achieved through the captive’s ability to change risk retentions, based on commercial insurance rates, risk tolerance and appetite and internal strategic business financial needs. A second element of “reduce costs” is savings from claims management and loss control activities as illustrated by loss rate trends. Claims management activities include early reporting, cost containment strategy, improved legal defense and subrogation, and increased management attention. Loss control activities include engineering, cost of risk allocation and contractual risk transfer. Non-loss cost components refer to tax dynamics, fronting fees, collateral needs or third-party vendor fees. The “build surplus” KPI represents the buildup of underwriting profit. Performance evaluation criteria are based on insured coverage versus pure balance sheet risk and whether the coverage is intended to protect business assets or stabilize premiums and losses or represents diversification into a profitable new business, such as extended warranties or service maintenance agreements. “Maximize return on invested funds” is the lone KPI that measures a potentially negative result as based on the amount of investment income that can be earned on surplus within the captive versus repatriating funds back to the parent to invest in higher income-producing opportunities. Known as opportunity cost, the performance evaluation criteria are based on selection of an appropriate internal capital rate, regulatory surplus requirements, catastrophic loss potential and future coverage needs. Determination of the internal rate of return is based on the organization’s financial strength, including cash and collateral needs, earnings, borrowing capacity and asset strength. Finally, the “improve the risk management function” KPI includes various qualitative criteria about the captive’s ability to improve control and administration of the risk management function and the flexibility of the risk management program. Component KPI metrics that measure improved control over the risk management function include the ability to negotiate or replace fronting insurers or reinsurers, consistent application of risk management throughout the organization, cost of risk allocation support, alignment of risk appetite and risk tolerance, underwriting dynamics and emerging risk identification. The component KPI metrics for improved flexibility of the risk management program include coverage forms and rates, coverage requirements and unbundled services. Component KPI metrics for improved administration of the risk management function include ability to protect reputation, governance structure and reporting, enterprise risk management application, coverage renewal automation, data warehousing and analytical capabilities. Reporting Dashboard The SCOUT dashboard offers predictive capabilities using a visual tool to track trends and align activities with goals and helps to identify when and where important adjustments should be made to the program. The visual display should allow end users to monitor what is going on at a glance by focusing on only the most important information needed to achieve objectives. Thus, managers will be able to step back from the details contained in the scorecard and identify key trends and relationships. The dashboard also serves as a reporting tool for senior management and board discussions and presentations while specific supporting data is contained within the performance scorecard. From a software perspective, the scorecard represents the back-end database while the dashboard represents the front-end interface and reporting. Scorecard results are designed to link to the dashboard for automatic updating. Because the dashboard is built upon information obtained in the scorecard, its final look and feel is unique to the captive’s original purpose and mission, goals and objectives. A potential dashboard application offers four design graphics, comprising: 1) select quantitative results; 2) quantitative metrics; 3) qualitative metrics; and 4) financial ratios. As the focal point of the dashboard, the “select quantitative results” section embodies the primary analysis in the display. Figures are taken directly from the performance scorecard. Each coverage underwritten within the captive can be detailed separately and sorted by policy year. Measurements include results for underwriting, loss rate, surplus and opportunity cost KPIs. Conditional formatting can be used to illustrate a check, exclamation point or X depending on performance result, in accordance with pre-defined rules. Sparkline graphics can be used to illustrate trends. See also: Demographics and P&C Insurance   The quantitative and qualitative metrics are captured within bubble charts through rankings of goal/objective priority and goal/objective performance evaluation within the scorecard. The bubble charts represent an effective xy scatter diagram, based on the metrics used for scorecard ranking. Finally, a financial ratios graphic can offer a traditional analysis of the financial performance of the captive as a whole. Within this analysis, actual versus benchmark ratios can be illustrated and sorted by fiscal year, including premium/reserves to surplus, risk retention to surplus, expense, loss, combined, policy year operating, investment income, asset to liability, reserves to liquid assets and operating ratios. Integrating SCOUT Into Organizational Risk Management Culture SCOUT offers a platform for supporting the business and growth strategies of the organization’s captive insurance company by offering a fully defined framework and methodology for consistent, sophisticated and continuous assessment of captive performance. The next step is for the organization to integrate SCOUT into its risk management culture to help in decision-making. For this to happen, the captive leader needs to develop a formal process for updating and maintaining the scorecard and dashboard, including data extrapolation of actuarial and financial statements and input from coverage specialists and strategic business unit leaders. When in place as a formal business process, SCOUT enables detailed and usable monitoring and tracking of risk management and risk financing functions related to a captive insurance subsidiary. It can also illustrate current and future economic benefits with both quantitative and qualitative metrics for strategic business unit leaders, board members, treasury and C-suite executives. As a platform for making better, faster decisions, the scorecard and dashboard can fit into the organization’s enterprise risk management efforts. Information is rolled up through the dashboard function while the scorecard allows for drill-down into the specific details needed to fully support decisions. Improved management and governance can then help captives take advantage of opportunities for new coverage types, enhancements, program improvements and corrective actions. Reprinted with permission from Risk Management Magazine. Copyright 2017 RIMS Inc. All rights reserved.