As the sharing economy continues to evolve and the autonomous revolution emerges, consumers’ insurance needs are changing, requiring new types of coverage to ensure adequate protection against new risks. Insurers have begun partnering with insurtech players to build the digital basics, streamlining the quote-to-issue lifecycle and positioning insurers to engage with the 73% of the market who are looking to purchase coverage online. Now, insurers are pushing partnerships to the next level, focusing on product diversity to meet the growing array of customer coverage needs. Product Diversity Is the Way of the future Technology has made astronomical leaps in the last two decades, taking society from a pre-internet world of engagement to an environment of connected devices and services. Service providers such as Zipcar and AirBnB have opened a new sharing economy, where individuals using web and mobile apps can share their personal services or amenities, such as a car or a home, on an as-needed basis. The sharing economy, however, creates risks not typically covered under traditional policies. See also: How Diversity Can Stoke Innovation   According to a New York Times article, AirBnB offers $1 million in liability coverage to hosts using its platform, but the coverage is secondary to the homeowner’s personal policy, where commercial operations are not usually covered. “There are also other issues with Airbnb insurance,” said Robin Smith, CEO of WeGoLook, "including the fact that it does not provide coverage if a guest shows up early or stays late. This can potentially be disastrous.” Risks like these are behind the growing demand for innovative product types. Accenture predicts a decline in the demand for personal auto, starting in 2026, but says that autonomous vehicles will net the insurance industry $81 billion in new premiums over the next eight years. “Three new business lines — cybersecurity, product liability for sensors and software algorithms and public infrastructure — are going to drive billions in new insurance premiums for the U.S. auto insurance industry in the coming years,” said Larry Karp, global insurance telematics lead in Accenture Mobility, part of Accenture Digital. “Forward-thinking insurers are already putting these new products at the top of their agenda as they look to capitalize on the first-mover advantage.” While future-thinking carriers may benefit from the autonomous trend, insurers that have not yet built the digital, D2C base will witness declining profitability as demand for key products falters. “Right now, 70% of the market is asking to buy insurance online,” said Eric Gewirtzman, CEO, BOLT. “When you consider the impact of the sharing economy and the autonomous revolution on encouraging consumers to become technology-savvy, that number is going to grow.” That puts direct-to-consumer distribution in a new light, making digital capabilities critical to gaining wallet share as well as share of market by supporting greater product diversity. Why Digital Is So Important to Product Diversity According to Rick Huckstep, industry influencer and editor on insurtech at The Digital Insurer, before the rise of the internet, insurers bought policy admin systems. Each product had its own core system costing millions of dollars and taking years to implement. These legacy systems now stand in the way of insurers as they seek to strengthen channel and product diversity. “Engagement with customers and the development of products are defined by the limits of the policy admin system,” Huckstep said. He then outlined a plan where insurers partner with insurtech players to rapidly adopt digital capabilities while using existing investments in IT. Direct-to-consumer channels of engagement put insurers' products in front of more consumers and enable more efficient distribution, but partnerships in digital innovation also provide insurers with access to an unprecedented range of new coverage types without the need to take on additional risk or obtain their own carrier appointments. According to Bain, insurers are leveraging new ecosystems. These synergistic partnerships build on an insurer’s digital foundation and allow insurers to deliver the products and services their customers want or need. “With ecosystems, we see insurers offering more of the core products and ancillary services consumers require, such as home, auto, business, pet and travel or the ability to compare auto repair shops and book appointments online,” Gewirtzman said. “Making the consumer’s life easier leads to greater customer loyalty for insurers and is an important factor in remaining competitive in the current and future market.” Overcoming the Challenges of New Product Innovation To meet consumers' growing demands for personalization, EY predicts that insurers will need to offer a wider portfolio of products. Digital, direct-to-consumer capabilities become a big part of this equation, giving insurers the opportunity to act in real time, identifying needs and recommending coverage options while the customer is in the act of buying. According to Huckstep, “Digital speed to market has never been more important,” a statement that is particularly relevant for insurers currently selling exclusively through external agent channels. See also: Reinventing Life Insurance   For insurers still seeking a digital identity, insurtech partnerships allow them to leverage existing investments in IT, while making a rapid move toward D2C distribution. Building on strong digital capabilities to offer products from an ecosystem of insurance carriers, a leading insurer improved quote conversion rates 4% over a single quarter. Another insurer sold 1.6 more of its own products every time it bundled a solution that included another carrier’s offering. “It’s successful digital transformations and partnerships like these that prove the case for D2C and product diversity,” Gewirtzman said. “As additional insurers come on board, we’ll start to see more than a few carriers excelling at meeting customer needs. We’ll see an entire industry operating from a customer-focused perspective.” What’s the role of product innovation and diversity in your customer acquisition and retention strategy?

In 2018, agents will accelerate their adoption of digital tools and will enter into stronger partnerships to share critical data and analytics to grow.

As an industry, we have been talking about technological evolution for a long time. But in 2018, the combination of competitive conditions, availability of cost-effective technology and numbers of independent agents striving for growth and better client service creates the perfect storm to drive significant acceleration in agent digital transformation. Barriers that once prevented agents from implementing digital technologies have been removed.

See also: 5 Accelerating Trends in Digital Marketing  

Here are five key predictions for 2018:

1. All about the infrastructure: Insureds’ expectations for the always-on agency are real, and to serve clients any time, anywhere, agencies need systems and processes that can efficiently handle business. Whether the agency is looking to grow, expand or even exit, having a strong and flexible digital infrastructure is critical. This includes interactive websites with online chat and quoting capabilities, client portals and mobile apps, next-generation agency management systems and integrated call centers for 24/7 services. Agents will be evaluating their infrastructures and expanding capabilities and services for clients.
2. Move from closed loop to open access: In the insurance ecosystem, agents operate in many environments, including regularly accessing multiple carrier websites, agency management systems and customer relationship management systems. Many of these applications are closed, meaning they don’t allow the free exchange of data, forcing agents to spend time on manual workarounds and double data entry. Agents will seek to partner with companies and implement tools that can bridge the gap between various systems and choose applications that are built on open structures, meaning they “talk” to one another.
3. Pursuit of the paperless agency: Though e-signature is nothing new—it has been around the industry for 20 years—a large number of agencies will finally implement e-signature and other e-document tools in 2018. To improve productivity and increase sustainability, more agencies will transition to an all-digital mentality when it comes to sending, receiving and signing documents. But they can’t do it alone. Removing all paper from insurance transactions will require collaboration with carriers and be informed by regulators.
4. Synergistic partnerships increasing access to sales analytics: The carrier/agent partnership is about to go beyond a provider/seller framework. Agents gather unique sales data such as target market behaviors, web preferences and specific product interest that can help carriers improve sales and marketing efforts. Meanwhile, carriers have the technological infrastructure and expertise enabling them to provide education, training and best practice programs that can help agencies improve their digital capabilities. These two entities will foster deeper and stronger partnerships that will enable both the carrier and the agency to improve sales and grow their businesses.
5. Agents embrace artificial intelligence (AI): Machine learning, robotics, artificial intelligence – these tools may seem daunting and beyond the capabilities of agents who are just beginning to adapt digital solutions. But as they become more commonplace, agents will appreciate the ease and benefit of using these technologies and even realize they might have been using some form of AI already. From automatic fill on certain forms to using machine learning to move key prospects to top of the workflow to installing chatbots on websites that can resolve claims and answer clients’ simple questions, agencies will convert from trepidation to the implementation of AI  that will drive key processes.

See also: Global Trend Map No. 1: Industry Challenges  

Insurers are acutely aware that a whole host of emerging technologies are poised to change the industry, in some cases dramatically. It is both exciting and scary for industry executives to contemplate the implications of driverless vehicles, artificial intelligence, the Internet of Things, wearables and many other important technologies. It is also easy to get wrapped up in the technology. What features do the latest wearables provide? What advanced tech capabilities are being built into vehicles today, and how soon will the age of driverless vehicles arrive? How should we assess the various AI-related technologies such as robotic process automation (RPA), chatbots, machine learning and a laundry list of others?

There is no question that understanding the technologies themselves is important, but, from an insurance point of view, it is not about the technology – it is about what the technologies mean for customers, risks and operations.

See also: Possibilities for AI in P&C Insurance  

SMA’s recently released research report, Emerging Tech in P&C: Insurer Strategies and Plans Through 2020, explores 13 key emerging technologies in depth. A survey of industry executives yields insights about insurer strategies, plans and investments for each technology, along with expectations on how far-reaching the impact on insurance may be.

All of these technologies are important in one way or another. The key is in understanding which areas of the business have the potential to leverage various technologies, and how rapidly (or slowly) the adoption of each technology is likely to occur. Assessing business area implications and potential use cases is straightforward, but determining adoption rates falls into the area of educated guesses. Nonetheless, it seems clear to many in the industry that AI, drones, the IoT and driverless vehicles are a few of the emerging technologies that will have the biggest impact on both personal and commercial lines insurers. Others that have received a great deal of press, such as blockchain and wearables, are also important, but, for these, there is less activity among insurers than for the others.

The timeframe question is beginning to take shape, as well. Drones are here and now. A high percentage of both personal and commercial lines insurers have either already deployed drones or are building strategies to use drones (for both inspections and claims). AI and the IoT also have many projects and investments underway. There are also many partnerships with insurtech startups that have solutions based on those technologies. Driverless/autonomous vehicles are expected to have a larger impact on the industry than any other technology, with premium levels predicted to fall dramatically. However, the technology progress, testing, laws, regulations and the adoption of vehicles with these capabilities faces a long ramp up over the next 10 to 20 years. The implications are enormous for the industry, and there is time and opportunity to build strategic plans and reorient the industry.

See also: P&C Core Systems: Beyond the First Wave  in

This blog just scratches the surface on emerging technologies and what they mean for P&C insurers. The bottom line is that all P&C insurers, across all lines, need to be actively following the developments and thinking about the implications for business strategy.

Self-driving cars insured by the manufacturer. Smart homes that warn of perils in real time. Predictive analytics and automated underwriting and renewals. Wearables that measure your daily activity. Drone, sensor and video technology that help insureds avoid losses. What do innovations like these mean for conventional insurance? They may herald an organizational shift away from a tradition of risk aversion to one more open to the risk of failure inherent in innovation. They mean developing and deploying new technologies that will automate processes and improve customer experience. On a grander scale, they may ultimately result in a shift away from strictly indemnity-based products toward ones that actually prevent loss. Digital transformation Insurance companies are taking several approaches to innovation. It is occurring in groups within insurance companies as well as externally across what is being called the “innovation ecosystem.” As well as continuing IT projects within an insurance company, many are reaching out to best-of-breed technology solution vendors and insurtech start-ups. They’re investing directly in insurance technology firms or funds or contributing to accelerators to form partnerships. See also: Global Trend Map No. 6: Digital Innovation  Celent recently found that more than 80% of insurance professionals viewed innovation as a critical corporate activity to meet and exceed growing customer expectations. Yet only 35% stated that innovation is critical to their business strategy. So why the gap? In an industry as complex and diverse as insurance, theory and practice can be hard to reconcile. This can make adapting legacy systems and processes, or adopting entirely new strategies, even more challenging. However, the arrival of new opportunities for partnership through joint ventures, and partial and full ownership of insurance tech firms, is making this shift in culture smoother. According to Novarica, the growing use of insurance technologies by life and P&C carriers strongly focuses on mobile, big data and telematics. Link innovation to business strategy The key is linking innovation efforts to business strategy. This applies to technology solutions and is crucial to ensuring the organization and innovation hub or team is aligned with goals. Understanding the models within the innovation ecosystem is an important starting spot for carriers considering how to plug in. Incubators versus accelerators, venture capital versus partnership and internal versus external teams are all options that have their own set of pros and cons and differing levels of appetite for risk. While some insurance carriers have yet to invest in innovation, others have taken the leap. Those that have will begin to see the results of those investments over the next few years. Telemetry for automobile insurance, sensors and drones for home insurance and IoT wearables for life and health are poised for growth. Chatbots and Alexa help members understand group benefits Alegeus announced the release of Emma last year, a chatbot that enables customers using its mobile application to receive information about their health benefits plans via voice commands. The intention is to empower consumers with an array of information about their account from recent transactions and annual contribution limits to what happens if you leave your employer. Manulife has introduced the ability to use Amazon’s Alexa for plan members to review their group benefits coverage also with voice commands. Church Mutual Insurance has piloted a project that uses IoT sensors to identify potential damage and notify insureds. The small pilot has succeeded, with 24 customers (out of 220 in the pilot) saving $500,000 in damages in the first two years. Church is protecting against weather-related losses in the U.S. See also: 2 Overlooked Factors for Innovation Success Silicon Valley is participating, as well. Tesla is bringing telematics to new levels for customers using data to build flexible, personalized products and deliver services such as accident alerts and advice on how to become a better driver in real time. Participating in innovation projects promotes innovative thinking within traditional insurance organizations. And while the day-to-day challenges of doing business can impede steps toward innovation, as they require additional resources and a mandate to do things differently, the innovation ecosystem is healthy and growing. Most insurance executives recognize that insurers can’t afford to be risk-averse anymore, but rather must become judicious risk takers.

A longtime colleague at the Wall Street Journal used to advise young reporters, "If you have a good story, you should write it every once in a while."

Although I am no longer a young reporter, I'm going to take Al's advice and return this week to what I think is one of the better stories developing in the insurance industry: that companies are moving beyond a product focus and are increasingly helping insureds avoid losses, rather than just compensating insureds after the losses occur. The shift toward prevention services is worth reiterating and will, I hope, keep jumping to the fore in coming months and years.

The latest example is the announcement this week by Good2Go Auto Insurance that it is providing policyholders access to the LifeSaver app to discourage distracted driving. The need is dire. While deaths on U.S. highways had declined steadily since 1980, leveling off at about 33,000 a year (still an ungodly number) starting in 2010, deaths surged in 2015 and again in 2016, when the total was 37,461. The 2017 total will likely be even higher when it is reported in the next few weeks, and distracted driving is considered to be a major reason. 

Apps to limit distracted driving have been around for a few years, but they have mostly wrestled with how to turn off the driver's phone (while not turning off all the passengers' phones). What I like best about the LifeSaver app is that it provides feedback about a driver's habits and coaches drivers about their behavior, something that may be more palatable for drivers and may prove effective as the backlash against distracted driving builds. In any case, it's nice to see insurers keep experimenting with how best to protect people.

Another recent example is the private firefighting forces dispatched to some homeowners during the wildfires in California late last year. Again, this isn't strictly new—the origins of fire insurance trace back to volunteers who organized to fight fires—but the high profile of the efforts in California suggest that such loss-prevention efforts will be stepped up. 

Meanwhile, Roost continues to roll out announcements about deals with insurers to subsidize its devices for policyholders—the devices alert homeowners to fires and water leaks. And life and health insurers are encouraging us deskbound types to use FitBits and related devices to increase our activity and improve our health.

We're still in the early days of this push toward loss-prevention, and many of the business models have yet to be proved—I'm especially skeptical that my FitBit will do enough to improve my lifespan measurably—but, hey, at least insurers are up and moving. 

Have a great week.  

Cheers,

Paul Carroll,
Editor in Chief

In our previous post, "Five Strategies to Fight Price Comparison," we argued that, with regard to customer engagement, Google, Apple, Facebook and Amazon, the companies that are so much feared by insurers, have in common that they literally carry pull in their genes. Obviously, there is so much insurance carriers can learn from them. We therefore decided to analyze the pull platforms of these companies, but also of the first financial institutions, fintechs and insurtechs that have established successful pull initiatives, and last but not least outside the industry best practices from among others Nike, Danone and Unilever - in total some 30 pull platforms. Our analysis revealed that these 30 pull initiatives all have their own mix of eight key characteristics: (1) they solve real problems, (2) leveraging content, tools and connections, (3) building communities, (4) thinking beyond customers, (5) looking beyond data, (6) fostering beyond their traditional vertical, (7) using network effects (8) and creating unconventional value. Let’s take a closer look at each of these eight key characteristics, each illustrated by a best practice. We deliberately used examples from outside the insurance industry, to spark your imagination. 1. Solve Real Problems Successful pull platforms solve real problems in an unconventional way. Not just frictions, but the real problem; the problem behind the financial need. Using technology, they enable their customers to be more in control, to learn and be better informed, to make better and faster decisions and to get better service, geared to their need. Nike+ Each time I go running, I activate the Nike+ running app. It registers distance, speed and routes, I can track my progress over time, connect with friends to keep each other going or compete and when I’m traveling. It helps me to find popular routes in cities abroad. Nike+ is changing the conversation with its customers on all levels: business model, brand, proposition and customer experience. Nike's proposition now is no longer about shoes that may or may not have shock-absorbing soles. It's also about a range of new services that key in on real underlying needs: making athletes enjoy their sport even more. While, obviously, Nike could easily use all the information to determine exactly when you need a new pair of running shoes, Nike is becoming a company that isn't just focused on products and sales, but also on creating services and building relationships. Alipay "Solving the real problem" is less trivial than it may sound. Let’s take Alipay, the successful payment system of Alibaba, used by millions of shop owners and other merchants throughout China (and beyond). Sabrina Peng, president, Alipay International, shared with us: “Alipay isn't just about payments; it's about customer relationships. The whole idea is to bring more value to the merchants and to the users. Payment is nothing more than just a part of the purchase cycle. Merchants don't want a new payment system. They want more customers." This insight is Alipay’s starting point to assist retailers in connecting with Alipay users in all sorts of ways. Merchants can use Alipay to market their services, including special offers, coupons or vouchers. Alipay users can see all the merchants nearby, see pictures, use unique discount codes and post reviews - resulting in more traffic, customers and revenue for merchants. The payment system plays a key role in the model but resides in the background. Alipay shows that it is essential to really understand the context to provide real added value and to play an active role in the ecosystem of that context. People are not interested in a mortgage, but in a house. The context of a nice house and easy living offers more opportunities to add value to customers than just the mortgage, or the home insurance, and more opportunities for new revenue streams. 2. Leverage content, tools and connections Pull platforms have a large added value when there is an imperfect, fragmented market, with lots of suppliers, many products that are difficult to compare, products that are distributed sub-optimally, a lot of detailed information on various locations, many who are interested in that information or products and asymmetry in information. That also explains the popularity of comparison sites for financial services and the large role given to search engines by consumers in the path to purchase. Successful pull initiatives put a specific set of content, tools and connections at the user's disposal. See also: 3 Keys to Selecting the Right Platform Danone’s BLX Danone developed a pull platform that supports mothers in all kinds of ways, from “becoming pregnant” to their child's first five years, the “early nutrition” stage. Tom de Waard, global digital experience director at Danone Nutricia Early Life Nutrition: “The BLX platform supports mothers in all kinds of ways, from 'becoming pregnant' to their child's first 1,000 days, the 'early life nutrition' stage that lays the foundation for future health. It includes being present in online places, owned, earned and paid, where mothers gather information and discuss matters with each other, a branded mobile app helping mothers 24/7 with relevant information and services. All these various data sources are used to provide tailor-made services to every parent with the right content, services and tools, and personal advice and offerings – precisely in sync with, for example, the exact age and health situation of the child. Months in advance of the birth, we are in frequent contact with the parents. That provides all kinds of possibilities to establish a connection. The result is that, from the birth on, our products are a natural given. The results of the platform are exceeding expectations by far on ‘brand of first choice’, NPS and the rate of interaction with the brand.” 3. Build Communities A vast number of pull initiatives we looked at fulfill a community function or make use of it. Many offer consumers the opportunity to play an active role or to share all kinds of content. This way, they lend the authority of credible consumers. Think of the community that Danone is building. Connecting peers ensures that all involved gain value from the interactions. More users result in more interactions, which in turn results in more value. Creating such an upward spiral is the real challenge. eToro The vast majority of private bankers and investment advisers we know are performing worse than the market. That is a serious imperfection. At social investment network eToro, private investors can compare their portfolio with that of others. It is sort of the Facebook of private investors. You can see who has performed well for years in a row. eToro lets you invest along with the most successful investors. Your portfolio proportionally copies the trades of the Popular Investor of your choosing. When he buys, you buy. When he sells, you sell. Yoni Assia, CEO of eToro, says, “64% of all trades via eToro are copy trades. Being followed and copied can be a lucrative business for our most popular traders. Our ‘Popular Investor Program’ allows traders to earn up to 2% of the assets they are passively managing.” eToro is one of the best examples we know of new conversations in financial services. Transparent information exchange is at the core of the business model. Trust in peers is leveraged and creates huge value for eToro members and eToro alike. eToro has more than 5 million registered users. 4. Think Beyond Customers Users of Danone’s BLX platform don’t have to be a customer to have access to all the tools and services. That means it also attracts interested potential consumers who otherwise wouldn't even show up on the radar. Financial institutions primarily think about services they can offer when someone already has been taken on as a customer. Most of the time, the number of non-customers is significantly larger. Why wouldn't you develop services for this much larger target group? Other financial institutions foster this route, too. Rabobank's Hypotheekdossier  Rabobank's Hypotheekdossier, “mortgage file,” allows consumers, whether they are a customer or not, to do the math when they are looking for a new house or refinancing their mortgage. Because the information and tools are better than elsewhere, the platform has a large appeal and is an excellent lead generator. Another example is Personal Capital, an American wealth manager that provides all kinds of tools to non-customers, letting them experience some of Personal Capital's expertise.
In essence, these companies are using pull platforms to move upstream. They are building the brand in an active manner, among the target audience, branding by doing. On top of that, they get direct access to tomorrow's customers, while being much less dependent on search engines and comparison sites. 5. Look Beyond Data In all the pull platforms we have discussed so far, the use of data plays a pivotal role. Pull initiatives offer the possibility to gather much deeper consumer insights about what is going on in the consumer's life around a particular life event or product. It is an important side effect of pull initiatives. They provide customer insights that can be translated into better products, or even real-time services. Unilever’s All Things Hair Unilever is the third-largest player in the global hair care market, but struggles to achieve growth. Consumers are tired of hair category clichés in advertising and go online in search of answers and inspiration. According to Google, there are around one billion (!) searches related to hair each month – from how to take care of split ends, to how to style your hair for a wedding. Half of all online beauty shoppers watch a related video on YouTube while looking for products to buy. But only 3% go to videos by beauty brands; vloggers control the other 97%. Facing these challenges, Unilever decided to launch All Things Hair, a YouTube channel where consumers can browse the latest trends, tips and treatments. What makes All Things Hair special is that it leverages partnerships with Google and a team of leading vloggers, many of whom have several million followers in their own right. Google's data-mining capabilities allow Unilever to gain real-time insight in what people are looking for with regard to hair, such as insights in growing search terms and trending topics such as celeb's hair or holiday seasons. It even helps Unilever to predict hair trends as much as three months in advance. These insights are used to brief a team of beauty vloggers, who are paid by Unilever to create bespoke tutorials. This content features relevant products from Unilever brands, such as Toni & Guy, Dove and VO5. All Things Hair became the No. 1 one hair care channel in just 10 weeks, with 50 million views in the first year - wedged between Rihanna and Nicki Minaj in YouTube's engagement ranking. 6. Foster beyond the traditional vertical Successful pull platforms dare to take on other roles. Danone is shifting from purely product to offering a broad array of services, as well. Alipay is choosing to have a different role in the value chain than the traditional role of a payment solutions provider; the company actively supports retailers to increase their revenues. If you want to solve the actual problems that customers face, then often there is more required than delivering a financial product. Successful pull initiatives dare to take on other roles. That not only fulfills the needs of customers better but also helps to open up new revenue streams. TDC’s Get The Get platform of Danish telco TDC comprises 12 services, from online newspapers and magazines, to pay-TV and Bet25.dk, online betting (35% of all Danes watch soccer via TDC). This way, TDC is developing its business model from subscriptions to a content play. Ping An China's leading personal financial service provider Ping An adopted the strategy of the synergistic development of traditional and non-traditional businesses by creating all sorts of portals in non-traditional domains such as home, health NS car, but also food and entertainment. All these platforms have large numbers of users and interactions, and advanced data mining and precision marketing capabilities. Each and every one of them are new business lines that create new value for themselves, as well as for Ping An. Only when relevant and timely are Ping An's traditional banking and insurance activities brought into contact with customers. The new business lines are not only increasing their own value; by moving upstream, they are increasing relevancy and enlarging the total customer base, and by allowing new synergies they also increase the value of the entire ecosystem of Ping An enterprises. DIA Amsterdam 2018 will take place on May 16^th and 17^th  in the awesome Westergasfabriek venue, close to the vibrant city center. 7. Use network effects Google finances online advertising purchases by merchants. Obviously, Google has a fair idea of the track record of the merchant, in terms of marketplace success – traffic, sales figures, customer reviews and satisfaction scores – as well as financial reliability and debtor risk. Amazon follows the same strategy as Google, providing loans to independent sellers on the Amazon platform. Everybody is expecting Apple to eventually use the vast pool of iTunes users, including their credit card data, for financial services. Stored value Both Google and Amazon can kick start such activities based on the millions of merchants they are already in contact with. That is their strength: they are capable of generating so-called network effects. Along the way, they have accumulated all kinds of assets; so-called stored value. Traffic figures, customer reviews and satisfaction scores are examples of such stored value. These accumulated assets are deployed later to develop new revenue streams with, if necessary, other business models. With every new service, the companies strengthen their position. Network effects can also be created by freeriding on the activity of established allied platforms. PayPal, for instance, grew on top of eBay. There is currently much debate and speculation about how Amazon will enter the insurance market. Many fear that the company will launch a full-stack insurer, more or less similar to the ones we know. Looking at how Amazon leverages stored value to offer loans to merchants, it may in fact follow a totally different strategy. It may be interesting to look at all the stored value the company has and then think of what totally new insurance concepts would leverage this stored value to the max. 8. Create unconventional value When financial institutions use pull initiatives to take on a different role in the value chain, we see that they not only strengthen their current business – for example by brand building or lead generation – but they also explore new revenue streams and business models. Ping An and TDC Get are explicitly doing so with various platforms. See also: Insurtech: Where’s the Beef?   PostFinance Card-Linked Offers PostFinance (Switzerland) is partnering with Strands to provide transaction-driven marketing. The integration with Card-Linked Offers (CLO) enables the bank’s systems to analyze customer transactions, make contextual offers, recommend marketing strategies to merchants and continuously learn from customers' responses. For example, businesses can reward loyal customers, gain competitors’ share of clients or re-activate customers that haven’t made a purchase for a while. Eligible customers receive the coupon on their mobile from the bank with a discount, which they accept or reject. The discount is redeemed automatically in the customer’s account; he just has to make the payment with the bank’s card. PostFinance charges a percentage of the revenue generated by the coupons, for instance 5%. So if a customer spends 3,000 CHF a year using the coupons, the bank gets 150 CHF in revenue from this customer. PostFinance has full control of the CLO platform, including multiple pricing options and monitoring capabilities. Pull platforms are digital flagships After mobile, social, and connected devices, pull platforms are offering a new interface with customers. Eduard de Wilde (director digital VODW) calls them examples of digital flagships, no less -- comparable to the flagship stores of renowned retail chains at the best locations in the most important cities to show their brand and what it offers in full depth. The best practices that we included show that pull platforms can take so many different shapes. Some seem to be detached from the systems; others seem fully integrated. Some of them are using a specific medium; others use different media simultaneously, seamlessly matched to each other. But they also have a single point of departure in common. Real problem solving requires that financial institutions need to speak to their customers at the moments when customers need them most. Consequently, pull platforms need to be designed around the customer journey and building the two-way relationship, to enhance top-of-mind position, brand loyalty and advocacy. The focus on problem solving also means it is about selling without selling. Self-serving content is out. The shift from push to pull is not just about shifting budget to pull platforms. How you reach customers is not the only thing that is important. It is what you do for them that counts even more. Consequently, brands need to adjust, from “how can we make sure people will buy more from us” to “how can we do more for them?” That is the way brands are built, and the way to become less dependent on search engines and comparison sites and escape the commodity trap. If you would like to read more about pull platforms, check our book "Reinventing Customer Engagement. The next level of digital transformation for banks and insurers," in English or in German Obviously, we will ample attention to platforms at DIA Amsterdam, May 16 and 17.

I may find myself hounded across Leadenhall market for suggesting such an idea, but is the ritual of brokers sitting outside an underwriter’s box, clutching stacks of insurance slips, about to be consigned to the history books? Could the process of matching the right risk to the right capital be done more effectively and efficiently? Insurance risks come in many different shapes and sizes, and the insurance industry has specialized in assessing and providing bespoke solutions for more than 300 years. The reality is that not all risks are unique or quite as subjective as we may be led to believe. For the more homogenous and parametric risks, is it not time the insurance industry reviewed how it covers them by assessing its efficiency, transparency and effectiveness? Valued at around $100 trillion, the global bond market is more than 20 times the size of the global insurance industry. The bond market is often perceived as opaque, old-fashioned and a slow-moving marketplace traded almost exclusively over the phone. Like insurance risks, bonds are also far from homogeneous, all having different sizes, credits, risks and protocols. The surprising fact is that, over the last 15 years, the bond market has begun to change its modus operandus, and now (on a volume-weighted basis) 37% of global bonds are traded…………. electronically. Third-party electronic marketplaces such as MarketAxess and Tradeweb have enabled this change by improving the efficiency of bond trading, reducing transaction costs and creating market liquidity, in what can be a very illiquid and stagnant marketplace. This has increased transparency and helped stimulate the overall growth of the market. See also: The World Is Flat; Insurance Is Round   The insurance industry has certainly evolved since its inception in Lloyd’s coffee shop in 1686, but the risk transfer process has remained almost identical. With a net expense ratio running at more than 40%, the sad fact is the cost of doing business through the Lloyd’s marketplace is stifling business rather than encouraging growth. This is why the creation of a third party electronic marketplace for the transfer of reinsurance risks would help drive progress, create efficiencies and stimulate innovation across the market, benefiting the insurance industry as a whole. Working with the insurance industry, AkinovA is building an electronic marketplace for the transfer and trading of reinsurance risks. By taking an inclusive approach, AkinovA is bringing together all parts of the insurance value chain to enable the creation of a truly electronic marketplace.

The first Out Front Ideas with Kimberly and Mark webinar of 2018 provided our thoughts on the 20 Workers’ Compensation Issues to Watch in 2017. What follows is a summary of the issues discussed: Healthcare The healthcare industry continues to evolve at a rapid pace, and the evolution is vast, encompassing everything from pharma to practice to technological disruptors. Consolidation and mergers and acquisitions in the healthcare space will continue in 2018. As CVS looks to broaden with the acquisition of Aetna, do not be surprised if Amazon, Walmart and other large employers expand their reach into health, as well. Health systems have been merging for years. In some of the mergers, we are now beginning to see hospital and facility exits resulting in local disruption for patients, providers, insurers and the benefit and risk programs of those affected. For many years, health plans have been in the business of delivering patient care. Probably the best example is Kaiser Permanente, operating as both a health plan and healthcare provider. Similar to UHG’s announcement of its DaVita acquisition, we will likely see more payer/practice mix in 2018. Drug companies are purchasing other drug companies, and, given their R&D cycles, generic and biosimilar opportunities, we do not anticipate this to decrease. Under Dr. Scott Gottlieb’s oversight at the FDA, expect to see approval and safety pathways accelerated in 2018, which will enable speed to market for new generic drugs, digital health software and medical devices. A few additional hot topics will include:

• Scope-of-practice advancements for physician assistants and nurse practitioners given their underutilization.
• Competition for convenient, quicker, more-accessible options for care with growing emphasis on community care, home care, retail clinic care and telemedicine.
• For most medical providers, revenues are flat while expenses continue to rise, prompting significant focus on efficiency. Offices and systems need to improve speed of delivery and agility at all levels.
• Value-based care models and value-based reimbursements. Examples in workers’ compensation include physician/health system pay for outcomes and bundled payments arrangements. Health plans look at population health outcomes and continue to advance accountable care organization (ACO) models.
• Pharma continues to aggressively address the need to create value for outcomes related to drug pricing. The debate there continues. How much is a drug worth if it literally saves the life of a patient?

Legislative Watch Thirty-four of the 50 state governors are currently Republicans. This, combined with the fact that insurance rates are down in most of the U.S., means we have not seen a significant push for workers’ compensation reforms the last few years. However, there are still some states where significant activity is expected in 2018.

• Florida will again attempt to fix the plaintiff attorney fee caps that were found unconstitutional by the state supreme court two years ago.
• Pennsylvania had the part of its workers’ compensation statutes dealing with the evaluation of impairment found unconstitutional in 2017. Efforts are underway to correct this legislatively.
• Expect the workers’ compensation reform battles between Illinois Gov. Rauner and the Democrat-controlled legislature to continue. This is an election year for the Illinois governor.
• In California, it is Gov. Brown’s last year. Expect yet another push by the legislature to undermine prior workers’ compensation reforms. Universal healthcare will likely be an issue in the 2018 governor’s race, and the outcome of this election could have a significant impact on workers’ compensation in 2019.

Treatment Guidelines and Drug Formularies We have seen a positive trend in states adopting treatment guidelines and drug formularies, which can help injured workers get proper, timely care and help to reduce unnecessary treatment. In 2018, California, New York and Arkansas will all be implementing new treatment guidelines or drug formularies. Montana is also implementing a drug formulary, but the timeline for this is not set yet. Georgia, Pennsylvania, North Carolina and Louisiana all considered either treatment guidelines or drug formularies in 2017, and we expect them to revisit this again in 2018. See also: The State of Workers’ Compensation   Judicial Watch Every year around the country, judges modify the practice of workers’ compensation in their state based on their interpretation of the statutes. These interpretations can significantly expand or restrict workers’ compensation benefits in the state. It is as important to monitor the court decisions in your state as it is to monitor legislative activity. Along those lines, challenging the constitutionality of workers’ compensation statutes is a trend that is expected to continue in 2018. Last year, Pennsylvania joined the list of states to have a portion of their workers’ compensation statutes found unconstitutional by the state supreme court. There is a case on appeal in Kansas right now challenging the constitutionality of a portion of their statute, as well. The basis for these constitutional challenges exists in many other states. Finally, last year, a judge in Alabama declared the state’s entire workers’ compensation statutes unconstitutional. This was appealed, and the case settled on appeal, so that decision ultimately was rendered moot. However, the issues raised in that court case regarding benefit adequacy are something we could see again anywhere. Workplace Violence Companies are working to raise awareness of workplace violence. Whether they are engaging consultants to assist with planning or conducting revised employee training, risk managers and human resources are working together to ensure they have a solid program in place. There is an uptick in patient attacks on healthcare workers. This is happening all too often, ranging from emergency room to mental health facilities and nursing home care settings. Given that 2017 marks an unprecedented awareness of sexual harassment in the workplace, we are adding workplace harassment as an issue to watch. Employers small and large are looking at their sexual harassment policies, training and complaint-investigation processes. State Variations Workers’ compensation is a state-based system, and the variation between the states is something that has been attracting consistent attention. Two people performing the same job for the same company in different states can receive significantly different workers’ compensation benefits. The very definition of an employee varies by state. From the administrative side, a lack of consistency with regard to state forms, data templates and even the definition of disability is very challenging to payers. The U.S. Department of Labor started looking into these issues in late 2016, but those efforts stopped after the election of President Trump. However, those issues are still very real and need to be addressed. Now is probably the best time to establish standards between state workers’ compensation systems – now, when the federal government is not pushing for it. If no action is taken, it is likely that the federal government will push for this in the future. Pain Management Everyone is keenly aware of the opioid crisis and the importance of tapering narcotics, narcotics avoidance, formularies and deaths related to opioids. 2018 provides the opportunity to advance our understanding of these issues and willingness to change treatment protocols for patients in pre-pain, acute pain and chronic pain states. With pain, one size does not fit all. Personalization of care and working in partnership with the patient, the family or support system and providers to collectively create a treatment pathway for the patient is important to ensure success. Natural Disasters 2017 was an unprecedented year for natural disasters in the U.S., with multiple major hurricanes and widespread wildfires. Natural disasters can have a big impact on workers’ compensation and healthcare systems, including the risks faced by first responders, the disruption to your workforce, challenges to the benefit delivery system and supply chain disruption. Cyber Every company has cyber risks and preparedness, and recovery is a daily priority for the CIO. Cyber risk reaches beyond hacking and selling personal identifiable information on the deep dark web. It can be a life and death concern. Health systems locally and worldwide were hit with ransomware in 2017, shutting down hospital and practice computer systems while money was demanded in exchange for digital keys to unlock the systems. Patient data hacks have resulted in medical device malfunctions and treatment delays. A recent cyber attack on Merck hurt its ability to produce medicines. Workers’ compensation payers, service providers and stakeholders are equally at risk. History shows that companies without a solid cyber insurance program put their business at risk. Companies and customers will place even greater emphasis on cyber risks in 2018 Rate Adequacy For the last few years, workers’ compensation rates around the country have been flat to down in most states. This is in spite of the fact that NCCI data shows that, over the last 20 years, the average medical and indemnity costs per lost time claim have increased at rates greater than inflation. In 2017, two of the top 10 writers of workers’ compensation posted multimillion-dollar reserve increases to cover their developing losses. This attracted the attention of rating agencies such as A.M. Best, which, in a September report, raised concern about the threat of inflation on workers’ compensation tail costs and the impact this could have on industry reserves. Multiple brokers have indicated that the workers’ compensation rate outlook for 2018 is relatively flat. But with workers’ compensation being such a long-tail business, premiums collected today must cover losses 30 years into the future. As losses continue to climb, it is inevitable that insurance rates will need to increase in the future to offset those losses. Job Accommodation Silos within companies result in multiple return-to-work policies, both formal and informal. Return to work is not a workers’ compensation issue, alone. The issue is inconsistent with job accommodations across organizations. Whether an employee is injured on the job, requests an accommodation as part of a disability or leave of absence or has the need for an accommodation in general does not alter the way in which an accommodation is handled. In 2018, we encourage you to break down the RTW silos and get comfortable outside your typical area of responsibility. We should not only meet ADA requirements but also provide employees the accommodations they deserve. Impaired Workforce 2018 means that recreational marijuana is now legal in more states than ever before, with California becoming the largest state to allow use. However, the reality of recreational marijuana is that this likely means that a percentage of your workforce is impaired on the job. Many employers stopped pre-employment drug testing for marijuana because too many potential workers failed the drug test and because the presence of marijuana in your system does not mean you are currently impaired. That’s the problem. Right now, there is no reliable method for employers to determine if their employees are impaired on the job. There is no “marijuana breathalyzer” that can quickly and accurately show whether a person is impaired. The bottom line is that the science of marijuana has not caught up with the social realities of marijuana. What can employers do? Courts have consistently ruled that employers with drug-free workplace policies can terminate an employee who tests positive for marijuana, even if the employee is using medical marijuana. There is one notable exception. Last year, a Maryland court allowed an employee to pursue a wrongful termination claim under these circumstances. Will other states follow the Maryland precedent or the cases in California, Colorado, Michigan and other states where the termination was allowed? In addition, what happens now that the Department of Justice has rescinded the Obama administration policy memo that indicated the federal government would defer to the states to enforce marijuana laws? Does this mean the federal government will start to arrest marijuana users and producers? No one knows for certain. Perhaps this will force Congress to take action on marijuana. Digital Health Digital health is a broad term related to the use of technology and health. Examples include mobile health apps, telemedicine products, tools to track consumer/patient data, education and patient reminder programs and treatment adherence. For those working in the digital health space, connectivity is the issue. There are plenty of technology solutions; the issue is how to connect all the stakeholders: patients, doctors and service providers, pharmacists and payers. Without connectivity, silos remain, and the system is too clunky to be effective. Probably the most common digital health discussion in workers’ comp is telehealth. We have been slow to adopt comprehensive programs, whereas the benefits space has been at it for more than five years. Group health has moved past triage of physical symptoms to treating mental health and, in 2018, moving into chronic disease management. Look for more hospitals to offer telehealth services as they diversify care offerings and seek to enhance their offerings. Technology has improved, and consumer awareness and interest is growing, so now is the time for workers’ comp to jump on board. OSHA Under the Obama administration, OSHA had a publicly stated policy of “shaming” employers in compliance. That meant frequent press releases highlighting violations, even if those violations were later rescinded. In 2016, there were more than 200 OSHA press releases on enforcement actions. OSHA under President Trump has been much more focused on education than penalties. As of late October, the administration had issued less than 20 press releases on enforcement actions. Scott Mungo, who worked for FedEx Ground, was nominated by President Trump to head OSHA in October. In December, his nomination was approved by the Senate committee, and it is expected he will be confirmed by the full Senate soon. What should we expect from OSHA under President Trump? If the first year of his term is any indication, we will see fewer new regulations and perhaps even a rollback of some existing regulations. The approach has been more consultative with employers, rather than combative. Workforce Wellbeing Human resources, risk managers and executive leaders recognize that workforce wellbeing affects both top and bottom line performance of an organization. Benefits are a talent attraction and retention tool in 2018, and human resource officers are deploying programs to address physical, emotional and financial wellness – the three pillars of health. Wellbeing programs place emphasis on an individual’s personal needs and considerations for both health and productivity. Workplace wellbeing programs in 2018 expand far beyond weight loss and smoking cessation. They may also include financial planning tools, resilience and mental health awareness training. To promote use of benefits, human resources departments need to break down the benefit silos. The whole health model at Sedgwick health is a great example, because it integrates group health, leave of absence, workers’ compensation, short-term disability and job accommodations. Benefit integration and ease of use drives engagement, which, in turn, improves business performance. Fraud When you hear about workers’ compensation fraud, the first thing that comes to mind is videos showing allegedly disabled workers engaged in a variety of physical activities they claim to be unable to do. While these videos are sensational, the reality is that true fraud from injured workers is rare. The most common source of workers’ compensation fraud comes from employers in the form of premium fraud. Underreporting payroll, misclassifying workers and incorrectly classifying workers as independent contractors is something that happens all too often. Employers that commit workers’ compensation fraud drive higher premiums for honest employers and create an unfair competitive business environment. The construction and staffing industries have been dealing with this issue for many years. Many states have been aggressively cracking down on this type of fraud, but it continues to be a significant problem. See also: 25 Axioms Of Medical Care In The Workers Compensation System   Medical provider fraud is another area of workers’ compensation fraud getting more attention lately. In the last two years, we have seen several high-profile prosecutions of medical providers in California. The fraudulent treatment alleged in these cases amounts to billions of dollars. We have not seen medical fraud like this in other states, in part because California’s system has a high percentage of post-injury CT claims, which allows unauthorized treatment and the filing of a lien by the medical provider. These elements create an environment that is ripe for fraud and abuse. We hope that we will not see this fraudulent behavior spread to other states and that California will continue its diligent prosecution of these cases. Consumer Experience and Engagement We are living in a consumer’s world today. The pace with which we want our services delivered and the high standard of excellence expected has led all sectors in business, including health and workers’ compensation, to consider their definition of consumer. Failure to engage a consumer leads to complaints and negative PR and possibly lack of treatment adherence, whereas high levels of consumer experience lead to positive outcomes. You will hear more about use of net promoter score (NPS) to understand consumer experience and link to engagement in 2018, and we believe use of NPS has potential in workers’ compensation. Now is the time to engage consumers in the conversation around our products, services and certainly program design. The injured worker’s voice is often missing in the workers’ compensation system. People, Places and Things The aging workforce, the evolving workforce and technology are all having a significant impact on the workers’ compensation industry. In the coming years, we will see a significant exodus of talent from our industry due to retirement. How do we attract the next generation and compete against other industries for people? What will the office of the future look like? How will changes in technology affect the way we do our jobs, including how we communicate with injured workers? Insurtech If you have not checked out the latest conversations in insurtech, 2018 is the time. The market has grown considerably in the last three years with a worldwide platform. What’s insurtech? Insurtech is use of technology to bring efficiencies to the insurance industry. Those engaged with insurtech believe new tech players will disrupt the current insurance market by bringing coverage to a digitally savvy customer base. Customer expectations of seamless, instant transactions are increasingly the norm, and insurtech use of blockchain and AI are promising – although yet to be proven in most scenarios. Much of the focus of insurtech is on personal lines, but it is starting to move into commercial segments. McKinsey reported last year that 46% of insurtech companies are focused on property and casualty, 33% on health and the remainder on life. They target primarily pure risk insurance, where they have developed access points to the value chain on innovations. Immigration Reform Finally, immigration reform is something that has been talked about politically for years, but Congress has not been able to advance any meaningful discussions in this area. Will that change in 2018? Our country and Congress appear deeply divided on this very important issue. The outcomes of these discussions could have a significant impact on the millions of undocumented immigrants currently working in this country without the benefit of workers’ compensation coverage or other workplace rules and regulations. To listen to the complete webinar, click on this link.

To begin on a dreary note, I feel like I am beating a dead horse discussing agencies' standard of care. This would not even be a valid topic, except: 1. Too many attorneys are involved who cannot see the forest for the trees. They look at every situation with the idea that, if the agency had not done this or that, they would have an easy time winning the suit. Their ability to win a suit easily should not be a factor in advising agencies to shirk their standards. Telling an agency to not advertise that they are professionals so that when they are accused of failing to provide services at a professional level they can win a case more easily is horrendous advice. Agents do not need attorneys who cannot win hard cases. See also: Are P&C Insurers Failing Agents?   Furthermore, advertising is not the issue. To even bring it up is evidence the attorney or other adviser is completely missing the point. The real point should be to act as a professional so that the agency can advertise as a professional. By acting as a true professional, the agency does not have to worry about using better advertising. It does not have to worry about being called out as a hypocrite for advertising one thing while doing something less. 2. A preponderance of agencies seems to want to be considered incompetent. A low standard of care is evidence of incompetence. At the very least, a low standard of care encourages amateurism. This combination of advice from on high, attorneys and advisers, with a willing audience that WANTS TO BE TOLD to act amateurish, is a death knell for independent agencies because NO ONE NEEDS AMATEUR AGENTS! The need for professional agents is stronger than ever. With so many new distributors of insurance, including ones that do not seem to think insurance licenses are even important, existing amateur agents are being made redundant. Some of these new distributors are going one level of dumb further, but cheaper. Other new distributors are far cleverer because one has to read their advertisements carefully to understand that they create the impression of professionalism but not the promise of professionalism. They are using the difference between implying and inferring. They have larger budgets to hire more professional advertising experts that can craftily navigate between appearance and reality. I do not agree with their approach, but I understand it, and I expect some will be successful. This group's success further negates the value, whatever value ever existed, of amateur agents. The space that is left, which is largely uncontested, is the space of a true professional agency. This requires closing your ears to those advisers and attorneys who incompetently cannot understand the difference between a professional agency’s E&O exposures advertising professional services and an amateur agency's E&O exposures created when they advertise professional-level services or images. A true professional agency will incur far less E&O exposure because its clients are far more likely to buy the coverages they need! What is the cause of most E&O claims? The client not having the right coverage. If the agency sells clients more coverages, then the odds of a client not having the right coverage decreases. E&O is not that complex. The #1 way to avoid E&O is to sell clients the coverages they truly need, no more and no less. Executing at a professional level is harder than the strategy, which is why this space is open. It is difficult, and, if it was easy, the space would not be available. Here are a few key points for becoming a true professional agent:

1. Learn your coverages.
2. Use a coverage checklist with your clients. No single better tool exists, by far, than a checklist for determining coverage applicability other than my proprietary exposure training process.
3. Read your forms. I flat do not understand why anyone would assume what coverages exist or do not exist in a non-ISO form without reading it and without regard to how well someone knows the ISO form. If one is not selling an ISO form, then one has to read the proprietary form to know what is or is not in it. This is work. This is what you get paid to do as a pro. Amateurs take short cuts.

Why do more agency personnel not take these three basic steps? To date, they've learned to make a living being partially ignorant, so why start now? Please understand, I am not trying to be cynical, satirical or facetious. The fact is, based on the E&O claims I have seen and the hundreds and hundreds of interviews I've conducted of agency personnel, ignorance and incompetence is not an overstatement. People with 10, 15 or 20 years' experience cannot describe basic coverages, and yet they have made a living. Hence, they have made a living while remaining ignorant. See also: Insurtechs: 10 Super Agents, Power Brokers I can't argue about past success, but, going forward, I do not see how this business model has much opportunity. The new disrupter agencies can achieve the same level of amateur knowledge for much lower commissions. If an agent knows the coverages, identifies the coverages the client actually needs, sells the client those coverages and obtains the client's sign-offs on the coverages he or she needs but will not purchase, and then reads the forms to determine whether the coverages actually exist, the odds of a client having an exposure is quite limited. Additionally, the agency's sales will increase, and the agency can have more fun by advertising more powerfully. I think a smart agency owner would build the entire sales strategy around identifying other agents' mistakes, which should be like shooting fish in a barrel. Hiding behind an attorney's caveats is no way to go through the world, and it is not much of a business strategy. Be bold by doing what your clients truly need you to do, enjoy your success and sleep better at night.

In the past five years, three technologies have laid the foundation for remaking entire industries:

1. Advances in IoT technology have burst open the floodgates of real-time data.
2. AI can process this massive amount of new data to identify previously unknown correlations between inputs on risk.
3. Distributed ledger technology has obviated the need to either, (to borrow from a Russian proverb), trust or verify data provided by a third party.

Though use of these technologies in insurance applications is still in the early days, it is clear they will have profound impact on the industry. This paper will explore how these three transformative technologies might be woven together to create a single platform, enabling insurers to mitigate claim events, slash operating costs and improve the customer experience. Successfully implementing such a platform will require a significant change to the insurance business model. Insurers will expand their role beyond just that of a counterparty to whom risk is transferred and become a critical business partner providing operational, logistical, and business process services to their clients. Thesis IoT and sensor data provide granular data in real time on processes and conditions that were previously detectable only through post-production Q/A processes or manual checks. Distributed ledger technology (DLT) allows the reporting of this data to become immutable. Large amounts of “shenanigan-proof” data can be run through an intelligent rules engine to create smart insurance contracts. There has already been considerable interest in using DLT and IoT data to create smart contracts to insure objects that are the sources of that IoT data. Aigang has a proof-of-concept application for insuring mobile phone batteries. The transformative opportunity lies in putting data from disparate sources onto the blockchain and running that data through linked applications. Such a platform will permit the creation of sophisticated integrated smart insurance contracts to cover complex risks and processes. Insurers will replace multiple policies (with often-overlapping or gapped coverage) with a single, closed-form risk mitigation and claim adjudication solution. For ease of reference, this paper will refer to these agreements between insurer and insured as Highly Integrated Smart Contracts (HISCs). HISCs' holistic approach to risk identification and mitigation allows insurers to become integral partners to their clients by offering a comprehensive solution that extends beyond risk transfer. Prevention of loss events will reduce costs and eliminate distractions, freeing insurers’ clients to focus on their core businesses. The HISC platform will also allow insurers to help clients optimize their operations, resulting in increased efficiency, improved margins and greater operational certainty. Let’s look at an example to see how this might work in practice. Use Case: Semiconductors Our use case will look at an application where sensors are already extensively used and tolerances are very tight: semiconductor fabrication. Platform Overview Figure 2 is a high-level illustration of the HISC platform components shared by an insurer and a foundry, and some key points of interface and data exchange.

1. Sensor data related to the manufacturing and testing process as well as dynamic data on the physical and IT infrastructure of the facility are collected and sent to the blockchain.
2. Static data elements that factor into evaluating risk and potential liability – including licensing requirements, certifications and equipment specifications -- are also sent to the blockchain.
3. The dynamic and static data are used in conjunction with the foundry’s internal limits, terms and specifications contracted with customers and regulatory requirements to form the rules of the HISC.
4. The engine evaluates all the data against the HISC rules and sends alerts when limits are approaching or breached, and similarly confirms when inputs and outputs conform to rules of the HISC. The AI layer of the engine would learn over time how the inputs affect one another in ways not previously recognized so that tolerances might be tweaked and interventions can occur ever earlier, further minimizing both risk and waste.

Platform in action Let’s look at two scenarios to see how the HISC platform would work in practice. The first will look at risk mitigation, the second at claim adjudication. Example 1: Risk mitigation In a process as complex as semiconductor fabrication, there may be thousands of data points, but we will look at just one to get a sense as to how the platform might be used. See also: 2018 Predictions on Cybersecurity   For the semiconductor to function properly, suppose each wafer must have a thickness of 525 millimeters with a tolerance of +/- 20 micrometers. However for one of the foundry’s customers, the manufacturer of implantable medical devices, a wafer more than 535 millimeters causes excess heat buildup and interferes with other critical components. The foundry has agreed to a tighter tolerance: +10/-20 micrometers. Figure 3, illustrates the process for reporting the data on wafer thickness, evaluating the data against the rules and ordering and logging required actions.

1. Sensor data on thickness is sent to the blockchain and evaluated by the engine
2. The engine confirms that Chips 1-4 are within tolerance and sends that confirmation to the ledger. The engine determines Chip 5 is approaching the tolerance limit. (At this point, in optimized systems, relevant equipment would be re-calibrated before an out-of-tolerance wafer is even created.) Chip 6 is flagged as out of tolerance and is ordered destroyed. If Chip 6 completed the fabrication process and was shipped to the customer, a defective product may result. (The terms of the HISC may be such that product liability and other claims resulting from shipping that chip would not be covered.)
3. Chip 6 is destroyed, and a record of its destruction is sent to the blockchain.

Example 2: Claim adjudication Arsine is an extremely flammable, explosive and toxic chemical used in the semiconductor fabrication process. After bringing a new machine into the plant with his forklift, Bob accidentally runs his forklift into an arsine storage vessel. There is a small fire that knocks the foundry offline for a week, and three employees are injured, including Bob. Figure 4 illustrates the claim process through the HISC platform.

1. The foundry submits the claims to the insurer through the platform.
2. The claim triggers a request for the data related to the coverage requirements.
3. The engine evaluates the claim against the coverage requirements. It looks at Bob’s licensing and certification, maintenance records of the forklift, the specs of the storage container, the facility temperature and the performance of the fire-suppression equipment. The engine determines the claim is payable.
4. The insurer pays the foundry’s claim, a record of which is sent to the ledger.

HISC Benefits These two hypothetical examples provide a sense of how these technologies will benefit insurers. Exactly how these benefits are realized will vary, but the benefit themes will be the prevention of loss events, reduction of operating costs, increase in efficiency and evolution of the insurer to an integrated services provider. Below is an overview of the primary benefits we can anticipate from the HISC platform. Fewer loss events The HISC platform is designed with the express purpose of reducing loss events, which of course increases margins. The impact of loss events often extends far beyond the cost of the claim, so there is even greater value in avoiding them than is immediately apparent. Lower operating costs for insurers As even complex claims are auto-adjudicated, many of the costs associated with the claim process – investigation, audit, legal, sign-offs and disbursement – can be eliminated, significantly increasing margins. Lower costs and greater efficiencies for clients An optimized platform will let stakeholders know a problem is coming before it arrives. Alerts like approaching tolerance thresholds allows calibrations to be made before a breach, reducing waste and increasing margins. Over time, the AI layer will provide new insights, enabling the engine to identify previously unknown correlations between inputs. For example, the engine may be determine that, if two particular specs both reach 90% of tolerance, failure is likely for a certain application. This insight will decrease returns and associated costs and increase customer satisfaction. Increased customer satisfaction and higher retention A less-than-smooth claim experience leads customers to move their business. HISCs provide friction-free claim payment, increasing customer loyalty. Customized coverage HISCs allow insurers to create customized coverage, fully capturing the insurance expense, while clients are protected from coverage gaps without paying for products or features they don’t need. New revenue opportunities for insurers As insurers move beyond risk transfer and into other services, there will be new revenue opportunities for insurers. There are three broad opportunities in ascending order of complexity:

1. The massive amounts of data and insights from companies across their books can be sold to customers and service providers in benchmarking reports and industry studies.
2. Insurers will be well-positioned to provide operations and business process consulting services to their insurance clients.
3. Over time, small to mid-sized companies in certain industries may find it attractive to outsource manufacturing logistics management to insurers, akin to UPS’s move into supply chain logistics and management and Amazon’s into retail order fulfillment and cloud services.

Each of these additional revenue opportunities has the added benefit of increasing the stickiness of the customer relationship. See also: Collaborating for a Better Blockchain   Critical Success Factors There are several non-inconsequential hurdles to be overcome before HISCs transform commercial and specialty insurance. Below are just five of the critical success factors necessary to implement HISC platform. Included is high-level estimate of the relative technical and implementation challenges of each. 1. Additional IoT data Some operational and business processes may have dozens of data points to analyze, others thousands. The closer to 100% of the data that is brought on to the blockchain, the more effective HISCs will be. IoT data has grown significantly, but total capture rates vary widely. As sensor costs continue to fall rates will continue to increase. (Technical challenge: low to medium; implementation challenge: low) 2. Interoperability between different IoT platforms Like any new technology, adding IoT to operational and business processes will be an iterative process. Within a single company, there are likely to be several different platforms for different processes (e.g. manufacturing processes, data security, equipment monitoring). IoT data from all of these different systems will need to be brought onto the blockchain and incorporated in to rules engines and other applications. (Technical challenge: medium; implementation challenge: medium) 3. Implementation of DLT standards Neither HISCs nor the platform can be deployed on a public blockchain, so there must be some DLT standard broadly adopted by the industry. Corda (R3) and Hyperledger (Linux Foundation) are two consortium-led DLT platforms in development. JPMorgan (Quorum, built on Ethereum) and Monax have also created smart contract platforms. Companies are unlikely to support multiple standards, so getting agreement around one (or building a solution that is DLT-agnostic) is imperative. (Technical challenge: high; implementation challenge: very high) 4. Intelligent engine development Putting data on the blockchain is simply readying the inputs. The data must be routed to a (likely) off-chain rules engines that must do more than provide a simple binary outcome. These engines will need to trigger actions, in some cases requiring human intervention, but still reported on the ledger. AI technology currently in broad use today is sufficient for the activities required in HISCs. The data integration, using ETL, data visualization, EDWs, etc., will be complex, but can all be accomplished using existing tools. (Technical challenge: low to medium; implementation challenge: low) 5. Integration of off-chain processes Not every required action determined by the engine will necessarily be able to be executed on the platform. This may include backup communications between stakeholders, transferring funds and certain operational actions. These off-chain actions and their results will need to be cleanly brought back on-chain. Early on, there will likely be misses on some handoffs, but those challenges will be more due to planning and communication issues than technical shortcomings. (Technical challenge: low; implementation challenge: low) Final Thoughts The HISC platform described in this paper is closer to the end state than it is the next step of how these disruptive technologies will affect P&C insurance. The takeaway is that these (and surely other) technologies are an opportunity for insurers to not only change how they do business, but also the very nature of their business. They can become more than risk transfer counter-parties and create new revenue streams by offering high-value services, making them indispensable partners to their clients. Getting there will not be easy. It will necessitate insurers becoming embedded, to a certain extent, with their clients. Successfully deploying HISCs will require insurers to expand beyond current competencies and develop expertise in other domains. These will include technology platforms, operations and logistics generally, as well as more specific subject matter expertise in the industries they serve. This need to provide more integrated services to their clients may lead to strategic partnerships between insurers and consulting firms, or perhaps acquisitions of one by the other. Exactly how and how soon this unfolds is anyone’s guess, but, once change begins in earnest, momentum will build quickly, and insurers that are ill-prepared will find themselves unable to compete.