In wellness, it’s totally legal to lie to customers. Indeed, if you don’t, you’ll probably lose them, since your competitors are happy to do exactly that, and most customers aren’t going to notice anyway. In securities, though, it is totally illegal to lie to shareholders or to pay someone to write a favorable but dishonest report on your product, with the intent of propping up the stock price. This brings up to Fitbit, and a recent report on savings allegedly generated by its activity trackers, published by Springbuk. Let’s leave aside for a moment the value of activity trackers to users. “Like” is not the issue in this savings claim. The issue is whether the math works. And it doesn’t. The Springbuk report of savings and outcomes for Fitbit was impossible. Among the clinical issues is the study design itself: The report defines “active” as taking 100 steps a day. However, as the previous installment showed, it is impossible not to take 100 steps in a day without being so sick you can’t get out of bed. So rather than being the threshold for being counted as an “active” person, as the Springbuk study says, it should be the threshold for being a person who can get out of bed. And of course, people who can get out of bed will by definition have lower healthcare costs than people who can’t get out of bed, whether or not they wear a Fitbit. See also: Are Patients Ready to Take Control?   Among the mathematical issues, it is not possible to reduce costs by 46% (one of the claims made) with a fitness device, because in the working-age population, only a small number of hospital admissions are caused by not taking enough steps. Further, in addition to the apparent mathematical and clinical impossibility of Springbuk’s results, the author — and Fitbit — refused to respond to the following query, which was sent multiple times. Hi Mr. Daniels, I have some questions about your report. Perhaps I’ve gotten some things wrong, so I’d love to hear from you in the next 3 business days, if I have. First, isn’t it the case that anyone who is not in a wheelchair walks at least 100 steps a day, Fitbit or no Fitbit? Is that the threshold for “active” as opposed to “bedridden” ? Second, Figure 2c indicates that the very fact of being in the “engaged” group, even if you never get out of bed, reduces costs by 30%+. How is this possible? A corollary: It would seem that all savings are being attributed to Fitbit, at least in the Fitbit interpretation. They also seem to be taking credit for this: “266 employees who used their Fitbit tracker for at least half the duration of the program decreased their healthcare costs by 45.6% on average.” Third, can you reconcile this statement…:

“The materials in this document represent the opinion of the authors and not representative of the views of Springbuk, Inc. Springbuk does not certify the information, nor does it guarantee the accuracy and completeness of such information.”

…with this statement:

“This demonstration of impact achieved by integrating Fitbit technology into an employee wellness program reinforces our belief in the power of health data and measurement in demonstrating ROI,” said Rod Reasen, co-founder and CEO of Springbuk."

Fourth, how is it possible to show basically no separation for 182 days of getting out of bed (taking 100 steps a day) from being bedridden, but massive separation for getting out of bed for 274 days? I can’t find the explanation of the exercise science that would lead to that result. It would seem that there is some huge physiological disadvantage to those extra 92 days of taking 100 steps. Fifth, am I missing the disclosure that Fitbit paid you to do this study? I can’t find it anywhere. Or did you do this on a pro bono basis? Sixth, would you have come up with this same result if you had been paid by a hedge fund that was shorting Fitbit stock and wanted to show no savings? Seventh, since most wellness-related healthcare spending is unavoidable altogether by walking 100 steps a days or any other amount for 12 months, I’m wondering if you were able to determine approximately which elements of healthcare spending were reduced, in order to get a 45.6% reduction in costs? You would have to wipe out all hospitalizations, for example – and get roughly a 10% reduction in everything else. Thanks very much. If you would like to reply, I’ll look forward to your reply by 5 PM EDT on Wednesday 5/24. Assuming Fitbit paid Springbuk (that’s a big assumption — this obvious conflict of interest is not disclosed anywhere, so the reader has to decide whether Springbuk collected money, or whether it did this study out of the goodness of its heart), one of four outcomes is possible:

1. Springbuk genuinely thinks, among other things, that walking 100 steps a day for 274 days reduces healthcare costs by 27% vs. walking 100 steps a day for only 182 days. No crime there, other than the one committed by the grade school that granted them a diploma. It’s unlikely they think this, because Springbuk says they are “obsessed with analytics” and that they sell “the leading health analytics software…[with] powerful insights.” So if Springbuk truly believes their own report, then congratulations are in order: they have accomplished more in this one analysis than most extremely stupid people accomplish in a lifetime. (Not an original line, as Veep fans know, but apropos nonetheless.)
2. Springbuk wanted to show savings because they were being well-paid to do so, but Fitbit put no pressure on them when they gave them the check. Once again, doesn’t say much for Springbuk’s ethics, but Fitbit did not commit a crime.
3. Fitbit paid Springbuk to lie for them, in order to impress prospects and customers. Once again, no crime. There wouldn’t be enough room in the prison system if lying in wellness were a crime. (See http://www.ethicalwellness.org for a list of wellness vendors that have agreed not to lie. It’s not very long.)
4. Fitbit paid Springbuk to lie for them, in order to inter alia impress investors. This is not legal, any more than if Fitbit made up their own data for that reason. Since many Fitbit analyst reports make reference to savings of “up to $1500 per employee per year,” and since this study appears to be one of only two justifications for that statement (the other being equally suspect), there is a case to be made that Fitbit’s stock price would indeed be lower if they told the truth: that no disinterested researcher has ever found more than a trivial impact on employee health status or healthcare insurance cost.

We don’t know which of these four is the case. Is Springbuk dishonest, or just incompetent? Does Fitbit genuinely believe that wearing their device could magically reduce healthcare costs for U.S. corporations by hundreds of billions of dollars, or are they willing to lie in order to boost revenues and their share price? See also: IoT’s Implications for Insurance Carriers We look forward to hearing the answers to these questions once the financial media gets hold of this posting. Opinions expressed in this column are those of Al Lewis individually. They do not necessarily represent the views of Insurance Thought Leadership. Therefore all threats of lawsuits should be directed to the former, to which I say: “Go ahead. Make my day.”

Here is another startup that is going to revolutionize the industry: I first talked about a recent interview with their CEO on my LinkedIn Discussion Board. (If you’re not aware, I communicate about industry issues on LinkedIn and via Twitter — you can access them and subscribe from my Contact page.) This startup I want to talk about claims that it can place homeowners insurance without an application of any kind. The company basically only needs to know your name and address, then it gets all the data it needs from other sources. Presumably this process takes a couple of minutes — and that’s it. I invite you to read the interview and then join the discussion. This “We can write your insurance in two to three minutes” mantra is becoming a common theme with many of these insurance startups. The rationale is improving the customer experience. But what about the customer experience of having a six-figure (or greater) uncovered loss because nobody took the time to prompt the consumer for exposures? See also: Why A Homeowner Should Know About Complying With Workers' Compensation Laws    I make this point in the LinkedIn discussion:

“If you were going to sky dive for the first time, would you pack your parachute yourself? Would you insist that someone else pack it as fast as possible with almost no attention to detail because you’re in a hurry? Or pack it with their eyes closed? My insurance program is my financial parachute. There are no shortcuts to security unless you’re buying insurance with no exclusions or policy limits, and most of what is being sold on the internet is far from that.”

So what do you think? Are regulators who welcome these startups with open arms really doing their constituents a service by embracing “fast and cheap”? Or are they simply insuring (no pun intended) financial ruin for perhaps a great many of them? For more discussion, comment on this article and visit the LinkedIn discussion on this subject.

The sharing economy is not just a U.S. experience. It is truly a global phenomenon that has infiltrated and influenced multiple industries in both developed and developing countries. Even the ultra-conservative insurance industry has not been immune to these advancements. While U.S.-based insurer Lemonade has been receiving much of the recent domestic headlines for being an innovator, the insurance sharing model, or peer-to-peer insurance, has, in fact, been in existence in several countries since as early as 2010. Companies such as Friendsurance, PeerCover, Riovic and Guevara have played key roles internationally in the disruption of the traditional insurance model in countries like Germany, South Africa, New Zealand and France — among others. While peer-to-peer insurers shift focus toward technology, automation and social networking, it is apparent that the core concepts of traditional insurance — such as sharing losses through mutual insurance arrangements, avoiding adverse selection and mitigating moral hazards — remain fundamental to its business model and, quite frankly, its survival. Peer-to-peer insurance, much like traditional mutual insurance, is a group of “peers” who pool their premiums to insure against a risk and across both types of insurance the perils that buyers are insuring against remain homogeneous. It is, in essence, the centuries-old concept of mutual insurance being given a 21st century makeover. This new peer-to-peer model of insurance adheres to traditional pooling and sharing of losses, but it is now combined with today’s technology, providing a product for increasingly savvy consumers who require transparency in an on-demand economy. Further, peer-to-peer and traditional insurers also group policyholders in similar ways; however, the peer-to-peer model may provide more refined classes because of advances in computer algorithms and artificial intelligence (AI). Simply, peer-to-peer companies allow participants to insure a common deductible, while large claims are still covered by traditional insurers. When smaller claims occur that fall within the deductible, this loss is shared among a small circle of friends or similar policyholders. Traditionally, when policyholders had a good year and a favorable loss ratio, premiums would be returned in the form of a dividend. This concept has also been adopted by some peer-to-peer insurers, while others have also designated excess premiums be sent to a charity chosen by the policyholder group. So while peer-to-peer insurance may provide more refined methods of grouping policyholders or more options for distributing unused premiums, the underlying core concepts of traditional insurance are still maintained. See also: Examining Potential of Peer-to-Peer Insurers   Sharing economy businesses express their desire to reduce costs and increase transparency for consumers. Peer-to-peer companies are working to accomplish this by insuring self-selecting groups. Their philosophy is that they can improve the quality of the risk because of the relationship between the members. The peer-to-peer models strengthen the sense of responsibility within the group, which results in a reduction in both moral and morale hazard. As the two often get confused, we define moral hazard as a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost — in other words, an intentional act. Conversely, morale hazard is an increase in the hazards presented by a risk arising from the indifference of the person insured to loss because of the existence of insurance, which, in comparison, is more unintentional behavior. Allowing policyholders to actively choose the members of their policy group could foster a greater sense of belonging, responsibility and duty to others. Groups in which close-knit friends or family share in losses tend to manifest a stronger aversion to risk with the knowledge that your actions will have a direct impact on your family’s pocketbook. That family vacation everyone was planning — and paying for with the year-end dividend payment — could be put on hold because of a recent insurance claim. Similarly, if any proceeds from premiums were designated for a specific charity (i.e. pediatric cancer research in honor of a niece stricken with the disease), a member of a close-knit group may engage in better driving habits to avoid being the person responsible for a drag racing accident that could result in the loss of that donation. With more at stake, pooling participants are more likely to engage in responsible behavior — better for them and the insurer. For peer-to-peer models where groups can unconditionally decide on their members, there can be even greater benefits — for both the group and insurer. One such advantage is the reduction of adverse selection. Typically, it can be very difficult for insurers to assess the full nature and habits of applicants at the time of an underwriting review. The insured is typically in a position to palliate their risk, often without making material misrepresentations. However, in peer-to-peer models that rely on referrals from other group members, the likelihood that the complete risk exposure of a potential insured is revealed is much greater. For example, perhaps several family members have decided to submit an application for shared automobile insurance with a peer-to-peer insurer. While most of the members have superior driving history and habits, they all know to never drive with Aunt Susie. She’s known to them as a speeder, tailgater and road-rage extraordinaire; however, she has been lucky enough to avoid any serious accidents, which has kept her record looking clean. Though she may appear to be a good risk for a half-sighted insurer, her relatives know better and, in preservation of their premium and potential dividend, deliberately do not ask her to join their group. See also: An Overview of VC Investment in Insurtech   Although peer-to-peer insurance models have promoted their new-age benefits with the introduction of digital platforms, AI and cost transparency, their business model is built on the foundation on traditional insurance, and their ability to succeed will be based on how well they can deliver the best of both worlds. Peer-to-peer insurers will continue to develop their models and philosophies on distribution channels, return-of-premium programs and scope of coverage. While it is too early to calculate how much market share they can siphon from traditional insurance companies, it is clear they have many valuable attributes both operationally and philosophically that will assist them entrench their business among mainstream competitors.

This week's Six Things will serve as an introduction to Guy Fraker, who joined us not long ago as chief innovation officer and who wrote an important article linked to below. That article tackles the question that he hears so frequently when he coaches big companies on how to innovate: "Where do we start?"

Where to start about Guy? He is a huge addition to our team. He has 30 years of experience within the insurance industry and has been on the leading edge of building innovation systems for the past 10, spanning primary carriers, reinsurers and related sectors. Through what we call ITL's Innovator's Studio, he will offer webinars and provide other coaching for established companies that are wrestling with the thorny questions that come from trying to innovate at scale in such a rapidly changing environment. He will also assist us in evaluating and encouraging the more than 1,500 insurtechs we're tracking on the Innovator's Edge platform, as we help insurtechs and incumbents find the right matches with each other and form powerful partnerships. 

We don't intend to just be at the edge of innovation. We want to be in the middle, helping make good things happen. And Guy's breakthrough work on innovation will help put us—and you—right at the heart of the biggest change in insurance since Edward Llloyd set up his coffee shop near the wharves in London almost 350 years ago.

For good measure, Guy is one of the world’s leading authorities on the risks and opportunities associated with autonomous vehicles (which is how I first met him; I quoted him in a book on driverless cars that Chunka Mui and I wrote four years ago). Before joining ITL, he served as executive director of Cre8tfutures, which developed a step-by-step, "how to" system of innovation best practices, and was chief learning officer of AutonomouStuff, a provider of autonomy-enabling technologies and world class services. 

His article below provides a powerful framework for thinking about innovation, but that's just the start. You'll be hearing a lot more from Guy. In fact, you can subscribe to a new blog from Guy to follow his commentary and insights. And you can always contact him directly with any questions, at guy@insurancethoughtleadership.com.

Cheers,

Paul Carroll,
Editor-in-Chief

All any company decision-maker needs to do is pay heed to the intensifying regulatory environment to understand that network security has become a mission-critical operational issue. Consider that the Colorado Division of Securities is implementing 90 pages of new rules to clarify what financial “broker-dealers” and investment advisers must do to protect information stored electronically. That’s on top of the New York State Department of Financial Services enforcing new cybersecurity rules for financial services firms that wish to do business in the Empire State. And, of course, Europe is rolling out new privacy rules known as the General Data Protection Regulation, which will affect more than 4,000 U.S. companies doing business in Europe, including many small and midsize businesses. See also: How to Anticipate Cyber Surprises   I recently sat down with Edric Wyatt, security analyst at CyberScout, to discuss the first step any organization — of any size and in any sector — can take to increase its security maturity. His answer: Get cozy with the National Institute of Standards and Technology’s risk management framework set forth in its NIST 800 series of documents. (Full disclosure: CyberScout underwrites ThirdCertainty.) And let’s not overlook looming compliance standards covering data privacy and security, such as the Payment Card Industry Data Security Standard (PCI DSS) and the Health Insurance Portability and Accountability Act (HIPAA). Here are a few takeaways from our discussion: NIST is foundational. NIST 800 is composed of Uncle Sam’s own computer security policies, procedures and guidelines, which have been widely implemented in the Department of Homeland Security, the Department of Defense and most big federal agencies. New York state’s new rules for financial firms incorporate the NIST framework, and the U.S. Food and Drug Administration, likewise, refers to the NIST framework in guidance for medical device manufactures. NIST is aggressive. Derived from extensive public and private research, NIST 800 exists as a public service. It lays out cost-effective steps to improve any organization’s digital security posture. Implementation materials are available at no cost to organizations of all types and sizes, small- and medium-sized companies, educational institutions and state and local government agencies. NIST is flexible. At the end of the day, the NIST series guides organizations to shaping security policies and security controls that are flexible, adaptable — and effective. One vital component is senior management buy-in. New policies can and should be implemented and tweaked in a methodical, measurable manner and should be championed by senior leaders. The goal should not be just tightening security, Wyatt says, but also making one’s organization more reliably productive. A continual feedback loop can help keep controls alive and vital, Wyatt says. See also: Cyber Challenges Under NIST's Framework   This article originally appeared on ThirdCertainty.

Over a year ago, Stephen O’Hearn, global insurance leader at PwC, predicted, “Insurtech will be a game changer for those who choose to embrace it.” Since then, the insurtech playing field has matured. Many insurers that have operated in the “good enough” zone are finding that it is no longer, well, good enough. The game has changed. Whether you’re in underwriting, claims or exposure management or are a CIO, insurtech will have an impact on you. There's no option to stay on the bench. So, what’s your game plan? Partnership is the way forward Right now, collaboration should be a part of everyone’s game plan — not just insurers, but everyone from commercial tech providers to managing agents and brokers. Insurance is a team sport and has been since its inception. Insurtech will not change that; it will only amplify the need to partner — quickly. Who insurers pick as their partners to accelerate transformation matters, and the technology they employ to transform matters. See also: Insurtechs Are Pushing for Transparency   In the last year, talk of “disruption” has turned to talk of “collaboration” as the insurance community is realizing the fastest way forward is through partnerships. A more mature conversation is happening. Insurers are realizing the benefit — and speed — of leveraging what insurtechs have to offer. Once labeled “disrupters,” insurtechs are now “enablers.” Fact is, the vast majority of insurtechs aren’t looking to oust incumbents. They’re looking to find a niche where they can succeed and leverage the sheer scale of their more established partners. As a recent InsurTech Bytes podcast observed, “Partnership is the way forward. Enablers are leading disruptors across the insurance sector, presenting an exciting opportunity for insurers to drive forward their digital transformation. Insurtech has developed (largely) with a view toward partnership rather than disruption.” New digital opportunities are opening up more choice for consumers and businesses alike — think Internet of Things (IOT), vehicle telematics and, especially, advanced data and analytics. As customer expectations grow, an insurer’s data and analytics will need to keep pace in an effort to drive competitive differentiation. This includes the ability to hasten and streamline the quote process, more accurately price risk and mitigate and respond to claims. Insurers recognize data and analytics as a leading insurtech priority and, like other digital transformation priorities, are looking to either VC opportunities or partner integrations to accomplish this. In fact, in a KPMG survey of insurance executives, 25% of respondents said they already had a VC unit set up to make investments in technology companies. And 37% said a VC unit was in the works. Likewise, these same insurers are looking for partnerships to help accelerate transformation; three-quarters of respondents said they "will partner to gain access to new technology infrastructure." Still, while some insurers are clearly making plays toward making insurtech investments a priority, others are still on the bench. Only 39% of insurers believe they are harnessing digital technologies successfully. And one in five property and casualty (P&C) insurers do not apply advanced analytics for any function. This last statistic is mind-blowing when you consider how intrinsic data and analytics is to insurance. So, what is holding a large percentage of insurers back from embracing digital transformation? The gap between knowing and doing In a recent column, Denise Garth talks about the gap between “knowing and doing.” She writes, “Even though most companies know they should respond to key internal and external challenges to create promising growth opportunities — and more importantly to ensure survival — many are still only thinking about doing something, at best. Why is there a gap between knowing and doing?” The gap exists because the list of challenges is long: legacy systems and processes, lack of budget and downright risk aversion. Understanding where to start with digital transformation, and how, is critical for insurers that recognize the need to digitally transform. But the goal shouldn’t just be transformation. It should be to succeed — to lead and compete in ways that produce profitability, efficiency and innovation. However you measure success, integrating insurtech — whether IOT, blockchain or advanced data and analytics — should achieve those goals. But where to start? First, “see over the horizon” Without doubt, insurtech is an epic climb. It's not a bump in the road, it's a mountain that will shape the future of the industry. If we’re to succeed, we must start climbing — only by doing can we compete and start shaping what’s next. However, you first must climb to the top and, as Jon Bidwell, former Chubb chief innovation officer and now SVP and underwriting transformation leader at QBE North America, put it, “see over the horizon.” See also: 5 Insurtech Trends for the Rest of 2017   SpatialKey is insurtech, and even we’re not immune from the need to digitally evolve. We’ve been providing geospatial insurance analytics since 2011, and we’re constantly evolving our own platform and product offerings to include the latest technology. Our role as an insight hub is to help shorten and accelerate the transformation that’s necessary for insurers to remain competitive. But, at the same time, our insurance clients are recognizing that not all digital transformation has to be hard. Technology integrations can be swift and painless with the right partner. What is hard about insurtech is making the right choices, making the right investments, prioritizing the right transformation initiatives, collaborating with the right partners. It’s all a risk — but not as big a risk as doing nothing. There is no option to stay on the bench. No one knows what’s over the next horizon, but we all have an opportunity to shape it.

In the first of this series of four segments, we looked at the current state of the risk markets and the insurance industry. In this segment, we will look at how peer-to-peer (P2P) fits. First, P2P is not mutual insurance. While the mutual insurance model is in more of the same spirit as P2P than corporate insurers are, mutuals are still operating primarily with the same business methods that corporate insurance companies use, and the financial service is still an indemnity insurance contract. The same would apply to the fraternals. P2P is also not just a behavioral economic twist on insurance to reduce fraud. While elements of P2P methods do invoke (and should employ) behavioral economic principles, employing these principles alone will not qualify a service offering as P2P. P2P is hyped to get insureds to convert their social network into insurance leads. When done correctly, a P2P service offering should demonstrate a level of virility in excess of existing insurance offerings. But traditional insurance already achieves some virility -- I am an insurance broker, and much of our business is already generated via client referrals -- so virility alone would not be a key differentiator for P2P. P2P, today, is not actually disruptive. Rather, it is only an iteration of insurance as we know it today. To believe otherwise is a route to strategic disaster. But there are other methods that more fully embody P2P methods and will prove to be quite disruptive to the current balance existing in the risk markets. See also: Examining Potential of Peer-to-Peer Insurers   Okay, so what is P2P? In the first segment of this series on complexity, I discussed the three network graphs that have emerged in the risk markets and which business models embody them. For quick reference: To dive into this, we first need to define the activity that the risk markets perform for society. Why did the risk markets emerge, and why does society engage with the market? There are three core societal functions that risk markets perform for society:

• Risk transfer;
• Escrow of funds for a defined purpose; and
• Management of reallocation of escrowed funds.

Let’s take a look at each of these functions and the methods deployed to accomplish them. Risk Transfer One of the core elements required to legally define a contract as an insurance contract is indemnity. Inherent in the term “indemnity” is the idea of risk transfer. Indemnity is defined as “compensation or payment for losses or damages,” which essentially means that experienced risk from a loss event has been transferred from one party to another. While insurance is a highly efficient method of accomplishing some portion of total risk transfer, an insurance contract is only one of many methods humans use to transfer risk around society, and the method has its limitations. Other formal risk transfer methods include: companies that offer consumers a warranty on their products and service companies that are bonded by creating the same effect as a warranty does for consumers of their service. In the financial markets, we see options and swaps, as well as letters of credit. Formalized charity efforts also amount to risk transfer. In the public sphere, as was demonstrated in 2008, society has formalized methods for transferring risk from systemically important private companies to the public, all backed by the government’s access to taxation revenue. Informal methods of risk transfer that can be routinely observed include families and friends compensating each other for some risk that the other has experienced. The same behavior also emerges within groups and communities, both with and without the intentional purpose of risk transfer. These methods amount to “black market” methods because they are not formalized, and the economic activity is not taxed and does not contribute to GDP. However, the economic activity does and always will occur. Escrow of Funds With indemnity insurance and other formalized methods, every insured has paid a premium for the legal right to transfer their risk exposure to another party. Presumably, this transfer shifts risks from individuals to a group as a whole. These premium funds are held in escrow to assure participants that the system will work. This behavior can be viewed as an “escrowing of funds for a defined purpose.” With informal methods, we do not observe this escrow pattern. Indeed, many families and friends have received news that someone has experienced a loss that they do not have the means to bear. It is important to note that the person who has experienced the loss, in many cases, has already engaged with the available formalized methods that the risk markets have on offer — but the risk is in excess of what those methods can cover. With insurance, this uncovered risk amount can take the form of a deductible, the exclusion of a peril or a limitation of coverage on a covered peril. See also: 3rd Wave of P2P Insurance   Informal methods of risk transfer emerge to fill these segments of total risk, which formalized methods do not address. Because there are no funds that have been pre-paid and escrowed for the purpose of addressing these segments of risk, we observe informal methods of risk transfer employing a post-pay method of achieving coverage. This can be observed in the digital environment on crowdfunding platforms such as GoFundMe, where coverage for a loss is achieved after the event has occurred. Management of Reallocation of Escrowed Funds Formalized methods of redistributing escrowed funds, like insurance methods, employ a legal contract. In black and white, rules specify for what purpose escrowed funds will and will not be paid out by the system as coverage, and how the dollar amount of that coverage will be calculated. This legal contractual methodology creates the requirement for actuarial work. Insurance companies employ statistical and actuarial methods to ensure that enough money is escrowed to accomplish the purpose for which the society agreed to escrow the funds but also that there are additional funds to pay for the costs of centralized managing of the reallocation process, including some additional funds for profit for the insurance company. The degree to which these formalized methods necessitate the burning of escrowed funds is a reduction in efficiency. Internal process inefficiencies that exist in the companies managing the process effectively add to society’s realized risk from engaging with the insurance system’s methods. Currently, informal methods obviously do not employ legal methods, as no funds have been put into escrow for any specific purpose. These informal methods for the redistribution of funds to achieve a transfer of risk unfold as individual peer decisions, directly between the two peers involved. This is an example of an emergent P2P behavior. The Question Now, let’s get back to the original question. What is P2P? Whether we are taking about music files via Napster, transportation via Uber, housing via AirBnB or work via TaskRabbit, the amount of economic activity resulting from those P2P methods blossomed — but only after a platform enabled the formalization of the behavior that already existed in the world, albeit informally. In each of these markets, society built wonderful centralized organizations to accomplish the fundamental economic activity of the market. In each of these markets, when a P2P platform was built — offering just the right degree of formalization, but not too much, to enable, but not inhibit, the connection of individual peers on the platform — economic activity grew drastically. This is, fundamentally, an expansion of the market’s economic pie. In the risk markets, we will see the emergence of a P2P platform that enhances the individual’s ability to network using distributed methods of management and to accomplish the process of reallocation of escrowed funds. With this platform, the three core functions driving society to engage with the risk markets will be accomplished by the individual actors without necessitating a central authority. New technologies (such as distributed ledgers) and methods that, as it turns out, predate insurance by 1,000 years will converge, and the risk markets will see a P2P network come about. This network will be designed to accomplish a positive financial network effect that will create financial leverage, amplifying the amount of risk that individuals can cover with their own individually escrowed funds. P2P will effectively give users the option of “networked self-insurance” to better cover the gaps in total risk left by already formalized methods. Insurance methods will not go away. The methods play an important role in how our existing financial system works. But note what is not necessary for P2P: indemnity legal contracts, actuarial methods and a centrally controlled escrow account for processing the reallocation of those escrowed funds. There is nothing wrong with these methods. They work quite well and systemically serve to mitigate the risk housed on lending banks' balance sheets, albeit at the borrower’s cost. Lending activity also serves a systemically important role of enabling financial leverage for large capital purchases. However, that leverage comes with a risk. If a bank lends on a mortgage or auto loan and the underlying asset is destroyed, the loan on the bank’s balance sheet will have lost value. Indemnity insurance is likely to remain the only method of mitigating this balance sheet risk exposure that lenders will agree to accept. It would not be surprising to see the rise of insurance policies sold to banks on their loan portfolios — much like we see today occur in the process of securitization of the loan portfolios and somewhat similar to what we see with forced placed insurance. See also: Is P2P a Realistic Alternative?   It appears that we are observing in the risk markets that the insurance industry has been behaving in a way that can be described as: “If all you have is a hammer, everything looks like a nail.” Great, but just be sure you insure the risk exposure. There are new tools available to the risk markets, along with new behavioral patterns, and we should not be a surprised when we see new methods — P2P and otherwise — emerge to employ these new tools for the benefit of society. In the next section of this series, I will dive into one of those tools: blockchain, a.k.a. distributed ledger technology.

As Congress returns from recess, the current version of the Senate bill to repeal and replace the Affordable Care Act (ACA) aims to reduce Medicaid spending by $800 billion over 10 years. By reducing the federal match for new enrollees and tightening eligibility standards related to the federal poverty level, the plan will make it harder for people to cycle on and off Medicaid in accordance with their employment status, ultimately reducing the number of “expansion enrollees” that qualified for Medicaid under the ACA. The net effect is to make it financially infeasible for states to continue to cover the ACA expansion population, leading to more than 20 million Medicaid patients losing their insurance over the next decade.

Nine years ago, when I wrote "Riding the Indian Tiger," India was in a dynamic transition. Unbridled by the shackles of a socialist government, the economy was in full swing, with massive foreign direct investment, major infrastructure projects and a booming stock market. When I began researching my book, I had the opportunity to meet with the architects of India’s future, who included the founders of leading companies: Infosys, Jet Airways, Bharti Tele-Ventures, Tata Motors, Wipro and many more. I was impressed by the energy, intelligence and Silicon Valley culture that had been created by these firms. That optimism was tempered by the abject poverty that abounded, a growing gap between rich and poor, dilapidated infrastructure, contaminated drinking water, poor sanitation and corrupt government ministries. Still, I believed that, with ingrained democratic institutions, India would ultimately out pace China economically. Then came the global financial crisis, and India fared far worse than China, which had the ability to manipulate markets and weather the storm. With the overwhelmingly popular election of Narenda Modi in 2014, India once again emerged as an Indian Tiger. With GDP growth of 6.6% for 2016 and an estimated GDP growth of 7.2% for 2017, India is, in fact, surpassing China in economic growth. What about the insurance market? India, with a population of 1.2 billion, is now the 14th largest insurance market in the world at approximately $60 billion. McKinsey estimates that India will become the 10th largest insurance market in the world by 2025, with a value of more than $250 billion. Now, Brazil with a population of 200 million, is the 15th largest insurance market in the world today. Still, change is in the wind in India. See also: What India Can Teach Silicon Valley   It began with the liberalization of the domestic insurance market, which allows foreign companies to own as much as 49% of an Indian subsidiary. Foreign insurance companies are racing into the market, with an estimated $3 billion in direct investment coming into the Indian insurance industry in the next few years. But is the market ready for disruption? It depends on how you look at it. With a rapidly growing middle class, tech-savvy millennials and a life insurance market that has had an average CAGR of 22% over the past several years, the answer is yes. Yes, Brazil and India both have about 300 million smart phone users, even though India has six times the population, but the Indian insurance market is rapidly changing as old brokers and processes are forced to give way to a much more dynamic market. The clear and present opportunity for disruption in India will be a combination of transformational insurance products that create optimal flexibility for a rapidly growing middle class and the use of digital marketing channels that allow insurance companies to develop a virtual personal relationship with the new consumer. Digital marketing is still in its early stages in India, with total spending of $6.8 billion in 2016. However, with the average Indian internet user spending 40 to 45 hours a month online, the opportunity is clear. The purchase of goods and services online is still in its infancy, with the majority of purchases being related to music. Most telling might be the fact that online retail brokerage is booming in India, dominated by middle-class Indian housewives who are running their own stock portfolios. My recommendation for any savvy insurtech: Begin your reconnaissance now. Keep your powder dry until the time is right, but that might be sooner than you expect!

Nineteen percent of the world’s top 2,500 companies have appointed an executive, commonly known as a chief digital officer (CDO), to oversee the digital transformation of their business, according to the results of a new study about the role from Strategy&, PwC’s strategy consulting business. Though this number might seem modest, it more than tripled last year’s figure, of only 6%. Sixty percent of the digital leaders identified in our most recent study have been hired within the past two years. Strategy&’s 2016 Chief Digital Officer Study looks at the top 2,500 public companies around the world by market capitalization to better understand how many companies have appointed a digital leader, who they are and where the position fits into companies’ hierarchies. For the purposes of this study, the CDO is defined as that executive, no matter the title, who has been given the task of putting into practice the digital mission of his or her company or business unit. See also: The Dawn of Digital Reinsurance   In light of the significant increase in digital leaders across industry, company size and region, companies would do well to start believing the hype around the new position.

• Companies in the financial services and consumer-focused industries have the highest digital leader ratio. According to our study, 35% of insurance companies have digital leaders, and 27% of both banking and consumer products companies do, as well.
• European companies are hiring CDOs at faster rates than companies elsewhere (38% in Europe vs. 23% in North America, 13% in South and Latin America and 7% in Asia-Pacific).
• Larger companies continue to remain ahead of the curve in appointing digital leaders. The percentage of companies with CDOs by market cap peaks at 33% for Quartile 4, then decreases to 18% for Quartile 3, 15% for Quartile 2 and 10% for Quartile 1.

Creating a unified vision for digital “For a growing number of companies, it’s just not feasible any longer to spread out various digital efforts among separate business units,” says Pierre Peladeau, a leading digital practitioner and study co-author with Strategy&, partner with PwC France. “It may work during early stages of digitalization, but as a company moves toward a more advanced stage of digital maturity, a unified approach is needed to execute a more comprehensive digital strategy.” Taking the helm of a holistic digital strategy means different things for different companies. While some look externally for digital leaders, others engage existing leadership and a diverse group of stakeholders to help manage the transition. For these reasons, digital executives come in various forms, with a variety of different skills in tow. While marketing and sales-backed leaders dominated last year (34% and 17%, respectively), this year 32% of digital leaders bring technology backgrounds to the job, up from 14%. “One of the most daunting challenges for any digital leader is how to develop new digital applications at the same time as they’re dealing with legacy IT systems that have been vital to a company’s operation for years,” says Mathias Herzog, Strategy& co-author and partner with PwC US. “As this becomes more and more apparent, we should continue to see a growing number of executives with the technical expertise necessary to navigate a company’s multi-faceted digital assets.” Knowing how to work within these constraints while simultaneously maintaining the operational agility needed to move digitalization efforts forward will be key for any incumbent digital leader. See also: It’s Time to Accelerate Digital Change   “The CDO’s role, by definition, is transformational,” says Olaf Acker, co-author and Digital Services leader with PwC Strategy& Germany. “Which means anyone assuming the role has to balance the old technologies with the new, technical expertise with an understanding of internal organizational mechanisms and a vision for a company’s future that also aligns with its longstanding mission.” Methodology Strategy& examined the global top 2,500 listed companies by market capitalization as of July 1, 2016, as defined by Bloomberg. For more information, please visit www.strategyand.pwc.com/cdostudy. A copy of the study and breakdowns by industry, company size and geography are also available from the media contact.