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.

New, technology-driven changes in the ways people live their lives are prompting revolutions across industries. The insurance sector must adapt to these changing needs if it is to remain relevant to customers. The power and popularity of wearable technology as a generator of health data and the developing potential of genomics are well-discussed issues in the insurance industry. The sharing economy and shifting social factors also mean people visualize risk in new ways. Insurers want to offer security in ways that appeal to these emerging customer demands. But they are faced with myriad potential practical steps they could take. The idea of having individuals generate useful health and activity-related data, through wearable technology, is already established in insurance. However, the scale at which highly personalized data is being generated by consumers, whether deliberately or unwittingly, has been growing at a remarkable pace. Deciding how best to handle issues around data privacy is among the industry’s key questions. Some people will not wish their personalized data to be put in the hands of insurers making decisions about policies, while others will want their data to be used to drive down insurance costs. See also: ‘AI’ or Just ‘I’? Most Adaptable Will Win!   To understand how the insurance industry, “insurtech” startups, innovation labs and accelerators view these challenges, we spoke to some 75 thought leaders from around the world in a project we called the Incredibly Curious Adventure. The results of the research are fascinating. Many of those interviewed saw a real opportunity for the insurance industry to evolve from life protection to life enrichment, firstly through more consumer-centric product design, and secondly through the dynamic use of predictive data that wearables, supercomputing power and artificial intelligence make possible. However, legacy systems present a real challenge to insurers in the adoption and integration of these new technologies. Many insurers underestimate the readiness of the market to embrace the new opportunities and even to take advice from machines. Another essential issue for the insurance industry is genomics, particularly with regard to its relevance in creating life insurance policies. In spite of early discussions on the subject, in the last couple of years it has been parked mainly out of view, and the insurance industry has voluntarily agreed not to use much of the data that is available. But our collective understanding of genomics and its potential relevance to risk assessments has been expanded very significantly in recent years, and it offers the opportunity to do things better with individuals’ consent. Personal genomic information is increasingly being taken into consideration by doctors as they prescribe medications and by the pharmaceutical companies who create those products. For individuals, the deepening of the information about their own bodies, which they can now access and refer to, is radically different from what it once was. People are increasingly engaged with the details of how best to manage their health, with the help of the digital data they create. There is no doubt that a time is coming when consumers will wish to see this information made relevant to their insurance. Given these changes, there must be genomic-themed conversations across a full spectrum of stakeholders around what kind of information should be made accessible to and deemed relevant for insurers. The rich intelligence on everyday health knowledge gained from consumer genetic tests and much wider use of genomics in medicine could mean people are much better equipped to make personal decisions about their insurability than insurers can. While recognizing the ethical responsibility of getting it right, this potential asymmetry of information is especially relevant in a voluntary insurance setting. There are certainly moral questions that need to be asked before insurers are given a full regulatory go-ahead in this context. But it is clear there are significant potential benefits for consumers who open up access to data on their lifestyles, activity patterns, medical history and their genetic make-up. Importantly, insurers would be able to offer much more personalized insurance policies. Making the most of data and genomics poses a serious technological challenge. To stay ahead of the competition, insurers must look toward startups to provide support and technical expertise. Some insurers are in a position to acquire and absorb startups. Many others are not. The chief executives we interviewed said it is collaboration with startups that offers the potential to add value through insight and connection. At Gen Re, our focus is now on nurturing relationships with startups whose innovations have real potential. We partner with those whose ideas can help insurers be more responsive to the changing dynamics within their industry, whether that is in relation to data analytics, mobile health, artificial intelligence or wearable technology. Large-scale insurance companies are typically enthusiastic to adapt to change, but are operationally less agile. Insurtech startup companies are helping to change fundamentally the insurance industry and enabling it to meet emerging demand among consumers for greater personalization. See also: It’s Time to Accelerate Digital Change   It is our view that insurers must embrace the changes happening and be part of the conversations going on around these fundamental issues. Now, more than ever, the future is wide open. Our aim as a reinsurer is to be part of that global discussion about what the insurance industry can be and what it should offer. As originally seen in “Future of Insurance” published by Raconteur Media on June 14, 2017, in The Times.

The rise of the on-demand economy is disrupting billion-dollar markets — from retail, travel and transportation to healthcare, financial services, insurance, cable and utilities. In fact, a recent survey by Pew Research Center found that 72% of American adults have used on-demand services. While we’ve become accustomed to witnessing startups and digitally native companies launch on-demand services with relative ease, the reality is far different for established enterprises with legacy systems that they have to integrate. For many companies, adapting to an on-demand model requires organizational restructuring, not to mention disparate systems that need to be connected to make that possible. Often, it’s difficult for enterprises to keep pace with the changes to meaningfully transform their business for the on-demand economy. By 2025, leading enterprises will operate entirely on-demand — using software and mobile devices to connect to global and distributed networks and using a combination of AI and chatbots to handle customer service, payment and transactions and other business processes. According to Gartner, three out of 10 jobs will be converted to software, robots or smart machines. These realities both threaten and present opportunities for enterprises. But the biggest risk of all is for businesses is to pretend the changes aren’t happening. Enterprises need to embrace the change to both redefine their role and the value they bring their customers, all while automating key areas of their business, ensuring compliance and stimulating growth. See also: On-Demand Insurance: Ultimately a Bust?   The on-demand economy has raised consumer expectations across industries. It places the customer firmly at the center of a business. We’ve seen Amazon set a new standard for retail customer service. Uber and Lyft have used a distributed workforce to disrupt a $60 billion local transportation market, while Airbnb has changed the travel and vacation rental market, and Lemonade is changing the insurance industry. The elevated experiences provided by these companies, and those like them, combine to raise the customer expectations across all industries. What’s even more interesting is what has become known as the “experience gap.” It’s based on the fact that 80% of CEOs believe they are delivering a superior experience, but only 8% of customers agree. And given that more than half of customers today say they’ve switched companies solely because of poor user experiences, it’s clear that companies that fail to embrace change and the shift to consumer-centric solutions are at a strategic disadvantage. This experience gap is the catalyst for a lot of disruption because it’s catching businesses off-guard because they’re not yet deploying the new tools that can close the gap. As such, competition doesn’t manifest itself through traditional means. Instead, competitive differentiation stems from the quality of experiences businesses can deliver to their customers. So that brings us to the question of “how” to deliver experiences consumers expect. How can enterprises join the on-demand economy and deliver experiences that are synonymous with being always-on and personalized? In broad terms, there are elements or “steps” of digital transformation that enterprises can undertake to get them in the right place and ready to meet the needs of today’s demanding consumer. And, the process is not as complex as one might imagine. Enterprise Transformation for the On-Demand Economy 1. Enabling messaging as a customer engagement channel The first step is to enable a secure messaging system that can adequately serve the needs of consumers. This means it needs to offer all the necessary functionality that consumers experience in other channels such as payments, scheduling, CRM integrations, file transfers, customer service and marketing. In addition, the communication platform needs to meet security and privacy standards to ensure no breaches in compliance. The fact is, traditional channels — such as telephone and email — are no longer the primary channels through which people communicate with each other. The adoption of messaging has been rapid, and it shows no signs of slowing down. With this in mind, businesses large and small need to follow suit and begin the transition to messaging by including it in their channel strategy. The reason messaging is such a key part of the on-demand economy is that its very premise is on-demand. Messaging allows consumers to respond in their own time and send messages whenever they like. It harbors a strong sense of immediacy that’s unmatched on other channels. And it’s a channel that’s easily accessible through the smartphones that people carry with them everywhere they go. 2. Messaging across all devices and channels This same messaging capability then needs to be plugged in effectively across all devices and channels to connect with customers in real time. So, whether the primary interface is a mobile app, website, social network or otherwise, it’s the same high-value messaging experience. 3. Scale through business process automation with chatbots and artificial intelligence. The third step to entering the on-demand economy is scaling the always-on messaging experience through the use of chatbots and artificial intelligence (AI). These technologies work to automate the whole operation and provide a cost-effective solution for scaling 24/7 connectivity. The future of business communication is firmly based in the on-demand economy. So enterprises must be focused on making processes easy to access and intuitive to move through. Despite all the extraneous features and services that will be enabled through technology, the biggest drivers of innovation will be utility and simplicity across the customer experience. See also: Insuring a ‘Slice’ of the On-Demand Economy What It Means for Businesses to be On-Demand To be truly on-demand is to be at the beck and call of customers and consumers — to deliver experiences that provide consumers with access to information and services when and where they need it. It’s a simple concept with massive implications. Each day, consumers embark on an infinite number of journeys. For businesses to play a role in these consumer journeys, they need to meet them where they are along the way. And that is the the premise of the on-demand economy. Businesses no longer have the control — consumers are the ones who are empowered. It’s therefore essential that businesses adopt the on-demand model to retain and build their customer’s loyalty.

As Congress looks at restructuring two national insurance plans — the American Health Care Act of 2017 and the National Flood Insurance Program — legislators must address the issue of fairness. That is the view of Wharton professors Howard Kunreuther and Mark Pauly, who co-wrote the book, "Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry." In this opinion piece, they argue that considering the issue of fairness in designing these programs is not merely an exercise to aid the old and needy. Rather, it is also to make legislators think about what policies will make premiums less onerous to people with lower risk so they will not be discouraged about getting coverage. The U.S. is at a critical moment as Congress is attempting to determine how two insurance programs should be structured to help Americans who need protection from physical and financial risk. Both the reauthorization of the National Flood Insurance Program (NFIP) and the American Health Care Act of 2017 raise questions as to whether affected individuals would be treated more fairly under the new legislation than they currently are. For us, fairness in the context of new legislation means consideration of the impact that a sudden increase in premiums or unexpected changes in the terms of coverage will have on the well-being of the affected individuals. See also: Flood Risk: Question Is Where, Not When   When the National Flood Insurance Program (NFIP) was enacted in 1968, there was a concern that high premiums would significantly reduce property values and that this could become an unfair economic strain. For this reason, the NFIP specified that homeowners living in high-risk areas at the time the law was enacted would be charged a subsidized premium. The same potential conflict regarding fairness applies to health insurance. Is it fair that those with pre-existing medical conditions or those who unexpectedly acquire high-risk conditions might have to pay much higher health insurance premiums than when they were less at risk?  Yet this is what will happen if private insurers are allowed to charge risk-based premiums and politicians decide to provide limited subsidies to cushion those higher premiums.  However, is it fair to impose high premiums on individuals with low risks to finance such subsidies? And is it fair to offer no reward to those who take steps to improve their health status and thus reduce their future health spending risk? Elected representatives on both sides of the aisle continually espouse the principle of fairness across a wide range of issues, including trade, tax reform and jobs. If they truly want to extend that allegiance to the principle of fairness, they might wish to consider offering some form of financial assistance to help working class families who become high-risk for floods or to help them buy or continue coverage for health care. The choice of the right amount of support regarded as fair is ultimately a political issue where voters’ perspectives may differ. There are efficient ways to address the fairness problem for both insurance programs that might gain bipartisan support. With respect to health insurance premiums, it is easy to justify assisting low-income and older people who want to buy coverage. Empirical studies of Medicaid programs suggest that individuals care about other people’s health conditions. Many taxpayers are thus likely to support having the public sector cover part of the cost of health insurance for those whose health might be improved by having insurance. In the case of flood insurance, those subject to water-related damage should receive information on the cost of insurance that reflects their flood risk. If this risk-based premium exceeds a proportion of their income or housing costs, they could be given an insurance voucher or tax credit so they could afford insurance. A new RAND study recommends that those whose total housing costs — including flood insurance premiums — exceed a certain percentage of their income be provided with financial assistance. This would ensure that taxpayers are not subsidizing high-income individuals. It is important to encourage property owners in flood prone areas to invest in cost-effective, loss-reduction measures. Homeowners could be offered a long-term home improvement loan, tied to the property, to pay for cost-effective ways to mitigate future losses, such as elevating the house or moving utilities to a higher floor, so that the annual cost of the loan, paid all or in part by vouchers or tax credits, would be less than their savings from the reduced risk-based premium. This proposal is not only fair but also encourages property owners to reduce future losses from inevitable disasters. It also avoids using taxpayer dollars to assist uninsured and unprotected victims from hurricanes and floods who will demand and may receive federal disaster relief. See also: How to Make Flood Insurance Affordable   In summary, the proposed flood and health insurance programs should be designed with reasonable premiums for high-risk individuals so they will want to purchase coverage that protects them against catastrophic financial losses. At the same time, one needs to be concerned about not discouraging low-risk individuals from purchasing insurance by imposing the subsidy burden on them alone through premiums much higher than their risk rather than on the general population through a broad-based tax. By considering the issue of fairness as an important criterion in designing these programs, we will have taken a major step in enabling high-risk individuals to have coverage while at the same time maintaining the basic principles of insurance. Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

After eight years of gains in stock markets and a nice pop following the election of a Republican president in the U.S. in November, an old friend of mine sounded a note of alarm in the Wall Street Journal this week that I think is worth noting—he was right in a big way before the internet bubble burst in 2000, and he's been my proverbial canary in the coal mine since then. Based on what he wrote, I think we should all confront a scenario where the Dow Jones Industrial Average tumbles 2,000 to 3,000 points and where the fallout spreads throughout the insurance industry, affecting not only client activities but also investment portfolios and even the valuations of insurtechs, as insulated as they might seem to be from the valuations of the Fortune 500.

Here is the article by Andy Kessler, who has been a friend since we became neighbors two decades ago. The WSJ has a pay wall, so the article won't be accessible to many, but it can be summarized briefly. The argument for alarm is essentially based on his experience both as a securities analyst on Wall Street and as a successful hedge fund manager in Silicon Valley. Andy writes:

"Are there any bells ringing now? How about a few months back when someone looked me in the eye and insisted—without cracking a smile—that Uber was a bargain at a $68 billion valuation? Or when, shades of AOL and Time Warner, Amazon bought Whole Foods for $13 billion—and then its stock went up by more than that amount? Or when Tesla missed its numbers again, and the stock rose anyway? Or when the price of a bitcoin, backed by nothing but the faith of devotees, hit $3,000, tripling over a year? Or when Hertz stock rose 14% on news of a deal with Apple for a self-driving car that is still vaporware?"

The article briefly cites his successful call in 1999 about the coming market collapse. He tells the story in more detail in his entertaining 2005 book, "Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score." The story goes like this:

He and his partner spent years trying to raise money for a hedge fund but were mostly frustrated by a Catch-22: If you had money, people would give you more, but if you didn't have money then you couldn't raise any. Andy and his partner finally raised enough money to be on the map and had one of the best years of any fund in 1998, according to public rankings. People started throwing money at them. In late 1999, a group asked to have breakfast around the corner from their office in Palo Alto, CA, and it was a memorable scene.

A stretch limo pulled up outside the restaurant. Huge bodyguards piled out. Two Middle Eastern investors quickly dispensed with the chit chat and said they wanted to wire $500 million into Andy's back account the following morning. Andy says he started calculating: The 2% carry, alone, would be worth $10 million a year to him and his partner, Fred, who operated out of a tiny office with just one assistant. That didn't even account for the 20% of any profits they would earn. Then Andy realized that Fred was turning down the money, because they wouldn't know what to do with it. Andy says he tried to kick Fred under the table but missed, and finally acquiesced. 

Only days later, the scene repeated itself. Another stretch limo. More bodyguards. Another pair of Middle Eastern investors. Another quick offer of $500 million. (Andy says he wondered whether $500 million was a unit of currency in the Middle East that he wasn't familiar with.) This time, Andy found himself turning down the money, because there weren't enough good places out there to invest it. On the short walk to their office, Andy and Fred decided that, just because they had turned down $1 billion didn't mean it wouldn't find its way into the market and add to the already unrealistic valuations. They decided that they should get out of the market, not take on new money. They did—at the crazy valuations still possible in late 1999 and early 2000, before the crash began in April 2000. 

So, when Andy calls the top of a market, I listen. I think you should, too. His piece doesn't mean the market will crash tomorrow. Or ever, in fact. The stock market operates at its own beat—during my days at the Wall Street Journal, a reporter threw darts at a dartboard quarterly and generally did just as well as the experts in predicting stocks. But it's worth remembering that stocks don't just go up. They can go down, too. And we seem to be in a frothy market where a relatively small shift in sentiment could have major implications. As long as we, as an industry, are the experts in risk management, now feels like a good time to think about the risks we'd face from a major downturn in the stock market.

Any downturn won't affect the fundamental changes happening in insurance. Disruption will continue apace. But contemplating a stumble in the stock market is an exercise I'd recommend. 

Cheers,

Paul Carroll,
Editor-in-Chief

Away from the noise in Washington, there’s a quiet movement to improve healthcare and lower costs, and it’s making progress. The movement is led by employers and other large purchasers of health benefits. This is the third in my periodic profiles of some of the best strategies in the private sector. One of the most promising innovations I’ve seen in healthcare does not come from Silicon Valley or an Ivy League incubator, but from the plain soil of practical Arkansas, birthplace of the world’s largest retailer. Walmart takes seriously its responsibility for stewarding the benefits it offers its more than 1.3 million U.S. employees and their dependents. I first heard about Walmart’s leadership from their former global benefits leader Tom Emerick, whose book Cracking Health Costs (written with Al Lewis) describes “Company-Sponsored Centers of Excellence (CSOEs),” a handful of hospitals Walmart picks for employees and their families whose doctors have diagnosed them with certain conditions and recommend surgery. While employees can always remain with the hospital of their own choosing, Walmart will pay all copays and travel expense for the patient and a companion if the patient consults with one of the centers of excellence. See also: Walmart’s Approach to Health Insurance   Emerick started the program by targeting one of the most invasive and risky procedures offered in hospitals--transplants. He selected world-class hospitals as centers of excellence, including big names like Cleveland Clinic. If an employee or covered family member is told by the doctor that he or she needs a transplant, the employee is eligible to visit a center of excellence, where a team of physicians examine the patient, recommend a treatment and, if necessary, do the surgery. What happened next astonished Emerick. As he explains in his book, “About 40% of covered plan enrollees were originally told they needed a transplant but were discovered to not need a transplant when sent to the top clinics in the United States.” Avoiding a transplant saves money, but, more importantly, it saves endless heartache and suffering for those patients able to find less invasive alternatives. A transplant is one of the most painful and difficult surgeries imaginable, and requires a lifetime of medical follow-up, including strong medications, many with serious side effects. Emerick’s successor at Walmart, Sally Welborn, expanded the CSCOE model to cover orthopedic procedures for knee, hip and spine, as well as certain common cancer diagnoses. She added a bold twist to the program: Along with her senior director Lisa Woods and the Walmart team, she negotiated a deal that upended the usual way healthcare does business. Each center of excellence signed two contracts: first, accepting a bundled payment for a treatment recommendation, and second, another capped bundled payment covering all aspects of the procedure. These were not the usual fee-for-service contracts. Instead, Walmart aligned the hospital’s financial incentives with the patient’s best interests. That sounds like common sense, but in healthcare common sense is the exception, and the deal is a breakthrough. Traditionally, in fee-for-service, hospitals are reimbursed for everything they do, regardless of whether the work helps or harms the patient. But with bundled payments, the hospital gets paid for accomplishing what the patient needs and wants. Like Emerick, Welborn was surprised by the results. About a third of the time, medical teams did not recommend the procedure the patient had been referred for. As many as half of those recommended for the cancer center of excellence had been misdiagnosed. Sally is leaving Walmart in July, and she departs with a powerful legacy. In addition to this program and some other innovative initiatives, she’s spread lessons learned throughout the employer community. She worked with Pacific Business Group on Health, for instance, to bring together other employers to launch their own centers of excellence programs, building on the Walmart model so they don’t reinvent the process from scratch. See also: Walmart Shows Way on Health Benefits   Scaled nationally, programs like Walmart’s have vast potential. Officials at the agency that funds Medicare have been developing bundled payment trials over the past few years. It remains to be seen whether deals like this from the private sector influence the new administration. But the need is urgent. A blue ribbon consensus panel at what used to be called the Institute of Medicine estimated that about a third of all health costs are wasted each year, often on inappropriate, unneeded procedures and errors. Those wasted dollars are enough to fund all of Medicare, Medicaid, CHIP and Obamacare subsidies, with a little left over to cover NIH or CDC, as well. In an era of frustration and fear over health care reform, Arkansas offers a promising moonshot worth watching. Congress, take note.

Despite a decade of prominence, the Age of the App may be over. The future of auto claims could belong to the chatbots. Equipped with AI and machine learning capabilities, these computer software programs can conduct natural language-like conversations with customers in real time. Already, Amazon’s Alexa and Apple’s Siri are working as personal assistants and shoppers, while others serve as bankers, officer managers, HR administrators, concierges and more. And it won’t be long before chatbots quickly expand throughout the insurance sector. They are already starting. Compared With Chatbots, Apps Are a Nuisance Because the insurance industry is traditionally slow to adopt new technology, apps are still considered “cutting-edge” by many insurance carriers. Compared with chatbots, though, mobile self-service apps may shortly be seen as the customer-service equivalent of a horse and buggy. According to Gartner, 20% of all brands will abandon their mobile apps by 2019. By contrast, Gartner forecasts that, by 2020, AI bots will power 85% of all customer service interactions. What’s behind this warp-speed transition from apps to bots? Speed, convenience and user-friendliness. See also: Much Higher Bar for Customer Service   While mobile self-service apps do represent a great leap forward for some policyholders, even those who love them were never thrilled about the time and patience required to download and install them and learn to use them. And many people have grown weary of their cell phone real estate being occupied by one-time apps. For every 10 apps downloaded by consumers, seven are uninstalled after just two weeks without ever being used. Interacting with a chatbot involves no user’s manual. Customers can message (24/7) to converse with an intelligent chatbot that, for all practical purposes, behaves like a human – one fully equipped to handle all their auto insurance concerns. In fact, chatbot-powered customer service could be even better than the “traditional” variety for mundane questions. For example, customers will no longer have to endure a menu of phone prompts before they’re connected with the appropriate person. Instead, the bot will be able to answer most questions or guide them through the steps needed to achieve the desired outcome in the format we’ve become accustomed to, text messaging. Improving the Customer Experience Imagine a self-service claim in which the vehicle owner interacts with a chatbot. The customer starts by verifying his identity and is then orally or text-guided through a series of steps to complete the entire process. The chatbot asks questions. The customer answers. The customer submits photos or videos of the damaged vehicle, and the chatbot either responds with additional questions or walks the policyholder through the next steps. Once the process is finished, the bot transmits the details of the transaction to the carrier, which determines the right outcome for the claim – e.g., whether an estimate needs to be written by a human, through an AI photo estimating solution or through having the owner bring the car to a repair facility. At some point, policyholders will even receive auto claim payments through the chatbot, further streamlining the claims process. This is already happening in some areas of insurance. And because chatbots can learn and acquire more knowledge with every transaction, they will make the customer experience better as they continually collect and process vast amounts of data. For customers, dealing with a chatbot for assessing vehicle damage will be like having an appraisal assistant standing right next to them. Of course, many people will realize that they are not, in fact, talking with another person, but communications will be so seamless and natural that they may eventually forget this. For insurers, chatbots will lower costs by allowing companies to replace many customer service personnel. For example, customers have a tendency to call their insurers multiple times to inquire about their claims and ask basic questions. Such interactions could be easily automated using a chatbot. See also: Hate Buying? Chatbots Can Help   Incorporating Chatbots into the Claims Department While chatbots have many applications, by no means is technology the right solution in every customer service interaction. There are many times when the human factor is far superior. Chatbots are one more tool in the toolbox. Here are two smart uses for them in a claims department: 1. Guiding customers, step-by-step, through the claims process using structured questions and answers. For example, if you want a vehicle owner to complete a mobile self-service claim, you could employ a chatbot to guide them through the verification process, as well as the submission of photos/videos and other documentation of the damage. Once this is done, the bot might transmit the claim to your company and an auto repair facility. An added benefit is that you will be collecting lots of data to help process not just this one claim but to enhance the customer service experience on all future claims. 2. Answering an array of FAQs submitted by policyholders – FAQs for which carriers currently deploy vast CS resources. Creating a human-like experience for managing thousands of customer inquiries could dramatically lower your customer service costs. Ironically, the biggest benefit of chatbots is enhancing the customer experience by providing services that are faster and more personalized – a machine-made level of personalization. So while apps still have a place in the insurance industry – for now – it’s likely that some of them will be out of a job, thanks to the rise of the chatbot.