Microinsurance in developing countries is not just a reduced-cost coverage for poor people: It’s an innovative way of selling insurance in a customer-centric approach… and the insurtech wave has a big role to play! Microinsurance already covers around 135 million people, which represents around 5% of the entire market potential, with an average of 10% annual growth. The risks covered by such solutions are the typical ones of the traditional insurance market: life insurance, health insurance, accidental death and disability and property insurance. Developing countries have economies that are generally based on farming and agriculture. and they can’t cover all the needs of a growing population exclusively with the goods they produce. Approximately 70% of the world’s 7 billion people live in poverty. In such a context, there is significant demand for a certain range of insurance products from health and life, agricultural and property insurance, to catastrophe cover. The potential market for insurance in developing countries is estimated to be between 1.5 and 3 billion policies. See also: Big New Role for Microinsurance   Microinsurance presents a different type of business potential in comparison with the microfinance and microcredit current. Microinsurance is not just a reduced-cost and specific-risk insurance coverage for people in developing countries. It is an innovative way of selling insurance that is aligned with customer expectations while covering a specific need, at the right moment, at the right price, in a customer-centric approach. This type of insurance could help close the protection gap both in developed countries and underdeveloped ones. Microfinance instead can be defined as "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high-quality financial services, including not just credit but also savings, insurance and fund transfers."  Microcredit (generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983) means providing credit services to those with low income. It is an extension of very small loans to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. Provided that people with low income are offered the right products, means and knowledge, they will become effective consumers of financial services. The MicroInsurance Centre estimates that in the next 10 years or so, the microinsurance market could grow to 1 billion policyholders. An important concept is that insurance demand should not be taken for granted. This is because of the often negative connotation it is being given in the developing world, which stops it from reaching more people. The market needs an innovative approach based on customer education and incentives. Insurance benefits have to be clear in the mind of potential customers and, for that to be achieved, trust has to be built. This can be done through new and engaging approaches like plots in TV and radio programs or even through literacy campaigns. To create demand, other types of incentives can be used: tax exemption, subsidies or compulsory cover. For microinsurance to function in a developing country, the products and the processes have to be simple and the premiums need to be low. A change of mindset is needed from insurers, alongside a more efficient administration strategy and distribution channel. The key question that insurers have to pose to themselves is: How do you sell insurance to someone who never had to deal with such a concept before? How to generate revenues from a policy where the premium is just a few dollars per year? These questions show the essential challenges of microinsurance that insurers need to tackle in a quick and cheap manner to provide cover for people who have little money. New solutions for developing countries are starting to emerge on the market; for example, in some parts of Asia pre-pay cards provide insurance cover for flood damage. Insurers will have to find the right business model and partners when approaching such markets and consider less common mechanisms for controlling moral hazard, adverse selection and fraud. For example, proxy underwriting, group policies and waiting periods mitigate adverse selection. At first, investing in microinsurance might seem a bit reckless, but the returns do exist: starting from reputational gains in the short term, knowledge in the medium term and growth in the long term. If indeed microinsurance will start to grow at its true potential by entering developing economies, then there are some critical areas that need more thought: starting from product innovation and technological solutions that are adapted to low-income markets, to choosing the right partners to work with (NGOs, community-based organizations, international reinsurers and so on) and understanding which are the risk factors that will affect the region in the future (for example, economic development, climate change or population growth trends). See also: 5 Innovations in Microinsurance   The direction in which technology is heading indicates that developing countries will fast forward straight to mobile, skipping desktop computers, which are less feasible as communication tools. Already, more than half of the world's population is using a mobile phone, and almost 25% is using internet regularly as fewer and fewer people use fixed telephone lines. Mobiles are the dominating means of communication, even in the Third World, with smartphone ownership and internet usage on the rise. According to a survey by Pew Research Center, in the last two years there has been a significant increase in the number of people from developing nations that declare they use internet and own a smartphone. Moreover, in nearly every country, millennials are much more likely to be internet and smartphone users compared with those over age 35. This phenomenon is a characteristic of both advanced and emerging economies. In spite of these trends, less than 5% of people with low income have access to insurance or to covers that they actually need, which makes underdeveloped countries an ideal market to explore.

Although I believe in the capabilities of technology as much as anyone, breathless articles sometimes set me off. I will now rant about one, because I think these articles should be a warning about how even smart people can get sucked in by the possibilities of digital technology of the sort that is currently turning insurance on its head. (Yes, if I'm honest, I also want to vent a little.)

The article that made my head explode (most recently) described how great it would be to live in a connected home where you would wake up to the smell of bacon that had automatically started cooking on your stove just minutes before your alarm went off. Sounds great, right? Who doesn't love the smell of bacon in the morning (or the afternoon or evening)? Everything is better with bacon.

But think for a moment. Who put the bacon in the skillet? You did, unless there's a robot involved here that the article didn't describe. When did you put the bacon in the skillet? The night before. Do you really want to eat bacon that has been sitting out all night? I don't, no matter how good it smells.

This lack of thinking through an issue from beginning to end is not an isolated event. The bacon idea is actually just a variant of the hoary notion that, on the way home from work, we'll turn on our microwaves remotely and start cooking our dinner (which has been sitting, unrefrigerated, in the microwave all day). People have been touting the idea of internet toasters and refrigerators for many years, even though the toaster has no conceivable use and the refrigerator actually sits in the middle of a complex issue that isn't solved just by connecting it to the internet—no, I don't want the refrigerator ordering milk for me simply because I've run out, and I certainly don't want it managing my whole shopping list. 

The lack of thorough thinking isn't new. It has been going on at least since I started covering the world of technology for the Wall Street Journal in 1986. And the thinking infects even people and companies that should know much better. In April 1988, I wrote an article on the front page of the second section that described how even some very savvy companies made their products worse through digital technology. BMW added electronics to some top-line cars that required a 40-minute video to explain; just the section on locking and unlocking the car required three minutes. Buick so confused drivers that some who tried to turn down the radio wound up turning off the air conditioning. When some of the geekiest of the geeks in Silicon Valley—including the CEO of Sun Microsystems and a future CEO of Microsoft—went bowling, they couldn't figure out how to use the digital scoring system.

I haven't quite given up hope. But I'm close, given the persistence of the thinking that it's good to do things digitally just because it's possible to do them digitally. 

I thought I should at least call the issue to your attention. We're smarter about so many things than we were in 1988. Let's get smarter, too, about how digital technology fits (and doesn't fit) in end-to-end solutions.

Rant over. Thanks for hearing me out.   

Cheers,

Paul Carroll,
Editor-in-Chief 

The answer to P&C pricing may lie in the insurance credit score. That is basically a set of algorithms applied to data from credit reports that provide guidance for pricing and underwriting personal lines insurance. Although the score has been a source of political and regulatory controversy over the years, the use of insurance credit scores is now widespread. Much of the controversy has been over possible disparate impacts on various societal groups. But a root of the controversy has been the non-intuitive relationship between a given person’s use or misuse of credit on the one hand, and that person’s probability of incurring insured losses on the other hand. The correlation just doesn’t seem to make much sense. But statistically there are correlations, which in general have passed regulatory review. See also: Credit Reports Are Just the Beginning   Insurance credit score controversies are now ancient history (i.e. were settled before most millennials graduated from high school). But suddenly something interesting is happening. The race is on to find the next insurance credit score—and the winners (if there are winners) will gain a pricing (and underwriting) edge. There are only two requirements to enter this race.

1. You have to forget about all the kinds of data and information that insurers have been using to price and underwrite risks.
2. You have to use your digital imagination to find some new data and models that provide the same or better lift as the old data and models that you have just thrown out the window. (Lift is the increase in the ability of a new pricing model to distinguish between good and bad risks when compared with an existing pricing model.)

So what kind of new data might a digital imagination look at?

• For personal auto, connected cars will provide a rich data set to mine. How about whether a car is serviced at the manufacturer’s suggested intervals (correlated with whether the car is serviced by a dealer or by an independent repair shop)? Or the use of a mobile phone while the car is in motion (correlated with time of day, precipitation and whether satellite radio is also playing)? Or use of headlights during daylight hours (correlated with the frequency of manually shifting gears in a vehicle with an automatic transmission).
• For homeowners insurance, connected homes could supply all types of new data. For example, whether Alexa (or similar device) controls the home’s HVAC systems, correlated with setting security alarms before 11 p.m. Or, electricity and gas consumption, correlated with use of video streaming services on weeknights. Or, the number and type of connected appliances, correlated with the number of functioning smoke, carbon monoxide and moisture detectors.
• For commercial liability insurance, telematics and IoT will be the key data sources. Does a business with 10 or more commercial vehicles use both fleet management and telematics solutions? What mobile payment options are offered (correlated with dynamic pricing capabilities)? What are the business’ use of social media and messaging apps, correlated with the degree of supply chain digitization?

See also: Why Credit Monitoring Isn’t Enough   Of course, obtaining a lot of this data will require permission from policyholders—and even with permission these methods may raise social or political issues. But premium discount and loss control incentives for telematics programs have proven effective. And for better or worse,  Scott McNealy got it right in 1999 when he was asked about privacy and said, Nope, you don't have any.

As the healthcare industry continues to digitize, data protection technology has not been able to keep pace. Unfortunately for industry participants, healthcare has become a top target for state-sponsored and free-agent hackers. In fact, a study released by Michigan State University in April 2017 found that healthcare providers reported 1,225 of the total 1,798 data breaches in the U.S. from 2009 to 2016. Why has the healthcare industry become such a target? And what can healthcare providers do to protect their organizations and the thousands of patients they serve? One primary reason for the target on healthcare’s figurative back is the rapid implementation of electronic health records (EHRs). From 2009 to 2014, adoption of EHRs rose from less than 10% to 97%. This haste to complete implementation has led to a deficiency in data protection and security measures within EHRs. Additionally, with more and more providers leveraging mobile devices and turning to data driven by the Internet of Things, attackers have a plethora of new entry points to access private and sensitive data. See also: Data Security Critical as IoT Multiplies   A quick scan of the Identity Theft Center’s 2016 Data Breach Report shows that lost workplace laptops and stolen company-issued cell phones are frequently listed as reasons for a data breach. Given the growing use of workplace devices in the healthcare industry, as well as the corresponding danger of transmitting information from a central data center to end-user devices and back again, it is crucial that data is protected the moment it is created. Further, healthcare providers must ensure employees are aware that their devices could be compromised when the connection to the data center is lost. Mobile devices make it harder to protect data For example, an attacker could access data while employees are traveling between medical centers when the connection is lost and then sell the retrieved information or leverage it for ransom. As such, data should be protected regardless of whether it is at rest or in transit, as well as in connected and disconnected environments. To protect themselves from vulnerabilities that lead to data breaches, cyber attacks and ransomware, healthcare organizations must revisit their security strategy. This strategy should be comprehensive, flexible and capable of mitigating the impact of a breach at various levels within the enterprise via multiple layers of security solutions. The use of layered security allows for incremental defense to ultimately protect what is most vital to the business—its data. If other security countermeasures are defeated, data protection, which supersedes traditional encryption, will be vital as the last line of defense. For this reason, organizations must use data protection that travels with their data, rendering the data useless to the attacker should it be compromised. Training, technology part of treatment Data security is a threat that will not fade away, but rather grow in importance. As technology continues to advance, attackers and other entities involved in data theft will have just as many tools as the healthcare providers endeavoring to protect valuable and private information. See also: Aggressive Regulation on Data Breaches   Healthcare organizations must accept that their data will become a target and that these threats could originate from nontraditional sources, such as IoT and other innovations. Leaders must act now to protect their business, patients and other stakeholders. This article originally appeared on ThirdCertainty. It was written by Ermis Sfakiyanudis.

“It’s all about the customer.” How often have we heard that statement?  More times than we can count, Yet it is more relevant than ever as we exit the “pre-digital” age and enter an environment where survival will be measured by rapid adaptability (see our recent blog post An Ocean Apart: Pre-Digital and Post-Digital Insurance Models). In our prior posts, we focused on two areas of the insurance value chain that likely are not top of mind when thinking about digital transformation — billing and claims.  In this post, we’ll cover policy and customer serving, which is certainly a higher-profile area for digital enhancement. Policy and customer servicing should be near the top of insurers’ “to do” lists when it comes to embracing the digital shift and transforming into a digitally optimized, customer-focused enterprise. While many insurers express the desire to become more digitally enabled, most are struggling to catch up, let alone position themselves as leaders. Technology is evolving, and customer demands are growing faster than most companies can deal with. Add to this the challenge that insurers are often saddled with legacy systems, siloed data and product- (not customer-) focused processes that make anticipating and adapting to these changes all the more difficult. A McKinsey survey from earlier this year reported that most insurers in the U.S. and Europe focus their digital attention on sales and marketing, in particular on the earliest stages of the lifecycle — research and quoting. While these two areas are important, the survey noted that insurers were lagging in their ability to service customers digitally after they were on-boarded. See also: Key to Digitizing Customer Experience   Improving Customer Service Is a Great Way to Differentiate Majesco’s primary research studies on consumers and small-medium businesses showed that, compared with other industries, insurers are pretty bad at service. Life insurers are ninth out of 10 in terms of “ease” of servicing (of the industries shown in comparison, only streaming TV/video/music gets poorer marks for service), while P&C insurers are in fifth place (behind online banks, local retailers, national retailers and online retailers). All small-medium businesses (SMBs) ranked life insurers and employee benefits providers no higher than eighth out of 10 different industries they use as suppliers. P&C insurers also ranked low (fourth out of 10) among the smallest SMBs (those with fewer than 10 employees), but fare much better among larger companies, rising as high as third and second. Furthermore, our research noted that poor marks have a demonstrable effect on success. If a respondent reported that any one of the aspects surveyed (research, purchase, service) was “not easy” then their Net Promoter Score dropped significantly. And NPS is recognized as a key predictor of a company’s growth and profitability. According to Celent research, even agents, who are understandably worried about digitally enabled self-service reducing their importance in the sales process, recognize the need for digitization of insurance service processes. The research notes that agents are asking insurers to invest in technology enhancements to, among other things, improve online policy changes. But It Isn’t Easy (of Course) At first glance, policy and customer service appears to be an important and straightforward – if not particularly sexy – way to apply digital capabilities to improve outcomes. But looks can be deceiving. Some of the basic tenets of good service – a 360-degree view of the customer, for example – can be difficult and expensive to implement. Regulatory barriers may prevent streamlining how policy changes are implemented online, varying significantly from state to state and country to country. Legacy policy management systems may not be able to connect to digital front ends in a direct way. But all of these challenges provide an opportunity to focus on a customer journey-map-based approach to digital transformation! By starting with a vision for digitally enabled customer service (what you want the service experience to be, what business goals you are trying achieve, what key performance indicators you will measure for success) and then creating customer personas and journey maps, you will be able to create a transformation road map. That road map will include people, process and technology changes that you will make over time to reach that vision, allowing for incremental change (instead of taking a riskier, big-bang approach to changes). Don’t Ignore the Shiny Objects Just because we recommend an incremental approach doesn’t mean it can’t be fun! There is a lot of cool and interesting insurtech investment in this area, which can (and often should) be leveraged to roll out needed functionality without having to build it yourself. For example, having e-signature (and as per this blog post on digital billing) and multiple e-payment capabilities can make a policy change paperless and seamless for the customer, something that has been shown to improve service “ease of use” scores. Chat capabilities (human or chatbot) to walk customers through basic to tricky processes is a boon to customer service, with leaders like Lemonade and Geico leveraging them at almost every step of the customer lifecycle. Co-browsing options can be used to help customers navigate particularly tricky process steps. Customer analytics can be used to identify customers at risk of leaving, help them manage their risks and even identify cross- and up-sell opportunities. Even artificial intelligence (AI) shows promise in customer service, and far beyond just chatbots. IBM’s Watson is assisting customer service efforts in dozens of industries, and all indications are that it will be especially useful in insurance, where matching customers to products and services can help generate revenue and improve customer satisfaction. An excellent non-insurance example is the work Watson is doing with H&R Block. Watson is used to feed appropriate question prompts to tax professionals during client consultations. Bill Cobb, H&R Block president and CEO, said, “Watson is learning more and more as it does more tax returns.” According to a recent IBM blog, “Watson has learned 600 million data points relevant to the industry as well as the U.S. tax code.” Imagine Watson in insurance, rolled out to give agents prompts based on both individual knowledge and “learned” experience. Watson will help insurers translate regulatory requirements and improve relationship management. Cognitive customer service will give real depth to the possibilities. The Future Today Institute has stated in its 2017 Tech Trends Report that artificial intelligence will soon be integrated into nearly every facet of work life. In a detailed look at industries covered in the report, AI is the #1 trend in every industry. But Keep an Eye Out for Pitfalls One potential pitfall is to think this service mentality applies to just personal lines, which, as I’ve highlighted in my other blog posts, is far from the truth. Commercial carriers have a lot to gain from digitally enabled servicing, particularly in the SMB market, where margins can be thin on a per-policy basis. Commercial carriers may be very amenable to service outreach that includes risk-mitigation advice as well. See also: ‘It’s the Customer Experience, Stupid’   Insurtech is not just for personal lines, either: A recent SMA study highlighted more than 400 insurtechs targeting the commercial space, and the carriers themselves are interested in leveraging them for, among other things, customer servicing. Other pitfalls include trying to do too much at once or taking a scattershot approach to service improvements. These dangers reinforce the critical importance of leveraging customer journey mapping to create a disciplined approach to capability deployment. How to Start As we have consistently advocated, start with a vision of what you want to achieve. Check this against other investment priorities and pain points for your customers and other stakeholders (for example, if the biggest area of complaint is with the claims process, you may want to consider starting there). Create personas and journey maps to guide your decision-making.

The core systems replacement cycle is speeding up. Twenty years ago, even if you spent your entire career working at the same insurance company, you might expect to go through the implementation of a new core system once, maybe twice. Technology – and the speed of business that it enables – is changing that.

Technology is advancing at an exponential rate, and that includes the technology underlying the business of insurance. Moore’s Law predicts that processing power will double every two years. Other technologies exhibit similar exponential advances. Before solid-state drives emerged, the cost of hard-drive storage dropped by half annually. In 1997, 1 GB of memory would set you back about $100. Ten years later, the price had dropped to less than $.50 per GB.

See also: Finding Success in Core Systems  

When processing power was limited and storage was expensive, we were constrained in how we used core systems. The exponential advancement of these and other technologies removes the obstacles that had previously restricted their use – which opens many, many new avenues of technological advancement and business innovation. In the next 10 years, we can expect similar advances in the technology that we are using today.

Ten years is a critical number in insurance technology. In 2007, new insurance core systems did not have a variety of capabilities that are necessary to deal with the challenges of today. Mobile and policyholder collaboration is now a mandate. Advanced use of data and analytics has become a base-level requirement. Insurers now need to be able to handle a wide variety of specialized lines of business such as cyber, as well as shared economy elements like hybrid products to provide coverage for UberX and Lyft drivers. Consequently, more insurers expect that a core system implemented today will be up for replacement in less than 10 years. In 2011, nine out of 10 insurers anticipated a new policy administration system would last for more than a decade. Today, only six out of 10 insurers agree.

This is a tremendous shift in the market’s perceptions among P&C and L&A insurers alike. It reflects the accelerating pace of change and the exponential advances in technology. Insurers looking to the future – at the changing business models and products in the market – are unsure that an older core system will be able to face the challenges brought by digital and greenfield insurers as well as other insurtech advances. At a minimum, the core systems of today must continue to improve in upgradability to keep up with the advancing capabilities insurers need to match the pace of market changes.

Shorter lifespans mean insurers are rethinking how they allocate resources for core systems modernization. When faced with obsolescence in less than 10 years, insurers are more attracted to options that require less up-front planning and capital. This has translated into a greater number of cloud-based core systems as well as a shift toward more subscription-based pricing models.

The speedy implementations and quick time to value possible with cloud-based core systems appeal to insurers for the same reasons. Quick time to value is essential for insurers to be able to take advantage of new market opportunities, and implementations that take months rather than years can increase insurers’ adaptability. These buying trend changes aren’t displacing insurers’ purchases and implementations of larger, enterprise-wide core systems. The new trends simply give insurers the quick wins they need while they continue to advance enterprise-wide core systems modernization projects.

See also: The Death of Core Systems  

My recent report, Bridging to the Future With Core Systems Modernization, explores that trend and other ways that insurers are using modern core systems to increase the adaptability of their businesses. Core systems replacement and modernization is one of the seven SMA Bridges to the Future – and is critical for insurers to prepare for the opportunities and challenges of insurance in the coming years.

When we look at how quickly our world is changing, 10 years doesn’t seem so long. It reminds me of a prescient quote from Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.” And he said that more than 20 years ago.

Connected insurance represents a new paradigm for the insurance business, an approach that fits with the mainstream Gen C, where “C” means connectivity. This novel insurance approach is based on the use of sensors that collect and send data related to the status of an insured risk and on data usage along the insurance value chain. Auto telematics represents the most mature insurtech use case, as it has already passed the test and experimentation phase. It is currently being used as an instrument for daily work within motor insurance business units. In this domain, Italy is an international best-practice example: Here, you can find at the end of 2015 half of the 10 million connected cars in the world have a telematics insurance policy. According to the SSI’s survey, more than 70% of Italians show a positive attitude toward motor telematics insurance solutions. According to the Istituto per la Vigilanza sulle Assicurazioni (IVASS), about 26 different insurance companies present in Italy are selling the product, with a 19% penetration rate out of all privately owned insured automobiles in the last quarter of 2016. Based on the information presented by the European Connected Insurance Observatory, the Italian market surpassed 6.3 million telematics policies at the end of 2016. See also: Telematics: Moving Out of the Dark Ages? Based on this data, we can identify three main benefits connected insurance provides to the insurance sector:

1. Frequency of interaction, enhancing proximity with the customer while creating new customer experiences and offering additional services
2. Bolstering the bottom line, through specialization,
3. Creating and consolidating knowledge about the risks and the customer base.

The insurance companies are adopting this new connected insurance paradigm for other insurance personal lines. The sum of insurance approaches based on IoT represents an extraordinary opportunity for getting the insurance sector to connect with its clients and their risks. The insurers can gradually assume a new and active role when dealing with their clients—from liquidation to prevention. It’s possible to envision an adoption track of this innovation by the other business lines that are very similar to that of auto telematics, which would include:

1. An initial incubation phase when the first pilots are being put into action to identify use cases that are coherent with business goals;
2. A second exploratory phase that will see the first rollout by the pioneering insurance companies alongside a progressive expansion of the testing to include other players with a “me, too” approach;
3. A learning phase in which the approach is adopted by many insurers (with low penetration on volumes) but some players start to fully achieve the potential by using a customized approach and pushing the product commercially (increasing penetration on volumes);
4. Finally, the growth phase, where the solution is already diffused and all players give it a major commercial push. After having passed through all the previous steps in a period spanning almost 15 years, the Italian auto telematics market is currently entering this growth phase.

The telematics experience teaches us two key lessons regarding the insurance sector:

1. Transformation does not happen overnight. Before becoming a relevant and pervasive phenomenon within the strategy of some of the big Italian companies, telematics needed years of experimentation, followed by a “me, too” approach from competitors and several different use cases to reach the current status of adoption growth.
2. The big companies can be protagonists of this transformation. By adding services based on black box data, telematics has allowed for improvements in the insurance value chain. Recent international studies show how this trend of insurance policies integrated with service platforms is being requested by clients. The studies also show that companies, thanks to their trustworthy images, are considered credible entities in the eyes of the clients and, thus, valid to players who can provide these services. If insurance companies do not take advantage of this opportunity, some other player will. For example, Metromile is an insurtech startup and a digital distributor that has created a telematics auto insurance policy with an insurance company that played the role of underwriter. After having gathered nearly $200 million in funding, Metromile is now buying Mosaic Insurance and is officially the first insurtech startup to buy a traditional insurance company. This supports the forecast about “software is eating the world”— even in the insurance sector.

See also: Effective Strategies for Buying Auto Insurance How can other markets capitalize on the telematics experience and create their own approach?

The Employee Retirement Income Security Act (ERISA) has been around since the Ford administration. Most people know the law in relation to retirement benefits, but it’s emerging as an unexpected, yet high-potential, opportunity to drive change in the dysfunctional U.S. healthcare system. The law sets fiduciary standards for using funds for self-insured health plans, which is how more than 100 million Americans receive health benefits. Health plans for wise companies with more than 100 employees are self-funded because they are generally less costly to administer. As a result, more than $1 trillion in annual healthcare spending is under ERISA plans or out-of-pocket by ERISA plan participants. While it's roughly one-third of healthcare spending, employer/union-provided health benefits likely represent more than two-thirds of industry profits as they wildly overpay for healthcare services because of the misperception that PPOs help save them money. In reality, PPO networks cost employers/unions dearly. This overpayment makes ERISA plans an attractive target for operational efficiencies. Healthcare is the last major bucket of operational expenses that most companies haven’t actively optimized (they've already optimized operations, sales, marketing, etc.). For those that don’t get on top of this, it could also be a source of significant potential liability for companies and plan trustees. We are already aware of the ripple effect on benefits departments — one entire benefits department (with the exception of one person) was fired when the board realized the lack of proper management. See also: ERISA Bonding Reminder   ERISA requires plan trustees to prudently manage health plan assets. Yet very few plans have the functional equivalent of an ERISA retirement plan administrator who actively manages and drives effective allocation of plan investments. This person (or team) would have deep actuarial and healthcare expertise to enable them to deeply understand and negotiate potential high-cost areas of care, something traditional human resource departments lack. At the same time, it’s broadly estimated that there is enormous waste throughout the healthcare system. The Economist has reported that fraudulent healthcare claims alone consume $272 billion of spending each year across both private plans and public programs like Medicare and Medicaid. The Institute of Medicine conducted a study on waste in the U.S. healthcare system and concluded that $750 billion, or 25% of all spending, is waste. PwC went so far as to say that more than half of all spending adds no value. It's impossible to imagine any CEO/board allowing this in any other area of their company. Increased outside scrutiny on how ERISA-regulated health plans spend their dollars could create immense potential liability for both company directors and health insurers across the country. Nationally prominent lawyers, auditors and others are catching on to this and are taking action to get ahead of it or are advancing potential new categories of litigation that could result in hundreds of billions in damages. In just the last couple of months, we at the Health Rosetta Institute — a nonprofit focused on scaling adoption of practical, nonpartisan fixes to our healthcare system — have learned of some key events that will likely further increase scrutiny on ERISA fiduciary duties. First, two Big Four accounting firms have refused to sign off on audits that don’t have allowances for ERISA fiduciary risk. A senior risk management practice leader at one of those firms told a room of healthcare entrepreneurs and experts that ERISA fiduciary risk was the largest undisclosed risk they'd seen in their career. As more accounting firms start to require this, it will change how employers manage ERISA health plan dollars. Second, independent directors have quietly sounded the alarm to three company auditors about this growing issue, recognizing the potential for personal financial liability that director and officer insurance policies may not cover. We expect to see more of them focusing on this issue, given that healthcare spending is roughly 20% of payroll spending for most companies. Third, attorneys are building litigation strategies around employers filing suits against their ERISA plan co-trustees (the plan administrators who actively manage the plan’s health dollars) alleging they breached their ERISA fiduciary duties by turning a blind eye to fraudulent claims. We expect the first of these cases to be brought this year and expect to see significantly more in the next couple years. One firm we’re aware of is working on cultivating dozens of these cases. The implications of this third trend could be enormous. If boards and plan trustees know fraud could exist and don’t take action to rectify the issues, they could open themselves to liability from shareholders and plan beneficiaries. The scale of damages just for fraudulent claims could be on the magnitude of lawsuits over asbestos and tobacco. A very conservative estimate of what percentage of claims are fraudulent is 5% (many believe 10-15% is more accurate). Employers spend more than $1 trillion per year on healthcare. If you take the low-end estimate (5%) and extrapolate over the statutory lookback period for ERISA (six years), that would be $300 billion. These legal threats could force employers to actively manage health spending the same way they manage other large operational expenses. We’ve already seen companies doing this, reducing their health benefits spending by 20-55% with superior benefits packages. Employers use a variety of approaches, but most are relatively straightforward and focus on proven benefits-design solutions that make poor care decisions more costly and better care decisions less costly to encourage the right behavior. Most importantly, they don’t focus on shifting costs to employees. This cost-shift to the middle class has devastated the American Dream and was the backdrop for the populist campaigns that were badly misreported (in terms of their root cause). See also: Solution to High-Cost Indemnity Payments?   Three high-potential areas for improvement include actively managing high-cost care to move it to high-quality, lower-cost care settings; directly addressing drug costs; and creating incentives for wise care decisions. Here are a few repercussions these changes may have for companies and investors:

1. As more procedures move from expensive hospital settings to lower-cost independent ambulatory surgery centers, this means lower margins at for-profit hospitals, threatening return assumptions on hospital revenue bonds and growth potential for ambulatory care categories.
2. Tackling pharmacy spending puts downward pricing pressure on pharmacy benefits managers. An indirect example of the consequences of this is the face-off between drug middleman Express Scripts Holding Company and health insurer Anthem. In the next quarter, a statewide health plan is doing a reverse auction to select their next PBM. It's hard to imagine the incumbent PBM will be willing to drop its pricing and rebate games for a high-profile public entity.
3. More active management of healthcare, self-insurance and lower costs by employers reduce revenue and margins at public insurance companies, threatening core revenue streams. This is compounded by self-insured employers moving to independent plan administrators not tied to traditional insurers.

Surprisingly, the most sustainable and high-impact of these approaches will benefit employees, as well. Most wasted spending in healthcare that directly affected patients is the result of overuse, misdiagnosis and sub-optimal treatment. Time and again, we’ve found that the best way to slash costs is to improve health benefits. And isn’t better healthcare at a lower cost the best outcome for all of us?   This article was also written by Sean Schantzen, who was previously a securities attorney involved in representing boards, directors, officers, and companies in securities litigation and other matters including some of the largest securities cases in U.S. history. An earlier version of this article was also published on MarketWatch.

At times, it seems like insurtech is around every corner, with new startups materializing every day, conferences emerging out of nowhere and accelerators doing their job of accelerating. Until recently, most of the activity and visibility in property/casualty has been related to personal lines. Sure, there have been commercial lines startups and partnerships in the distribution space for quite some time, but there has appeared to be much less activity than around personal lines. This has begun to change in the last six months.

See also: Insurtechs Are Pushing for Transparency  

SMA’s recently released research report, InsurTech and Commercial Lines: A Surge of Activity and New Implications, analyzes the current state of the insurtech world, and there are approximately 400 startups that SMA has identified as relevant for commercial lines insurers. At this stage, the biggest areas of interest are small commercial (distribution) and workers’ comp (loss control and claims). This follows the natural path of technology adoption in the insurance industry. Insurtechs and emerging technologies will likely advance along this path. There are certainly some insurtechs that are applicable beyond small commercial today, but the complexity and uniqueness of other commercial lines have limited insurtech's penetration thus far.

Among the insurtechs with capabilities for commercial lines, almost half are either in the connected world or the distribution spaces. Distribution plays include digital agents/brokers, startup MGAs and tech companies with platforms or solutions for agents and brokers. Those with connected-world solutions have great potential for risk reduction and mitigation for fleets, properties, worksites and other areas that commercial lines insurers cover.

It is likely that insurtechs will continue to emerge with use cases for commercial lines. In the meantime, the existing body of insurtechs are maturing as they refine their solutions, pilot/partner with insurers and begin to roll out live implementations with customers.

See also: Leveraging AI in Commercial Insurance  

From a commercial-lines standpoint, insurtech is no longer hidden in the shadows. As more and more insurtech activity sees the light of day, the potential to transform the industry increases.

Fifty-six cents of every premium dollar is indemnity (loss costs). A further 12 cents is needed to assess, value and pay those losses. Given that two-thirds of the insurance industry economics are tied up in losses, it would be logical that much of the innovation we are now witnessing should focus on driving down loss costs and loss adjustment expense — as opposed to the apparent insurtech focus on distribution (and, to a lesser extent, underwriting). This is beginning to happen. What do you have to believe for loss costs and adjustment expenses to be a prime area of innovation and disruption? You have to believe that the process (and, thus, the costs) to assess, value and pay losses is inefficient. You have to believe that you can eliminate the portion of loss costs associated with fraud (by some estimates, as much as 20%). You have to believe that there is a correct amount for a loss or injury that is lower than the outcomes achieved today, particularly once a legal process is started. You have to believe that economic improvements can happen even as customer experience improves. And you have to believe that loss costs and adjustment expenses can decline in a world in which sensor technology starts to dramatically reduce frequency of losses and manufacturers embed insurance and maintenance into their “smart” products. See also: ‘Digital’ Needs a Personal Touch   Having spent years as an operating executive in the industry, I happen to believe all of the above, and I am excited by the claims innovation that is just now becoming visible and pulling all of the potential levers. We are seeing an impact on nearly all aspect of the claims resolution value chain. Take a low-complexity property loss. Technology such as webchat, video calls, online claims reporting and customer picture upload are all changing the customer experience. While the technologies aren't having a huge impact on loss adjustment or loss costs, they are having profound impact on how claims are subsequently processed and handled. One such example, as many have heard, is how Lemonade uses its claims bot for intake, triage and then claims handling for renters insurance. Lemonade’s average claim is a self-reported roughly $1,200 (low value), and only 27% are handled in the moment via a bot as opposed to being passed to a human for subsequent assessment. Still, Lemonade certainly provides a window to the future. Lemonade is clearly attacking the loss-adjustment expense for those claims where it believes an actual loss has occurred and for which it can quickly determine the replacement value. More broadly, Lemonade is a window into how many are starting to use AI, machine learning and advanced analytics in claims in the First Notice of Loss (FNOL)/triage process — determining complexity, assessing fraud, determining potential for subrogation and guiding the customer to the most efficient and effective treatment. While Lemonade is the example many talk about, AI companies such as infinilytics and Carpe Data are delivering solutions focused specifically on identifying valid claims that can be expedited and on identifying those claims that are more questionable and require a different type of treatment. These types of solutions are beginning to deliver improvement in both property and casualty. New data service providers — such as Understory, which provides single-location precision weather reports — can be used to identify a potential claim before even being notified, which can reduce loss costs through early intervention or provide reference data for potentially fraudulent claims. Equally interesting is the amount of innovation and development appearing in the core loss-adjusting process. Historically, a property claim — regardless of complexity — would be assessed via a field adjuster who evaluates and estimates the loss. Deploying technical people in the field can be very effective, but it is obviously costly, and there is some variability in quality. In a very short time, there are very interesting new models emerging that reimagine the way insurers handle claims. Snapsheet is providing an outsourced solution that enables a claimant of its insurance company customers to use a service that is white-labeled for clients. The service enables the claimant to take pictures of physical damage, which is then “desk adjusted” to make a final determination of the value of the claim, followed by a rapid and efficient payment. WeGoLook, majority-owned by claims services company Crawford & Co, is using a sophisticated crowd-sourced and mobile technology solution to rapidly respond to loss events with a “Looker” (agent) who can perform a guided process of field investigation and enable downstream desk adjusting process, as well. Tractable provides artificial intelligence that takes images of damaged autos and estimates value (effectively a step toward automatic adjudicating). Tractable — like, Snapsheet and WeGoLook — has made great strides. Aegis, a European motor insurer, is rolling out Tractable following a successful pilot. In each of these instances, the process is much improved for customers — whether it be self-serving because they choose to do so (Snapsheet), rapidly responding to the event (WeGoLook) or dramatically reducing the cycle time (Tractable). All provide material improvements in customer experience. See also: Waves of Change in Digital Expectations   Obviously, each of these models is attacking the loss adjustment expense — whether through a more consistently controlled process of adjusting at a desk, using AI to better assess parts replacement vs. repair or improving subrogation, among other potential levers. Today, all of these solutions are rather independent of each other and generally address a low-complexity property loss (mostly in the auto segment), but the possible combination of these and other solutions (and how they are used depending on type and complexity of claims) could begin to amplify the impact of technology innovation in claims.