The first step to managing risk is understanding it. That simple sentence gets to the heart of the opportunities and challenges of risk management. The concept of risk is pretty simple. The ISO 31000 definition of risk couldn't be much more straightforward: "the effect of uncertainty on objectives." But anyone who's been tasked with managing an organization's risk knows that identifying and managing business risks is complex. How organizations tackle risk varies from company to company based on their particular risk appetite. One business may be ready to push the envelope and look for competitive advantages through bigger gambles, while a more conservative firm may rely on established trends and avoid risk to the extent possible. For risk managers tasked with interpreting an organization's risk appetite and recommending a course of action, risk is something of a moving target. The risks themselves are constantly changing, and even within a single organization, the approach to risk may vary by department or individual. See also: Easier Approach to Risk Profiling   And risk managers' jobs are only getting more difficult. In fact, more than 70 percent of executives say that risks have gotten more numerous and more complex over the last five years, according to a recent report from the Enterprise Risk Management (ERM) Initiative at North Carolina State University and the American Institute of Certified Public Accountants. The report, "The State of Risk Oversight: An Overview of Enterprise Risk Management Practices," surveyed CFOs and other executives at organizations of varying sizes across a broad range of industries. While these executives said that risks were getting more complicated, only a quarter said that they have a "mature" or "robust" risk management process to address these escalating risks. Understanding risk at the enterprise level Those organizations that lack effective risk management processes have limited ability to assess emerging strategic, financial or operational risks and opportunities. Only a quarter of those surveyed considered their organization's risk management process to be an important strategic tool. The holistic approach of ERM, which seeks to actively manage all of an organization's risks instead of taking the traditional silo approach, has several benefits. It helps leaders establish an enterprise-wide appetite for risk and prioritize individual risks based on what's likely to have the most significant impact on the organization. Perhaps most importantly, it identifies the interplay of specific risks--circumstances that could originate in one area but have major implications for another. If flooding is likely to delay a delivery to a manufacturer, a robust ERM program would analyze that risk's effect on not just shipping and receiving but also sales, facilities, customer service and any other area that could be affected. As organizations take an enterprise-wide view of their risks, the skills risk managers need to be successful will shift as well. In one 2017 PwC survey, 63 percent of corporate officers said that giving frontline employees more risk management responsibilities enables their companies to better foresee and respond to risk, and about half will further this shift in the next three years. It's clear that organizations are increasingly relying on risk managers who can effectively communicate risk elements and strategy to both executives and employees. Understanding emerging risks Understanding your organization's risk appetite and addressing current risks is only part of risk management. New risks crop up all the time, and risk managers need to stay vigilant. Cyber risk, with its ever-increasing sources and severity, gets a lot of media coverage and is a top priority for most organizations, but even traditional types of risk are constantly shifting and evolving. Risks stemming from government action and regulations have been particularly difficult to predict of late, and organization-specific issues like employee malfeasance, reputational harm and operational risks continue to pose serious threats. More and more risk managers are turning to data analytics to quantify these risks, but many organizations still struggle to effectively use the data at their disposal. In fact, another PwC survey asked U.S. executives, "Which areas of risk represent the largest capability gaps for your company today?" The leading response: fragmented risk data and analysis. Risk managers have so much data at their fingertips, much of it unstructured, that they can't effectively use it to make risk-based decisions. Complexity scientist Francesco Corea points out that more information should lead to more accurate results, but it can also make things more complicated. See also: New Approach to Risk and Infrastructure?   Understanding what your risk managers need As organizations work to establish an ERM program and grapple with overwhelming amounts of data, let's take a closer look at three factors that will make risk managers and their departments more effective.

• Risk managers need education. A solid foundation in risk management principles and practices, as well as an understanding of the methods used to deploy ERM across an organization, is essential. The Institutes' Associate in Risk Management (ARM™) program provides that comprehensive overview, but ongoing education to keep up with evolving risks is just as important.
• Risk managers need access. Risk managers need to be able to secure buy-in from many individuals: executive decision makers, data scientists, frontline employees and more. Risk managers therefore need access to these collaborators, as well as training on the soft skills needed to be effective in their role.
• Risk managers need allies. An organization shouldn't rely on just one or two risk experts to deal with risk. If risk is to truly become a key strategic tool, individuals at every level of the company need to develop basic risk knowledge and a risk mindset.

This piece is based on one of several Institutisms, mottos to inspire risk management and insurance professionals to success through lifelong learning and continuous education. Knowledge is the path to managing your clients' risks. And in the world of risk management and insurance, The Institutes are the ultimate knowledge resource for professionals--at every level and in any discipline. From designations and continuing education to networking and research that informs public policy, our name is all you need to know. Learn more about the ARM designation.

Speaking of comparative rating…. I was just reading an Insurance Journal article about Compare.com where the CEO referred to the semi-startup as a “disrupter.” Disrupting what? Independent agents have been doing comparative rating for decades. There is nothing new or disruptive about doing it online. And, in either format, it’s a dangerous thing. Compare.com’s CEO says that what consumers want is choice: “If you come back to that as the fundamental premise, do you want to walk into your grocery store and be offered one option for soup? Do you want one option for fruit? No, you want lots of options. Do you want a simple way to shop for it? That’s what compare.com does.” See also: It’s Rush Hour in Telematics Market   For the nth time, “insurance” is not a product you buy off a store shelf. Why do these people keep making comparisons to consumer products? I guess the upside is that at least he didn’t throw Amazon into the mix, as I wrote about in the blog post “Insurance and Paper Towels.” And what “choice” does comparative rating provide to consumers? Would this premise work for buying, say, used cars? Let’s see what choices UsedCarComparison.com would give us: Ford       $4,167 Chevy    $8,246 Honda   $8,963 Toyota  $5,920 Kia         $6,743 Need a boat? Just go to BoatComparison.com: Bayliner            $48,450 Crest                 $27,248 Chapparal        $51,506 Regal                $86,727 Bennington     $34,999 Easy choices. I’ll buy that Ford and use it to tow my new Crest boat. After all, the only thing I need to know is the manufacturer and the price, right? Similarly, in the case of insurance comparative rating, all I need is the name of the “manufacturer” (aka insurance company) and the price (i.e., premium), correct? Needless to say, NOBODY would buy a car or a boat with only the information provided above. Then why should consumers be expected to buy insurance sold that way? The answer to that question is easy…because we’ve conditioned them to believe that the only thing that matters is price. Any true insurance professional knows that, but apparently few insurance professionals make decisions for insurers when it comes to advertising. See also: How Technology Drives a ‘New Normal’   Even in independent agencies, we are all too eager to simply plug some information into a comparative rating system, then tell the consumer which quote is the lowest, without any regard for which carrier, product and service is the best fit for their unique needs. If this practice continues, we might as well concede the industry to the startups (and entrenched carriers) that sell on price and/or convenience, as opposed to providing a real, professional service that helps consumers avoid catastrophic loss.

Using innovative strategies, some companies may be erasing employee security training’s reputation for ineffectiveness. Security training “got a bad rap, because it was so bad,” says Steve Conrad, the founder and managing director of MediaPro, a Bothell, Wash.-based security awareness training company with such clients as Microsoft, Yahoo and Adobe. Old training methods “usually consisted of slide presentations — or their online equivalent — that were super dull and could last an hour or two,” he says. “Employees were expected to sit through this, either at their desks or in a group and come away with knowledge gained. And that was it. Awareness training was once and done, and it just didn’t work.” See also: How Good Is Your Cybersecurity?   Stu Sjouwerman, founder and CEO of KnowBe4, a security awareness training company founded in 2010 and based in Clearwater, Fla., says “old-school security training” often stems from “classical break-room sessions where employees are kept awake with coffee and doughnuts and exposed to death by PowerPoint.” Those days are over, according to officials of the two companies. MediaPro — which was founded in 1992 and has focused on security awareness training programs as a product since 2003 — says it’s an e-learning company that bases its training on proven adult learning principles, providing educational content in a way that learners remember. “This concept extends beyond the training courses themselves,” Conrad says, “to our focus on consistent reinforcement of key learning principles through extracurricular content such as games, videos and posters, as well as phishing simulation exercises.” Phishing exercises help change behavior KnowBe4, Sjouwerman says, sends frequent simulated phishing attacks to train employees “to stay on their toes.” Both companies believe that employees’ most common security mistake is falling for an email phishing scam. “Bad guys have come up with all sorts of creative ways to convince employees to click on a link or send sensitive information via a spoofed (sender) address,” he says. Clicking on a link in a suspicious email and opening an infected attachment can be avoided, Sjouwerman says, “by recognizing red flags.” Red flags include receiving an email from a suspicious domain or address you don’t ordinarily communicate with, or one sent at an unusual time, such as 3 a.m. No company is immune to such scams, Conrad says, “but simulated phishing campaigns aimed at an organization’s employees teamed with comprehensive cybersecurity education can go a long way toward changing risky employee behavior.” Technical safeguards against phishing scams exist, “but no organization should rely on those alone,” he says. “Social engineering — the basis of phishing scams — is such an effective way into the sensitive data of an organization because it completely bypasses these technical safeguards and goes after what is most companies’ weakest link: the human.” Workers’ weak spot Why do employees engage in risky behaviors when cybersecurity threats are so abundant? “It’s likely a combination of being busy and being exposed to so many technological sources of distraction on a daily basis,” Conrad says. Sjouwerman mentions another reason: “No one ever took the time to enlighten them about the clear and present danger that risky behavior can really cause, especially in an office environment.” A 2016 study by PhishMe, a Virginia-based phishing threat management company, found that 91% of cyber attacks — and the resulting data breaches — begin with a spear-phishing email. Another study done last year by LastPass, a Virginia-based password management service, found that 91% of respondents know it’s risky to reuse passwords for multiple online sites, but 61% do it anyway. The study also found that the No. 1 reason respondents changed their password was because they forgot it, and only 29% changed it for security reasons. Employees’ risky behaviors have triggered an increasing number of companies to provide better security training. “I think this is a really exciting time in the market. Huge numbers of companies are committing to doing real education, and we’re seeing exciting innovations in the variety of content that is available,” Conrad says. “I like to think that the age of boring people about security is over and we’re entering an era where people are going to be motivated and engaged by education around these issues.” See also: Cyber, Tech Security Start to Merge   Repetition is key Employee training, Conrad says, needs to be more frequent than an annual affair. He says, “Learners need to hear something more than once for it to stick — just ask any ad executive or marketing jingle writer,” he says. “Think about what makes up an advertising campaign: a series of messages that share a single idea or theme, transmitted via different media channels on a regular basis, for an extended period of time — with the singular goal of influencing consumer behavior. “A great security awareness initiative should look like a great advertising campaign. Repeated, consistent messages delivered throughout the month, quarter or year — whatever cadence is appropriate for a given organization.” This post originally appeared on ThirdCertainty. It was written by Gary Stoller.

Instead of a short bio, let us know what are your top three books everyone working on digital transformation needs to read and top three tech gadgets one needs to have? "Zero to One." This is the best book on tech, and so many entrepreneurs don’t understand the key concept: Your tech better be 10X better if you want to win, "Moneyball." I love this book because it helped me see how someone can look at a problem totally different. In the case of "Moneyball," Billy Beane started looking at baseball stats in a different way. "The Dip." This is Seth Godin’s best book, and it’s super short. 10X better technology takes time. You will hit a new dip every single day. Pushing through the dip is key; 99% of people don’t get through the dip in some form or fashion. iPhone. I hate my phone and love my phone all at once. I saw some crazy stat that it’s still a better deal at $1,000 than most gadgets, based on the number of times you touch it in a day (versus everything else). Garmin Fenix 5. I was really disappointed with my Fitbit. So I ponied up for a Fenix 5 watch, and I absolutely love it. I love how well it is constructed. Calendly (or equivalent scheduling app). I would go insane without this app. Seriously. You are not only the CEO of RiskGenius but also a renowned influencer in the insurance industry. First, tell us more about your company. How far are you with becoming the Google of insurance? We are getting closer every single day. Users can now use our Google-like search to find and compare policy language instantly. Now we are moving to an analytics based approach — put another way, the computers are going to start showing insurance pros what is and is not important. See also: Why AI Will Transform Insurance   When you start a discussion - for example, on LinkedIn - a lot of experts from around the globe participate. What role does social media play in your work as CEO? What would you recommend to C-suites of incumbents who don’t have an interactive presence on the internet? Social media is our secret sauce. I have more than 100,000 followers on LinkedIn, and most of them are in insurance. That is crazy. I use LinkedIn to share wins, struggles and ideas. Some day, I would love to go back and read through all my crazy LinkedIn posts. Most corporate social media is so, so boring. I love the personal touch. And, I guess you have to be a bit controversial -- although I don’t really think my posts to LinkedIn are that controversial. For example, I recently posted that you can't fix your front end until you address your legacy software. I don’t see that as controversial; others did. Life is too short to be boring. How do you estimate the state of the industry inside and outside the U.S.? Honestly, we are in the first inning of a nine-inning transformation. There are major insurance corporations that are just now scanning in paper documents. Most insurance professionals can’t really find the digital information they need. We have so far to go. What do you think are the biggest chances for incumbents to use the digital transformation? What are the biggest hurdles in your opinion? The biggest opportunity and the biggest hurdle is tearing down information silos. I can’t tell you how difficult it is to get our hands on  an insurance carrier's forms sometimes. This occurs because (1) the information is not stored in a central location and (2) the information gatekeeper does not want to give up the information to a more efficient system. Herbert Fromme, maybe Germany’s most famous journalist on insurance topics, said a few weeks ago that insurers can reduce the majority of tasks in the future and, for the rest, need employees with different skill sets. What do you think about this? Absolutely, and this is no different than most other industries. I used to be a litigation attorney. I attained my billable hours primarily by reviewing large document sets on cases. Two years into my career, I started reading about outsourcing operations that would review litigation documents at a fraction of the cost. Two years after that, I started reading about technology-assisted review, which involved machines reviewing litigation documents. The same thing is happening in insurance. Insurance companies have just gotten comfortable outsourcing many jobs to other countries where labor is cheap. And now you are starting to see machine learning solutions that can do the outsourcing work (ahem, www.riskgenius.com). What are your top three do’s and don't’s for a C-suite that understands the need to act soon? Do's:

1. Spend most of your time on the problem.
2. Make sure you have buy-in from all employees — not just executives.
3. Avoid reading traditional tech press — do your own research.

See also: How Technology Breaks Down Silos   What would you advise young people who are thinking of entering the insurance industry? Go get a job in insurance and pay attention to all of the crazy, frustrating situations that you see. There will be a lot. It is the nature of the beast. Talk to your peers about the problems you are having. See which problems others focus on. Then figure out how to fix the problem you have selected. Thank you for your time.

It has been busy in insurance lately, as the industry continues to engage and consider the future — first at our customer conference, Convergence 2017, then at Insurtech Connect. Both conferences had record attendances, a sign that insurers are both grappling with change and committed to making it happen. It is a shifting future, one that is reinvigorating an industry that has decades of tradition. Players across the entire range of insurance industry segments are being confronted with permanent changes in consumer behavior, different employee expectations, rapidly evolving technology and a quickening renaissance of the business environment. Increasingly, opportunities will need to be discovered because technology alone does not constitute a strategy. It is also not a plug-and-play in the sense that a new tech overlay cannot compensate for a fundamental legacy infrastructure — whether that means in the business model, products, culture, technology, market boundaries or customers. Change is being forced on insurers — whether they like it or not — as several of the orthodoxies traditionally underpinning the industry are challenged and disrupted. Customer at the Center of the Renaissance At the heart of this insurance renaissance is the customer. The customer's expectations, driven by unrelated or adjacent industries, are reshaping insurance. The innovators, many coming from insurtech, are assembling new insurance products and services and are using customer-centricity as their value offering. Finally, the competition, which is heating up, is based on customers’ positive reaction to the new business models and products in the market. This is all happening regardless of whether incumbents choose, or are able, to play in this area. Majesco’s consumer and small-medium business research last year captured these views and expecta­tions of today’s customers in the midst of the disruption and change rapidly unfolding in the insurance industry. In our Future Trends 2017: The Shift Gains Momentum report, we underscored that the insurance business models of the past 50-plus years have been based on business assumptions, products, processes, channels, etc. for the Silent and Baby Boomer genera­tions. Things began to shift with the Gen Xers, with Millennials and Gen Zers putting tremendous power to move things forward at a rapid pace. The business models of the past will not meet the needs or expectations of the future. Unfortunately, Majesco’s research, Strategic Priorities 2017: Knowing vs. Doing, shows there is a gap between what many insurers know about the changes that are going on around them and what they are doing about them — the “knowing–doing” gap. The report highlights that turning awareness into doing, with actionable initiatives, is elusive, creating an ever-widening gap between leaders who are taking action and those who are not. And in a fast-paced era of change and disruption, the ability to be a fast follower is fading rapidly, putting insurers at risk of becoming irrelevant. Insurers should be asking themselves, “Are we acting upon our knowledge of the insurance industry and market trends? Or, are we simply educated observers?” See also: Insurtech: One More Sign of Renaissance   As Albert Einstein famously said, “We can’t solve problems by using the same kind of thinking we used to create them.” The Shrinking and Shifting Future The state of the industry in a widening “knowing–doing” gap suggests a need for increasing strategic and future planning, followed by actionable plans. Research, however, suggests an ever-shortening strategic planning horizon. The Harvard Business Review concludes that the focus on defending business models (rather than exploring new ones) represents a significant loss in future options. As we highlighted in our new report, Changing Insurance for the Digital Age (a collaboration with Global Futures and Foresight), investors value the future growth options of S&P 500 firms relatively less, by $1 trillion — for which there are 28 insurers, representing only 5% of the 500 firms. This would seem proof enough that a myopic focus generates less growth and value over the long term. So how can insurers prepare for change and participate in the rapidly unfolding renaissance?

• Insurers must look to customers — before technology — as the starting point for change.
• Insurers must modernize and optimize their existing business to stay relevant with existing customers, because it will fund the future business. In today’s world, replacement of legacy systems is just table stakes.
• Insurers must develop new business models that meet the digital-age needs and expectations and are the foundation of the future business.

Each of these paths are mandatory and increasingly necessary to ensure relevance and growth. In our Strategic Priorities 2017: Knowing vs. Doing report, Majesco found that companies that reported strong growth in the past year were 17 times more likely to also be developing new business models, compared to those that had lower growth. Nearly 90% of the higher-growth companies were also developing new products — three times higher than companies with lower growth. Those that adapt quickly will likely see new business heights, while those that do not will possibly experience dramatic market losses instead. The growth gap between leaders, fast followers and laggards will likely expand, creating an unbridgeable chasm with devastating business implications. The Digital Age is Powering the Renaissance The digital age — a revolution — is rewriting the rules of business and, with it, redesigning organizational and business model structures. However, as we noted in Changing Insurance for the Digital Age, only 11% admit feeling ready to craft more “future-proof” organizations. Many industry orthodoxies are increasingly irrelevant, yet most insurers have been reluctant to reinvent themselves, with less than 25% of insurance executives expecting their operating models to be disrupted by changes in consumer behavior. Technology and customer expectations are already radically rewriting models; almost half of insurers business models are already in the process of being disrupted by new competitors. We saw this onstage at Insurtech Connect this past week, with new insurtech startups and traditional insurers creating business models and offerings. As many companies stated at Convergence 2017 and Insurtech Connect, the perception gap of customer expectations to what we deliver cannot be addressed through the provision of technology alone. It must be aligned with strategic re-organization and customer-centricity, thereby using technology to help avoid the widening gap between own orthodoxies and customer expectations. In effect, insurers must disrupt themselves. As we have said before, “It is better to Uberize yourself before you are Kodaked.” Narrowing the Knowing–Doing Gap Are we acting upon our knowledge of the insurance industry and market trends? Or are we simply educated observers? Each and every day, we see the growing impact of change in the insurance industry — new products are introduced, new channels are established, new services are offered, new business models are launched, all which recalibrate customer expectations. Acknowledging the role and strength of changing customer behavior expectations and then acting upon that awareness across the organization is central to future success. Customers are increasingly demanding personalized, on-demand, digital insurance services. In many cases, these go beyond the realm of traditional products, into providing valuable services that range from reducing risk to engaging with a community of similar customers. These services — when added to a robust, relevant product offering — have the potential to reposition insurers within the market and give them a future-focused, customer-centric edge. See also: A Renaissance, or Just Upheaval?   Insurance companies must stop talking about opportunities and start doing something about them by using the disruption and change as a catalyst for real change. We are entering a new age of insurance. These efforts will carry insurers into that new age, where they will be prepared to capture the revenue growth presented by a market shift that will define a new ecosystem of market leaders. Are you taking knowledge and acting on it? Are you walking the walk? Insurtech Connect highlighted that your future competitors are.

In August, I wrote about “Lemonade’s Bizarre New Self-Service Approach.” This “self-service” approach is pitched by Lemonade as a benefit to customers who can apparently delete coverage for spouses, mortgage companies and others unilaterally — something that could create serious problems for consumers who are not counseled on the possible repercussions of such actions. In other words, Lemonade is reducing its workload, increasing consumers’ risks of loss and making customers thank Lemonade for it. Earlier this month, I posted on LinkedIn about “Lemonade’s ‘Zero Everything’ Policy.” Again, Lemonade touts something that largely benefits… Lemonade. And it does it in a way that makes consumers think they are getting the benefits. See also: Politics of Guns and Workplace Safety   Just this week, I learned of yet another odd Lemonade decision regarding a new coverage stance on guns and gun owners. This is from their web site blog: “Guns, And Why Lemonade Is Taking A Stand“ According to the blog post, Lemonade’s next policy form revision will include the following:

1. “We will exclude assault rifles altogether. We simply don’t understand why civilians need military-grade weapons, and we prefer not to insure them.
2. We will add requirements that firearms be stored securely and used responsibly, upon penalty of voiding coverage. We believe guns should be treated mindfully and soberly, not as a plaything, a status symbol or an ideological prop. Reasonable people, we believe, can agree on that.”

On the first point, Lemonade did not elaborate on how “assault rifle” will be defined, nor did the company indicate whether the exclusion will be for loss of the rifle itself or, more likely, liability claims for BI to others. If the latter, this policy sounds like it punishes victims as much as gun owners. Lemonade’s HO policies already exclude liability coverage for intentional losses like the recent Las Vegas shooting. So even if the perpetrator had an HO policy with the company (or most other insurers), the policy wouldn’t cover victims’ claims. However, what about an accidental negligent shooting or BI that arises when someone takes a gun owned by someone else and the owner is sued? Most HO policies would respond to such claims. However, it doesn’t sound like Lemonade wants any part of that. On the second point, Lemonade says that its revised policies will require that all firearms be stored “securely and used responsibly” or else there is no coverage. How do you determine what “securely” and “responsibly” mean if these terms are the ones actually used in the revised policy language? And, again, if such an exclusion is invoked, who is the loser? It sounds like the victim(s) of such negligence now have no insurance proceeds to access. So, who is potentially the primary beneficiary of these changes? It sounds like Lemonade is because it would not be paying claims to innocent victims of the negligence of their insureds. Insurance policies sometimes exclude BI or PD that arises from illegal activities, though most auto policies, for example, don’t exclude BI or PD that arises from driving under the influence. The reason is that one of the primary purposes of liability insurance, from a social aspect, is to benefit innocent victims of such careless actions. See also: Examining Potential of Peer-to-Peer Insurers   However, what we could be seeing with this change from Lemonade is that its insurance products may base coverage on what LEMONADE thinks is morally right or wrong. The company's blog post says it is being upfront about what it thinks is “good” and “not good,” and that Lemonade is not into “gun worship” or “vigilante” gun owners and is doing its part to “solve gun violence.” Sounds like what Lemonade is doing is simply taking away a victim’s source of financial recovery for the negligence of Lemonade’s customers. Does that benefit society, or does it benefit Lemonade?

The estimated prospective ROE for homeowners this year is 4.5%, down from 6.7% in 2016. There are three key themes to note regarding homeowners insurance in 2017: Growth The homeowners' line of business continues to grow; premiums increased to $91 billion in 2016 from $89 billion in 2015. The rate of growth has slowed from prior years, and slower growth is expected in the near future with less aggressive but positive rate change in the pipeline. Further, catastrophe losses are rising faster than inflation, and coverage gaps continue in perils (like floods), suggesting opportunities exist for carriers to find premium through coverage innovations. Divergent Markets From the macroscopic perspective of this study, there are at least three different homeowners markets: 1. Florida, a market unto itself. Eight of Florida's 10 largest carriers have limited name recognition outside the Florida market, though several are expanding to other coastal states. Remove Florida and US ROE increases to 9.1%, suggesting the assumptions of this study (nationwide carrier with A.M. Best “A” rating) differ from market reality in the sunshine state. 2. The hurricane-exposed coast, excluding Florida. Hurricane coast states posted an ROE of 6.7% in this year’s study. At present, these states are characterized by heavy regulation; strong competition between established brands vs. younger carriers; and sophisticated risk differentiation based on granular catastrophe-savvy rating plans. 3. Everybody else. The remainder of the U.S. owns a respectable 12.2% ROE with market share largely dominated by big-name national and super-regional brands. Regulatory considerations are easier to navigate than in coastal states. Catastrophe risk has unique challenges associated with less robust models for thunderstorm, wildfire and flash flood risks as compared to hurricane risks. California and Washington are unique because of their strict regulatory environment, but they otherwise resemble the other states in the cohort in terms of perils and players of note in part because earthquake endorsements are not required for home loans, show limited take-up and are ultimately excluded from this analysis because they roll up to the earthquake annual statement line. Technology This year’s study examines “one dollar of homeowners premium,” which highlights 8 cents of loss adjustment and 21 cents of policy acquisition costs (12 cents for commissions and brokerage plus 9 cents for other acquisition costs). These areas of the value chain are coming under attack from insurtech startups eager to test established carriers’ ability to adapt rapidly evolving technology. Aon’s Digital Monitor currently tracks over 40 startups, backed by nearly $2 billion in venture capital, that are attacking these areas of the property and casualty value chain (not all in homeowners, specifically). Mobile and software-as-a-service platforms, drone and satellite imagery and proprietary catastrophe-detection internet-of-things-enabled hardware promise to continue to apply pressure to traditional homeowners carriers’ approach to the business of insurance. ROE study methodology The basis of the prospective ROE estimate is industry, state and aggregate statutory filing data including reported direct losses, expenses, payout pattern and investment yields. We replace actual historical catastrophe losses as measured by property claims services with a multi-model view of expected catastrophe loss. On-leveling of direct premiums to current rates uses rate filings of the top 20 insurance company groups by state. Finally, estimated capital requirements and reinsurance costs consider a nationwide-personal-lines-company writing both home and auto business at a capitalization level consistent with an A.M. Best “A” rating. The ROE estimates exclude earthquake shake losses; the premium and losses for that coverage are recorded on a separate statutory line of business. See also: 10 Trends on Big Data, Advanced Analytics   The diversification available to a nationwide personal lines insurer impacts the ROE calculation. For instance, homeowners business in California diversifies Gulf and East Coast hurricane exposure for a nationwide insurer. A California standalone would incur higher capital and reinsurance costs than the California portion of a nationwide insurer with similar premium volume in the state. Similar results are to be expected for any other regional or single state insurer. The normalization of catastrophe by this study replaces the local impacts from large events — like Harvey, Irma or the first and second quarter hail and wind losses experienced in 2017 — with the modeled catastrophe average annual loss. The prospective impact to the line from these events remains to be seen, and future versions of this study may attempt to measure impacts to rate level and reinsurance pricing. The 2017 nationwide ROE estimate of 4.5% falls below our 2016 estimate of 6.7%. Profitability challenges to the line include: (1) a slowdown of rate increases (and decreases by some major carriers) that failed to pace loss and expense inflation, and (2) premium and exposure growth that pushed up the A.M. Best capital requirements to maintain the assumed “A” rating. Declining costs of reinsurance to capitalize the volatility inherent in the homeowners line were insufficient to offset the increased capital charges. Softening reinsurance costs cumulatively added over 210 bps of ROE in our study since 2013; after the catastrophe losses of 2017, the reinsurance and capital markets will be closely watched for pricing signals. The maps above and below show, in loss ratio points, the amount that catastrophe experience exceeds model average annual loss. Adjusting combined ratios for expected versus historical catastrophe loss is an important step to distinguish weather-related randomness from inadequately priced business. Historical catastrophes can distort measures of results at a state level, causing the noise to overwhelm the signal. While state level adjustments can be significant, the 10-year nationwide experience catastrophe loss ratio of 13 points is meaningfully lower than the modeled expected catastrophe loss ratio of 23%. 2016 ended the dearth of hurricane activity that was the boon of gulf coast carriers for nearly 10 years. The Gulf states plus Florida had 30 points of favorable results relative to expected from 2007 through 2016, and, as of the time of this publication (even with Harvey and Irma), that favorable experience is more than 24 points of performance lift. The five year retrospective comparing catastrophe experience to modeled expectation is favorable for much of the country. States on the eastern slopes of the Rockies into the plains (including Colorado, Nebraska and Montana) experienced pain primarily from hail-driven losses in several of the last five years. Texas is an interesting case study because the lull in hurricane activity drives overall favorable experience overwhelming thunderstorm losses that contributed to a five-point drag on the loss ratio. The five-year averages reflect the period from 2012 to 2016. Across the country, the first two quarters of 2017 experienced the highest thunderstorm-loss levels since 2011, and the third quarter included multiple major landfalling hurricanes. Taken together, this should partially erode the favorable experience of the previous five years. The percentages in the map above show the direct target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and non-catastrophe risk. The targets are for a sample of nationwide companies only and will vary among individual companies because of state distribution of premiums, capital adequacy standards, target return on capital, allocation methodologies, reinsurance and other considerations. For a diversified insurer with a footprint similar to the industry, the target combined ratios fall into three main categories: (1) Florida, (2) other hurricane exposed states and (3) states not materially exposed to hurricanes. The map above shows average approved rate changes filed between January 2016 and August 2017 for the top 20 homeowners groups by state that made a filing in the period. Rate activity, while still positive, continues the slowdown observed in last year’s study. Notable decreases came from at least one large industry carrier, suggesting potential divergence in pricing levels that the averages fail to reflect. Rate changes on the coast, including Florida and Texas, ticked up significantly versus observations from last year. For Florida, in particular, rate activity was likely insufficient to on-level for assignment of benefits and claims adjustment issues facing the state’s carriers. See also: How to Drive More Quotes   Homeowners as a growth engine continues to be the headline for the insurance industry through 2016; the line has outpaced GDP and most other underwriting segments since 2010. Direct written premiums increased from $71 billion in 2010 to $91 billion in 2016, with a projected $93 billion for 2017 given prospective rate activity. A strong component of growth through 2015 was the emphasis on rate adequacy with indicated rate levels increasing over 30% since 2010. Policyholders changing carriers will prevent the industry from realizing the full aggregate benefit of the individual carriers’ rate actions. The “S” shape of the rate change curve suggests the line should be watched carefully. The rate activity through 2015 is now fully earned, and rates since 2015 show more modest increases. Time will tell if rate increases around 2% will be sufficient to track loss and expense inflationary pressures. Our study suggests that, at prospective 2018 rates and before income taxes, insurers keep slightly more than four cents of profit for every premium dollar they earn. The four cents of direct profit is shared between the primary carrier, reinsurance partners and the U.S. Treasury. The full report is available here.

Have you noticed that big opioid pharma (BOP), manufacturers and distributors of prescription opioids are under attack? I have. In fact, I've written about it for awhile. You can read “Suing Big Opioid Pharma - The Next Big Thing?” from 3/13/17, “780,069,272 Pain Pills” from 12/20/16, “Suing Big Opioid Pharma” from 9/27/16 and “Patients Sue Physicians' and Pharmacists” from 5/22/15. As I've followed the strategic initiative, it reminds me of big tobacco. As a refresher, it was accused (informally, at first, and then collectively, over time) of knowing that tobacco was dangerous and addictive but kept it a secret. In November 1998, attorney generals from 46 states entered into the Tobacco Master Settlement Agreement (MSA) with the four major tobacco companies:

The states settled their Medicaid lawsuits against the tobacco industry for recovery of their tobacco-related health-care costs, and also exempted the companies from private tort liability regarding harm caused by tobacco use. In exchange, the companies agreed to curtail or cease certain tobacco marketing practices, as well as to pay, in perpetuity, various annual payments to the states to compensate them for some of the medical costs of caring for persons with smoking-related illnesses. In the MSA, the original participating manufacturers (OPM) agreed to pay a minimum of $206 billion over the first 25 years of the agreement.

See also: Misconception That Leads to Opioids   Throughout 2017, I have saved every article I read on the subject of the opiod problem (see below). You are more than welcome to read the entire article, but I think the date (constant throughout the year), source (wide variety of publications) and headline (provocative and descriptive) provide a sweeping perspective on the scope of this activity:

• Bloomberg Technology, 10/13/17, “Teamsters Push to Strip Cardinal Health CEO of Chairman's Role”
• Vox, 10/11/17, “Sen. Claire McCaskill on the opioid epidemic: pharma ‘ought to begin looking over their shoulder’”
• STAT, 10/10/17, “A veteran New York litigator is taking on opioid makers. They have a history”
• NorthJersey.com, 10/5/17, “N.J. sues opioid drugmaker Insys over its role in deadly epidemic”
• Bloomberg Businessweek, 10/5/17, “The Lawyer Who Beat Big Tobacco Takes On the Opioid Industry” (the subtitle is helpful for context: “Mike Moore made cigarette companies pay for the high cost of treating smokers. Here he comes again.”)
• The Nation, 10/3/17, “Fighting the Opioid Epidemic by Targeting Big Pharma’s Bottom Line”
• NBC News, 9/28/17, “Washington State Sues OxyContin Maker Purdue Pharma”
• Fortune, 9/27/17, “Big Pharma Is Getting Hit With a Huge Wave of Opioid Suits”
• Cision PR Newswire, 9/22/17, “Kentucky Attorney General Taps Morgan & Morgan to Lead Opioid Litigation”
• Chicago Tribune, 9/19/17, “States expand investigation of opioid makers, distributors” (subtitle: “The investigation into marketing and sales practices seeks to find out whether the industry's own actions worsened the epidemic”)
• AP News, 9/19/17, “States expand investigation of opioid makers, distributors”
• Portland (ME) Press Herald, 9/18/17, “Portland joins nationwide lawsuit against opioid manufacturers”
• WNEP-TV (Moosic PA), 9/15/17, “Taking the Opioid Crisis to Court”
• New Mexico Office of the Attorney General, 9/7/17, “Attorney General Balderas Files Lawsuit Against Opioid Manufacturers and Distributors for Fueling the Opioid Epidemic that is Crippling New Mexico”
• STAT, 9/6/17, “Insys ignored warnings about marketing powerful opioid Subsys”
• WorkersCompensation.com, 8/21/17, “IL AG Reaches $4.5 Million Settlement With Drugmaker Insys For Deceptively Selling & Marketing Highly Addictive Opioid Painkiller”
• CLM Magazine, 8/18/17, “America on Opioids: As the epidemic continues, the legal landscape for manufacturers and distributors unfolds”
• WCI360, 8/16/17, “Drug Co. to Pay IL Millions in Opioid Marketing Lawsuit”
• WorkCompCentral, 8/16/17, “Another State (South Carolina) Sues Purdue Pharma Over Opioid Claims” (subscription required)
• The Washington Post, 8/10/17, “This is why I’m (Ohio Attorney General) suing five opioid manufacturers in my state”
• The Cannabist, 8/9/17, “New Hampshire sues OxyContin manufacturer for role in opioid crisis” (Yep, the marijuana industry is paying attention.)
• Vox, 8/9/17, “US officials are starting to treat opioid companies like Big Tobacco — and suing them”
• Oregon Live, 8/7/17, “Fed up with opioid deaths, Multnomah County sues drug makers for $250 million”
• The Wall Street Journal, 7/23/17, “Lawyers Hope to Do to Opioid Makers What They Did to Big Tobacco” (subscription required)
• The Globe and Mail (Canada), 7/19/17, “Ottawa urged to prosecute Purdue Pharma over marketing of OxyContin”
• Business Insider, 7/12/17, “It's been a brutal week for the most shameless company (Insys Therapeutics, maker of Subsys) in the opioid crisis — and it's about to get worse”
• Reuters, 7/11/17, “Mallinckrodt settles U.S. opioid drug probe for $35 mln”
• Fortune, 7/10/17, “Big McKesson Shareholder, Governance Experts Say the Opioid Crisis Should Have Cost the CEO Some Bonus Pay”
• The Onion, 7/10/17, “OxyContin Maker Criticized For New ‘It Gets You High’ Campaign” (The best satire always includes a grain of truth.)
• Insurance Journal, 7/10/17, “Illinois County Sues Opioid Makers”
• WorkersCompensation.com, 7/6/17, “Opioid Litigation and Workers' Compensation”
• The Washington Post, 7/4/17, “Drugmakers and distributors face barrage of lawsuits over opioid epidemic”
• Fox News 23 (Tulsa), 6/30/17, “Oklahoma AG sues drug manufacturers over opioid addiction”
• NJ.com, 6/23/17, “N.J. joins multi-state probe of drugmakers over opioids, report says”
• The Wall Street Journal, 6/21/17, “Missouri Files Its Own Suit Against Opioid-Painkiller Producers” (subscription required)
• AJC.com, 6/19/17, “Georgia AG joins nationwide probe of opioid marketing”
• The Wall Street Journal, 6/14/17, “States Launch Bipartisan Probe of Opioid Marketing and Addiction” (subscription required)
• Business Facilities (Topeka), 6/9/17, “Drug Kingpins”
• Reuters, 6/2/17, “U.S. state, local government lawsuits over opioids face uphill battle”
• Fortune, 5/15/17, “New York County Sues Purdue Pharma and Johnson & Johnson Over Opioid Marketing”
• The Globe and Mail (Canada), 5/1/17, “Purdue Pharma agrees to settle OxyContin class-action suit”
• NPR, 4/25/17, “Cherokee Nation Sues Wal-Mart, CVS, Walgreens Over Tribal Opioid Crisis”
• AlterNet, 3/16/17, “Going After the Opioid Profiteers”
• CNN, 3/13/17, “Lawsuit alleges that NFL teams gave painkillers recklessly”
• HuffPost, 3/7/17, “Taking Aim At The Opioid Industry”
• Managed Care Matters, 2/23/17, “Who’s going to pay for the Opioid Crisis?”
• Los Angeles Times, 1/19/17, “City devastated by OxyContin use sues Purdue Pharma, claims drugmaker put profits over citizens' welfare”
• WorkCompCentral, 7/14/16, “(Work) Comp Should Sue Purdue” - (From the author: “And it IS fraud! Knowingly concealing information that causes harm and damage to others is just as bad as misrepresentation.”)

The full scope of the opiod crises includes an investigation by Congress; lawsuits by individual states, counties and cities around the country (and in Canada); collaboration among attorney generals; and class action lawsuits. (And maybe others). The initiation of most of this action is not academic, it is personal. Take Mike Moore, the former Mississippi attorney general who was the first to sue Big Tobacco using a then-unproven legal strategy. His nephew started with Percocet as prescribed by a doctor in 2006. By 2010, he was using street fentanyl. Moore saved his nephew from an overdose by taking him directly to the hospital.

As he’s watched the tobacco victory pay off in declining smoking rates, he’s also seen easy access to powerful pain medication spark a new deadly crisis. He’s convinced this is the moment to work the same mechanisms on the drug companies that forced the tobacco industry to heel — and he’s committed himself to making that happen. “It’s clear they’re not going to be part of the solution unless we drag them to the table.”

The primary argument against BOP is the same as the one against Big Tobacco. BOP knew the dangers of their product, but they misled consumers (in this case, prescribers) by purposefully obfuscating the truth. See also: Opioids: Invading the Workplace   If you look at the evidence (anecdotal and factual), it appears as though there was a strategic effort to hide the truth. Of course, all of this in large part is still alleged — not proven in a court of law — and BOP will have an opportunity to make their arguments. Except... In May, Purdue Pharma settled a class-action lawsuit in Canada for $20 million. But of course, settlements always include the language “no admission of guilt.” As I stated in a post:

$20 million (or 0.064% of OxyContin revenue) to settle? This is a rounding error for Purdue Pharma. But not to those who became dependent/addicted and lost anything from an active lifestyle to life itself. Fair and equitable? That was a rhetorical question — I don't believe it is either fair or equitable. Not so much the dollar amount, but the fact that it will not hurt Purdue at all in the pocketbook. If the goal of a lawsuit is to change behavior because it's too painful not to, then this probably didn't hit the mark.

Whether you believe the opioid epidemic is real or not (I do), or whether you think at least some of the deaths from illicit street heroin and fentanyl are a consequence of over-prescribing prescription opioids (I do), I think we can all agree it's wrong for a company to tell its customers there is no danger when there really is (and when the company knows it). In this case, it can be deadly. So if BOP wants to know where this is heading, they just need to refresh their memories about what happened with Big Tobacco. What happened then is about to happen again.

I have been fascinated hearing my futurist colleagues talk about the subject of minimalism as an emerging trend. While not new, the practice of deliberately ridding one’s self of things that do not add real value to life is apparently gaining traction for a variety of reasons that point to the need to understand it better. Just the fact that I was fascinated by it suggests that I may be a minimalist myself and not even know it. I read an article by Courtney Carver called, “25 Reasons Why You Might Be A Minimalist,” and I saw myself in about 18 of them. The one that made me chuckle the most is, “If you can’t stop giving stuff away, and your dog is afraid he might be next, you may be a minimalist.” I don’t have a dog, which is another sign, but my husband expressed a similar concern to me last year after I spent my entire summer sabbatical finding ways to reduce the amount of stuff in our lives; he wanted to make sure he was not on the list. Minimalism, which might sound like a religion or cult, is sometimes described as having fewer than 100 things in your life. However, it is more of a mindset than it is about strict rules. For example, Steve Martin’s character in the 1979 movie “The Jerk” had a memorable scene where he was running away from home and said, “I don’t need anything. Except this.” (He picks up an ashtray). Then he gradually picks up several other items and says, “The ashtray, this paddle game and the remote control,” etc. etc. until he is laden with stuff that was actually useless, but to him was important. See also: Innovation: ‘Where Do We Start?’   So, what does minimalism have to do with innovation? Everything. If you are in an industry that intersects with people’s stuff. Let’s see, that would be insurance, investments, banking, real estate, education, entertainment, food, packaged goods, appliances, furniture, clothing, media, pets…what isn't included? When an emerging trend intersects with your business and there is a potential new need that your capability can fulfill, that’s called innovation “white space.” New growth opportunities are generally not obvious, so to find them we must triangulate emerging trends/drivers of change with basic human needs that never change, plus the current and potential capabilities of the company. This is the fuzziest of the fuzzy front end of innovation. To get a better idea about how this is done, do this exercise: Pick a trend, such as minimalism and:

1. Choose a human need, such as the need for freedom, stability, simplicity or control (refer to MD Trend Framework Wheel).
2. Brainstorm many possible future states around how the trend and the need would potentially affect the core of your business competency or provide opportunity.

Here is an example for four different industries. If you cross:

1. Real Estate: With the need for simplicity, you may imagine that more people in the future may live in tiny homes. If tiny homes are not considered real estate, how would that future hurt you or provide opportunity?
2. Insurance: With the need for control, you may imagine that people might scrutinize the value of insurance from every direction and expect ultimate transparency. How do products and experiences stack up?
3. Banking: With the need for stability, you may imagine that more people in the future may pay off their debt faster than they are required to. How does that change your business model?
4. Education: With the need for freedom, you might imagine that fewer students opt for higher, specialized degrees and instead want real-world experience. If your institution relies on the predictable growth of the student body, how will you lean in?

These are just a few examples. You certainly could, however, imagine many more permutations, combinations and scenarios. So how do you know which ones to bet on? While nothing is guaranteed, there are ways to de-risk your choices through the application of different types of research, understanding what your organization will support and developing your team’s consumer-focused insight and design skills. See also: Can Insurance Innovate?   If you would like to learn more about this topic and how to de-risk the process, please register to attend, or receive the replay of, a WebEx hosted by LOMA and sponsored by LexisNexis Risk Solutions. In the meantime, clean out your closet and see how it makes you feel!

Solution providers are quickly advancing innovative approaches to the next generation of emerging technologies that are affecting both insurers and policyholders. SMA has acquired a unique historical view of how solution providers are innovating within insurance through our annual SMA Innovation in Action Awards – and we have seen how it has changed over the six years of the program. The two winners of this year’s SMA Innovation in Action Awards for Solution Providers are excellent examples of how the use of technology like telematics and artificial intelligence (AI) is maturing in the insurance industry. TrueMotion’s smartphone usage-based insurance (UBI) product combines mobile technology, machine learning and data science to help insurers better understand and mitigate risk, acquire more profitable customers and increase customer loyalty as well as giving individual users feedback on their driving habits. TrueMotion’s solution illustrates how solution providers are expanding the possibilities of existing technologies. Telematics is firmly established as an insurance technology and continues to spread from personal to commercial lines of business. TrueMotion’s innovation lies in the refinements it has made and how it is using telematics, sensors and mobile technology to effect measurable improvements to drivers’ behavior. Not only does TrueMotion use the sensors in a user’s own smartphone in place of an on-board device (OBD), the company can determine when a driver is actually behind the wheel based on the position of his phone. This solves a weakness in OBD-based telematics: how to link good or bad driving habits to a specific driver rather than a specific vehicle, while still excluding trips that driver makes as a passenger. See also: Strategist’s Guide to Artificial Intelligence   The sophistication in data collection and the advanced analytics on the back end allow TrueMotion to give drivers immediate feedback for more effective behavioral modification. TrueMotion also takes an innovative approach in monitoring how the user interacts with her phone while driving, allowing for real-time alerts if distracted driving reaches dangerous levels. Solution providers are also moving beyond emerging technologies in the physical domain, like connected vehicles and drones, to those of the virtual realm, like artificial intelligence, cognitive computing and blockchain. These technologies have been slower to gain a foothold in the insurance world, partly due to a slower development timeline and because their insurance applications were still to be determined. That is already changing. Today, interest in artificial intelligence and machine learning, in particular, has skyrocketed. Intellect SEEC’s Intellect Risk Analyst is an AI-based risk discovery and assessment software for the commercial insurance industry. It aggregates data from more than,800 structured and unstructured data sources and applies rules set up by the underwriter. Machine learning analyzes the resulting underwriting decisions and refines its data aggregation and analysis capabilities in response. This solution gives insurers an accessible way to apply big data and AI to their existing transactional processing – in this case, underwriting. Integrating big data with advanced AI technologies gives underwriters access to new information and insights on the proposed risk. These new insights for risk assessment and pricing, together with the continuous improvement of data aggregation with machine learning, are powerful assets for underwriting. See also: It’s Rush Hour in Telematics Market   In these continually changing times, it becomes critical for all members of the insurance ecosystem to collaborate on new ways of doing business. Technologies that are focused on improving risk and harnessing the power of AI and machine learning, for example, showcase how resources and technology are interacting to change the insurance landscape. Innovation is flourishing across the insurance industry, and there are still great opportunities ahead. As solution providers continue to grow their use of advanced technologies into new territory, the potential value of their partnership increases for insurers. We expect to see solution providers’ innovations play a key role in the transformation of the insurance ecosystem.