When dawn broke on the morning of Sept. 8, 1900, the people of Galveston, Texas, had no inkling of the disaster that was about to befall them. The thickening clouds and rising surf hinted that a storm was on the way, but few were worried. The local Weather Bureau office, for its part, gave no reason to worry; no urgent warnings were issued, and no calls were made to evacuate. But by late afternoon it became clear that this was no ordinary storm. Hurricane-force winds of more than 100 mph were soon raking the city, driving a massive storm surge that devoured almost everything in its path. Many tried to flee, but it was too late. By the next day, more than 8,000 people were dead, the greatest loss of life from a natural disaster in U.S. history. Fast-forward to September 2008 when Hurricane Ike threatened the same part of the Texas coast — but this time it was greeted by a well-informed populace. Ike had been under constant surveillance by satellites, aircraft reconnaissance and land-based radar for more than a week, with the media blasting a nonstop cacophony of reports and warnings, urging those in coastal areas to leave. The city of Galveston was also well-prepared: A 17-foot-high seawall that had been constructed after the 1900 storm stood ready to protect the city, and government-flood insurance policies were available to residents who were at risk of property loss. Unlike in 1900, Texas residents really should have had little reason to fear. On their side was a century of advances in meteorology, engineering and economics designed to ensure that Ike would, indeed, pass as a forgettable summer storm. See also: 5 Techniques for Managing a Disaster   It didn’t quite work out that way. Warnings were issued, but many in low-lying coastal communities ignored them — even when told that failing to heed the warnings meant they faced death. Galveston’s aging seawall turned out to be vulnerable; it was breached in multiple places, damaging roughly 80% of the homes and businesses in the city. The resort communities to the north on the Bolivar Peninsula, which never saw the need for a seawall, fared even worse, witnessing almost complete destruction. And among the thousands of homeowners who suffered flood losses, only 39% had seen fit to purchase flood insurance. In the end, Ike caused more than $14 billion in property damage and 100 deaths — almost all of it needless. Why are we underprepared for disasters? The gap between protective technology and protective action illustrated by the losses in Hurricane Ike is, of course, hardly limited to Galveston or to hurricanes. While our ability to foresee and protect against natural catastrophes has increased dramatically over the course of the past century, it has done little to reduce material losses from such events. Rather than seeing decreases in damage and fatalities because of the aid of science, we’ve instead seen the worldwide economic cost and impact on people’s lives as hazards increased exponentially through the early 21st century, with five of the 10 costliest natural disasters in history with respect to property damage occurring since 2005. While scientific and technological advances have allowed deaths to decrease on average, horrific calamities still occur, as in the case of the 230,000 people estimated to have lost their lives in the 2004 Indian Ocean earthquake and tsunami; the 87,000 who died in the 2008 Sichuan earthquake in China; the 160,000 who lost their lives in Haiti from an earthquake in 2010; and the 8,000 fatalities that occurred in the 2015 Nepalese earthquake. Even in the U.S., Hurricane Katrina in 2005 caused more than 1,800 fatalities, making it the third-most deadly such storm in U.S. history. In our book “The Ostrich Paradox,” we explore six reasons that individuals, communities and institutions often under-invest in protection against low-probability, high-consequence events. They are:

1. Myopia: a tendency to focus on overly short future time horizons when appraising immediate costs and the potential benefits of protective investments;
2. Amnesia: a tendency to forget too quickly the lessons of past disasters;
3. Optimism: a tendency to underestimate the likelihood that losses will occur from future hazards;
4. Inertia: a tendency to maintain the status quo or adopt a default option when there is uncertainty about the potential benefits of investing in alternative protective measures;
5. Simplification: a tendency to selectively attend to only a subset of the relevant factors to consider when making choices involving risk; and
6. Herding: a tendency to base choices on the observed actions of others.

See also: Are You Ready for the Next Disaster? We need to recognize that, when making decisions, our biases are part of our cognitive DNA. While we may not be able to alter our cognitive wiring, we may be able to improve preparedness by recognizing these specific biases and designing strategies that anticipate them. Adapted from The Ostrich Paradox: Why We Underprepare for Disasters, by Robert Meyer and Howard Kunreuther, copyright 2017. Reprinted by permission of Wharton Digital Press.

In the early ’60s, Roger Maris and Mickey Mantle hit a remarkable number of home runs — including famous, back-to-back four-baggers that, according to Yogi Berra, were the reason he famously quipped, “It’s déjà vu all over again.” While spring training is still a bit away, we’re in the thick of tax season, where legions of scammers are swinging for the back wall. According to the IRS, there was a 400% increase in phishing and malware incidents during the 2016 tax season. With the April 15 filing deadline still feeling as far away as the Green Monster from home plate in Fenway Park, Berra’s other dictum — “It ain’t over till it’s over” — has never been more true. My book, “Swiped: How to Protect Yourself in a World Full of Scammers, Phishers and Identity Thieves,” goes into great detail about the various tactics cyber criminals use to lure you, but the most important thing you can do to keep yourself scam-free this tax season is educate yourself on the most prevalent risks out there. As ever, the best advice is to file your taxes as early as possible. Tax-related identity theft is primarily aimed at grabbing your tax refund, and scammers are creative, sophisticated and persistent and move very quickly once your information is in hand. Armed with your Social Security number, date of birth and a few other pieces of your personally identifiable information, which if you have been involved in a data breach (you can check here to see warning signs and view two of your credit scores for free on Credit.com) is likely available on the Dark Web, people are furiously filing fraudulent tax returns online. See also: Implications for Insurance Taxation?   Here are three scams to bear in mind as the tax season is upon us: 1. Phishing There is no bigger threat than phishing. By now, it is a home truth that there are phishers out there. Catfishing is a regular part of the popular imagination, and phishing emails hit our inboxes with the same regularity as the various promotional emails we get from retailers and media outlets. Phishing emails take many forms, but they are most commonly pointed at getting enough of your personally identifiable information to commit fraud in your name (identity theft). They also commonly contain a link that places malware on your computer. These programs can do a variety of things (none of them good), ranging from recruiting your machine into a bot-net distributed denial-of-service attack; to placing a keystroke recorder on your computer to access bank, credit union, credit card and brokerage accounts; to gathering all the personally identifiable information on your hard drive. Here’s what you need to know: The IRS will never send you an email to initiate any business with you. Did you hear that? NEVER. If you receive an email from the IRS, delete it. End of story. Oh, and the IRS will never initiate contact you by phone, either. That said, there are other sources of email that may have the look and feel of a legitimate communication that are tied to other kinds of tax scams. 2. Criminal tax preparation scams You learned how to do homework in school for this reason: Not all tax preparers are the same, and you must vet anyone you’re thinking about using well before handing over a shred of your personally identifying information. Get at least three references, check online to see if there are any reviews and call them. Here’s why: At this time of the year, tax prep offices that are actually fronts for criminal identity theft tend to pop up around the country in strip malls and other properties and then promptly disappear a few days later. Make sure the one you choose is legit. 3. Shady tax preparation Phishing emails may not be aimed at stealing your personally identifiable information or planting malware on your computer. They simply may be aimed at getting your attention and business through enticing (and fraudulent) offers of a really big tax refund. While these preparers may get you a big refund, it could well be based on false information. Be on the lookout for questions about business expenses that you did not accrue, and especially watch out for signals from your preparer that you are giving him or her a figure that is “too low.” Other soft cons of shady tax preparation include inflated deductions, claiming tax credits to which you are not entitled and declaring charitable donations you did not make. Bottom line here: We’re all connected these days, and chances are you will get caught, so just make sure you are working with someone who follows the instructions. (Yes, they’re complicated, and that’s why it’s not a bad idea to get help.) See also: New Worry on ID Theft: Tax Fraud   As Berra said, “You can observe a lot by watching.” Tax season is stressful even without the threat of tax-related identity theft and other scams. It’s important to be vigilant, because, to quote Berra all over again, “If the world were perfect, it wouldn’t be.” Full disclosure: CyberScout sponsors ThirdCertainty. This story originated as an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

The insurance industry is on a collision course. As in the 1933 science fiction novel "When Worlds Collide," a small number of individuals with insight have recognized this fact and are preparing for a new and different future, while many others are blissfully unaware of the impending danger. Okay, maybe that is a bit dramatic, but the traditional world of insurance is threatened by the rapidly encroaching digital world and insurtech. At SMA, we foresee a convergence of the traditional and the new that will create an updated generation of the industry rather than the disruption (and perhaps destruction) of the industry that some predict. Very few of the new entrants want to go it completely alone when it comes to meeting regulatory and capital requirements, underwriting the risk and managing the end-to-end insurance value chain. Instead, they tend to create value in specific areas that might mesh nicely into areas in need of enhancement at existing insurers. Thus, the emergence of convergence — or the bringing together of the new, innovative companies and capabilities with the traditional elements of established businesses. See also: A Mental Framework for InsurTech What is this convergence likely to look like? And, more importantly, what should insurers do to position themselves for success? If there is a single word that describes how convergence is playing out in the industry, that word is "partnering." One way to look at the partnering opportunities is to combine the best of the old with the best of the new in five key areas.

• Distribution: About 30% of all insurtech startups are, in some way, connected with the distribution space. These companies are born digital; often create an innovative customer experience; and leverage mobile, artificial intelligence, gamification and other technologies. Distribution is a prime area for partnering, and all of these new distribution firms are looking for insurer partners.
• Risk: The rapidly expanding availability of data on perils (especially real-time data) offers new possibilities for improved risk selection and pricing. New predictive models and scores; more location-based data with greater levels of precision; and new real-time behavioral data all create differentiating opportunities for insurers. Much of this new capability is available through firms that could be great partners.
• Product: Innovation is the name of the game with products. There are many insurtech firms that are creating ideas for micro-insurance, usage-based insurance, behavior-based insurance and parametric insurance. Many innovators are seeking insurers with underwriting capacity and a solid distribution network.
• Customer service: New options are emerging for areas such as billing, claims and other areas related to customer service. New and emerging technologies are especially relevant here, with drones, blockchain, mobile payments, AI, wearables and other tech creating new options. Many of the insurtech firms have innovative offerings in very specific areas and look for proof-of-concept and piloting opportunities with insurers.
• Operations: Many tech companies — both incumbent and new firms — offer solutions to take operational efficiency to the next level. Robotic process automation and other AI techs lead the way, but other technologies offer improvements, as well. Video streaming and smart glasses for claims can improve claim operations. Again, the companies that are creating these new solutions are eager to partner with insurers.

See also: Why AI Will Transform Insurance The future doesn’t have to be a disaster scenario for the insurance industry. In fact, the potential is here for the industry to reach new levels of profitability and societal impact. Partnering to leverage emerging technologies, new business models, innovative products and new ways to reach customers can result in the best of both worlds for everyone, delivering new value to customers and growth for the industry.

Small- to medium-sized insurers that want to remain relevant should heed the call of innovation. There has been a lot of press lately about how innovation can help insurers overcome growth obstacles. It’s no secret that the insurtech startups of the world, for which digital innovation is the hallmark, are garnering the attention — and funding — of venture capitalists and larger carriers, but how is that innovation affecting small- to medium-sized (SMB) insurers? In some ways, SMB insurers are vulnerable to a fate like what is being experienced by department stores such as Kmart and JC Penney or the local bookshop, all of which hang on by a thread as the online and big-box retailers take control of the market. Market demographics contribute to this pressure, as emerging generations of customers — with demands for anytime, anywhere digital access to policy, claims and account information — put an additional burden on carriers. It’s no wonder that SMB insurers may feel overwhelmed at the thought of keeping up with the likes of IoT, machine learning, business intelligence or robotic process automation. But many SMB insurers assume (incorrectly) that they don’t have the resources necessary to climb aboard the innovation train. See also: Top 10 Insurtech Trends for 2017   Consider the business culture in which SMB insurers (small mutual insurers, commercial workers’ comp carriers, municipal risk pools, captives and self-insured groups) operate. These carriers work within a known and predictable entity where budgets are firm — often the result of a formalized, collective group mandate. Smaller self-insured pools — such as public entities, under the scrutiny of their not-for-profit, state-controlled state insurance departments — are also frequently held to a more stringent set of business performance and accounting standards and metrics. But, like their larger counterparts across all lines of business, these smaller self-insured pools are expected to be efficient, productive and successful in every aspect of their operations, including core systems (underwriting, billing, claims), financial management and CRM/workflow. Unique Challenges Because of the financial and cultural boundaries under which they operate, many of these insurers — as well as many other types of small insurers — still must rely on Microsoft Office products or cobbled-together, aging, home-grown legacy solutions to support day-to-day business functions. This may mean that a single technology solution provider (or perhaps the insurer’s own, in-house IT staff) is responsible for the health and well-being of the organization’s technology footprint, architecture, back/front office, distribution, networking, communications and security. And, lately, those that rely on outside help for their IT function are faced with confusion and potential service delays as the surge in vendor merger and acquisition results in their trusted partner being gobbled up by a technology behemoth. The service-level agreement (SLA) may remain intact, but the larger vendor will undoubtedly start pressuring the carrier to rethink outdated hardware and software. This pressure, along with the potential drop in personalized service that typically accompanies a large M&A deal, add to the SMB insurers’ challenges to remain competitive. In addition, the talent pipeline is drying up because of a retiring workforce. To replace these workers, what’s the likelihood that SMB insurers will be able to recruit top technology talent to manage an outdated AS/400 linked to a client/server front end? If it sounds like I’m insinuating that smaller insurers should assume a victim mentality, that’s not the case. These carriers play a critical role in risk management, so they need to remain relevant. But these SMB insurers will not be able to overcome innovation-related growth obstacles until they better understand and embrace affordable technology innovation options that will make their jobs a lot easier. The first step is gaining an understanding of what’s possible — such as an affordable pay-as-you-go, as-needed migration of core systems and data to a software-as-a-service (SaaS) hosted environment, a gradual sunsetting of existing hardware and the gradual move to a digital platform that pulls all necessary functionality together for reliable, secure, front- and back-end operations. From there, SMB insurers can implement predictive analytics for use in claims, communications and even cross-selling. Even at a small scale, machine learning and artificial intelligence can help these carriers improve their claims function, customer service capabilities and more. See also: 4 Hot Spots for Innovation in Insurance   Risk-management changes within our marketplace — such as legislative issues, changing (read: younger) demographics, the advent of the sharing economy and the growing presence of disrupters -- will affect all lines of business and all sizes of insurers. The SMB insurers that will remain relevant will be those that hear the wake-up call and understand the path to innovation, that choose a stepped approach to business and technology relevance and that greet the future with an openness to what’s possible.

To sell an idea to stakeholders, buyers and users, we not only have to change what they think but how they think. Without the right mental model, they won’t see the problem, understand the benefits or choose to change. Mental models are like sorting hats; they are how our minds make sense of the world around us, the vast amount of information we process and intuitive perception of our actions and their consequences. They filter the signal from the noise.

For example, consider the mental model: "Life is like chess." If you believe this mental model, you’ll see life as a strategic game with winners and losers following set rules, and you may set the goal of winning. But if your mental model is that "life’s a beach," then you may see life as more fun, with no winners and losers and no rules. You may expect that forces beyond your control like the waves of the ocean can influence you but that you can use them to have fun.

See also: Innovation Happens at the Edge  

Often dubbed as the “Monaco of the East,” Singapore the red dot has beaten a path to steady economic progress and prosperity since the 1970s. Much of the success can be attributed to the vision of one man, Lee Kuan Yew, Singapore’s first prime minister, who reigned for more than 30 years, making him the world’s longest serving prime minister. He was unafraid of challenging popular ideologies. Right up to the end of his life, Lee believed in constantly adapting to the changing realities of the world and refreshing his mental map. He sought the views of experts in industry, academia, politics and journalism. But having processed their arguments, he did not let himself be swayed if he absolutely believed something else was in the best long-term interest of Singapore. I was drawn to his vision and chose to move to Singapore to experience the economic miracle. I have seen first-hand how one man has changed how people think and as a result transformed Singapore from the "third world to the first world in a single generation."

   

See also: How to Master the ABCs of Innovation 

Innovations that change the world need to be explained before they can be accepted. Brands that successfully sell their innovations have been able to change how we think, feel and connect with not only their products but ourselves and the world around us.

One of the most dangerous jobs in America is power-line maintenance. More than 330 people were killed last year due to falls and electrocution while working on power lines, and thousands more were injured. Now one energy company is employing sophisticated drones to monitor power lines, allowing workers to trade the sometimes-scary task of climbing way up a swaying tower in possibly lousy weather to check out a junction for a ground-based drone control and monitoring job. According to an AES exec: “We find that using drones, we can reduce the number of hazardous hours that it takes to do certain types of maintenance. And we can also enhance the efficiency of the business.” And AES is not just focused on aerial drones to reduce occupational risks. It recently announced a program seeking unmanned methods of evaluating energy production and transmission equipment. The risk here is intense heat; when something goes awry, it often takes considerable time for the site to cool down enough for a human to enter and figure out what’s happened. AES is looking for ways to use “unmanned technology” to get in quickly, assess the problem and fix it. See also: What Is the Future for Drones?   Measure is the company working with AES; Measure is deep into multiple ways to use drones in heavy industry. For example:

• shipboard workers using drones to check on container stability, possible fuel leaks, wiring and hoses
• firefighters using drones' heat-mapping capabilities to identify hotspots, vulnerable areas and trapped people
• tower workers using drones to keep nesting birds at bay

What does this mean for you? Fewer accidents, lower risks for workers, reduced workers' comp premiums.  And this is just the start.

The Japanese firm Fukokui Mutual Life Insurance has replaced more than 30 office workers with artificial intelligence (AI), in this case the famed IBM Watson. Watson, or one of its doubles, is in fact affecting nearly all industries in multiple ways. Eliminating workers is a major goal. But could Watson replace workers in workers’ comp? AI has been around for decades, but now with advanced technology it has fully caught on, and its applications are widely varied. AI is what drives driverless vehicles and operates machinery sans human involvement. More practically, AI enhances worker productivity, accuracy and efficiency. But AI should never reach workers’ comp if more pragmatic, technology-based strategies are implemented now. Replacing workers’ comp professionals with Watson is not feasible at this point or, I hope, ever. Yet, it is a wake-up call to the industry. See also: 10 Questions That Reveal AI’s Limits   Imagine injured workers navigating the workers’ comp system without claims adjusters and medical case managers. Picture Watson managing claims. It could make payments without difficulty and even review the bills effectively. Watson could also determine which claims are the most challenging and refer them to medical case management. Stop there! Envisioning Watson as medical case manager is a real stretch. Human interaction is central to effective medical case management. Likewise, Watson delivering claim management services without dialogue with the claimant would be spotty and unpleasant at best. Accuracy and efficiency under Watson management could be nearly perfect, but claim adjusting relies heavily on human interaction. Injured workers managed by Watson would feel victimized in a heartless system. The only recourse would be to litigate. Watson might have trouble with that. While replacing professionals with technology like Watson is going too far, it should prompt workers’ comp payers to engage current technology to improve processes and outcomes—just to keep up. Clearly, the momentum in every industry is more technology to gain efficiency, and workers’ comp cannot afford to lag. To stay in the game, technology designed to assist workers with task-relevant knowledge and decision support that makes them more accurate, more efficient and, yes, smarter is crucial. Watson will replace health insurance industry administrative workers fairly easily. Essentially, bills are paid if they match the benefit plan and the treating doctor is in the PPO. However, the workers’ comp industry is very different from general health and much more complex. The question is how can the workers’ comp industry optimize efficiency and productivity without discarding its professionals and alienating injured workers? The answer is to apply currently available predictive analytics technology to make WC professionals smarter, more accurate and highly efficient. Of course, that also spells profitability for the organization. Apply predictive analytics to understand historic data and the cost drivers inherent in it. Monitor the data continuously to identify risk conditions as they occur. Create apps that inform claims reps of conditions and events in claims that need attention in real time so action is taken early. Assist claims reps by providing information for decision support such as the probable ultimate medical reserve amount for a claim. Time and effort are saved, while accuracy and efficiency are gained. Rather than labor with decisions such as adjusting reserves, you can present a timely and accurate projection, optimizing efficiency. See also: Next Big Thing: Robotic Process Automation   Similarly, relevant information should be available for medical case managers so they can avoid searching for claim information and status. Timely alerts and shared information promote collaboration and integration of efforts between claims and case management decision-makers in the organization. Watson is thwarted.

“The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative.” ― Peter Thiel, Zero to One Whether we’re talking about telematics, artificial intelligence (AI), digital distribution or peer-to-peer, investing in insurance-related technology (commonly termed "insuretech" or "insurtech") is no longer considered boring. In fact, insurtech is one of the hottest investable segments in the market. As a 20-plus-year veteran in insurance, I find it surreal that insurance has become this hip. Twenty years ago, I gulped as I sent an email to the CFO of my company, where I proposed that there was a unique opportunity in renters insurance. That particular email was ignored. Today, that idea is worth millions of dollars. What changed? Insurance seems to be the latest in a string of industries caught in the crosshairs on venture capital. With the success of Uber and AirBnB, VCs are now looking for the next stale industry to disrupt, and the insurance industry carries the reputation of being about as stale as they come. The VCs view the needless paperwork, cumbersome purchasing processes, dramatic claims settlement and overall old-school look and feel of the industry and think they can siphon those trillions of dollars of premium over to Silicon Valley. It seems like a reasonable thesis. The problem is, it’s not going to happen that way. Insurance will NOT be disrupted. While insurance looks old and antiquated on the exterior, it is actually quite modern and vibrant on the interior. The insurance industry is actually the Uncle Drew of businesses; it’s just getting warmed up! The Model Much of the reason I think VCs are unaware of their doomed quest for insurance disruption is that they are looking at the market from a premium standpoint and envisioning being able to capture large chunks of it. $5 trillion is a lot of money. Without an appropriate model, an outsider coming into insurance can naively think they can capture even a fraction of this. But premium is strongly tied to losses. Those premium dollars are accounted for in future claims. I once had a VC ask me what the fastest way to $100 million in revenue was. The answer is easy, “slash the premium.” I had to quickly follow up with, “and be prepared to be go insolvent, as there is no digging yourself out of that hole.” He didn’t quite get it, until I walked him through what happens to a dollar of premium as it enters the system. And it was this that became the basis of the model I use to assess new product formation and insurtech startups. There are four basic components to my model. Regardless of new entrants, new products or new sources of capital, these four components remain everpresent in any insurance business model. Even if a disruptive force was able to penetrate the industry veil, that force would still need to reflect its value proposition within my four components. Component 1 – EXPOSURE This is the component that deals with insurance claims: past, present and future. Companies or products looking to capture value here must be able to reduce, prevent, quantify or economically transfer current or new risks or losses. Subcomponents in this category include expenses arising from fraud and the adjustment of claims, both of which can add substantially to overall losses. See also: Insurance Coverage Porn   Startups such as Nest are building products that increase home security by decreasing the likelihood of burglary (or increasing the likelihood of capturing the criminals on video) and thus reduce claims associated with burglary or theft. Part of assessing the value proposition of Nest is to first understand the magnitude of the claims associated with burglary and theft and then quantify what relief this product could provide (along with how that relief should be shared among stakeholders). Another company that is doing some interesting things in this model component is Livegenic (disclaimer: I have become friends with the team). Livegenic allows insurers to adjust claims and capture video and imagery using the mobile phone of the insured. This reduces the expenses associated with having to send an adjuster out to each and every claim. Loss adjustment expenses can be in excess of 10% of all claims, so technology that reduces that by a few basis points can be quite valuable to an insurer’s bottom line and ultimately its prices and competitiveness. Component 2 – DISTRIBUTION This component focuses on the expenses associated with getting insurance product into the hands of a customer. Insurtech companies in this space are typically focused on driving down commissions. This can be done by eliminating brokers and going directly to customers. Savings can also be achieved by creating efficient marketplace portals that allow customers to easily buy coverage. Embroker is one of many companies trying to do just that in the small commercial space by creating a fully digital business insurance experience. Companies such as Denim Labs are providing social and mobile marketing services to companies in insurance. And then there is Lemonade, which is developing AI technology that it hopes will reduce the friction of digitally purchasing (its) insurance and making the buying process “delightful.”  Peer-to-peer (P2P) insurance is a fairly new insurtech distribution model that attempts to use the strength of close ties via social methods for friends and close associates to come together to make their own insurance pools. Distribution expenses in insurance are some of the highest in any industry. As with the risk component, reducing expenses in this component by even a few basis points is incredibly valuable. Component 3 – CAPITAL This component focuses on the expenses associated with providing capital or the reinsurance backstop to a risk or portfolio. For many insurers, reinsurance is the largest expense component in the P&L. Capital is such an important component to the business model that the ramifications of it almost always leak into the other components. This was one of my criticisms of  Lemonade recently. Lemonade will have a lot of difficulty executing some of the aspects of its business model simply because it cedes 100% of its business to reinsurers. So, when it comes to pricing or its general underwriting guidelines, its reinsurance expenses will overwhelm other initiatives. Lemonade can’t be the low-cost provider AND a peer-to-peer distributor because its reinsurance expenses will force it to choose one or the other. This is a nuance that many VCs will miss in their evaluation of insurtechs! For those seeking disruption in insurance, we have historical precedent of what that might look like based on the last 20 years of alternative capital flooding into the insurance space. I will devote space to this in future articles, but, in brief, this alternative capital has made reinsurance so inexpensive that smaller reinsurers are facing an existential crisis. Companies such as Nephila Capital and Fermat Capital are the Ubers of insurance. Their ability to connect investors closer to the insurance customer along with their ability to package and securitize tranches of risk have shrunk capital expenses tremendously. Profit margins for reinsurers are collapsing, and new business models are shrinking the insurance stack. It is even possible today to bypass BOTH veritable insurers and reinsurers and put the capital markets in closer contact with customers. (If you are a fan of Michael Lewis and insurance, you will enjoy this article, which ties nicely into this section of the article). In the insurtech space, VCs are actually behind the game. Alternative capital has already disrupted the space, and many of the investments that VCs are making are in the other components I have highlighted. Because of the size of this component, VCs may have already missed most of the huge returns. Component 4 – OPERATIONS The final component is often the one overlooked. Operations includes all of the other expenses not associated with the actual risk, backing the risk or transferring the risk from customer to capital. This component includes regulatory compliance, overhead, IT operations, real estate, product development and staff, just to name a few. It is often overlooked because it is the least connected to actually insuring a risk, but it is vitally important to the health and viability of an insurer. Mistakes here can have major ramifications. Errors in compliance can lead to regulatory problems; errors in IT infrastructure can lead to legacy issues that become very expensive to resolve. I don’t know a single mainstream insurer that does not have a legacy infrastructure that is impinging on its ability to execute its business plan. Companies such as Majesco are building cloud-based insurance platforms seeking to solve that problem. See also: Why AI Will Transform Insurance   It is this component of the business model that allows an insurer to be nimble, to get products to market faster, to outpace its competitors. It’s not a component that necessarily drives financial statements in the short term, but in the long run it can be the friction that grinds everything down to a halt or not. SUMMARY I have presented a simple model that I use when I assess not just new insurtech companies but also new insurance products coming into the market. By breaking the insurance chain into these immutable components, I can estimate what impact the solution proposed will provide. In general, the bigger the impact and the more components a solution touches the more valuable it will be. In future articles, I will use this model to assess the insurtech landscape. I will also use this model to assess how VCs are investing their capital and whether they are scrutinizing the opportunities as well as they should, or just falling prey to the fear of missing out. Originally published at www.insnerds.com,

Risk management is ultimately about creating a culture that would facilitate risk discussion when performing business activities or making any strategic, investment or project decision.

Here are some of the key points that are often missed:

Looking into the past is sometimes the best way of predicting the future. And when it comes to using social media in the insurance industry, past announcements can be highly prescient. For example, if we go back to 2014 when AXA and Facebook announced a strategic partnership, it was commended in the nascent insurtech industry as a milestone moment and was seen as a brilliant, innovative move by industry-observer group SMA. But after 2 1/2 years, what has actually happened? Can customers buy insurance on Facebook yet? Is social media being used to augment underwriting data? Surprisingly, all the resources invested by insurance companies have not led to meaningful innovation in the niche field of using social media in insurance.

Until now.

See also: How to Capture Data Using Social Media  

In this overview, I will present three ways insurers can use social media to everyone’s advantage. 1) Outbound marketing

The most common form of social media use is by far outbound marketing. That makes sense, as 50% of consumers use social media to research their insurance purchase. However, merely posting updates on the latest way to save on your home insurance premiums won't cut through the clutter, which is why Aviva and others use more creative formats. But insurers have not yet absorbed the meaning of “social” in social media, and they often see it as another one-way communication channel. Used effectively, it can make the brand appear more “personal” and relatable, if insurers are interacting with customers on social media — this is easily done by simply posting Facebook updates or tweets. BoughtByMany is a startup trying to change the situation by allowing consumers to come together and group-buy specialized insurance policies. Using outbound marketing enables a company to have more control over who is being targeted in a marketing strategy and ensure that money is being spent effectively to reach them. Insurance companies — especially — can benefit from using different social media channels to advertise their products, as they can target those in certain areas of specific ages or even different income levels. Social media can also greatly help insurers because they can use the public data on an individual’s social media profile and generate insurance quotes in a quick and simple way for the buyer.

2) Fraud prevention

It makes sense for insurers to look through a claimant’s social media channels for signs of fraud — for example, with home, car and disability insurance. In practice, this is very difficult and can lead to PR problems when handled in the wrong way. But because insurers uncover 350 insurance frauds totaling £3.6 million every day, (according to the Association of British Insurers), it is likely that more insurers will do anything they can to avert fraud. If insurance companies are providing quotes for customers by using their social media data, there is no room for buyers to falsely represent themselves in the application, because all data is gathered automatically from their profile once the user has granted access. Using identity verification mechanisms already built into the social media networks is another practical way of reducing fraud, because it creates an extra layer of security for the insurer. 3) Faster and friendlier customer journey

With so many people using various different social media platforms, it makes sense for businesses to adapt. What we are seeing today is many companies implementing a “helpful chatbot” function onto their website. One innovative startup is Spixii.ai, which uses the bots to speed the customer interaction. Businesses using certain social media channels, such as Facebook, are now able to chat directly with the customer, making it appear much more personal. If all our lives are already on social media, why are insurance companies asking so many questions when we buy an insurance policy? Why can't we just connect our Facebook or LinkedIn accounts and autofill at least the quote forms? When being required to fill out long, tedious online insurance forms, some users may not only lose interest but also not be sure on the correct answer, which, in turn, could lead to giving up during the application or receiving a policy that is not right for them. So far, using social data for insurance has not been done, but it represents a massive opportunity to increase online conversions by making life not only easier for the consumer but providing a more accurate and a faster customer experience, as well. See also: 2 Concepts on Social Media and Analytics  

The exponential growth of social media shows no sign of slowing, and, although insurance companies are only beginning to use social media, we are confident of rapid adoption. If social media has already transformed other industries, isn't it only a matter of time before it happens in insurance, too?