Download

To Shape the Future, Write Its History

We need stories to crystallize and internalize concepts and plans. We need shared stories to unite us, and guide us toward a collective future.

Chunka Mui

March 20, 2017

"History will be kind to me, for I intend to write it myself.” — Winston Churchill

When it comes to large-scale innovation, my experience is that history will indeed be kinder if aspiring innovators take the time to write it themselves—but before it actually unfolds, not after.

Every ambitious strategy has multiple dimensions and depends on complex interactions between a host of internal and external factors. Success requires achieving clarity and getting everyone on the same page for the challenging transition to new business and operational models. The best mechanism for doing that is one I have used often, to powerful effect. I call it a “future history.”

Future histories fulfill our human need for narratives. As much as we like to think of ourselves as modern beings, we still have a lot in common with our earliest ancestors gathered around a fire outside a cave. We need stories to crystallize and internalize abstract concepts and plans. We need shared stories to unite us, and guide us toward a collective future. Future histories provide that story for large organizations.

The CEO of a major financial services company occasionally still reads to internal audiences parts of the future histories that I helped him and his management team write in early 2011. He says they helped him get his team focused on the right opportunities. As of this writing, his company’s stock has almost doubled, even though his competitors have had problems.

To create future histories, I have executive teams imagine that they are five years in the future and ask them to write two memos of perhaps 750 to 1,000 words each.

For the first memo, I ask them to imagine that the strategy has failed because of some circumstance or because of resistance from some parts of the organization, investors, customers or other key stakeholder. The memo should explain the failure. The exercise lets people focus on the most critical assumptions and raise issues without being seen as naysayers. T

here is usually no lack of potential problems to consider, including technology developments, employee resistance, customer activities, competitors’ actions, governmental actions, substitute products and so on. Articulating the rationale for failure in a clearly worded memo crystallizes thinking about the most likely issues.

To heighten the effect, I sometimes do some formatting and structure the memo like an article from the Wall Street Journal or New York Times. Adopting a journalist’s voice helps to focus the narrative on the most salient points. And everybody hates the idea of being embarrassed in such publications, so readers of the memo pay attention to the potential problems while there’s still time to address them.

The second memo is the success story. What key elements and events helped the organization shake its complacency? What key strategic or technological shifts helped to capture disruptive opportunities? How did the organization’s unity help it to out-innovate existing players and start-ups?

This part of the exercise encourages war-gaming and helps the executive team understand the milestones on the path to success. Taken together, the future histories provide a new way of thinking about the long-term aspirations of the organization and the challenges facing it.

By producing a chronicle of what could be the major success and most dreaded failures, the organization gains clarity about the levers it needs to pull to succeed and the pitfalls it needs to avoid. Most importantly, by working together to write the future histories, the executive team develops a shared narrative of those potential futures. It forges alignment around the group’s aspirations, critical assumptions and interdependencies. The process of drafting and finalizing the future histories also prompts the team to articulate key questions and open issues. It drives consensus about key next steps and the overall change management road map.

In a few weeks’ time, future histories can transform the contemplated strategy into the entire team’s strategy.

Future histories also facilitate the communication of that shared strategy to the rest of the organization. Oftentimes, senior executives extend the process to more layers of management to flesh out the success and failure scenarios in greater detail and build wider alignment.

Future histories take abstract visions and strategies and make them real, in ways that get people excited. They help people understand how they can contribute—how they must contribute—even if they aren’t directly involved in the innovation initiative. People can understand the timing and see how efforts will build. People can also focus on the enemies that, as a group, they must fend off.

These enemies may no longer be saber-toothed tigers, but they are still very real and dangerous to corporations. “Future histories” unite teams as they face the inevitable challenges.

Chunka Mui

Chunka Mui is the co-author of the best-selling Unleashing the Killer App: Digital Strategies for Market Dominance, which in 2005 the Wall Street Journal named one of the five best books on business and the Internet. He also cowrote Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years and A Brief History of a Perfect Future: Inventing the World We Can Proudly Leave Our Kids by 2050.

Commercial Lines

Innovation Challenge for Commercial Lines

Insurtech also must mean breaking down existing operational silos and building new, streamlined structures.

David Cabral

March 20, 2017

Let’s be realistic. Managing customer requirements is expensive and exhausting with current structures for commercial insurance operations! While insurtech is currently seen as incorporating technology into an organization to produce new products or touch customers in new ways, it also must mean breaking down existing operational silos and building new, streamlined structures. Any reengineering should incorporate strategic innovation and technology to ensure that all parties have aligned objectives to rapidly respond to new opportunities and exit unprofitable ones while improving operational efficiency and controlling costs. Operational Silos – Release the wrecking balls!!!

Commercial insurance companies consist of various operational silos. Unfortunately, over the years, these silos have subsumed the key functions of underwriting and claims and, in effect, are controlling the overall strategy and direction of a company’s risk appetite without substantive feedback from underwriting and claims – the teams that actually interact with customers! There are numerous reasons why these operational silos have been implemented, but a key reason is the inclination to avoid risk. Yes, there is a touch of irony here, as the industry is supposed to be in the business of assuming risk -- but these companies are protecting their balance sheets while attempting to manage increased regulatory requirements. If you are an underwriter or claims manager, climbing over the ice walls in the Game of Thrones must appear easier than dealing with the daily internal operational challenges.

The primary support that operational silos receive means that underwriting and claims team struggle to receive resources and appropriate technology investments to support existing business, improve service and produce innovative, effective and profitable risk management products in an extremely competitive market. See also: How Insurtechs Will Affect Agents in 2017 We are repeatedly informed that insurers spend between 20% and 40% of each dollar/pound/euro of premium on costs of operations and customer acquisition costs, marketing and distribution. I would argue these costs do not factor in costs due to internal frictions -- and they are VERY expensive! Prioritizing operational silos means that internal imbalances affect all areas of the organization:

Product deliverables – Whose team are you actually on? For those who would argue that the structure of commercial insurance companies is not a hindrance to producing business or creating products, I’d like to share a real-life example of how one commercial insurance company saw its market share and resulting profitability significantly reduced due to its own operational silos:

The underwriting teams’ inability to respond quickly to market conditions was driven by a lack of support and priority by the legal and governance departments. The company had no streamlined collaborative protocols between departments to support new product or policy form development, nor was technology used to manage the product development process. Company A’s internal operational silos restricted a path for innovation, reduced long-term value and allowed competitors to reduce Company A’s market share. The company’s poor execution also evidenced the inability to respond quickly to market changes -- brokers and competitors began to challenge Company A's market leadership abilities. Compliance operations – The growing beast The disconnect between regulators and commercial insurance compliance is a pet peeve of mine -- instead of investing in systems that improve compliance by streamlining internal processes, risk identification and risk management, companies have greatly expanded compliance staff numbers over the years and added another silo of operations. This operational expansion slows customer support, increases costs and still contains high levels of inefficiency. Of course I’m aware that compliance is critical, but there are easier and more cost-effective ways to achieve compliance goals and improve regulatory reporting. My team at Artemis Specialty conducted a London market broker survey in 2015 to identify how quickly the market develops products and the quality of service -- the results were depressing. Brokers expressed a growing concern that underwriters were spending as much as 40% of their time on internal and regulatory functions in lieu of servicing business. Further discussions indicated that many commercial insurance companies have inadequate technology in place to support their business. Effective technology will provide underwriting and claims personnel with the required tools to meet corporate underwriting, claims and regulatory guidelines and reduce the number of compliance employees (no, I’m not anti-compliance employee). Additionally, underwriting and claims teams can focus 100% of their time on new and existing customers -- the key reason they are employed! Innovation labs – Another operational silo? A number of commercial insurance entities have created innovation labs, which, at first glance, is an admirable step to introduce disruption -- but it does raise a number of questions:

Will the lab be viewed and managed internally as an additional operational silo?
If the innovation lab is separate from existing operations, how will it challenge the status quo?
Where is the buy-in at all levels of the company? How do you create excitement across the entire organization to participate in innovation experiments?
Can the lab be described as innovation if it is only created to digitize existing legacy products?

Internal disruption is difficult, but M&A is easier? Seriously? Over the past 15 years, it has become glaringly obvious that it is time to develop a new business model for our customers -- they deserve it! So, why is internal disruption difficult? During the last 10 to 20 years, there have been numerous commercial insurance mergers and acquisitions. Companies instill a new corporate identity in to the acquisitions and new employees while integrating legacy systems. If a company is capable of a merger and acquisition, why is it not capable of implementing and managing its own internal disruption to create innovative, efficient and customer-focused environments?

I have restructured numerous departments over the years to refresh the innovation culture, create products, improve efficiencies and increase customer service and satisfaction -- surely this can be replicated throughout an organization and at the corporate level? How many operational meetings have I attended over the years to push for improved internal collaboration, efficiencies and the transformation of the broking, underwriting or claims operations and processes? Why is the response almost always: “It’s too difficult.” See also: 10 Predictions for Insurtech in 2017 Many analysts cheer when companies are acquired or merged, as there is now “scale” and a reduction of costs through layoffs and other efficiencies. I have attended numerous analysts’ calls throughout my career and noted they rarely question M&A technology efficiencies in depth; in fact, it’s rare when technology questions are raised during annual or quarterly financial investor and analyst updates. Will analysts and investors now raise more technology questions due to the increased insurtech enthusiasm and press? I would be a bit more curious about how a company is meeting new technological challenges and its impact on future company profitability.

Existing commercial insurance strategies of top-line growth or releasing underwriting reserves are not sustainable -- nor is it a sustainable strategy to create mass layoffs when the former strategies no longer work. A new commercial insurance model is not about implementing a digital front end to create a smoke-and-mirrors modernization image to support existing products -- nor is it simply about partnering with or acquiring an insurtech company. It’s about breaking down existing operations and rebuilding a collaborative and innovative model to improve operational efficiency, control costs, create innovative products, improve customer engagement experiences and produce sustained profitability. Let’s break down these barriers!

David Cabral

David V. Cabral is the founder and managing director of Artemis Specialty Ltd., a consulting firm that helps clients develop new products, reduce risk, improve operational efficiencies and increase profits.

Risk Management

4 Steps to Integrate Risk Management

Integrating risk management into strategic planning is NOT doing a strategic risk assessment; it is so much more.

Alexei Sidorenko

March 20, 2017

Let me start by saying that integrating risk management into strategic planning is NOT doing a strategic risk assessment or even having a risk conversation at the strategy-setting meeting; it is so much more. Kevin W. Knight, during his first visit to Russia a few years ago, said, "Risk management is a journey… not a destination." Risk practitioners are free to start their integration journey at any process or point in time, but I believe that evaluating strategic objectives at risk can be a good starting point. The evaluation is relatively simple to implement yet has an immediate, significant impact on senior management decision making. Step 1 – Strategic Objectives Decomposition Any kind of risk analysis should start by taking a high-level objective and breaking it down into more tactical, operational key performance indicators (KPIs) and targets. When breaking down any objectives, it is important to follow the McKinsey MECE principle (ME – mutually exclusive, CE – collectively exhaustive) to avoid unnecessary duplication and overlapping. Most of the time, strategic objectives are already broken down into more tactical KPIs and targets by the strategy department or HR, saving the risk manager a lot of time. This breakdown is a critical step to make sure risk managers understand the business logic behind each objective and helps make risk analysis more focused. Important note: While it should be management’s responsibility to identify and assess risks, the business reality in your company may be that sometimes the risk manager should take the responsibility for performing risk assessment on strategic objectives and take the lead. Example: Risk Management Implementation VMZ is an airline engine manufacturing business in Russia. The product line consists of relatively old engines, DV30, which are used for the medium-haul airplanes Airliner 100. The production facility is in Samara, Russia. In 2012, a controlling stake (75%) was bought by an investment company, Aviarus. During the last strategic board meeting, Aviarus decided to maintain the production of the somewhat outdated DV30, although at a reduced volume due to plummeting sales, and, more importantly, to launch a new engine, DV40, for its promising medium-haul aircraft Superliner 300. See also: What Gets Missed in Risk Management The board signed off on a strategic objective to reach an EBT (earnings before tax) of 3,000 million rubles by 2018. Step 2 – Identifying Factors, Associated With Uncertainty Once the strategic objectives have been broken down into more tactical, manageable pieces, risk managers need to use the strategy document, financial model, business plan or the budgeting model to determine key assumptions made by management. Most assumptions are associated with some form of uncertainty and hence require risk analysis. Risk analysis helps to put unrealistic management assumptions under the spotlight. Common criteria for selecting management assumptions for further risk analysis include:

Whether the assumption is associated with high uncertainty.
Whether the assumption impact is properly reflected in the financial model (for example, it makes no sense to assess foreign exchange risk if in the financial model all foreign currency costs are fixed in local currency and a change in currency insignificantly affects the calculation).
Whether the organization has reliable statistics or experts to determine the possible range of values and the possible distribution of values.
Whether there are reliable external sources of information to determine the possible range of values and the possible distribution of values.

For example, a large investment company may have the following risky assumptions: the expected rate of return for different types of investment, an asset sale timeframe, timing and the cost of external financing, rate of expected co-investment, exchange rates and so on. Concurrently, risk managers should perform a classic risk assessment to determine whether all significant risks were captured in the management assumptions analysis. The risk assessment should include a review of existing management and financial reports, industry research, auditors’ reports, insurance and third party inspections and interviews with key employees. By the end of this step, risk managers should have a list of management assumptions. For every management assumption identified, risk managers should work with the process owners and internal auditors and use internal and external information sources to determine the ranges of possible values and their likely distribution shape. Example: Risk Management Implementation (Continued) The assessment would look into: Macroeconomic assumptions

Foreign exchange
Inflation
Interest rates (rubles)
Interest rates (USD)

Materials

DV30 materials
DV40 materials

Debt

Current debt
New debt

Engines sales

New DV30 sales volume
New DV40 sales volume
DV30 repairs volume
DV40 repairs volume
DV30 price
DV40 price

Other expenses

Current equipment and investments in new
Operating personnel
General and administrative costs

Based on the management assumptions, VMZ will significantly increase revenue and profitability by 2018. Expected EBT in 2018 is 3,013 million rubles, which means the strategic objective will be achieved.

We will review what will happen to management projections after the risk analysis is performed in the next section. See also: A New Paradigm for Risk Management? Step 3 – Performing Risk Analysis The next step includes performing a scenario analysis or Monte Carlo simulation to assess the effect of uncertainty on the company’s strategic objectives. Risk modeling may be performed in a dedicated risk model or within the existing financial or budget model. There is a variety of different software options that can be used for risk modeling. All examples in this guide were performed using the Palisade @Risk software package, which extends the basic functionality of MS Excel or MS Project to perform powerful, visual, yet simple risk modeling. When modeling risks, it is critical to consider the correlations between different assumptions. One of the useful tools for an in-depth risk analysis and identification of interdependencies is a bow-tie diagram. Bow-tie diagrams can be done manually or using the Palisade Big Picture software. Such analysis helps to determine the causes and consequences of each risk and improves the modeling of them as well as identifying the correlations between different management assumptions and events. The outcome of risk analysis helps to determine the risk-adjusted probability of achieving strategic objectives and the key risks that may negatively or positively affect the achievement of these strategic objectives. The result is strategy@risk. Example: Risk Management Implementation (Continued)

The risk analysis shows that while the EBT in 2018 is likely to be positive, the probability of achieving or exceeding the strategic objective of 3,000 million rubles is 4.6%. This analysis means:

The risks to achieving the strategy are significant and need to be managed
Strategic objectives may need to change unless most significant risks can be managed effectively

Further analysis shows that the volatility associated with the price of materials and the uncertainty surrounding the on-time delivery of new equipment have the most impact on the strategic objective.

Management should focus on mitigating these and other risks to improve the likelihood of achieving the strategic objective. Tornado diagrams and result distributions will soon replace risk maps and risk profiles as they much better show the impact that risks have on objectives. This simple example shows how management's decision making process will change with the introduction of basic risk modelling. Step 4 – Turning Risk Analysis Into Actions Risk managers should discuss the outcomes of risk analysis with the executive team to see whether the results are reasonable, realistic and actionable. If indeed the results of risk analysis are significant, then management, with help from the risk manager, may need to:

Revise the assumptions used in the strategy.
Consider sharing some of the risk with third parties by using hedging, outsourcing or insurance mechanisms.
Consider reducing risk by adopting alternative approaches for achieving the same objective or implementing appropriate risk control measures.
Accept risk and develop a business continuity/disaster recovery plan to minimize the impact of risks should they eventuate.
Change the strategy altogether (the most likely option in our case)

Based on the risk analysis outcomes, it may be required for the management to review or update the entire strategy or just elements of it. This is one of the reasons why it is highly recommended to perform risk analysis before the strategy is finalized. See also: A Revolution in Risk Management At a later stage, the risk manager should work with the internal auditor to determine whether the risks identified during the risk analysis are in fact controlled and the agreed risk mitigations are implemented. Join our free webinar to find out more (click the link to see available dates and times). Read the full book from which this is adapted. You can download it for free here.

Alexei Sidorenko

Alex Sidorenko has more than 13 years of strategic, innovation, risk and performance management experience across Australia, Russia, Poland and Kazakhstan. In 2014, he was named the risk manager of the year by the Russian Risk Management Association.

Emerging Technologies

What India Can Teach Silicon Valley

Among many other things, the U.S. could follow India's lead in doing away with currency and moving toward a digital economy.

Vivek Wadhwa

March 17, 2017

Silicon Valley fancies itself the global leader in innovation. Its leaders hype technologies such as bitcoin and blockchain, which some claim are the greatest inventions since the internet. They are so complex that only a few mathematicians can understand them, and they require massive computing resources to operate — yet billions of dollars are invested in them. India may have leapfrogged the U.S. technology industry with simple and practical innovations and massive grunt work. It has built a digital infrastructure that will soon process billions more transactions than bitcoin ever has. With this, India will skip two generations of financial technologies and build something as monumental as China’s Great Wall and America’s interstate highways. A decade ago, India had a massive problem: Nearly half its people did not have any form of identification. When you are born in a village without hospitals or government services, you don’t get a birth certificate. If you can’t prove who you are, you can’t open a bank account or get a loan or insurance; you are doomed to be part of the informal economy — whose members live in the shadows and don’t pay taxes. See also: Why to Boost Visas for Foreign Entrepreneurs In 2009, the government launched a massive project, called Aadhar, to solve this problem by providing a digital identity to everyone based on an individual’s fingerprints and retina scans. As of 2016, the program had issued 12-digit identification numbers to 1.1 billion people. This was the largest and most successful IT project in the world and created the foundation for a digital economy. India’s next challenge was to provide everyone with a bank account. Its government sanctioned the opening of 11 institutions called payment banks, which can hold money but don’t do lending. To motivate people to open accounts, it offered free life insurance with them and made them a channel for social-welfare benefits. Within three years, more than 270 million bank accounts were opened, with $10 billion in deposits. And then India launched its Unified Payment Interface (UPI), a way for banks to transfer money directly to one another based on a single identifier, such as the Aadhar number. Take the way that credit-card payments are processed: When you present your card to a store, the cashier verifies your signature and transmits your credit-card information to a billing processor such as Visa, American Express or MasterCard — which works with the sending and receiving banks. The billing processors act as a custodian and clearing house. In return for this service, they charge the merchants a fee of 2% to 3% of the transaction. This is a tax that is indirectly passed on to the customer. With a system such as UPI, the billing processor is eliminated, and transaction costs are close to zero. The mobile phone and a personal identification number take the place of the credit card as the authentication factor. All you do is to download a free app and enter your identification number and bank PIN, and you can instantly transfer money to anyone — regardless of which bank he or she uses. There is no technology barrier to prevent a UPI from working in the U.S. Transfers would happen within seconds, even faster than the 10 minutes that a bitcoin transaction takes. India has just introduced another innovation called India Stack. This is a series of secured and connected systems that allow people to store and share personal data such as addresses, bank statements, medical records, employment records and tax filings, and it enables the digital signing of documents. The user controls what information is shared and with whom, and electronic signature occurs through biometric authentication. Take the example of opening a mobile-phone account. It is cumbersome everywhere, because the telecom carriers need to verify the user’s identity and credit history. In India, it often took days to produce all the documents that the government required. With the new “know-your-customer” procedures that are part of India Stack, all that is needed is a thumb print or retina scan, and an account can be opened within minutes. The same can be done for medical records. Imagine being able to share these with doctors and clinics as necessary. This is surely possible for us in the U.S., but we aren’t doing it because no trusted central authority has stepped up to the task. India Stack will also transform how lending is done. The typical villager currently has no chance of getting a small-business loan, because he or she lacks a credit history and verifiable credentials. Now people can share information from their digital lockers, such as bank statements, utility bill payments and life insurance policies, and loans can be approved almost instantaneously on the basis of verified data. This is a more open system than the credit-scoring services that U.S. businesses use. See also: How to Make Smart Devices More Secure In November, in a move to curb corruption and eliminate counterfeit bills, Indian Prime Minister Narendra Modi shocked the country by announcing the discontinuation of all 500- and 1,000-rupee notes (about $7 and $14) — which account for roughly 86% of all money in circulation. The move disrupted the entire economy, caused pain and suffering, and was widely criticized. Yet it was a bold move that will surely produce long-term benefit, because it will accelerate the push to digital currency and the modernization of the Indian economy. Nobel Prize-winning economist Joseph Stiglitz said at the World Economic Forum meeting in Davos, Switzerland, that the U.S. should follow Modi’s lead in phasing out currency and moving toward a digital economy, because it would have “benefits that outweigh the cost.” Speaking of the inequity and corruption that is becoming an issue in the U.S. and all over the world, he said: “I believe very strongly that countries like the United States could and should move to a digital currency so that you would have the ability to trace this kind of corruption. There are important issues of privacy, cybersecurity, but it would certainly have big advantages.” We are not ready to become a cashless society, but there are many lessons that Silicon Valley and the U.S. can learn from the developing world.

Vivek Wadhwa

Vivek Wadhwa is a fellow at Arthur and Toni Rembe Rock Center for Corporate Governance, Stanford University; director of research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering, Duke University; and distinguished fellow at Singularity University.

Commercial Lines

Don't Miss the Crossover Issues in WC

Crossover issues are not strictly workers' compensation issues -- which is why they are sometimes overlooked. That omission can be costly.

Teddy Snyder

March 17, 2017

March Madness may be the ideal time to remember workers' compensation crossover issues. Crossover issues are not strictly workers' compensation issues -- which is why they are sometimes overlooked. That omission can cost a party money or even lead to a professional malpractice suit. Third-Party Claims Product liability, medical malpractice and negligent roadway design are examples of third-party claims usually unaffected by the exclusive remedy rule. Collisions may give rise to the most common third-party claim. See also: How Should Workers’ Compensation Evolve? SSDI Whether and when to apply for Social Security Disability Income (SSDI) are not simple decisions. Federal law is written to make sure a disabled person does not earn more when not working than the person did on the job. The “80% rule” limits the combined total of SSDI and indemnity payments to an injured worker. This rule principally affects lower-wage earners. Medicare/Medi-Cal Virtually all workers' compensation professionals recognize the need for a Medicare Set-Aside in appropriate cases. Correct self-administration remains a challenge. Additionally, practitioners should be aware that two forms of Medi-Cal currently exist: traditional and expanded. Savvy negotiators can often use these programs to create a safety net to cover the injured worker’s medical expenses as part of a Compromise & Release completely closing the claim. C&Rs drafted without considering Medi-Cal issues could imperil medical care for the injured worker and the injured worker’s entire family. Immigration Undocumented injured workers are eligible for workers' compensation benefits in California. Some undocumented workers have been in their jobs for decades. They remain under the legal radar until a workplace injury occurs. At that point, a false or stolen identity may come to light, creating issues for the injured worker and the employer. The Patriot Act’s provisions about identification required to open a bank account or to send money out of the country can interfere with an injured worker’s decision to choose a Compromise & Release. Tax The tax code provides that money received on account of a physical injury is not taxable. Usually all payments made on a workers' compensation claim arise from a physical injury. However, a number of circumstances could trigger taxation. Also, once an injured worker receives a buy-out, earnings on invested or banked sums are taxable. See also: Five Workers’ Compensation Myths Get Help Workers' compensation professionals should recognize crossover issues, and counsel should alert clients when these issues appear. The next step could be to bring in an expert in that area, provide one or more referrals or advise clients to seek professional advice on their own.

Teddy Snyder

Teddy Snyder mediates workers' compensation cases throughout California through WCMediator.com. An attorney since 1977, she has concentrated on claim settlement for more than 19 years. Her motto is, "Stop fooling around and just settle the case."

IOT

How Smart Is a 'Smart' Home, Really?

My experience shows that the insurance industry can be doing so much more. At a minimum, there is a great opportunity to educate the policyholder.

Karen Furtado

March 17, 2017

During this past year, I built a home in the White Mountains of New Hampshire and determined early on that it would be a “smart home.” Now, I speak about insurtech trends often, so you would think building a smart home would not be difficult. You would be wrong. To truly test the possibilities, I took on the task of configuring and connecting my home myself. And I wanted as much remote detection and control as you could possibly get in a home, such as:

Temperature control
Moisture/humidity detection
Motion detection
Smoke and carbon monoxide detection
Lighting controls
Door locking controls
Remote answering doorbell

I was already familiar with a number of great technologies in the market, but I found interoperability to be low. Some work with hub-type connections, where multiple devices are all controlled through a single source; others are elegant at the service they perform but are closed technologies that could not interoperate with other technologies, leaving me to manage the home using multiple apps. Add the fact that each technology is changing rapidly. No matter which path you take, you will have to stay on top of the changes. That is the challenging world of IoT. It's a work in progress. See also: Home Is Where the (Smart) Hub Is My experience shows that the insurance industry can be doing so much more. At a minimum, there is a great opportunity to educate the policyholder. Very few insurer websites deal with connected homes. Policyholders are hearing and seeing more about these devices – and it is all about the technology. Many people are really pursuing the capabilities that a connected home device can provide. They are installing remote locks to make it easier to get into the home while balancing two kids and groceries. They are coming home from work and want the lights on before they arrive. To be sure, this desire-to-be-connected revolution is more focused on the convenience aspects and what it can do for the policyholder than all of the safety aspects combined. But therein lies the benefit for insurers! The greater the adoption of these platforms and technologies, the greater the opportunity to truly prevent and mitigate risks in each connected home.

Karen Furtado

Karen Furtado, a partner at SMA, is a recognized industry expert in the core systems space. Given her exceptional knowledge of policy administration, rating, billing and claims, insurers seek her unparalleled knowledge in mapping solutions to business requirements and IT needs.

Customer Experience

How Basis for Buying Is Changing (Part 2)

Once an insurer is prepared to gather evidence quickly, quote quickly and engage with speed — every situation becomes an opportunity.

Denise Garth

March 17, 2017

How fast is too fast in insurance? Most insurers would probably say that the recognizable point of an insurance process being “too fast” is the point at which poor decisions are made regarding risk. If the risk is the same either way, then there is no “too fast.” In my last blog in this series on how buying decisions are changing, we discussed some of our findings from the Majesco Future Trends 2017 report and talked about how a generational shift of market boundaries and technology was creating a culture of impatience. See also: How Basis for Buying Decisions Is Changing In today’s blog, we’ll explore how insurers are coping with the need for speed, without compromising on risk. We’ll look at how product adaptation and a transformed framework will benefit insurers by positioning them to meet needs with immediacy. Because human decisions are being made faster than usual, it places the onus on insurers to create products that can be quickly and easily understood. It also means building a framework that supports quick evidence gathering, rapid data transmission, instant analysis and immediate transactions. Why is speed filled with potential risk? There are essentially two reasons why quick decisions can be bad.

If an insurer takes a shortcut to provide quick coverage, it may be missing key information regarding risk. Is the insurer getting the data and information it needs in a timely manner, or is it more concerned with providing a decision in a timely manner?
If the customer is making a poor decision to gain quick coverage or if the customer quickly decides against coverage, the customer could be at greater risk. Does the customer understand the choices, both in terms of insurers and products? Will the choice just cover risk or help the customer monitor and reduce risk?

Behavioral science and rapid decisions In our last blog, we mentioned Daniel Kahneman’s book, Thinking, Fast and Slow. Kahneman describes human decision making and thinking as a two-part system. System 1 thinking produces reflexive, automatic decisions based on instinct and experiences. These are “gut” reactions. System 2 thinking is slow, deliberate and based on reason and requires cognitive effort. In an ideal world, insurers would be able to help customers to slow down and make better decisions. That world, however, has rapidly disappeared because of new expectations set based on experience in other markets or industries. Just consider Amazon continually resetting the bar. So, it is incumbent upon insurers to rise to the new “speed” bar and create a new model for rapid, yet limited risk insurance decisions. This is a large part of what insurtech has been trying to disrupt. Insurtechs have been borrowing principles of speed, psychology and behavioral economics from other markets and industries to persuade customers to do business with them while they are making quick decisions. The highest-profile use in 2016 was Lemonade, a startup darling. The company recently announced national expansion plans and has been widely cited for its disruption of the traditional insurance business model with a new one grounded in outside-in, innovative business processes, sophisticated technology and behavioral economics principles. Dan Ariely, well-known author of Predictably Irrational and other books, has helped the company create a truly different insurance experience through both process and perception. Lemonade changed the customer experience along the entire value chain, based on Ariely’s insights about people’s decision-making processes. The AI chat-driven application and claims processes use a few simple questions, pulling in data as needed from other sources behind the scenes. Lemonade claims it takes 90 seconds to complete a purchase and three minutes to get a claim paid (though it has also extensively promoted a recent 3-second claim). These simple, transparent and fast processes require less System 2 thinking by customers, creating a simplified and engaging experience while ensuring that the data used for underwriting is the most important, credible and accurate, rather than relying on human memory. Auto enrollment, social proof and honesty pressure At the macro level, government, academic and corporate efforts have focused on encouraging greater employee participation in saving for retirement by devices like automatic enrollment and default contribution rates for 401k plans, and improving individual health insurance plan decisions by reducing choice overload, among others. The UK government has a Behavioural Insights Team (BIT) nicknamed the “Nudge Unit” whose mission is to “use insights from behavioural science to encourage people to make better choices for themselves and society.” At the micro level, companies like Geico employ principles like social proof (i.e. “people like you choose…”) to increase shoppers’ confidence and nudge them toward selecting specific products and closing the sale immediately. This kind of evidence is designed to quickly move people off the fence of indecision and into the security of the social community insurance fold. Lemonade tackles the question of customer honesty by employing a social benefit component. The company takes a 20% flat fee off the premium paid, with the balance used only to pay claims, then gives any excess to a charity of the customers' choice. This sets up a quasi-“moral commitment” for the customer to act in the interests of that organization (by behaving responsibly and not filing a claim that will reduce the benefit to the charity). By explaining the model up front, Lemonade gains the mental assent to honesty during the crucial application phase. An applicant isn’t just buying insurance, she is “buying into” a bigger promise that includes risk protection when needed and support of a worthy cause for every dollar unused for claims. See also: How We’re Wired to Make Bad Decisions All of these efforts help make both fast decisions and good decisions, significantly reducing or eliminating risk to gain speed in the process. Shifting up to the next gear Seeing how changes to customer-facing engagement can both improve and speed up decisions, we’re now faced with the impact of those decisions on technology throughout the business. Is it possible for insurers to innovate fast enough to make quick decisions pay off? Because the need for speed touches so many different areas of the business, insurers wanting to rewrite decision methodology may need to act more like startups — innovating from the outside in. In the Future Trends report, Majesco advocates that insurers re-imagine the insurance business by creating a new business model that embraces the demographic, market boundary and technology changes rather than restructuring the old model. The new ideal is a cycle of continuous insight and improvement that may bear unintentional yet valuable fruit. When an insurer transforms itself to meet the demand for quick decisions on its standard products, it will also be laying the groundwork for systems that will support new product development — products that currently lie outside its realm. Once an insurer is prepared to gather evidence quickly, quote quickly and engage with speed — then every insurable person, event or property becomes a new opportunity for business. It is within today’s fast-paced lifestyles where insurance is likely to find new lodes of business opportunity from unserved or underserved markets and customers. Insurers that understand the nature of good decisions in a time-crunched culture will meet new customer needs without compromising themselves. For a deeper look at how lifestyle trends are affecting insurance technology decisions, be sure to read Future Trends 2017: The Shift Gains Momentum.

Denise Garth

Denise Garth is senior vice president, strategic marketing, responsible for leading marketing, industry relations and innovation in support of Majesco's client-centric strategy.

Cyber

Quest for Reliable Cyber Security

It's time to adopt the playbook of high-reliability organizations (HROs) like nuclear submarines, aircraft carriers and nuclear power plants.

David Patrishkoff

March 15, 2017

As we still struggle to improve physical security in the brick and mortar world, we are also greatly challenged by security issues in the cyber world. The layers of cyber protections are melting away quickly (Figure 1) as evidenced by an exponential growth in cyber crime. We are all racing rapidly away from the shores of the brick and mortar world, chasing after irresistible and addictive internet-based technology.

The Cyber War Statistics and Projections Figure 2 shows the Lloyd's of London estimated worldwide cyber damages in U.S. dollars for 2013 (100 Billion) and 2015 (400 Billion). The Jupiter Research projection for 2019 is $2 trillion. Cybersecurity Ventures projects $6 trillion of damage for 2021. If these projections become reality, that represents a 60-fold increase in cyber damages for the eight-year period between 2013 and 2021.

An independent Ponemon Institute study sponsored by Hewlett Packard said that, in 2016, the average U.S. firm reported cybercrime damages of $17 million. The average cyber damages were much less in non-U.S. countries, but the growth in such crimes is also increasing exponentially. The U.S. National Small Business Association study said that, on average, small businesses that had their bank accounts hacked lost an average of $32,000. See also: 10 Cyber Security Predictions for 2017 The Cyber War Defender Sentiment Various IT expert surveys tell us that the majority of defenders feel that we are losing this cyber war. Here are some key disturbing sentiments:

An iSense Solutions survey of 250 IT professionals was conducted for Bitdefender among companies that were breached. Those that suffered cyber breaches in the last year convey the disturbing news that 74% of those that were breached don’t know how the breach happened.
A survey by the Ponemon Institute revealed that it took between 98 and 197 days to detect the fact that a security breach has happened.
An AT&T (Cybersecurity Insights) report surveyed 5,000 companies worldwide that were launching Internet of Things (IoT) devices. Only 10% of IoT developers felt that they could secure those devices against hackers. It is estimated that 10 billion devices were connected to the internet in early 2016 and that the number will grow to 30 billion devices by 2020.
Another Ponemon Institute survey in 2016 consisting of 643 IT experts revealed that only one-third of the IT experts surveyed consider the cloud safe from cyber attacks.
Cyberventures estimates that $1 trillion will be spent on cyber security products and services between 2017 and 2021.
Cyber experts tell us that just meeting compliance is the beginning of cyber security and not the end.
The World Economic Forum (WEF) stated that a “significant” amount of cybercrime and espionage still goes undetected.
Hacker tools are cheap, fast and becoming easier to use, providing disturbing attacker advantages.

The Cyber War Executive Summary Let’s summarize this gloomy situation. We are in an exponential growth period of cybercrime. Anywhere from 67% to 90% of experts surveyed can relate to these comments:

They distrust the cloud.
Most do not know how or when they were hacked, if they were hacked.
Most do not know how to fully protect the old and new flood of internet connected devices from future hacks.
Just meeting compliance is insufficient against hacks and cyber attacks.
When hacks are noticed, they are noticed three to six months-plus after the fact.

This raises the question of how IT and security professionals will spend their security budget if they have been so unsuccessful in the past and present. This is clearly a high-risk environment and getting worse. See also: How to Stir Dialogue on Cyber Security Can Cyber Strategies Rescue Us? Classic and logical-sounding cyber strategies have been and are being rendered useless by hackers and cyber-sharks. Figure 3 depicts the sad state of worldwide cyber security. Why are most cyber strategies not working? Maybe because they focus too much on the technical and do not engage all of the enterprise resources and its culture as an additional layer of defense.

Figure 4 reminds us of the words of MIT Professor Bill Aulet, derived from the original quote by the famous management consultant Peter Drucker: “Culture eats strategy for breakfast, operational excellence for lunch and everything else for dinner.” If our cyber strategy does not harness and engage the enterprise culture as a partner in this cyber war, we should expect only limited successes.

Can Artificial Intelligence (AI) Rescue Us? Some are touting AI and machine learning as the “last hope” for cyber security, but some experts are also quick to confess that not all AI strategies are effective and that the cyber protection industry is only at the beginning of this journey to apply AI to cyber security. This confidence in AI also assumes that the “bad guys” will not use AI to become better hackers. Can High-Reliability Organizational (HRO) Techniques Rescue Us? Decades ago, high-risk organizations like nuclear submarines, aircraft carriers and nuclear power plants developed a highly successful culture-based management system that was later designated as high-reliability organizations (HRO). HROs have achieved zero-incident safety records even though they are considered high-risk. Now that every organization is thrust into the high-risk cyber world, it’s time to consider the HRO playbook and assess our cultures against custom HRO cyber criteria. Airlines, railroads, power plants, hospitals and other organizations are starting to customize HRO principles to meet their stretch goals for employee, customer and patient safety. See also: Paradigm Shift on Cyber Security Figure 5 shows one of the first basic enterprise system and cultural assessments required to lay the foundation for HRO cyber thinking across all layers of the organization. Such assessments will require anonymous inputs from all stakeholders and levels to ensure that all skeletons in the closet and the taboo talk rules that limit cyber successes are exposed.

The pursuit of becoming a high-reliability cyber organization is not for the faint of heart, and it is not a quick fix. It is a set of highly disciplined principles that affect the behaviors, attitudes, decision making and accountability for every level of the enterprise cascade as summarized in Figure 6. If any of the cyber security elements in the cascade has a weak link, cyber security will be at risk. The last line of defense against cyber attacks needs to be organizational and cultural and not just technical or centered on compliance.

As the world moves toward the shocking new reality of annual multitrillion-dollar cyber damages, organizations will need to combine technical and non-technical best practices for reliability to counter cyber threats. Unfortunately, it might take one or more big business failures or a major worldwide cyber calamity before more organizations start to see the value of a combined high-performance culture and technical strategy. Great successes of HRO organizations should teach us that a combined culture and technical strategy is the best way to defend ourselves in this expanding cyber world war.

David Patrishkoff

David Patrishkoff is president of E3 (Extreme Enterprise Efficiency) and the founder of the Institute for Cascade Effect Research. He is a Lean Six Sigma Master Black Belt and the inventor of a cascading risk management methodology that has patent pending status.

Leadership

Implications of Our Aging Population

Insurers must adapt to a world of slow growth and low interest rates in the longer term, while changing their product mix.

Benno Keller

Christian Hott

March 15, 2017

Aging is a key force shaping our societies and the economy. Too often, the current debate on aging and demographic change narrowly focuses on the direct implications for pensions system and healthcare and neglects the broader economic implications. An understanding of the wide ranging economic implications of demographic change, however, is fundamental for insurers and policymakers in order to make sound long-term decisions.

The world of shrinking workforces

The world is quickly entering a new phase of demographic development. The new world is characterized by a shrinking or – at best – stagnating workforce due to the continuous decline of birth rates since the “baby boomer generation.” While Germany’s working age population peaked about 15 years ago, according to UN figures, China is currently at a record. In the U.S., the working age population is expected to continue to grow due to immigration, albeit at a much slower pace than in the past.

But decreasing birth rates not only mean that that the workforce is shrinking (or at least not growing). It also means that the average age of the workforce is increasing, especially until the baby boomer generation will be retired within the next decade. We refer to this phenomenon as “silver workers.”

Furthermore, as people live longer, the proportion of retirees in the total population is going to increase. This increase will be far more pronounced in the future than it was in the past. In developing economies, this trend is starting at a much lower level, but the eventual change will be far more rapid and dramatic than in developed economies.

The economics of aging

These demographic developments – shrinking workforces, the rise of silver workers and increasing share of retirees – will have profound economic implications. In a world of shrinking workforces, we cannot expect the economy to expand rapidly, unless productivity can be increased far beyond long-term historical averages. In fact, past growth rates were driven considerably by an increasing labor force. This is especially true for some developing economies like Brazil and Mexico. But also in the U.S., more than 40% of economic growth over the past 25 years can be attributed to an increasing working age population. We will have to get used to low GDP growth rates.

However, overall GDP growth says little about the development of individual living standards. To assess living standards, we need to consider the implications of demographic change on GDP per capita. Three forces are at play:

First, because fewer workers will have to provide for more retirees, demographic change depresses GDP per capita. In the U.S., the share of working age population to total population is expected to decline from 60% to 54% over the next 25 years. In China and Germany, the decline is more pronounced: from 67% to 57% in China and from 61% to 51% in Germany. This implies that, as long as the production of each person of working age does not change, per capita GDP would decrease by 9% in the U.S. and by 15% in China and Germany by 2040.

Second, future GDP per capita will depend on the development of investments and savings. As people will have to live longer on their savings in retirement, we expect saving rates to increase. As these savings are invested, there will be more machines per person (i.e. the capital stock will increase relative to the labor force). This will partly compensate for the negative impact of the labor force development on GDP per capita.

Finally, advances in productivity may entirely or partially offset the demographic pressure on GDP per capita. Projections of productivity growth are fraught with high uncertainty. However, based on historical productivity growth rates (about 1.5% per year in most developed countries), productivity growth will likely compensate for the negative demographic impact on GDP per capita in most countries (Italy being a potential exception).

Taking these three factors together, we conclude that GDP per capita will continue to grow in most countries, albeit at a slower pace than in the past. The next question is: How will this per capita income be distributed among workers and retirees? We expect that aging will depress real interest rates as the demand for capital is likely to shrink relative to savings. In fact, real interest rates have been steadily declining over the last three decades.

We will have to get used to a low-interest environment and, hence, low returns on retirement savings. At the same time, the relative scarceness of labor should bolster wages. Hence, the future workers will likely benefit relative to future retirees (who are today’s middle-aged savers).

A threefold challenge

This analysis suggests that there is a threefold funding challenge from aging. First, low interest rates make it difficult for individuals to accumulate sufficient savings to fund their retirement. Second, the increasing share of retirees in society exerts a rising funding pressure on public pay-as-you go pensions systems. While in the U.S. there are currently 25 people of retirement age per 100 of working age, it will be 40 people of retirement age in 25 years. Third, the increasing average age of the workforce raises the risk of disability. Inability to work due to critical illness or disability reduces the ability of individuals to accumulate sufficient savings to fund retirement.

Policymakers have to consider a number of policy measures to address this threefold funding challenge. Potential measures include increasing the retirement age, providing incentives for individual savings, enhancing productivity, increasing labor force participation and increasing pensions contribution or reduce benefits.

See also: Demographics and P&C Insurance

In most countries, however, none of these measures seems desirable or politically feasible on its own. In the U.S., for example, pension contributions would have to be increased by 63% between 2015 and 2040 to compensate for the increasing share of retirees in the population. Alternatively, the retirement age would have to be increased by seven years. Policymakers therefore need to develop strategies that combine a broad range of different measures in varying degrees. There is a risk, though, that measures to enhance productivity, namely investments in education, will be de-prioritized as public finances come under increasing strain.

For insurers, this analysis suggests that they must adapt to a world of slow growth and low interest rates in the longer term. Furthermore, in a world of aging workforces, products designed to protect the income against disability and inability to work will become more important. Hence we expect to see a stronger shift from savings products to protection products.

Benno Keller

Dr. Benno Keller is an economist with over 10 years of experience in research, public affairs and thought leadership within insurance industry, both in Europe and in the US.

Christian Hott

Dr. Christian Hott is an independent economic advisor based in Dannau near Hamburg, Germany. He has over 15 years experience in conducting original research, writing reports and holding lectures in the areas of economic development, financial stability and the regulation of the financial sector.

Leadership

Let’s Sponsor a Free Online RMI Course

The industry faces a talent crisis, and the flow of students from RMI programs at universities won't fill the need. Let's be creative.

Tony Canas

March 15, 2017

The average age of an insurance professional in the U.S. is around 60 years old. Estimates place the giant wave of retirements coming our way at around 50% by 2020. The U.S. Department of Labor estimates that between retirements and growth we’ll need to hire 400,000 people in the next decade. That’s a lot of people! Risk Management and Insurance (RMI) programs at colleges and universities have become more popular over the last few years, but they still only exist at fewer than 100 out of the 3,000-plus institutions in the U.S. RMI programs produce amazing graduates, but they only feed 15% of our hiring needs each year! So 85% of our new hires come without any sort of insurance background or education. Each company has to take the full expense of training these new insurance pros, and retention is lower because those people haven't committed to a career in insurance; they might still be testing the waters. See also: A New Paradigm for Risk Management? At the same time, college has gotten more expensive, and total student loan debt stands at around $1.3 trillion! That debt is very scary to potential college students, and many are choosing to forego going to college to avoid going into debt. This is bad for their future employment, but it’s also a waste for us; we could use their talents if we just played our cards right.

This is where today’s crazy idea comes in. We should come together as an industry and ally ourselves with an online education provider such as Coursera. Coursera offers massive open online courses (MOOCs) from world class universities in video format, with intra-video quizzing, group projects, automated grading of multiple choice tests and student peer grading of papers. You can take almost any Coursera class for free, or you can pay a small fee to get a certificate proving you passed the class. Coursera even has cool technology to verify you’re doing your classwork yourself instead of paying someone else to take tests for you.

Currently, there is not a single insurance and risk management class on Coursera. The only classes that come up in a search have to do with health insurance exchanges or with product and portfolio financial risks. See also: The Sad State of Continuing Education We should come together as an industry and sponsor a free (or almost free) risk management and insurance program on Coursera, available to ANY student who is interested. We would work with the school to make sure the curriculum teaches them the things employers in the industry need them to know, and we could even split it into an “associate” type program meant to train customer service rpepresentatives (CSRs) for agencies and a more in-depth “bachelor” type program meant to train future underwriters, agents and claims and other industry professionals. This could be a cost-effective way to make big strides toward solving our talent crisis, and it would help us improve our image overall. Who's in?

This article originally appeared on InsNerds.com.

Tony Canas

Tony Canas is a young insurance nerd, blogger and speaker. Canas has been very involved in the industry's effort to recruit and retain Millennials and has hosted his session, "Recruiting and Retaining Millennials," at both the 2014 CPCU Society Leadership Conference in Phoenix and the 2014 Annual Meeting in Anaheim.