As the Obamacare compliance clock ticked down, a Phoenix-area CEO lay wide awake at 2 a.m., worrying he might have to consider laying off more than 70% of his 170-employee workforce. Earlier that day, his insurance broker told him that companies with more than 50 full-time employees would be fined heavily if they didn’t provide health insurance under Obamacare. His lawyer confirmed it — the fine would be as high as $5,000 per employee. None of his options looked good. The cost of the health insurance his broker proposed exceeded his company’s profits; ignoring the law’s reporting requirements would increase his fines even more. Reducing his staff to avoid the Obamacare mandate meant splitting up his company or laying off 120 employees. Except for one thing: His broker and lawyer were wrong about the law. Obamacare does not require employers to offer health insurance. Since Obamacare became law, blue collar, service, construction and other such companies nationwide have grappled with providing employer-sponsored healthcare that wouldn’t completely bankrupt their business — a seemingly impossible challenge given the skyrocketing cost of medical insurance. Here in Arizona, CEOs are confronting the issue head-on. Like these CEOs, you have to start by arming yourself with the truth. Then, you realize that, if structured correctly, healthcare can become a huge competitive advantage for companies of all shapes and sizes. Say what? Healthcare is usually one of the biggest expenses for a company. Most people would consider it a major impediment to profitability — not a competitive advantage. But that’s where they’re wrong. In a previous article, I discussed how the correct place of service makes the biggest impact on healthcare costs. Simply understanding the huge difference in costs for services performed in a hospital vs. identical services received in a lab or imaging facility down the street can help companies and their employees make smart choices about getting high-quality, high-value care. But it doesn’t stop there. Beyond managing place of service, employers can take action right now to transform healthcare into a competitive edge. This might seem unbelievable — status quo healthcare is a colossal expense that’s bleeding companies dry — but small- and medium-sized businesses really can avoid overpaying, lower employees’ costs, decrease the amount of time spent away from work and provide benefits that larger competitors simply cannot match. See also: Is Transparency the Answer in Healthcare? The experts will tell you this is impossible, but these three steps are all it takes: 1. Think differently. First, businesses must decide that they are finished with the status-quo healthcare system. What would it be like for them to approach healthcare with a completely different mindset? To reconsider what they’re willing to tolerate and pay for — and what they’re not? Instead of being resigned about the burden of healthcare — helpless in controlling costs while also meeting the mandates of Obamacare — what would happen if they were to apply an entrepreneurial mindset and skill set to their healthcare problem? Despite shocking health insurance rates and a general belief that costs cannot be controlled, thinking differently about healthcare translates to an entirely different experience. With the help of a trusted broker — they’ll never think about their company’s healthcare the same way. 2. Understand the law and what’s required. Most business owners do not truly understand what the law requires or what the difference is between what’s required and what they may want to provide their employees for strategic reasons. In many cases, insurers are using Obamacare to convince companies they must provide traditional health insurance or risk massive government fines. Brokers can help their clients understand what the law requires and build a plan that meets Obamacare mandates and offers great healthcare without killing the bottom line. For example, self-insurance is a great solution for many companies. 3. Design and build a health plan that meets a company’s unique needs. Most employer-sponsored health plans are structured to benefit their insurer, but brokers can help their clients change all that. The best plan will allow the company and its employees to pocket the savings if waste, administration and overpricing are eliminated. See also: Healthcare Quality: How to Define It   Here are a few key components of a health plan that work well:

• $0 Co-pays for routine care (the “routine 90%”): 

It might seem counterintuitive, but charging co-pays for routine care will actually cost companies a lot more money in the long run, not to mention reduce employee satisfaction. The simple solution? Businesses should steer clear of routine co-pays. Instead, they can provide the “routine 90%,” meaning 90% of the care that 90% of people need and use, 90% of the time, all at no cost to their employees. This includes things like preventive services, primary care, physical medicine and injury care, rehabilitation (including chiropractic), basic labs, X-rays and immunizations. The “routine 90%” represents a very small portion of overall claims, perhaps as low as only 10% of the costs. Purchasing traditional insurance to cover this 90% is unwise for businesses aiming to control costs and make their workforces happy; self-insurance will usually make the most sense. When these services are free and easily accessible, expensive hospital and urgent care visits will go down a meaningful amount. But be wary: This “no co-pay” tactic can also backfire; it can be used as a loss-leader tactic to guide your staff toward high-priced hospital services when a hospital system employs the primary care doctors. This is exactly why it’s important for business owners to educate their people about the huge price differentials between hospital doctors and services and identical services performed at an off-hospital lab or office.

• Stop-loss insurance for non-routine services (the “other 10%”):

Stop-loss insurance covers the more expensive and less predictable 10% of costs for things like accidents, chronic or complex illness and catastrophic diagnoses like cancer. Such insurance will cover hospitalization, specialist care, brand-name prescriptions and other high-cost services and procedures.

• Plan design that guides and rewards

Most people don’t know how to get the most value out of the healthcare system, but brokers can help business owners educate their employees and provide smart incentives. Giving employees $0 co-pays for the inexpensive “routine 90%” is a great way to start, but there are plenty of other incentives that will save business owners money while also improving employees’ healthcare. As an example, a smart health plan design will always discourage the quick use of elective orthopedic surgeries and procedures until inexpensive $0 co-pays in the “routine 90%” prove ineffective. A smart plan will always reward the use of generic prescriptions over expensive brand names that provide no extra benefit. In future articles, we’ll dive into some easy (and very smart) incentives that any employer can include in their plan designs to ensure they can lower the bigger, unnecessary claims costs.

• Data analytics

A well-designed health plan includes a mechanism for continuous data collection and learning about the people who incur the most claims costs in any particular year, month or day. In a previous article, I discussed why business owners should own their company’s health data because it enables the employer and broker to negotiate fair pricing, educate their people about place of service and ensure they’re making smart decisions about care. The same is true for stop-loss insurance; companies should demand ownership of employees’ data. Collecting and leveraging this data will provide the advantage businesses and their brokers need to keep renewal costs from rising every year.

• Free protection and support

It’s important that HR managers and employees know where to start when they have questions or need care. Doctors and other health industry professionals may direct their patients to hospitals and other needlessly expensive places of service. And if the providers are affiliated with a hospital system, they may be obligated to refer patients to a hospital, even if the services they need are available at an offsite clinic at a much lower cost. Business owners have the power to disrupt this status quo process. By providing their people with free, 24-7 assistance in navigating the healthcare landscape, they can improve employee care and satisfaction and can protect their business from overpaying. Knowing the costs of services, where to find value and how to avoid waste before a service is needed is a critical part of the protection and support employees need and appreciate. In a future article I'll share some very valuable healthcare “hacks” that business owners and employees will find empowering. In the meantime, I encourage you to visit redirecthealth.com/HealthPlanScorecard to complete the free Health Plan Scorecard. In 10 minutes or less, you’ll be able to score your healthcare mindset and make immediate improvements.

Watching people try to recover from injury can be baffling. Some recover function quickly; others do not. Why is there so much variability with severity and duration of disability, given similar injuries or illnesses? Why do some individuals get stuck in delayed recovery? Our medical system has tended to focus on the physical: If there is back pain, there must be something going on in the disc, vertebrae or nerve roots. That approach isn't bad. Medicine has made a lot of progress with that tactic. But sometimes a physical cause isn't apparent. If we examine what else may be happening in people's lives, what they're thinking and what they're feeling, we start to uncover circumstances and behaviors that may be delaying their recovery. The Hartford is focusing on a different and promising approach that looks beyond the physical aspects (such as symptoms, physical findings, test results) and looks at the whole person as a biopsychosocial being who may have non-physical barriers that are delaying recovery. The Hartford has developed a program that offers help to assist people in getting unstuck. Internal data analytics indicate the presence of psychosocial risk factors can account for a two- to four-fold increase in disability duration of work-related injuries. Background The biomedical model has served as the traditional foundation of our understanding of the body and has formed the bedrock of modern Western medicine. In essence, this model reduces illness and injury to their most basic units; the body is seen as a machine that operates on the basis of physical and chemical processes. In other words, find out what's wrong with the body and fix it. The biopsychosocial model seeks to amplify the biomedical model by addressing an individual holistically as a physical, psychological and social being. The 1970s saw pioneering work in the treatment of chronic pain by using psychological — or behavioral - principles. For instance, W.E. Fordyce at the University of Washington found that helping patients with pain behave normally (that is, getting them to stop displaying pain behaviors) led to improvements in function. In the 1980s, cognitive behavioral therapy (CBT) began to be used in treating chronic pain patients. CBT tries to change patterns of thinking or behavior that are behind a person's difficulties all to change how they feel. In the past 20 years, some have shown the usefulness of interventions based on specific psychosocial risk factors for pain and disability. Much of this work has been carried out in Canada, Europe, Australia and New Zealand. See also: Better Outcomes for Chronic Pain The medical and research literature points to social and behavioral factors -- like fear, expectation of recovery, catastrophic thinking and perceived injustice -- as powerful forces that can delay recovery after an injury or illness. As one example, a 2015 WCRI study showed that fear of getting fired could affect a worker's return to work after an injury. The Hartford Approach Armed with an understanding of these drivers of disability, The Hartford is using its advanced data analytics and developing innovative solutions to help workers at risk regain the function they had before an injury or illness. A patented text mining technique allows us to look for psychosocial, comorbid and other risk factors to identify, early on, individuals who demonstrate a likelihood to have a prolonged disability. By combining this early identification tool with a growing toolkit of interventions, we are finding new ways to help individuals restore their lives after an injury or illness. One such tool is a proprietary, telephonic coaching intervention. Having identified claimants who show an elevated risk for prolonged disability, we invite them to participate in a program that matches them with a specially trained coach who helps them overcome psychosocial barriers. By equipping individuals with skills and techniques to change the way they think, feel and act, we help them develop confidence to take control of their recovery. This confidence allows them to increase function in all areas of life, including return to work. The voluntary program, called iRECOVER(SM) uses phone calls with the coach, along with a workbook and homework assignments. It can last several weeks. Although still in its early days, iRECOVER shows promising results: earlier return to function and return to work. Participant feedback has been very positive. For instance, we have received emails and letters from injured workers that say:

• "There's light at the end of the tunnel."
• "I feel confident going back to work. A good part of this is due to my participation in iRECOVER."
• "I think what you do is probably as important as medical treatment."
• "iRECOVER helped me be courageous and strong."

See also: Data Science: Methods Matter (Part 1) Conclusion By considering the whole patient, applying potent data analytics and developing innovative solutions, we are getting to the root of delayed recovery for many individuals. The results will benefit all concerned, especially the injured worker, who just wants life to get back to normal.

This is part 4 of a 4-part series. Part 1 can be found here. Part 2 can be found here. Part 3 can be found here.  In 1494, Luca Pacioli, a Venetian friar and mathematician, published a textbook that described the use of double-entry bookkeeping. Drawing upon his knowledge of Venetian merchants, Pacioli showed how this type of accounting kept an accurate record of accounts. This gave merchants a much clearer picture of their financials and business. With the clearer picture, merchants would both avoid loss and feel more confident in the use of funds to grow.  Double-entry bookkeeping was a tool for improving earnings and profitability. Today, earnings and profitability are still a priority. Earnings keep insurers in business. Just as merchants during the Italian Renaissance were looking for any way they could get ahead, today’s insurers are seeking new methods and tools that will power their growth, earnings and profitability. The questions remain the same: What will cause us to lose less of what we have earned? What will affect our growth and profitability? As we explore the new Insurance Renaissance, we are finding that many of yesterday’s answers are apropos to today’s questions. A matter of models For insurers, one model has worked for years; it centers on claims. If we keep claims loss ratios healthy within product portfolios by reducing the claims cycle time and keeping expenses under control, then insurers meet their obligations and regulatory mandates and can make a profit. This model has been effective. It has incrementally improved over time, with experience.  But taking an alternative model for claims in light of new tools and methods can radically improve the claims environment and financials. Why should insurers look at alternative models? Like Pacioli sketching out the best “new” methods of bookkeeping, we can also sketch out the best ways to think about new insurance models.  For insurers, the best new models will have a positive impact on claims and expenses — and, more importantly, enhance the customer relationship and experience. We can start with the assumption that claims on any of our products are higher than they could be and that the cost of administering the business is also higher than it could be. These concepts are basic and are nothing new, but innovative models often begin with the most mundane truths. See also: The Coming Renaissance New business models will lower claims No matter what form of insurance you sell, technology-led opportunities for risk prevention (and even elimination) have never been better. Connected devices in cars, in homes, on wrists and in pockets are giving insurers data that will allow them to know their customers and push them toward safer and healthier behaviors. New data streams will supplement insurer knowledge with outside evidence. The organization that places its focus on prevention and elimination (instead of payouts) will grow very adept at using data to enhance the customer relationship and experience, while fundamentally changing the claims model. It will provide greater event predictability and proactive management. Fraud will decline. Costs will decrease. Risks will grow much clearer. How low can claims go? Zero is certainly not attainable, but dramatic claims reductions are likely to occur as homes, cars, buildings, fleets, people and much more grow more connected. Insurer branding may shift to the point where insurers are considered prevention and elimination companies — providing real and valuable risk management services and capabilities. Their value proposition will be less about claims support and more about customer risk management and experience. This kind of business model will require a new financial model to accompany it — not unlike paying for a home or property security system. The offering will be in prevention and elimination, not in payout. New business models will lower expenses The sharing economy has arrived. Office space, server space, vacation space, tools and rides are all sharable. It makes sense, then, that the new models of business and technology will find the reusable and the sharable and put them to good economic use. Insurers have existed as operational islands for decades, in some cases to protect the company’s proprietary information, and in other cases just to maintain control. Today, it is possible to have greater control, more flexibility and greater security while operating in a shared cloud environment. The cloud lowers expenses and gives insurers greater investment capability, often while improving speed to market, decreasing total cost of ownership and providing greater agility to respond to change. Creating an insurance model with the use of cloud services will allow for agility to adapt with ease, innovation to reimagine the possibilities and speed to seize the opportunities for entrepreneurial testing and long-term success. See also: Data Science: Methods Matter New business models will open new revenue streams Cable television had a high hurdle to surmount when it proposed to charge households for TV service — a service that was still available for free. It had to prove its value before the return on investment would be clear. It had to show it could realize income from both advertisers and subscribers. Today, cable providers, internet companies and phone and mobile providers have entered a perpetual model flux where following consumer trends and providing new offerings are the only sure path to steady revenue, growth and customer satisfaction. Insurers may be on the cusp of a similar model flip, where models are continually in flux and unstable. An insurer’s outside income may not always be premiums. An insurer’s stability will be found in its capacity to adapt quickly, mining the opportunities to be found in value-added services, relevant partnerships and innovative offerings. These new revenue streams MAY lower the need to focus on claims ratios, or they may simply improve combined ratios overall. Will people pay their auto insurer for deeper automotive care that may extend the life of the vehicle? Will they pay their home insurer for connected home monitoring if it lowers their insurance premium and manages their risk? Could a life insurer offer variable premium products based on data gathered through an individual’s mobile phone regarding lifestyles, travel, activity and perceived stress levels? Anything is possible —and that’s the point. For insurers, new models are on the rise that will help them enjoy their own Insurance Renaissance. Preparing to meet the new economy with a Renaissance-ready infrastructure will turn the opportunities into real solutions … and real customer value.

In spring 2016, PwC investigated the current state and future direction of stress testing. We surveyed 55 insurers operating in the US about their stress testing framework and the specific stresses that they test. We also engaged in more detailed dialogue with a number of insurers in the US and globally, as well as with some North American insurance regulators. Our principal conclusion is that stress testing, though well established, would benefit significantly from a modest amount of additional effort. Borrowing terminology from the Pareto principle, we think less than 20 percent more effort would yield 80 percent more value. A brief history Thanks to the requirements of the Dodd Frank Act of 2010, we expect that stress testing is the most widely recognized and understood risk management tool. The basic concept is relatively simple and most people in business and government readily accept the notion that if a specified future unfolded –say a repeat of the last economic crisis –it would be good to know ahead of time if banks would remain financially viable. After its initial introduction, stress testing continues to maintain a high level of attention via the ongoing publication of results from the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) which the media, financial commentators, and the banks themselves eagerly anticipate. It is easy to see how stress testing concepts in the Dodd Frank Act could apply to insurers. And, indeed the insurance industry (more specifically, its actuaries) has widely used stress testing and scenario analysis for decades. More recently, 2013 was especially noteworthy for insurance stress testing, with publications on the subject by the North American CRO Council, the CRO Forum and the International Actuarial Association. From a regulatory perspective, the National Association of Insurance Commissioner’s (NAIC’s) Own Risk and Solvency Assessment (ORSA) calls for a prospective solvency assessment to ascertain that the insurer has the necessary available capital to meet current and projected risk capital requirements under both normal and stressed environments. In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has provided clear direction on stress testing governance and methodology in its 2009 publication on Sound Business and Financial Practices (Guideline E-18). It also is noteworthy that, in Europe, despite all of the attention lavished on Solvency II and internal capital models, the European Insurance and Occupational Pensions Authority (EIOPA) launched a Europe-wide stress test for the insurance sector in May 2016. Equally as important as the regulatory initiatives are the business applications and benefits of stress testing. As we address in more detail below, survey results show that insurers make good use of this risk management tool and are looking to expand its application even further. A little more effort We see three areas where only a little more effort can yield substantial benefit: 1) a clearer definition of stress testing, 2) more thoughtful stress construction, and 3) a more robust stress testing platform. As a start, it will be useful to clarify what we mean by stress testing. As we use the term here, we mean a projection of income statements, balance sheets and –most importantly –projected available and required capital over a multiyear business planning timeframe (including new business over the planning timeframe). Typically the test is done for the entire enterprise and includes a base case and a number of stressed future states. This definition of stress testing is consistent with how both insurance (ORSA Guidance Manual) and banking (FRB CCAR) regulators use the term. It contrasts with risk-specific stress testing. Risk-specific stress testing typically looks at a single risk, often only for the part of the enterprise susceptible to that risk. And, it frequently assesses the impact over a range of stochastically determined scenarios. Distinguishing between stress testing and risk-specific stress testing needs little effort but can help companies avoid considerable confusion as they enhance and apply stress testing capabilities. Only with clear definitions can an insurer evaluate whether or not it has deployed the tool effectively. A vague notion of stress testing taking place somewhere in the organization typically means that there is unawareness of potential gaps in the enterprise risk management (ERM) framework. See also: The Key Role for Stress Tests in ERM Another area where we believe a little more attention would pay major benefits is the development of comprehensive stress scenarios. When describing future states, insurers have many factors to consider in order to articulate the risks that can impact their business. As an indication of the range of these factors, the section of our survey that addressed stresses had 32 questions, many with sub-parts, each covering a different risk. However, rather than starting with an effort to combine all of these risks, stress testing benefits from starting instead with a narrative that articulates a potential future and then addresses how that future would impact the insurer through various risk factors. For example, a stress narrative could be based on a prognosis of an ongoing steady decline in the price of oil and other commodities, then a postulation of the resulting impact on economic growth, interest rates, equity valuation, employment rate, etc. The narrative then could move to an analysis of the impact of these factors on the insurer’s risks, leading to a projection of how the company’s income statement, balance sheet, available and required capital would fare if this future, in fact, unfolded. Lastly, we note that despite the considerable attention and utilization of stress testing as a management tool, it appears that, for many insurers, the infrastructure that produces results is ad hoc and likely inefficient. Our survey indicates that only 10% of respondents have built a bespoke platform for stress testing. 78% of them use spreadsheets alone or spreadsheets combined with actuarial/projection software. In terms of how long it takes to conduct stress tests, 42% of respondents indicate the process takes between one and two months. A further 35% report that it takes more than two months, and sometimes longer than three months. While systems infrastructure updates do not normally result in major improvements from little effort, many insurers, particularly in the life sector, have already embarked on a process of modernization. As they are looking to address their risk, actuarial, and financial reporting needs in a comprehensive manner, we recommend that stress testing capabilities receive high priority. With a modest amount of extra effort, insurers should be able to incorporate significant enhancement to their stress testing platform as part of this modernization. This in turn will yield the benefit of more timely, accurate and insightful stress testing results. A lot more value Insurers already use their stress testing for many purposes. Survey results show that respondents currently utilize their stress testing for an average of almost five different uses. Additionally, respondents indicated they each had plans to add almost four new uses in the future. More than half of the respondents reported using their stress testing work for strategic planning, calibrating their risk tolerances and limits, assisting with dividend, share-repurchase and similar capital planning, and regulatory impact assessments. These are critical business decisions and further highlight the value of stress testing. Furthermore, stress testing usage has had a positive impact at a significant majority of respondents’ companies. 36% reported instances where key decisions have been made very differently compared to the process prior to stress testing. An additional 29% reported that the results of stress testing has a measureable influence on decision making, though no specific decisions were cited.   See also: New Approach to Risk and Infrastructure? More benefits We see a few additional areas where better articulated stress testing processes and procedures could result in significant benefits.

• Recognize that stress testing is a separate tool in the risk manager’s tool kit–Frequently, publications and discussions on insurance stress testing describe it as something that supplements other risk management tools. We believe that relegating stress testing to supplementary status undervalues its benefits and contribution. It would be more productive to recognize stress testing for what it truly is: a separate tool with different strengths and applicability compared to VAR-based economic capital.

Some risks –for example, liquidity risk –can be addressed only via a stress test. Adding more required capital does not effectively address the problem; liquidity risk needs to be addressed by developing a preplanned course of action, including accessing prearranged liquid funds. Likewise, reputational risk –and in particular the reputational impact of a cyber event –is better addressed via the stress test tool than via the economic capital route (and the potential addition of more required capital). Similarly, for some risks where economic capital looks like a satisfactory tool, it can give misleading information. Often pertinent risks only reveal themselves fully via stress testing. New business is a good example. Economic capital can include one or more years of new business, typically by assuming new business premium, claims, expenses, etc. are a replica of previous years’ values. But this fails to provide a platform to study how external factors could impact the insurer’s fundamental business model, leading to little or no sales of any new business that resembles prior years’ business. Lastly, we note that most other measures, especially traditional economic capital, concern themselves primarily with very extreme, “in the tail” events. Stress testing is useful not only for high impact, low probability events. More likely events warrant attention –in fact, they may warrant more attention because they often represent more tangible and practical problems that management needs to address immediately.

• Use stress testing to “war game” management action and prepare in advance for risk crises –In our survey, we asked insurers if stress testing incorporates management actions. In other words, as stress events unfold, presumably management would take some form of corrective action in response, and that corrective action would impact future financial results. Almost half said they do not incorporate management actions. We believe this is a significant oversight.

Stress testing provides a ready platform to prepare in advance for risk crises. Insurers can use the tool to test different responses and select the one that yields the most effective resolution. They then can put in place a contingency plan and pre-event corrections appropriate to the event. Here again stress testing can provide a different perspective than economic capital and similar measures. Economic capital works well as a tool to quantify the impact of taking certain types of action in the present. For example, it can help determine the reduction in required capital if a particular reinsurance treaty were implemented. On the other hand, faced with a multifactor, multiyear stress event (perhaps including changes in interest rates, inflation and equity values, with increases in unemployment and deteriorating buying patterns), stress testing would be a more effective tool in judging if and when to reconfigure the asset portfolio, alter products and prices, and the cost and manner of reconfiguring staffing models. It is worth noting that, in our discussions with regulators about the merits of including the impact of management actions, their expectations are that, yes, insurers should include them. They recognize the benefit that stress testing can provide as an opportunity for planning ahead. However, they indicated that it would be appropriate to show the stressed result both before and after the application of management action. Showing both results can help promote thoughtfully developed post-management action results, not just a broad assumption that management will take appropriate actions.

• Take advantage of the board’s and senior management’s broad business insights to construct more insightful stress narratives –Our survey shows that most boards receive the results of the stress test either directly or via the risk committee of the board. However, only 11% report asking either the board or board risk committee to approve the stresses the company uses. We believe this represents a missed opportunity to gain board members’ insights and benefit from their engagement in the stress testing process. Not all directors will necessarily have detailed knowledge of the range of potential outcomes of all of the risks that can impact an insurer or the potential stochastic distributions of those risks, but directors typically are experienced and knowledgeable, often with a high level of business and economic acumen. Utilizing their individual and collective skills to contribute ideas on the types of stresses that merit study seems like a good fit for their role and an effective complement to managements’ efforts.

• Stress testing represents a potential avenue for global capital consistency –As a final potential benefit, we note again that stress testing seems to have a role in all major insurance and other financial services regulatory regimes. At the same time, the global insurance industry is challenged by the task of agreeing to a capital adequacy ratio, presumably based on an economic capital VAR-like foundation. A simpler capital formulation coupled with a robust stress testing regime may hold more promise for a globally agreeable approach.

See also: Key Regulatory Issues in 2016 (Part 2) A bright future Based on survey results and various discussions we had with insurers and other stakeholders, stress testing is universally accepted as a useful tool. We suspect that this is a consequence of its being directly related to the common business practice of preparing a financial plan. Including a few more future states or stresses and incorporating a measure of required and available capital in the financial plan are not major steps. Accordingly, the transition from planning to stress testing should be easy to accommodate. We note how sharply this contrasts with the introduction of economic capital, especially in the US insurance industry. Though its usage is growing, economic capital is not a uniformly accepted regulatory and business tool even after two decades. On the other hand, stress testing is already actively and universally used as a management and regulatory tool. With a little more effort, we believe it can yield very substantial benefits for all.

When Elizabeth and Ryan graduated from college, they didn’t have jobs and, frankly, didn’t know what jobs would fit their skills and abilities. Elizabeth was a psychology and history double major who didn’t want to pursue graduate school; Ryan was a biology major, with a minor in chemistry but had no interest working in a laboratory.  When they applied for jobs, they were like a lot of new grads. Both were bright and motivated, but they lacked an understanding of what value they brought to the workforce and which employers would have an interest in their backgrounds. Further, they had a lot of questions about how to conduct a job search. As CEO of a national firm that hires over a thousand new grads every year, I see stories like this every day. According to our research, they are not alone. Only about 20% of graduating seniors actively use career services during their senior years. Further, 60-70% of new grads don’t know where their education and skills fit in the workforce. Combine these stats with the fact that over 75% of new jobs are created by employers with 500 or less employees, companies that typically don’t interview at campuses, and it’s easy to see that the entry-level job market is highly inefficient. Other trends are also having an impact. For example, the larger companies that typically dominate college recruiting significantly reduced on-campus recruiting after the recession. Now, college recruiting is much more targeted, with advances in technology making direct interaction with college students much easier. Initial contacts are often made through social media, and interviews are often completed using video interviewing techniques. See also: The First Step in Recruiting Millennials Further, corporate college recruiters are also focused on high-demand majors in computer science, math and engineering or high performers in other majors with high GPAs. They know the majority of college grads can be easily hired through less expensive conventional recruiting methods after they graduate. The net result of all these factors is that fewer than 30% of graduating seniors have a professional job at graduation. This has led innovators to develop a variety of ways to make the entry-level job market more efficient. From job posting sites targeted on the entry-level to online skills assessment and career counseling to third-party recruiting and placement firms, this market is seeing a high level of activity. Since new grads typically don’t have direct experience in the positions they are seeking, one way to solve this problem is to match the transferrable (or soft) skills possessed by the candidate with positions that require those same skills. Important transferrable skills include critical thinking, time management, effective communication, leadership and initiative. Since the beginning of 2012, Prium Inc., a provider of managed care and medical intervention services located in Duluth, Georgia, has used a third-party career matchmaking firm to recruit, interview and select qualified candidates on behalf of Prium for their entry-level positions. Michael Gavin, Prium’s president, says, “Outsourcing helps take the college recruiting burden off our shoulders. More importantly, it’s incredibly effective for finding the skills and talents we need.” Prium’s experience underscores the value employers see in the outsourced college-recruiting model. Most small and medium employers like Prium don’t hire in the volume to justify building their own college recruiting programs. Using this approach, positions are filled quickly with highly qualified candidates. See also: How Colleges Can Work With Insurers   Since January 1, 2014, candidates from many of Georgia’s great colleges and universities, as well as candidates from other regional and national colleges, have started careers at Prium. For colleges and universities throughout the country, the “matchmaking” model helps them offer their students a proven job search option. Both Elizabeth and Ryan are thriving in their roles at Prium. Reflecting on being placed at Prium, Elizabeth said, “I never thought I would be working in the healthcare industry, and I hadn’t heard of Prium prior to interviewing. I never would have found this job on my own.” The labor market is changing rapidly at every stage of the process. Colleges, job-seeking grads and prospective employers all need a more efficient way to evaluate and select the right entry-level hires. Hearing success stories from young grads such as Elizabeth and Ryan show how effective an outsourced college-recruiting model can be in matching great candidates with rewarding careers in industries like insurance and healthcare — careers that most new grads would never consider.

I recently attended the Digital Marketing for Financial Services Summit (#DMFSToronto). Digital leaders from Citi, Facebook, Wells Fargo, MetLife, Allstate, Salesforce and more were there talking about what is working, not working and what is coming next within digital marketing for financial services. Five accelerating trends: 1) It’s all about the data. It has ALWAYS been about the data in digital marketing, but now with so many advancements in programmatic advertising, real-time media buying, CRM, data lake technology and data visualization services, it’s easier than ever to track results, test, learn and optimize your marketing efforts. Hari Pillai from Invesco spoke on a panel about a struggle many companies have — being data-rich but knowledge-poor. His keys to success were to create a strong infrastructure for your data and an API to simply and effectively leverage your data, so you know where the customer is in the journey. In his words, “Data is the secret weapon to move the customer down the journey.” See also: Data Science: Methods Matter (Part 2) 2) Customers matter more than ever. As we all know, the dynamic has flipped to a customer being in charge more than ever in the buying process. Fifty-seven percent of the purchase journey is done before a customer ever contacts a supplier per the CEB, so you need to listen to the key needs of your customers and figure out how to solve those needs. Ramy Nassar from Architech had a great presentation about focusing on customer needs instead of financial products. My favorite line from his presentation was, “Think about the need, not the transaction. No one wants to buy a mortgage, they want a house.” 3) Social will soon rule the world. The typical North American adult checks social media 17 times a day. SEVENTEEN! Combine that with the fact that cold calling and emailing response rates are hovering around 3-4%, and millennials preference for social as the No. 1 method of contact, and social will soon be taking over as the primary communication vehicle for marketing and sales. Any financial professional or salesperson who does not have a complete LinkedIn profile that is optimized for search will slowly begin to lose their client base. I spoke on the value of social selling to financial institutions in this new digital world and how to use the power of social media to generate leads and sales. See also: How to Capture Data Using Social Media 4) Wearables are not going away. If you are looking for the next big thing, wearables are it. How long is it until our Fitbit we use on a daily basis to track our steps starts feeding that information to doctors? Insurance companies? Retail stores? It’s a matter of time until everyone knows everything about everyone else. Enjoy your 15 remaining minutes of privacy! And be prepared to have everything measured and managed in real-time. Rachid Molinary of Banco Popular de Puerto Rico presented an informative use case on how the company quickly integrated mobile banking into wearable technology. Now you can check your BPPR account balance in a matter of seconds on your Apple Watch. What was even more impressive was the processes and systems they have put in place to bring this new tech to market in a short period of time. See also: The Case for Connected Wearables 5) The pace of change is fast (and will get faster). Mitch Joel gave a fantastic keynote about how fast the world is changing and how every company thinks they are being innovative. However, to truly create innovation is to “create something that the market did not know that it needed, that then becomes adopted (and paid for) in a way in which we could have never imagined our lives without it.” Not many companies are doing this today. Erin Elofson from Facebook spoke about their roadmap and how VR is playing a huge role in their future. To get a small glimpse of the company's VR capabilities, check out the first film shot with the new Facebook Surround 360 camera. This is just the snowflake on the tip of the iceberg. So, how will you and your company react to this new digital world in financial services? These changes are coming sooner than anyone expected. Those that adapt quickly will thrive, those that don’t will struggle to survive. Related articles

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The best customer service representatives (CSRs) are a rare breed. Not only do the best understand the technical details, but they also have well-developed soft skills, including communication savvy, and grit. Because let’s face it, CSRs take their fair share of abuse. It’s not easy talking with customers all day, especially when those customers are often unhappy. Yet great CSRs can make or break your company’s image. Hanging on to CSRs who “get it” and are engaged in the essential job they perform is a must. Experienced agents and brokers know that’s easier said than done. Fewer than two-thirds of customer service employees are engaged, according to the 2015 Employee Engagement Trends Report from Quantum Workplace. That’s a lower rate than for almost every other department, including human resources and sales. A study from Bain & Co. looked at Net Promoter Scores (in part, a measure of how likely employees are to recommend their job to qualified family members and friends) and found that customer service ranked dead last among 10 common business departments. Retention rates for CSRs in insurance aren’t much better. Our industry had a 28% turnover rate for CSRs in 2015, according to data from ContactBabel. That’s slightly better than the average across industries, which hovers around 33%. Even Zappos, with its laser focus on customer service and employee culture, suffers a 20% annual turnover for CSRs. The high cost of losing employees and hiring and training replacements is well-established. A CallMe! survey found that the average turnover cost for a CSR is $3,500 per person. That’s the bad news. The good news is that you can take three specific steps to make sure you’re bringing in the right customer service reps—and keeping them. 1. Watch for resume red flags Not everyone is cut out to be a CSR. In fact, the top reason CSRs quit is that they were “just the wrong type of person for the job,” according to the ContactBabel report. Refine your hiring process so you’re employing only the right type of people for the job—otherwise, they’ll never be engaged. Watch for red flags in resumes, including a lot of short stints at past jobs, especially other customer service positions. Also, keep an eye out for experience that didn’t involve a lot of communication, such as in data entry, administration and so on. Give special attention to applicants with an interest in new technology and experience working with social media channels. And that cliché interview question, “Where do you see yourself in five years?” can actually give you a good idea about whether a person’s career goals align with your customer service values. Some agencies play one or two particularly unpleasant customer service calls to measure how a prospective CSR might react to the most difficult calls he may receive. Others role-play an interaction with a customer, headset and all. You want to make sure would-be CSRs know what they’re getting into. A little extra vetting during the hiring process pays off big-time in building an engaged team. See also: A Practical Tool to Connect to Customers 2. Treat them right Study after study has shown that if you want to boost CSR retention, you have to keep reps engaged. A little flexibility goes a long way in keeping people happy at work. Two-thirds of female CSRs are working mothers, meaning unexpected scheduling issues are going to come up. While the job itself requires CSRs to work set hours, finding ways to give CSRs the flexibility to find a suitable work/life balance will help them stay engaged. CSRs also want a chance to advance their careers. The International Customer Management Institute (ICMI) recently surveyed call centers on the top causes of CSR turnover. The most frequent source may surprise you: better opportunities inside the organization. But representatives don’t always see career opportunities within the call center itself. With CSR-to-supervisor ratios (known as span of control) averaging from 12:1 to 15:1, CSRs realize there’s a less than 10% chance they’ll ever be promoted to the level of their direct supervisor. That means you need to spell out the possibilities for advancement within the department. Consider adding titles—mentor, tech expert or shift supervisor, for example—so CSRs can increase their responsibility and compensation. You can’t offer a promotion with a big cash bonus to every representative. But other small rewards, from a quick thank you to public praise for handling a particularly tough call, can make day-to-day work much more enjoyable. See also: 3 Skills Needed for Customer Insight 3. Learn from departing reps If you’re not picking the brains of CSRs who quit, you’re missing out on a valuable source of information that your competitors are taking advantage of. More than 80% of organizations conduct exit interviews with departing agents, according to ICMI. Make sure your exit interviews attempt to reveal specific things your call center can do differently to keep good CSRs on the job. But you don’t have to wait until a CSR is headed out the door to figure out what she wants—instead, ask. A brief, informal survey about the perks they’d value most is an easy way to figure out where to focus your efforts. Armed with more information about the benefits and responsibilities CSRs prioritize, you’ll be better able to keep your best reps engaged and serving your customers.

As with most articles I read at Insurance Thought Leadership, I enjoyed The Myth of the Protection Gap. I do agree with the author (Paul Carroll) that not everything that can produce a negative outcome or loss needs to be insured. In fact, we are now in an era where we can buy insurance for nearly any property we own with a swipe of an app on a smartphone. Assuming that these companies are not charities, this approach is counterproductive, simply because it forces users to waste time having to remember to insure the thousands of small dollar items we own, when we can just afford to replace them. So place me in the camp that says insurance is for instances where we could not otherwise reasonably expect to be made whole again. But the protection gap itself is very real. I will use Paul’s hypothetical example to illustrate a counterpoint to his conclusion: “To make the math simple, let’s pick a country at random and make up some numbers out of whole cloth. Let’s imagine we’re Gabon, and we, as a nation, incur $1.5 billion of losses a year, while only $500 million is covered by insurance. We’re told we have a protection gap of $1 billion. We should buy $1 billion of additional coverage. It’ll only cost us $1.3 billion. That’s because — again, in very rough numbers — the insurer has to tack on 20% on top of the losses to cover expenses and needs its 10% profit margin to keep shareholders happy.” Let’s break this down: If the losses for Gabon are $1.5 billion per year, with $500 million covered, then how much insurance do they need to buy? The article is suggesting the answer would be an additional $1 billion. But that is not the right answer. The right answer is that Gabon should not buy any insurance! How is that possible? Well, if I know with certainty that my losses over time will be $1.5 billion, then instead of buying insurance I can set aside funds to pay those anticipated losses. To put it another way, if I were insuring an entity that will have $1.5 billion losses each year, then the premium I would charge MUST start at $1.5 billion (because I know for sure that those will be the losses ) and then tack on expenses for managing those claims, issuing paper and, of course, my profit margin. Am I nitpicking? Yes, I am. The hypothetical example likely meant that losses would average $1.5 billion per year and not BE $1.5 billion. But words matter, and, in this hypothetical example, the word “average” changes enough of the example to magically make the protection gap appear in full vengeance. How? Well, averaging $1.5 billion per year in losses can mean lots of things. It could mean $1.5 billion each year, every year, OR it could mean a $30 billion loss happening exactly once in the next 20 years (or an infinite set of other combinations). Uh-oh. It is this uncertainty in the losses that makes insurance such a valuable tool for risk management. Insurance is that tool that allows Gabon to manage its cash flows in such a way that it can function day after day and not have to worry about finding $30 billion at a moment’s notice. Insurance is not about paying for the average annual losses, it is about paying for the extreme losses and avoiding the cash flow crunch associated with that. The smoothing out of volatile cash flows IS the peace of mind that is often marketed to consumers of insurance. 90% of California homeowners lack earthquake insurance. The take-up for flood coverage is similar. These perils have caused hundreds of billions of dollars in property loss, the bulk of which were uninsured. Tens of thousands of families became homeless. We’ve seen it In Louisiana after Katrina and in the tri-state area after Sandy, and we will see it again. The protection gap is not a myth, it is very real, and these perils will continue to cause hundreds of billions of dollars in damage. These are losses that homeowners and businesses cannot fund themselves. They require insurance to protect them from these catastrophes. This fact alone provides a wonderful opportunity for our entire industry to grow by solving huge and emerging problems faced by societies. This is why we exist; this is our irreplaceable contribution to society.

No matter how robust a company’s cyber defenses, the bad guys seem to find a way to get in. And when — not if — they do, it could take weeks, or even months, to detect them and assess the damage. Building off the premise that spending a lot of money “trying to prevent the bad guys from getting in” is an imperfect approach, Vectra Networks wants to help cybersecurity teams track down and stop attackers once they’re inside the network — not before they get there. “The core problem is that all the sensors the company has invested in — firewalls, sandboxes, AV — act as a good filter, but they don’t stop everything from getting in,” says Vectra’s chief technology officer, Oliver Tavakoli. “We’re single-mindedly focused on finding that intruder inside your network before the FBI calls you and tells you about it.” Using machine learning and some of the same techniques used to sequence DNA and improve search engines, the company has developed a platform that looks at patterns to detect anomalies and trigger a mitigation response. Vectra isn’t advocating forgoing the traditional filters like firewalls and reputation lists — it’s still important to practice good cyber hygiene, Tavakoli says. But that’s no longer enough. “Presuming the filters are 100% perfect is a recipe for the kind of breaches we see in the news,” he says. So Vectra’s product, a platform software called X-series, picks up where those traditional security tools stop and provides real-time detection of an attack that’s in process. Instead of signature- and reputation-based methods, Vectra uses machine learning, data science and behavior analysis — an approach that’s much more effective in stopping the types of high-profile breaches that have dominated headlines of late. See also: What You Must Know on Machine Learning The platform, which was launched in 2014, is typically deployed with an on-premises appliance that sits within the data center and monitors packet traffic. Customers also can opt for a virtual appliance using another product, S-series sensors. The service is subscription-based, based on the amount of traffic that’s being processed.

Vectra’s chief security officer, Günter Ollmann, says, in the past, traditional tools relied on blacklists, two-dimensional signatures and behavioral analytics, which are all driven by human decisions. But the threats develop so fast that those techniques don’t keep up with the bad guys. “Machine learning is doing a much better job of … creating multidimensional signatures for detecting what’s going bad,” Ollmann says. Machine learning works in two ways: supervised and unsupervised. With supervised learning, humans tell the machines which behaviors are good and which are bad, and the machines figure out the commonalities to develop multidimensional signatures. In the past, Tavakoli explains, humans had to look at large sets of data to try to distinguish the good characteristics from the bad ones. With machine learning, it’s essentially about training the computer to find those differences — but much faster. “Supervised machine learning involves the machine doing 95% of the work and the data scientists doing the 5%,” Tavakoli says. With unsupervised learning, the machines develop the algorithms without having the data labeled, so they analyze the clusters to figure out what’s normal and what’s an anomaly. “That’s a slower detection, but it detects things that humans and those high-fidelity signatures would never be able to see,” Tavakoli says. Founded in 2012, Vectra set its sights on machine learning when the concept was still novel. The company, which came out of stealth mode in March 2014, immediately focused on a broad range of sectors. Now in what Tavakoli calls its “adolescent stage,” Vectra has gone through several phases of funding (for a total of about $75 million) and has grown to 125 employees as well as sales offices in Europe. See also: How Machine Learning Changes the Game “We believe the market is not limited to a few verticals because it’s a broad problem,” Tavakoli says. That means that for the next year or so, the company’s energies are focused on gaining sales momentum and scaling all its processes and operational capacity as the organization matures. The timing seems fortuitous, now that machine learning and automation are becoming the new frontiers for cybersecurity. And that’s what’s given the platform a broad appeal, according to Tavakoli: the ability to do the heavy lifting for humans, especially as the industry is experiencing a shortage of human resources. “You see a real renaissance nowadays when you hear about machine learning in all types of markets, and those techniques are being applied to a much broader set of problems than they were historically,” Tavakoli says. He believes it’s the machine learning that will fulfill the promise that big data holds, not yet through complete autonomy but rather as a leveraging point. “The whole world is swimming in a large amount of data being collected from all sorts of things, and people are struggling to pull value out of that data,” he says. “Machine learning and data science are at the vanguard of unlocking the information that’s hidden inside the data — and cybersecurity is just one such application.” This article first appeared at Third Certainty. It was written by Rodika Tollefson. More stories related to data security : JP Morgan Chase caper offers frank lessons about insider theft Predictive threat intelligence roots out cyber threats before they occur Biggest identity theft threat? Downplaying your risk