One of the most important lessons that Silicon Valley learned, that gives it a strategic advantage, is to think bigger than products and business models: It builds platforms. The fastest-growing and most disruptive powerhouses in history — Google, Amazon, Uber, AirBnb and eBay—aren’t focused on selling products; they are building platforms. The trend goes beyond tech.  Companies such as Walmart, Nike, John Deere, and GE are also building platforms for their industries. John Deere, for example, is building a hub for agricultural products. Platforms are becoming increasingly important as all information becomes digitized; as everything becomes an information technology and entire industries get disrupted. A platform isn’t a new concept; it is simply a way of building something that is open and inclusive and has a strategic focus. Think of the difference between a roadside store and a shopping center. The mall has many advantages in size and scale, and every store benefits from the marketing and promotion done by others. See Also: Pursue Innovation or Transformation They share infrastructure and costs. The mall owner could have tried to have it all by building one big store, but it would have missed out on the opportunities to collect rent from everyone and benefit from the diverse crowds that the tenants attract. Platform businesses bring together producers and consumers in high-value exchanges in which the chief assets are information and interactions. These interactions are the creators of value, the sources of competitive advantage. The power of platforms is explained in a new book, Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, by Geoffrey Parker, Marshall Van Alstyne and Sangeet Choudary. The authors illustrate how Apple became the most profitable player in the mobile space with the iPhone by leveraging platforms. As recently as 2007, Nokia, Samsung, Motorola, Sony Ericsson and LG collectively controlled 90% of the industry’s global profits. And then came the iPhone with its beautiful design and marketplaces — iTunes and the App store. With these, by 2015, the iPhone had grabbed 92% of global profits and left the others in the dust. Nokia and the others had classic strategic advantages that should have protected them: strong product differentiation, trusted brands, leading operating systems, excellent logistics, protective regulation, huge R&D budgets and massive scale. But Apple imagined the iPhone and iOS as more than a product or a conduit for services. They were a way to connect participants in two-sided markets — app developers on one side and app users on the other. These generated value for both groups and allowed Apple to charge a tax on each transaction. As the number of developers increased, so did the number of users. This created the “network effect” — a process in which the value snowballs as more production attracts more consumption and more consumption leads to more production. By January 2015. the company’s App Store offered 1.4 million apps and had cumulatively generated $25 billion for developers. Just as malls have linked consumers and merchants, newspapers have long linked subscribers and advertisers. What has changed is that technology has reduced the need to own infrastructure and assets and made it significantly cheaper to build and scale digital platforms. Traditional businesses, called “pipelines” by Parker, Van Alstyne and Choudary, create value by controlling a linear series of processes. The inputs at one end of the value chain, materials provided by suppliers, undergo a series of transformations to make them worth more. Apple’s handset business was a classic pipeline, but when combined with the App Store, the marketplace that connects developers with users, it became a platform. As a platform, it grew exponentially because of the network effects. The authors say that the move from pipeline to platform involves three key shifts:

1. From resource control to orchestration. In the pipeline world, the key assets are tangible — such as mines and real estate. With platforms, the value is in the intellectual property and community. The network generates the ideas and data — the most valuable of all assets in the digital economy.
2. From internal optimization to external interaction. Pipeline businesses achieve efficiency by optimizing labor and processes. With platforms, the key is to facilitate greater interactions between producers and consumers. To improve effectiveness and efficiency, you must optimize the ecosystem itself.
3. From the individual to the ecosystem. Rather than focusing on the value of a single customer as traditional businesses do, in the platform world it is all about expanding the total value of an expanding ecosystem in a circular, iterative and feedback-driven process. This means that the metrics for measuring success must themselves change.

But not every industry is ripe for platforms because the underlying technologies and regulations may not be there yet. See Also: InsurTech: Golden Opportunity to Innovate In a paper in Harvard Business Review on “transitional business platforms,” Kellogg School of Management professor Robert Wolcott illustrates the problems that Netflix founder Reed Hastings had in 1997 in building a platform. Hastings had always wanted to provide on-demand video, but the technology infrastructure just wasn’t there when he needed it. So he started by building a DVDs-by-mail business — while he plotted a long-term strategy for today’s platform. According to Wolcott, Uber has a strategic intent of providing self-driving cars, but while the technology evolves it is managing with human drivers. It has built a platform that enables rapid evolution as technologies, consumer behaviors and regulations change. Building platforms requires a vision, but does not require predicting the future. What you need is to understand the opportunity to build the mall instead of the store and be flexible in how you get there. Remember that business models now triumph products—and platforms triumph business models.

As the Department of Labor’s “ultimate” ruling becomes finalized in the short weeks ahead, insurance carriers across the country are putting a lot of sweat equity into various strategies. These strategies include many variants of two plans going on simultaneously: Plan A: Fight. After all, there are flaws in the way this ruling was brought to bear, and it places significant burdens on the industry that could harm consumers. Plan B: Alter. If the fight fails, then companies must be ready with alternative plans that are the least disruptive to their business model. Both plan A and plan B make a ton of sense, and there is no doubt that they must be done, and done quickly. The sales engines will shut down without them. However, both plan A and plan B are missing something really important: the future. See Also: Stepping Over Dollars to Pick up Pennies Why is the future missing? Both of these strategies rely on keeping things the same or as close as possible to the status quo. Yet, things have changed. While we may despise the way this legislation was brought to bear, and the math is very questionable, there is something we can’t deny. There is growing consumer mistrust in commissioned agents and advisers because it is believed they will sell products that make them the most money. While we all know that many commissioned agents do act in the best interests of their clients, consumer perception is the reality. A 2012 study by Maddock Douglas revealed that more than 70% of the population agrees that “insurance agents always try to sell people stuff they don’t really need.” Ouch. So, in spirit, this legislation is inevitable, and if it doesn’t take effect now it will keep coming back in new forms, and we will be fighting the same fight over and over. This realization blows up plan A. Further, if the ruling does take effect, and we merely alter our processes to work within the exceptions and leave the current compensation model largely intact, the consumer won’t be satisfied and will gravitate toward another model. That realization blows up plan B. So then we must create a new plan. Plan C: Lean in. No, I don’t necessarily mean robo-advice. While robo-advice is the proposed solution against bias, it is only one solution. It may not actually be the right answer for your organization. The consumer mistrust around agents and advisers does not mean we need to eliminate humans; we just need to eliminate bias. This is clearly an innovation challenge, and it requires developing many ideas and then choosing the best one(s) to pursue as your plan C. Your plan C ideas need to push thinking beyond the status quo, and if it is to be a successful alternative it should contemplate the following: 1) What would an unbiased advice model look like if it were invented today and the current one never existed? 2) What kinds of adviser incentives would the consumer see as aligned with their own best interests? 3) Who has solved a similar challenge in another industry, and what can you learn from them? 4) How can you prototype one or more of these models and learn if it will work before you invest a large sum in building it? All of these questions, and others, can be answered if you apply the right process for getting to your plan C. Yes, it is possible. Some may wince when I state the old wisdom that there is opportunity at every point of major change, because this one really hurts. I’ve heard some of the most respected experts call this the biggest change in the industry since the Armstrong investigation in 1905. It is painful; however, the old wisdom is still true. There is always opportunity in change, as long as we keep our wits about us enough to see it. If not, then the opportunity belongs to the disrupters of our industry. This article first appeared on National Underwriter Life and Health magazine. 

Healthcare is consuming an ever-greater share of corporate America’s balance sheet. According to the latest Kaiser Family Foundation survey, today's employers spend, on average, $12,591 for family coverage—a 54% increase since 2005. Some companies have finally had enough. Twenty of America’s largest corporations—including American Express, Coca-Cola and Verizon—recently formed a coalition called the Health Transformation Alliance. They’re planning to pool their four million employees’ healthcare data to figure out what’s working and what’s a waste of money. Eventually, they could leverage their collective purchasing power to negotiate better deals with healthcare providers. It’s a worthwhile experiment. The government has largely failed to rein in spiraling healthcare costs; in fact, by over-regulating the healthcare marketplace, it’s largely made the problem worse. The private sector will have to take matters into its own hands and find ways to creatively deploy market forces to its benefit. Collectively, U.S. employers provide health coverage to about 170 million Americans. Because many pay part—if not all—of their workers’ premiums, they’ve borne the brunt of the upward march of healthcare costs. According to the Kaiser Family Foundation, premiums for employer-based family insurance have increased 27% over the last five years, and 61% over the last 10. Unfortunately, this growth won’t slow any time soon. The Congressional Budget Office estimates that average premiums for employer-based family coverage will reach $24,500 in 2025—a 60% increase over premiums today. Understandably, companies are desperate to find ways to curb their healthcare spending. Last year, one of every three employers reported increasing cost-sharing for employees, through higher deductibles or co-payments. Another 15% said they cut worker hours to avoid falling afoul of Obamacare’s employer mandate, which requires firms to provide health insurance to anyone working 30 or more hours a week. See Also: Radical Approach on Healthcare Crisis But shifting costs elsewhere simply masks employers’ health-cost problem. They’ll have to address inefficiencies in the way healthcare is delivered to bring about savings that will actually stick. The Health Transformation Alliance sees three primary ways to do so. First, companies will have to mine their healthcare data for insight, just as they analyze the numbers for sales, operations and other core business functions. The Alliance will examine de-identified data on employees’ health spending and outcomes. The hope is to determine which providers are delivering the best care at the lowest cost and to then direct workers toward these high-performing providers. The U.S. healthcare sector today is awash with ambiguity and a lack of transparency. A knee replacement can cost $50,000 at one hospital but $30,000 at another. Two hospitals may offer the same price on a procedure, but one may have a higher rate of infection. Such differences matter. According to a 2013 report in the Journal of the American Medical Association, an infection can add, on average, $39,000 to a surgery’s price tag. Second, employers will have to use their combined buying power to secure better deals on healthcare. Tevi Troy, the CEO of the American Health Policy Institute, the organizing force behind the Alliance, said, “If you brought together multiple employers, you would have more leverage, more covered lives, more coverage throughout the country in terms of regional scope.” In other words, there’s safety—and potentially lower healthcare costs—in numbers. Third, employers will have to educate their workers about how they can secure better care at lower costs. Most consumers are clueless about where they should seek healthcare. They may welcome a gentle nudge from their employer toward a high-quality, low-cost clinic or provider. If it saves their bosses some money, all the better. See Also: What Should Prescriptions Cost? And as the Alliance hopes to prove, it’s a lot easier to borrow another company’s successful strategy for executing those nudges than to create one from scratch. An educational campaign that resonates with Verizon’s 178,000 employees, for instance, may do just the same with IBM’s 300-some-thousand staffers. As Marc Reed, chief administrative officer of Verizon, explained, “What we’re trying to do is to make this sustainable so that kind of coverage can continue.” Corporate America has been saying for years it cannot afford the healthcare status quo, with costs rising ceaselessly. But if employers use their healthcare data wisely—and capitalize on their collective bargaining power—they may discover that salvation from their health-cost woes lies within.

Earlier this year, defense contractor Raytheon spun out the cybersecurity services it had been supplying via Raytheon Cyber Products into a new business entity called Forcepoint. Forcepoint is also composed of security software vendor Websense and next-generation firewall vendor Stonesoft, both of which Raytheon acquired in the past year or so. See Also: Cyber Threats to Watch This Year Forcepoint isn’t your typical security start-up. It already has 20,000 customers and ranges from businesses with 50 to 200,000 employees. Based in Austin, Texas, the company has about 2,200 employees in 44 offices worldwide. At the helm is CEO John McCormack, who was previously a senior executive at Websense, Symantec and Cisco.

McCormack sat down with us at ThirdCertainty as he takes command of the freshly minted entity. The text has been edited for clarity and length. ThirdCertainty: What is Forcepoint all about? McCormack: We want to be the company that helps organizations move to the age of cloud computing in a safe and secure way. And we want to help in reducing what I call "point product fatigue." We’ve created a lot of point solutions for many of the cyber challenges that organizations face. And as I look in the eyes of many chief information security officers, I see real fatigue in their eyes. They’re still struggling to manage the environment they have today. Yet they need to get on top of these more determined adversaries. 3C: How is Forcepoint seeking to address that? McCormack: Our viewpoint is that, as we work to reduce that point-product fatigue, you build an open architectural approach. You build it on cloud computing concepts and capabilities that reduce their administrative burden, that reduce that operational footprint. We have to make a meaningful difference so that we can work on more important topics of hardcore security analytics and analysis of the inevitable breaches that happen to most organizations. 3C: Where does an organization begin addressing a worsening cloud-centric environment? McCormack: Have a healthy risk assessment and threat assessment done, and do best practices regularly. The other thing I would recommend is absolutely working on your weakest link. For all the technology and capabilities around cybersecurity, humans have been, and continue to be, the weakest link in the security chain. They get fooled. They aid and abet, and they make mistakes because of a lack of security awareness. 3C: Many times employees are just hustling to be more productive, not necessarily being careless. McCormack: Absolutely right. Most accidents happen because you’ve got users who are trying to do a great job, quite frankly, and are just trying to be productive. But we also know firsthand that adversaries will recruit people to put into your organization who will work to compromise your organization. You have to be able to identify those insiders. And you’ve got to be able to identify the intent. If it’s an accident, that’s one route to take. But if it involved malicious intent, that’s a different route that you might want to take. 3C: So a new mindset, really, is needed in this environment. McCormack: Yeah, you’ve got to bring your users into the fold. Cybersecurity is a highly technical field. You’ve got to make it reasonable to understand. Here at Forcepoint, we run a program called "Catch Of The Day." Anything suspect, whether it’s physical security or cybersecurity, can be reported and immediately responded to by our teams with both feedback and education about what they found and what they saw. Then we celebrate every quarter. Some of the best catches have kept us from being compromised.

The 2nd District Court of Appeal has handed down a decision affirming the legislature’s creation of the lien filing fee as part of SB 863. In Chorn v. W.C.A.B., a physician (Robin Chorn M.D.) filed a complaint that was joined by two injured workers in an effort to challenge, on constitutional grounds, the imposition of a lien filing fee. The court, with frequent references to Angelotti Chiropractic Inc v. Baker, rejected similar arguments that were raised, which, unsuccessfully, (thus far) challenged the lien activation fee provisions of SB 863. First, the court dealt with the issue of judicial standing for the injured workers—whether they could raise an issue of constitutionality regarding the lien filing fee provisions and in short order dismissed their claims in the case. From the ruling: Petitioners Kalestian, Vounov and Buie contend they have a “real and direct interest in challenging constitutionally infirm provisions of law that are transparently intended to impair access to expeditious treatment of their workplace injuries.” They claim that “the imposition of a lien filing fee that bears no connection to the value of the services rendered will make it less likely that medical providers will offer or render care to workers’ compensation patients on a lien basis,” and will “deprive injured workers of any choice as where [sic] they receive their care (if they receive care at all),” thereby “impairing the promise of unencumbered access to medical treatment of their injuries.” But petitioners have not submitted any evidence in support of these claims or any details of their alleged injuries beyond the bare assertion that they have “been denied medical care access as a consequence of SB863.” Moreover, they have not demonstrated that they are more affected than the “public at large” by the operation of sections 4903.05 and 4903.8, or that their constitutional challenges, if successful, would directly affect their rights.” See Also: Hidden Motives on Workers' Comp After dismissing the causes of action by the purported injured workers (no doubt added into the mix in an unsuccessful effort to piggyback onto a more sympathetic plaintiff than the medical provider), the court turned to the multiple arguments raised by the medical provider plaintiff. On the issue of the imposition of a lien filing fee as an impermissible “encumbrance” on the system, the court was unimpressed, noting the plaintiff failed to cite any legal authority as the basis of its assertions. The court pointed out that the courts have rarely been willing to substitute their judgment for the legislature’s in its efforts to create or maintain a system of workers' compensation. Noting the legislature’s findings regarding workers' compensation abuse on a broad scale, the court found the imposition of a $150 filing fee to be a rational exercise of legislative authority. The court then sequentially addressed the additional arguments: right to petition, due process, equal protection and right to contract.  In each argument, the court found the medical lien provider failed to demonstrate a constitutional violation based on the obligation to pay a filing fee. The court was particularly swayed by the fact that the lien claimants could, upon meeting the statutory criterion and prevailing in litigation, recover their fees: “…The compromise effected by section 4903.05—lien claimants must pay to file their liens, but may recoup their filing fees if they ultimately prevail—sufficiently protects the due process rights of lien claimants while serving the legitimate goal of deterring frivolous filings.” The court was particularly dismissive of the claim of contractual impairment, as the court noted the contracts that the plaintiff claimed were being impaired had not yet been created. The statutory prohibition on impairing contractual rights essentially prevents the government from changing existing contracts, but it does not extend to future contracts. The petition requesting an injunction enforcing the lien activation provisions of SB 863 was denied for the medical lien provider and for the injured worker plaintiffs, with respondents to recover their costs. Comments and Conclusions: This case had more or less dropped off the radar, particularly since the initial filing by the medical lien provider, Dr. Chorn, The refiled petition was filed directly with the Court of Appeal, the first level of appellate review that can consider constitutional issues. As a result, there really is no factual record to review. The court’s decision rests almost entirely upon statutory interpretation and the court’s conclusions (based on much the same logic as in the Angelotti case) that the legislature has broad discretion. The imposition of a recoverable filing fee turns out to be no more of an impermissible exercise of the legislature’s power than the activation fee. This case is likely to be appealed to the California Supreme Court, where it is almost just as likely to fail.

At American Family Ventures, we believe “Insurance 2.0.” will be, in part, shaped by structural innovation. The traditional insurance structure of centralized risk-pooling has been around for a long time. Unsurprisingly, it is also subject to heavy regulation. As a result, many entrepreneurs are using new approaches to lower regulatory burdens or unlock value through decentralization.

Two of the approaches we’re excited to watch develop are peer-to-peer (P2P) and private-investor-backed insurance.

Peer-to-Peer Insurance

P2P insurance isn’t a new concept. Mutual insurance companies effectively use a peer-to-peer model today. However, there appear to be a number of emerging approaches altering the dynamics of the risk/insured pool and creating new benefits for policyholders, carriers and investors.

For context, we see P2P as a set of techniques allowing insureds to self-organize, self-administer and pool their capital in a way that protects all the pool members from loss, all while ensuring any capital in the pool not reserved to pay claims (less any fees owed to a facilitator or administrator) is returned directly to the pool members. Of course, there is a great deal of nuance to making that work.

See Also: P2P Start-Ups From Around the World

Here’s a simplified diagram of a P2P insurance model:

We’ve identified a few reasons to think that, by redefining the traditional insurance structure, P2P models can offer unique benefits.

For one, the P2P system could mitigate elements of conflict in traditional, centralized insurance models. Because insurers (for the most part) get to keep the premiums they don’t pay out in claims, occasionally the incentives of policyholders and carriers fall out of alignment. Conversely, in a pure P2P model, because the premiums not needed for claims are refunded to the policyholders, in theory, any conflict with a carrier is diminished.

While that logic is clear, it likely oversimplifies the issue. The insurance system, while not without its flaws, has functioned for some time and has regulations and processes in place to mitigate adversarial circumstances. In addition, if conflict exists in the insurer/insured relationship, it likely remains present in the P2P model but shifts from customer/carrier to peer/peer. In essence, because any pool member’s payout is a function of the claims paid out to others in the pool, members now have personal disincentives to pay claims, similar to carriers in the traditional model. That said, the carrier/customer relationship isn’t perfect, and new variations of P2P could help advance it.

Secondly, P2P organizing models might leverage large networks like Facebook and LinkedIn more effectively than traditional insurance. The nature of self-selection logically fits the use of a social or professional network — it’s easier to imagine a group of Facebook friends deciding to form an “insurance group” than it is to imagine that same group recommending all of their friends purchase individual policies from a large provider. In effect, large networks power the formation of smaller networks.

In addition to organizing benefits, integration with large, network-based platforms can create efficiencies in administration and retention. Increased frequency of engagement as well as preexisting communication and payment infrastructure could power usability advantages, stronger net promoter scores and better retention rates.

Finally, P2P models, by enabling modifications to the size and composition of risk pools, could create differentiated pricing strategies. P2P models are often associated with self-organization, but they don’t necessarily require it. So, if P2P facilitators become involved in pool selection and can use existing or new underwriting criteria to influence or control pool composition, they could construct pools that offer each member the highest possible returns after claims (or, effectively, the lowest possible cost of insurance). In other words, P2P facilitators might algorithmically generate smaller baskets of varying risk profiles, shifting members, when necessary, to intentionally spread expected claims across numerous pools, thereby creating consistently lower average claims volumes per pool (and, consequently, better payouts for members).

Private-Investor-Backed Insurance

Private-investor-backed insurance allows third-party investment capital to pay or backstop claims expenses in exchange for investment return. For example, a private investor, in theory, could agree to receive premium payments from a basket of insureds in exchange for the obligation to pay claims when they arise. In this model, the private investor (or group of private investors) essentially steps into the financial shoes of the insurer, accepting a stream of certain cash flows in exchange for an uncertain future liability (which could exceed those cash flows). The facilitator of such a marketplace would likely take some fees in exchange for customer acquisition, administration, securing reinsurance and performing the functions of an insurer other than providing risk capital.

See Also: Insurance 2.0: How Distribution Evolves

There are a handful of benefits we think the private-investor-backed model offers participants in the insurance relationship.

First, if certain types of insurance risk can be effectively securitized, those securities would (theoretically) offer professional or retail investors diversification through an instrument that is not highly correlated with the general market (low beta). Some investors already have exposure to insurance through reinsurance contracts and catastrophe bonds, but securitized insurance could offer broader access to more familiar risks with different payoff profiles.

Secondly, similar to what Lending Club and Prosper were able to accomplish in personal and small business lending, a private-investor-backed insurance model might offer price-competitive options to customers who have difficulty securing traditional insurance. For example, today, customers who are unable to secure insurance from conventional insurers (standard market) use excess and surplus (E&S) markets to address their insurance needs. If private investors are willing to take on these E&S risks—whether due to the presence of unique underwriting criteria or higher risk appetites—they could create new competitive dynamics in the E&S market and ultimately improve options for buyers.

As a side note, we often hear people combining the notions of P2P and private-investor-backed insurance. In our minds, they are related and can work together but are separate concepts. Private investor backing is not a prerequisite to building a P2P model — a pure P2P model could employ a variety of strategies to guarantee liquidity and solvency. For example, P2P insurers could leverage reinsurance to cover large or aggregate claims beyond the pool balance, eliminating the need for private investment capital. The P2P insurers might also use traditional fronting arrangements to ensure solvency. By comparison, a pure private-investor-backed model doesn’t need P2P features to function. Instead, it might offer investors financial products that look similar to reinsurance contracts without making any changes to risk pooling or centralization of control.

Additional Considerations and Questions

There are various other structural approaches that might be used to create acquisition cost and pricing advantages or lower barriers to entry for start-ups. Often, these are not necessarily new structural ideas but are rather applications of existing legal strategies employed in surplus or specialty lines insurance to broader, bigger lines.

The successful execution of the P2P model relies on a number of assumptions we’re sure someone will figure out, but we don’t fully understand them just yet. For example, will pools self-select, or will they need to be automatically or algorithmically selected? If self-selected, will most pools (financially) perform as expected, or will there be a small subset of high-performance pools (created by information asymmetry) that generate an inverse adverse selection issue for the P2P business, thereby creating disincentives for participation by the majority of potential buyers? Will pools self-administer and self-police to influence lower losses and guarantee payment of claims, or will some centralized entity still need to exist to ensure member compliance? Will there be regulatory hurdles to overcome if small pools are constructed to reduce claims costs? Finally, how will pool facilitators/administrators/members handle float management — will the capital in the pools sit in cash, or will those assets be actively managed until need for claims? If actively managed, by whom?

The issues we’re interested to see addressed in private-investor-backed insurance are also numerous. Can insurance be a desirable or profitable asset class for private investors? Apart from catastrophe bonds, we haven’t seen much securitization of insurance. Which insurance products or coverages might one securitize best? In other words, which magnitudes and patterns of risk exposures will private investors accept, which existing or new data will they demand as third-party underwriters and what terms will be up for negotiation? Can facilitators find a way to make long-tail risk compatible with liquidity expectations for the asset class?

At the end of the day, we’re looking forward to finding out how companies are able to use structural innovation to create unique and differentiated value for customers.

A 74-page study released on March 18, 2016, covers 15 large, multi-state employers that provided their Texas employees with customized occupational injury benefits in lieu of workers’ compensation coverage between 1998 and 2010. This is Professor Morantz’s second research study on Texas “nonsubscription” (also known as the Texas “option” to workers’ compensation). The new report is found here. Major findings: 1. Option programs paid better wage replacement benefits than workers' comp programs did. 2. The frequency of severe, traumatic employee injury claims was cut in half. 3. The percentage of employees disabled dropped by a third. 4. Employer costs were cut in half. 5. Coverage exclusions had minimal impact on cost savings. 6. Negligence liability exposure gave incentives to option employers to invest in safety. 7. As large Texas employers elected the option, workers' compensation costs dropped. In the study, Morantz stated all the study participants “offered employees private plans whose benefits roughly resembled (yet also differed from) those available through workers' compensation.” She said, “Some ubiquitous features of private plans—such as first-day coverage of lost earnings  and wage replacement rates that are not capped by the state’s average weekly wage—are more favorable to injured workers than workers’ compensation.” See Also: Texas Work Comp: Rising Above Critics Morantz expressed concern in her study because past studies have confirmed the existence of two moral hazard effects:

1. “Risk-bearing” moral hazard predicts employees will take more risks on the job as benefit levels increase; and
2. “Claims-reporting” moral hazard refers to the expectation that a worker will be more likely to file an injury claim (including for a feigned or off-the-job injury) as benefit levels increase.

The study says: “Consistent with the existence of both moral hazard, nearly all studies have found that increasing benefits or shortening waiting periods increases the frequency, cost and duration of claims.” Fewer Traumatic Claims and Lower Costs In spite of this historic research on injury benefit improvements, Morantz found:

• Frequency of severe, traumatic injury claims declines by about 47% under the Texas option;
• Serious claims involving replacement of lost wages are about 33% less common in the option environment;
• Employer costs per claim fell by 49% under the option;
• Employer costs per worker hour fell by about 44%; and
• Although the fall in wage-replacement costs is larger in percentage terms, the decline in medical costs was equally consequential.

Coverage Exclusions Have Minimal Impact. The option injury benefit plans studied all contain:

1. Exclusions (non-coverage) for permanent partial disabilities;
2. Exclusions for certain diseases (such as any caused by mold, fungi, pollen or asbestos) and some non-traumatic injuries (such as non-inguinal hernias, cumulative trauma if the employee has worked less than 180 days, carpal tunnel syndrome, chronic fatigue syndrome and fibromyalgia),
3. Caps on total benefits; and
4. An exclusion for chiropractic care.

Morantz found these exclusions from benefit coverage account for little of the estimated cost savings, writing, “Even when all four factors are accounted for, [the Texas option] is still predicted to lower total cost per worker hour by more than 35%.” Benefit Enhancements and Liability Exposure Lead to Safety Improvements Morantz mentioned a prior research finding that a rise in benefits can spur employers to invest more heavily in safety. Also, the study says the significantly lower frequency of severe, traumatic accident claims “provides strong evidence for a real safety effect, which is precisely what economic theory would lead one to expect. [Texas option employers] are, at least in theory, internalizing all of the costs associated with workplace accidents (including tort liability), which should induce them to invest more in safety-enhancing technologies.” The negligence liability exposure for employers that elect the Texas option “may prove costly in exceptional cases” and “may strengthen their incentives to implement costly safety improvements” which, in turn, offsets the above moral hazard effects. Grounds for Denying or Terminating Benefits Morantz found the majority of private plans include more grounds for denying claims or terminating benefits in particular cases than are commonly found in workers’ compensation. These provisions focus on employee accountability just before or after the injury takes place and on the nature of the injury. (Those provisions are commonly subject to a “good cause” exception that must be administered by a fiduciary under ERISA in the best interests of the injured worker.) Impact of Employment Status Contrary to option critics' claims that all injury benefits cease upon any termination of employment, Morantz found that medical benefits continue unless the employee is fired for gross misconduct. She also found that option plans commonly do not terminate wage-replacement benefits if an employee is laid off, but such benefits do cease if the employee voluntarily quits or is fired for other reasons. Only one study participant’s plan reserved the right to terminate wage-replacement benefits if the employee was fired for any reason at all. See Also: What Schrodinger Says on Opt-Out Retaliatory Discharge Claims  Morantz noted that the Texas’ Workers’ Compensation Act protects employees who file workers’ compensation claims from retaliatory discharge but that employees covered by option programs enjoy no similar protection under state law. However, she also noted the anti-discrimination/anti-retaliation claim available to workers under Section 510 of ERISA. Drop in Texas Workers’ Compensation Rates as Large Employers Moved to the Option Although very small firms (those with one to four employees) have always been disproportionately likely to forgo participation in Texas workers’ compensation, Morantz noted that substantial numbers of very large employers (those employing at least 500 workers) began doing so around the turn of the millennium. In 2001, Texas had among the highest reported cost-per-claim among the 14 states included in the annual Workers’ Compensation Research Institute (WCRI) cost benchmarking study. Since then, both medical costs and indemnity payments per claim under Texas workers’ compensation have plummeted. Need for More Study Morantz concluded there is an urgent need for further analysis of the economic and distributional effects of workers’ compensation systems co-existing with privately provided forms of occupational injury insurance. This includes the need to further (1) identify which specific characteristics of private plans are producing the majority of cost savings, (2) study potential cost-shifting to government programs or group health plans and (3) consider differences between option programs sponsored by small-, medium- and large-sized employers.

In our emerging on-demand economy, Blue Ocean strategy will abound for P&C and life and annuity (L&A) In this post, I will focus on the Blue Ocean strategies that are needed in the P&C insurance industry. The essence of Blue Ocean strategy, as discussed in W. Chan Kim's and Renee Mauborgne's 2005 book Blue Ocean Strategy, is "that companies succeed not by battling competitors but rather by creating 'blue oceans' of uncontested market space." Society's expanding on-demand economy is generating newly uncontested P&C insurance markets. These new insurance markets are being formed from the blurring of consumer and corporate exposures that have historically been considered separate exposures by insurance companies, intermediaries, regulators and customers. My objective in this post is to discuss the emergence of a new insurance player, a licensed insurance intermediary, that offers insurance that the Transportation Network Company (TNC) drivers—specifically Uber and Lyft drivers—should purchase to protect themselves, their ride-share vehicles and their passengers. TNC drivers have insurance requirements for all three time periods From the moment they "tap the app on" to the moment they “tap the app off,” Uber and Lyft drivers generate a fusion of personal and commercial automobile insurable exposures. The fused automobile insurable exposures are in play throughout three three time periods during which drivers need to protect themselves; their personal vehicles being used as ride-share vehicles to pick up, transport and drop-off their passengers; and, of course, their passengers. The three time periods are:

1. Time Period 1: This period begins when an app is turned on or someone logs in to the app but when there is no ride request from a prospective passenger. The driver can be logged into Uber, Lyft or both, but the driver is waiting for a request for a ride.
2. Time Period 2: This period begins when the driver is online and has accepted a request for a ride but has yet to pick up a passenger.
3. Time Period 3: This period begins when the driver is online and a passenger is in the car but has yet to be dropped off at the destination.

No, your personal automobile insurer probably does not cover the ride-share It would be foolhardy (at best) and extremely costly (to the ride-share drivers) to assume the insurance policy that covers the driver's personal automobile would also cover the exposures the driver generates as a TNC driver throughout the three time periods. However, there is an expanding list of personal automobile insurers that:

• cover time period 1 for ride-share drivers—TNC companies do not provide coverage during this period; and
• will not cancel a driver’s personal automobile insurance policy if the driver tells the insurance company she is using the vehicle as a ride-share vehicle while driving for Uber or Lyft.

But the fact remains that there is a paucity of insurers that cover the personal and commercial automobile risks for people using a vehicle as a ride-share vehicle during all three time periods. Further, drivers could very well find themselves with insufficient coverage even if the TNC provides coverage during time periods 1 and 2. The paucity represents Blue Ocean uncontested market opportunities The opportunities are the drivers' need for insurance coverage to:

• the fullest amount possible given the requirements of each state and each driver’s situation (i.e. the cost to repair the vehicle will differ by vehicle and state where the driver operates)
• fill the insurance gaps between 1) the driver’s personal automobile coverage; 2) what Uber or Lyft provide during time periods 2 and 3; and 3) what each state requires.

Simply put, depending on the type of vehicle the driver is using as the ride-share vehicle and the state where the driver is operating, it is entirely possible that whatever insurance the TNC provides—even if it meets the minimum requirements of the state—is inadequate to financially help the driver (Note: this is not meant to be an exhaustive list of financial requirements):

• remediate/restore the ride-share vehicle to its pre-damaged condition;
• pay for physical rehabilitation for the driver, passengers or pedestrians who are injured in an accident caused by a ride-share driver or a third-party;
• pay for property remediation caused by the ride-share driver
• pay the lawsuit of ride-share vehicle passengers who claim the driver attacked them;
• pay for the lawsuit of ride-share drivers who claim a passenger attacked them; and
• make payments in lawsuits brought by passengers or pedestrians injured or killed, or owners of property destroyed or damaged by the ride-share driver.

Slice emerges to provide hybrid personal and commercial P&C insurance Slice Labs, a new player in the insurance marketplace based in New York City, is emerging to target this specific uncontested market space by providing Uber and Lyft drivers with access to hybrid personal and commercial automobile insurance for all three time periods. In a March 29, 2016, press release, the company announced it secured $3.9 million in seed funding led by Horizons Ventures and XL Innovate. I truly appreciate and personally respect Slice for taking the time to enter this Blue Ocean market space in the “right way” by first becoming licensed in the states where the company wants to operate. Currently, Slice is licensed to conduct business for Uber and Lyft drivers in seven states: California, Connecticut, Iowa, Illinois, Pennsylvania, Texas and Washington. Getting licensed Moreover, Slice’s business model is to operate as a licensed insurance intermediary with underwriting and binding authority. The intermediary has become licensed as insurance agents for personal and commercial P&C, excess and surplus (E&S), and accident and health (A&H) insurance. Slice also has managing general agency licenses in the states where that license is required to sell the hybrid insurance coverage. Slice is taking this path of licensure because it is using a direct model and doesn’t plan to distribute through agents (intending instead to distribute through the TNC platforms and directly to the drivers). Further, because this is a hybrid personal and commercial automobile insurance opportunity, Slice is designing and filing the requisite policy forms in each state where it wants to operate. Slice is underwriting the risk, but it is not financially carrying the risk. For that, Slice will be working with primary insurers and reinsurers. Slice has not yet reached the point where it can identify which (re)insurers are providing the capability. Obviously, without having the insurance financial capacity, Slice can’t operate in the marketplace (unless Slice plans to use its seed financing and future investment rounds for that purpose—assuming that is allowed by each state where Slice wants to operate). It is also important to know which (re)insurers are providing the capacity. I hope Slice releases that information very soon. Conducting business with Slice A driver purchases the hybrid policy by registering on the Slice app (registering is the process of the driver receiving and accepting the offer to apply for insurance), which triggers Slice’s underwriting process. At the completion of the underwriting process, Slice generates and sends the driver a price for the policy that will cover the driver’s fused personal and commercial automobile insurance requirements for each cycle of turning on and off the Uber or Lyft app. Once the driver purchases the policy, Slice sends the driver the declaration page and policy in a form required by each state. Slice will send the DEC page and policy digitally if that is allowed by the state. Moreover, the Slice app will show the proof of insurance, the time periods the insurance policy is in effect and the amount of premium being charged during the time period from “app on to app off.” If there is a claim, the driver will file the first notice of loss through the Slice app. Although Slice plans to work with third-party adjusters to manage the claim process, the driver will only interact with Slice until the claim reaches a final resolution. What do you think? Will this uncontested market space remain uncontested for very long? I sincerely doubt it. The addressable market is huge: every Uber and Lyft ride-share driver who does not have the requisite insurance or doesn’t have sufficient insurance (the two are not necessarily the same animal). What do you think of Slice, of this market opportunity and of other on-demand economy opportunities that reflect a fusion of personal and commercial insurance exposures?

People often use "innovation" and "transformation" synonymously. Both words evoke thoughts of change and modernization. Both words are important outcomes of the change management life cycle. We know innovation is occurring all around us, as people find ways to improve things. Alternately, transformation is the result of moving from one state to another. So, should we innovate, or should we transform? Should we do both? What’s the difference? See Also: Does Your Culture Embrace Innovation? I think the best way to answer is to explore the differences between innovation and transformation in insurance and break each down into definitions and examples. Then, you can determine where your company is in the change management life cycle and decide what will work best for your organization. What SMA has found, as we work with insurers, is that innovation and transformation are not only distinct, but are decidedly different, and their impact on organizations is different, too. Innovation Innovation is defined by SMA as rethinking, reimagining and reinventing the business of insurance. We have seen the results of innovation in business models, customer relationships, new products and new services and in how investments in technology are made. A perfect example of innovation is the focused improvements of customer experience. Once, customers had to push paper and make phones calls back and forth with agents, but innovation has made these types of interactions a distant memory. Today, chat, apps, portals, mobile, etc. have started to create an innovated customer experience. It is different and (arguably) better. Similarly, in the data analytics arena, innovation in the ways we use and apply data has changed the way insurers operate, price policies, handle claims and compete in the market. Innovation makes something that once seemed impossible possible. It is rethinking the way of doing things, questioning the possibilities and turning them into action. Transformation Transformation is the evolution or journey from a current level to a different and better state. SMA describes it as modernizing and optimizing. Like innovation, transformations produce an improved state, but we can also measure the journey as an outcome of the process. The journey of transformation is the tangible process, structure or building block for future success, even if a project fails or takes a different shape. Transformation can be seen in core system replacements, during which existing and necessary underwriting, billing and claims capabilities are shifted and moved into a better state through improved technology and processes. Transformations are evolutionary and occur over time. Our recent research reveals that approximately 13% of insurers self-identify as innovating, while 45% identify as transforming. That’s a pretty sizable difference. The data suggests that transforming existing systems and processes is a necessary effort in today’s world. SMA predicts the percentages of both innovating and transforming insurers will continue to grow. Most insurers need both!

Have you ever seen footage from old auto shows that showcase the "car of the future"? It always seems to be some sleek looking vehicle slowly spinning on a turntable, and everyone at the show can't wait to get one. Examples from past eras include the Cadillac Cyclone, Ferrari Modulo and Ford Nucleon. Only problem is, those concept cars never get built. Some features may get incorporated into production vehicles, but, in reality, that shining vision of the future never materializes. Some people see underwriting technology the same way. “Sure,” they say, “the features and functionality of a modern underwriting system sound really cool, but the promise of underwriting technology that truly transforms business results is just a fantasy.” See Also: The 5 I's of Underwriting  In reality, the next generation of underwriting technology is already here. It’s in production, it inspires real business value and a good number of forward-looking insurers are enjoying the ride! Property/casualty insurers are more engaged than ever in innovation initiatives, and strategy meets action (SMA) research ranks underwriting as one of the most highly targeted areas for investment. That’s because today's underwriting technology—especially in the form of dedicated underwriting workstations—is actually delivering on the promises of data-driven, workflow-optimized risk evaluation processes. Underwriting workstations are streamlining the underwriting process, making underwriters more efficient and helping to increase collaboration with producers. And, most importantly, underwriting workstations are giving underwriters access to a host of data and tools for better risk decision making, all while lowering loss ratios and driving profitability. Underwriting is often referred to as the engine of property/casualty insurance. The more underwriting operations are consistent, optimized and streamlined, the better the outcome. As insurers look to innovation strategies to advance their businesses, SMA’s outlook on industry trends indicates that underwriting workstation technology is playing a vital role in reshaping the underwriting process. Underwriting workstations stand out as a winning innovation investment because the real-world experiences of insurers that have already embraced the technology are a solid indicator of the benefits. Today, insurers continue to face challenges with legacy underwriting processes. From long processing and turnaround times to agent and underwriter communication delays and manual or paper-driven workflows, operational pain is often a standard fixture in conventional underwriting. Such restrictions actually discourage an environment for innovation, keeping underwriters from what they are meant to be doing: making the best possible risk evaluation decisions, as quickly as possible. The business and technology justifications for investing in advanced underwriting technology are plentiful. In fact, insurers are investing in modern underwriting technology and data environments as a foundational layer for business transformation. It is increasingly possible to make smarter, more informed risk evaluation decisions by using responsive, dedicated underwriting workstations that are connected to new sources of data and predictive models. The ability to access, assemble, manipulate and interpret risk information from a centralized, connected system is creating new opportunities for better and more consistent underwriting. More than ever, insurers are able to leverage modern underwriting workstations to offer the best coverages or exclusions at the right price. Those insurers with underwriting workstations in place have seen high returns on their investment. They experience growth in direct written premium, improved quote efficiencies, accelerated submission appraisal and see a boost in risk assessment productivity. Underwriting workstations sharpen the focus on actual risk evaluation, eliminating low-value tasks and the need to hunt for information. The solution increases the level of consistency, discipline and knowledge-sharing across the enterprise, through built-in rules, check lists and required supporting documentation before an application is allowed to move forward. Insurers may have aging technologies that perform key functions satisfactorily but, at a minimum, mandate underwriters access multiple systems (CRM, policy, billing, claims, loss control, etc.). The deployment of underwriting workstations insulates underwriting teams from having to maneuver in multiple systems to fulfill their tasks. Instead, data from diverse platforms can be made available to underwriters in the single, stable user interface of the underwriting workstation. It is a popular notion that policy systems alone can efficiently support the underwriting workflow. But the need for increasingly complex and data-driven risk evaluation precision—particularly by commercial and specialty lines insurers—indicates that a more sophisticated underwriting technology platform is required. Indeed, underwriting workstations can have the highest value when integrated with modern policy systems. The combination establishes a strategic and scalable enterprise platform, adding previously unattainable capabilities such as multi-line proposal workflows, full insured/account views and team-based underwriting. See Also: AI's Huge Potential for Underwriting Workstations also give agents and brokers access to the full underwriting process, making for easy collaboration and faster turnaround times. Producers and underwriters can share documents, notes and e-mail, providing real time visibility into the submission process for new business, renewals and endorsements. With underwriting workstations, managers gain support for regulatory and compliance requirements with systematic audit trails, and executive management gains deep insight around entire books of business. The organization also gains new strategic capabilities such as multi-line, account-based underwriting and becomes positioned to rapidly scale and expand products or lines of business. As data sources predictably grow and become more available, underwriting workstations allow insurers to leverage new sources of risk information. SMA research shows that more than 50% of property/casualty insurers are currently using data and analytics for underwriting and risk management, with more than 10% piloting data and analytics solutions and 25% planning to use those solutions in the next three years. The research indicates an increased reliance on varied and external data—such as geospatial models, catastrophe models, telematics and other sources—to support underwriting decision making, and it is helping increase profitability by eliminating risks that may currently be indiscernible in the underwriting process. While the ability to fully incorporate new data into business workflows continues to evolve, one key imperative for insurers is to improve their technologies and tools in a manner that informs and improves the underwriting process but does not further overburden underwriters with having to locate and integrate risk data. Insurers that capitalize on analytics in risk decision-making are able to accelerate growth and improve profitability. Therefore, data and analytics capabilities must be integrated within the underwriting workflows, and they must provide contextual analytics based on the risk being evaluated by the insurer. Underwriting workstations facilitate integration of multiple data sources and analytics, and they provide context based analytics at the point of the underwriting decision. So when insurers are looking for next generation technology to improve underwriting efficiency and boost the precision of risk evaluation, they don't have to wait or compromise. Unlike those concept cars of the future that never see the road, underwriting workstation solutions are already here and are tearing up the tracks.