As a professional loss accountant with more than 20 years of experience with business interruption (BI) valuation, I can understand why policyholders struggle with finding a repeatable, efficient system that produces an accurate measurement of their BI exposure. Over the years, some of my clients recognized the issues with the traditional BI values approach, and decided to make a change. Unfortunately, too many companies continue doing what they have always done, even when there is a better way available.

Consider for a moment, just how important BI information is to your underwriter. The numbers you report give the underwriter the basis for writing coverage and calculating premium. Each renewal provides policyholders the opportunity to present their unique BI exposure. Unfortunately, this opportunity is often squandered because of a misunderstanding of business interruption values and the exposures they represent. The point of this article is to share a proven, alternative approach.

Understanding BI Values

First, there's the ratable value. It is the "big number" that is calculated for the business as a whole, assuming a 12-month, total shutdown of all revenue-generating operations. This worst-case and often unrealistic scenario is the information requested by the insurance company, usually in the form of a one-page worksheet. Without additional information, the underwriter will use this information to set limits and charge premium.

The ratable value calculated is somewhat meaningless, except that it establishes the base assumption that is used as the BI value in all other scenarios, such as unincurred cost categories. The ratable value is seldom a reflection of your exposures. Better ways to assess your exposures are to examine your maximum foreseeable loss (MFL) and probable maximum loss (PML) scenarios.

What Is Maximum Foreseeable Loss?

The MFL, as the name indicates, is the worst-case scenario. This is not as extreme as the ratable value scenario, but pretty close. The assumptions used here include a complete breakdown of protection and loss mitigating factors while you are hit where it hurts at the worst possible time. An example would be the loss of a unique distribution center to a retailer during the holiday shopping season -- say the distribution center that handles online orders goes up in smoke on Cyber Monday.

The factors used to measure the ratable value would be used in this scenario to determine the business interruption value. Certain assumptions may change depending on the duration of the loss scenario. For example, labor expense may be considered completely saved in the ratable value scenario because of the assumption that there is nothing left, but only partly saved in an MFL scenario.

What About the Probable Maximum Loss?

The PML is the same as the MFL, except that loss mitigation efforts and protections work properly. The PML also takes into account pure extra expenses used to retain customers. The PML can help with decision making on purchasing extra expense coverage.

What Happens in Underwriting?

Although I'm not an underwriter, I've typically seen insurance companies take an engineer's approach to MFL and PML scenarios that vary only in duration. This singular perspective does not account for the rest of the pieces of the puzzle. The other pieces are the finer details that actually occur during a claim. In a real claim, topics like seasonality, make-up and outsourcing would surely come up, but you won't see them on any BI worksheet.

The MFL and PML should be based on realistic loss scenarios and measured as if they were a claim. Simply applying the ratable value to loss-period assumptions produces misleading and inflated numbers. This is precisely why it is in your best interest to develop your own valuation method based on real scenarios.

Why Create Exposure Scenarios?

If BI values are based on assumptions, and you are using the worksheet, then the assumption is a 12-month loss scenario. Can you imagine a scenario in which your operations would only be affected for six months? The worksheet makes a blanket assumption of 12 months whether realistic or not. Coming up with various loss scenarios by location would flesh out a more realistic representation of the impact of each particular loss. The scenarios would also highlight high-risk locations along your supply chain, which could improve your business continuity planning.

An exposure analysis project is not only an accounting project; it's an integrated business exercise offering multiple benefits to an organization. The goal is to identify and examine loss scenarios and the resulting ripple effects.

It isn't necessary, nor is it practical, to anticipate every possible loss scenario. It's better to prioritize by perceived risk and probability. Then, develop a good sampling of loss scenarios from which you can determine the impact to operations and the mitigating actions that would be taken. Depending on the exposure, involve the appropriate internal personnel, e.g., operations, sales, business continuity, IT and accounting. The external experts you may involve are your broker, legal counsel and, of course, a forensic accounting firm that specializes in insurance work. Additionally, your company's business continuity plan (BCP) and incident response plan should be factored in. However your scenarios play out, the loss accountants can calculate the business interruption as though it were an actual claim.

As you can see, this approach would produce a more accurate BI value by location and overall. It's the right way to look at business interruption, so make it a part of your approach with underwriters.

A radical shift is underway in how insurance markets are going to be regulated in the UK. The shift will transform the relationship between insurers, regulators and the public.

"Big data" promises a more personalized, customer-centric way of doing business. Yet, as insurers gain access to unprecedented levels of information about the lives of consumers, there could be problems with privacy.

This ability to track everyday lives begins to resemble an idea put forward by the 18^th century reformer Jeremy Bentham. He envisaged a prison designed in the form of a ring, with a central tower from which prisoners could be monitored at all times, but in which those monitoring remained unseen. He called it the Panopticon. The idea underpinning Bentham’s design was that the monitoring would be so constant, yet so unknowing, that the prisoners would adopt more conforming behaviors.

Let’s think of a modern day panopticon, the ring filled not with prisoners but with millions of consumers, and a central tower full of firms gathering data about us. Data about our everyday activities would stream into that central tower, to be turned by the firms there into personalized products and services. A "digital panopticon."

Insurers are one such class of firm taking up position in that central tower. Underwriting and claims people would analyze all that consumer data, looking for patterns of behavior that signal a good or bad risk, an honest or dishonest claimant.

Then there's the UK regulator, the Financial Conduct Authority (FCA), talking about a new era of regulation based on a combination of data, technology and behavioral science. The FCA illustrated this new era in a recent review of the pay-day loan sector, drawing in vast amounts of loan data from firms and analyzing it to produce new rules on lending and servicing practice.

Insurance could be next on the FCA's list. Might the FCA start drawing in vast amounts of insurer data to analyze it for signs of consumer detriment? If so, does this mean the regulator is now constructing an observation tower of its own inside that "digital panopticon," one that sits within the insurance market's own tower? Are we seeing the emergence of "panoptic regulation"?

Such a "tower within a tower" could be a game-changing move. It could bring about a radical change in market attitudes toward ethics, fairness and culture. After all, the key idea behind the panopticon was for it to bring out better, more universal behavior, on the basis that what you were doing at any time might be under observation. Is the real future of regulation then simply the power derived from being in that innermost tower, using data to watch over a firm that could be yours, to watch over a person who could be you?

And if firms use predictive analytics to anticipate policyholder behavior, then could the regulator use its own predictive analytics to identify emerging patterns of misconduct? A regulator able to address misconduct before it became widespread would be powerful as well as controversial.

This could bring about a revolution in trust, for might consumer concerns about their personal data fall away, knowing that regulators are able to see everything insurers are doing with it?

The original panopticon proved too radical for the time and was never built. Yet something very similar is taking shape in the digital insurance market. The key question is: Is the insurance market and its regulators ready for the consequences that will flow from this?

To explore the concept of panoptic regulation in more detail, read this paper I wrote for the Chartered Insurance Institute earlier this year.

The second-worst-kept secret of the year, after the launch of Google Compare in the U.S., is Berkshire Hathaway announcing its plans to sell insurance directly to business owners over the web. Quelle surprise.

I recently spoke with a C-suite exec who told me that "direct" is a dirty word.

Perception is reality.

In reality, though, "direct" is a lousy term that doesn't do justice to the implementations that today's technology has to offer that are often in direct alignment with an insurance company's business model.

The conversation becomes uncomfortable to some once the word "middlemen" is introduced. It doesn't have to be.

There are two primary outcomes to direct selling: (1) eliminating the middlemen or (2) empowering them. For visualization purposes, consider the following three brands:

Quotemehappy.com occupies the left extreme of selling directly to consumers. A spin-off of Aviva since 2011, the online insurer only provides phone support if a customer has a claim. For all other inquiries, there is browsing. Then there are the Geicos of the world, where insurers offer the convenience of buying on the web with the assurance of speaking to an agent, when needed. To the right extreme, Plymouth Rock provides an example of an insurer that has a patent-pending technology that matches online quotes to agents either pre- or post-purchase. There are several other players occupying the comfortable middle with direct-to-consumer models that offer varying degrees of human interaction.

Typically the outcome is determined by the company's original distribution channel: whether offline, web or mobile. The table below further illustrates how versatile "going direct" can be:

• Geico, Policy Genius and Cuvva are examples of insurance companies that implemented a direct-to-consumer strategy from the get-go; here, direct is a no-brainer.
• Plymouth Rock and Quotemehappy.com via Aviva signal companies that implemented a direct-to-consumer strategy in an attempt to address a change in the market.
• Allstate acquired Esurance to buy its way into the direct market, and so did AmFam with the acquisition of Homesite.
• Also, AmFam invested in insurance comparison site CoverHound.

When all is said and done, direct selling is first and foremost a marketing channel that empowers the consumer. Sans proper marketing and messaging, the online insurance journey is transactional at best, and players risk commoditizing their product.

"Commodity." Now there's a dirty word for you.

With increasing frequency, I am seeing post-termination claims being filed against employers who otherwise are doing an excellent job providing a safe work environment and comprehensive safety training.

It is impossible to develop statistics on this kind of claim, but anecdotal evidence indicates that there are more of them being filed. A slow economy exacerbates this problem.

It is important that we find strategies that will limit the number of these claims for the following reasons:

1. They typically are litigated, so they are incredibly expensive.
2. They are discouraging and disheartening to an employer who has cared about the safety of the workers and treated them well.
3. The majority of these claims are without substance. "Fraudulent" is a term that should not be used loosely but is very often applicable here.

We never can completely wring fraud and abuse from the workers' compensation system. Soft-tissue claims are virtually impossible to prove or disprove, so we must rely on the injured worker to be honest. That means employers must do everything possible to influence employees to be honest.

Besides getting the terminated employee to sign a waiver that she is injury-free on her last day, here are a few additional recommendations:

• After a layoff has been announced, but before the termination has taken place, honor those people who have worked safely and injury-free during their employment with the company. Adding a small gift card is a way to thank them. By recognizing them and thanking them in a public setting, you show your appreciation, and lack of appreciation is one of the primary reasons that people file fraudulent claims.
• If the soon-to-be laid-off workers are part of a safety team or department, make sure that they are included in any awards or recognition that is given at the end of the measured safety time period.
• Indicate to the workforce that the company policy is to contest and deny any claims that are filed after a layoff or termination. Don't just threaten, do it.
• Gain agreement from your insurance carrier that it will contest any post-termination claim and not simply offer a settlement to have it go away.
• Contact the physician who is issuing the cumulative trauma report and let him know that you intend to contest his finding. Your insurance carrier should be your ally in exposing repeat offenders.

Remember that an injury that occurs after a layoff has been announced, but before the termination takes place, sets up any post-termination claim as legitimate.

Treating employees well and creating the strongest possible safety culture are the best defenses, but incorporating additional strategies can help prevent a discouraging and expensive post-termination claim.

More companies than ever realize they've been breached, and many more than you might think have begun to put processes in place to respond to breaches.

A survey of 567 U.S. executives conducted by the Ponemon Institute and Experian found that 43% of organizations reported suffering at least one security incident, up from 10% in 2013. And 73% of the companies surveyed have data breach response plans in place, up from just 12% in 2013.

"Compared with last year's study results, survey findings show encouraging signs that organizations are beginning to better prioritize data breach prevention, but more needs to be done," says Larry Ponemon, namesake founder of Ponemon Institute.

Major data breaches have become a staple of news headlines. So it can't be that companies are complacent. The problem seems to be that big organizations just can't move quickly enough.

Home Depot was blind to intruders plundering customer data even as Target endured exposure and criticism for being similarly victimized just months before, possibly by the same gang.

In our connected world, it's hard to keep pace. The Ponemon study found 78% of companies do not account for changes in threats or as processes at a company change.

Rise of threat intelligence

That's where the trend toward correlating data from disparate threat sensors could begin to close the gap. It's a promising sign that ultra-competitive security companies have begun to collaborate more on sharing and analyzing threat intelligence.

Boulder, Colo.-based security vendor LogRhythm, for instance, has formed an alliance with CrowdStrike, Norse, Symantec, ThreatStream and Webroot to share sensor data and compare notes on traffic that looks suspicious.

LogRhythm supplies a platform for culling and analyzing data from its partner vendors "to help identify threats in our customers' IT environments more quickly, with fewer false positives and fewer false negatives," says Matt Winter, LogRhythm's vice president of corporate and business development.

Since announcing its Threat Intelligence Ecosystem last month, LogRhythm has received "considerable inbound interest from customers and channel partners," Winter says. "Feedback has been very positive."

Similar threat intelligence alliances, both formal and informal, are taking shape throughout the tech security world. The business model of Hexis Cyber Solutions, a year-old startup, relies on pooling threat sensor data from several security vendors, including antivirus giant Symantec and social media malware detection firm ZeroFOX.

Hexis applies analytics with the goal of accurately identifying - and automatically removing - clearly malicious programs.

"The state of the art today is a single-point security product triggering alerts on particular things and putting a warning on a screen," says Chris Fedde, president of Hexis. "We're all about analyzing alerts and taking action on them. Anything that's malicious we go ahead and remove."

In one recent pilot study, Hexis tracked 5,000 computing devices and 13,000 user accounts of a U.S. medical center for 30 days. Hexis intercepted 35,000 incidences of suspicious outside contacts and removed 23 malicious files.

Those malicious files that got inside the medical center's network included: Dirtjumper, a tool used to conduct denial of service attacks; Tsumani, malware used for spamming and data theft; a remote access tool (RAT) used to take full control of a compromised computer; and an adware Trojan.

There's a long way to go. But alliances to share threat sensor information, like the ones being pioneered by LogRhythm, Hexis and many other security vendors, seem destined to take root.

Someday in the not too distant future, it may not matter if intruders get inside the network, if robust threat intelligence systems are poised to cut them off from doing damage.

I recently had the pleasure of attending the Insurance Disrupted conference in Palo Alto (put on by the Silicon Valley Innovation Center in partnership with Insurance Thought Leadership). This was the single best insurance conference I have ever attended. I was surrounded by hundreds of hopeful, smart, problem-solving professionals from disparate backgrounds and industries all trying to make a difference in insurance without money being the prime motivator.

I was so encouraged by what transpired at the conference, the connections that I made and what I believe would be the promise of a new future that I began to pen this article on my flight home. But something just did not sit right with me as I wrote. Three weeks have gone by, and I am beginning to understand why I felt the way I did; at the end of the day, insurance will NOT be disrupted.

For all the promise of big data, the Internet of Things, autonomous vehicles and peer-to-peer insurance, there was nothing presented at this conference that struck me as disruptive in the way the tech industry is generally thinking of the term today. When technologists think of disruption, they immediately point to Uber and Airbnb, which disrupted the taxi/livery and travel accommodations industries. The taxi industry is literally fighting for its survival. No, that will not be the fate of insurance. Insurance will be a lot more difficult to shake up or disrupt.

Here's why:

1. At the core, insurance customers are leasing the potential to access capital. That capital is sitting in predominantly liquid assets. Not real estate, not taxi medallions. How do you make a big pile of money irrelevant?
2. The modern form of the industry is 300 years old, and the math is pretty solid (that's why they call it actuarial science). We sell a product whose costs are unknown at the time of purchase. That means scale and immense capital is required to cover worst-case scenarios, which rules out any new business model not having that potential. Peer-to-peer providers just won't be able to get sufficient scale to efficiently use capital to cover risk. And if they aggressively get scale, then they just become another insurance company, so what's the point?
3. Getting a better glimpse into those unknown expenses can create massive competitive advantages. This is where big data and the IoT creators are looking to disrupt, as big data and IoT will generate incredibly large data sets to be used to accurately predict, avoid and mitigate future losses. I have no doubt that these new technologies will make an impact on the industry, but I am less convinced of their disruptive nature. Insurers have already established non-actuarial, big data departments where fraud detections and credit scoring are just a couple of many predictive models being created. IoT devices will slowly be adopted by most insurers as they look to get competitive edges, but the follow-the-leader paradigm of the industry will mean that any edge will disappear quickly, and we will all be running hard just to stay in place. These technologies are impressive. I would classify them as a solid innovations to the industry, but not disruptive. (Disclaimer: I bought a smart battery from Roost.)
4. Autonomous vehicles represent the one area where some chaos can occur. But notice I use the word "chaos" and not "disruption." If autonomous vehicles can live up to expectations, then they will be a great service to society, reducing deaths and increasing efficiency. Risk will transfer from a personal lines business to commercial lines, and that could be chaotic for heavy personal lines auto writers such as State Farm and Progressive. But will this be disruptive? Will State Farm or Progressive be fighting for their survival the way that medallion owners in the New York City taxi system are? Again, I doubt it. State Farm is sitting on about $70 billion in surplus capital, and it generally writes at a 100 combined ratio, working the float and cash flow model. I think State Farm and large auto insurers like them will be just fine, and technologies such as autonomous vehicles will be more of an annoyance than an existential threat. And like others, I don't think autonomous cars are nearly as ready to take over our roads as many seem to think.
5. For better or worse, state-by-state regulation of insurance is intense and nebulous. Ask Zenefits. The battlefield is already uncertain, and scrutiny by a regulator with political ambitions can kill your disruptive product quickly. Any technology that you think you can create that could potentially benefit the majority of buyers while subsequently raising the price for some other group, alone, would be grounds for a regulator to squash you, as that vocal minority raises their collective voices. In Florida, the state may even create a company to compete against you, writing business at a loss. Insurance regulation might be the ultimate disruption killer.
6. There was not one presentation on natural catastrophes, which happen to be my area of expertise. How we underwrite, manage and think about natural catastrophe risk has changed quite a bit over the past 20 years. In fact, CAT models have been and may continue to be the most disruptive force in insurance, and yet there is little technology can do to disrupt that area of the industry. I would have been very excited if we had discussions about new business models to help customers with the problems the industry is currently facing with getting adequate flood or earthquake cover to homeowners. If someone had proposed a new product that removed the exclusions of flood and earthquake from the homeowners policy, now, THAT would be disruptive! Alas, nothing on NatCat, and so we will continue to have thousands of homeless families following big storms and earthquakes.

I don't think insurance will be disrupted, not in the way folks from Silicon Valley are used to doing it. But the future of insurance will look very different than today. Very digital. Streamlined. Less clunky, more efficient. If "disruption" comes to insurance, it is likely going to require the replacement of the current set of leaders with new ones cultured in this digital age and influenced by the successes of technology to make change happen to their business models.

Paul Vandermarck from RMS (a CAT modeling vendor) perhaps summed it up best when he said that no matter how all of this change to the industry plays out, we know of one sure winner: the customer. And that's how it should be.

The saying goes: The only constant is change-and, in our technologically enabled world, change continues to quicken in pace. For insurers grappling with legacy systems and striving to become more customer-centric, another shift is coming. In fact, many would argue it's already here. Welcome to the Internet of Things.

Are you ready to be an Insurer of Things?

Accenture has outlined six facets of the Internet of Things, which has begun to connect homes, cars, people, organizations and even entire cities. For insurers, these developments raise important questions, such as:

• Who or what is insured?
• Where does liability begin and end?
• What are the implications on claims in a market where an insurer's discrete business gives way to the Internet of Things, ecosystems and partnerships?

For example, Volvo recently announced that it would accept full liability for its autonomous cars. In principle, these cars would be equipped with safety features that would decrease the incidence of collisions and claims. That may drive down premiums-and will certainly force insurers to consider what a "connected claim" might look like in this new marketplace.

Over the next few weeks, I'll look at the Internet of Things and its implications for the insurance industry-and especially for the claims function.

For U.S. property-casualty insurers, 2016 will be a year of continuing disruptive change. Digital technologies, such as social media, analytics and telematics, will continue to transform the market landscape, recalibrating customer expectations and opening new ways to reach and acquire clients. The rise of the "sharing economy," under which assets like cars and homes can be shared, is requiring carriers to rethink traditional insurance models. Combined with an outlook for slower economic growth, increased M&A and greater regulatory uncertainty, the stage is set for innovative firms to capitalize on an industry in flux. Insurers that stay ahead of these shifts should reap substantial benefits, while laggards risk falling behind, or even out of the race.

Competitive pressures in the insurance industry have been building as cost-effective solutions in digital communication, distribution and infrastructure become widely available. Digital technology is eroding the advantages of scale enjoyed by established insurers and empowering smaller players to compete for market share through more flexible pricing models and new distribution channels. The recent launch of Google Compare, which enables customers to comparison shop for insurance, is the start of a larger wave of "InsuranceTech" activity in 2016.

At the same time, customer expectations and behaviors are evolving at a rapid pace, often faster than traditional mechanisms can react. Driven by their interactions in other digitally enabled industries, such as retail and banking, property-casualty customers are increasingly demanding a more sophisticated and personalized experience - including digital distribution, anytime access, premiums accurately reflecting usage and individual risk and higher levels of product customization and advice. Policyholders are also seeking coverage of broader risks, such as cybersecurity risk and under-protected property exposure.

Significant change to insurance ecosystem

Almost eight years after the global financial crisis, most major economies are still operating at well below potential. Although the U.S. is doing better than many countries, forecast growth of less than 2.5% for 2016 is unlikely to boost employment or wage growth significantly. With little sign that inflation is picking up, the Fed is intent on keeping interest rates near their current lows for the foreseeable future. Meanwhile, concern around the slowdown in China and other key emerging markets will continue to dampen U.S. growth prospects.

Despite sluggish economic conditions, property-casualty insurers should do well next year because of the favorable underwriting performance of the commercial lines sector and rising personal lines premiums. Softness in reinsurance pricing may increase opportunities for companies to cede capacity into the reinsurance and alternative capital markets, as well as achieve more stable reinsurance protection through broader terms and conditions. The industry will enter 2016 with a strengthened balance sheet and a strong base of invested assets from several years of solid reserve development and benign catastrophe experience.

But that is where the good news ends. In 2016, return on investment for firms is likely to continue to slip from its 2014 peak because of a combination of capital accumulation, competitive pricing, weakening investment returns and rising loss costs. Losses and expenses are growing faster than revenue, forcing companies to actively seek new solutions. In personal automobile and workers’ compensation, rising frequency and severity are beginning to erode loss ratio performance.

Competition is putting downward pressure on pricing, particularly in the commercial property and liability lines. This is compounded by slowing growth in commercial exposures because of economic weakness.

Regulatory headwinds ahead

In 2016, property-casualty insurers will face heightened political and regulatory uncertainty. An open presidential election for both parties, along with congressional and state elections, creates the potential for radical change with taxation and regulatory repercussions. Meanwhile, the Fed is preparing new capital standards for significant insurance companies, and HUD and the Federal Insurance Office may intensify investigations into the affordability and accessibility of personal lines insurance to customers from different backgrounds. The IAIS is also pursuing international capital standards through field testing, and the results may come into clearer focus in 2016.

The NAIC and states may separately advance their expectations of best practices in risk management, governance and solvency as current programs enter their second year of full rollout. All jurisdictions will likely push for better information, reporting and compliance in such areas as accounting, solvency, fair practices, transparency, governance and marketplace equity.

Impact of external forces on the US property-casualty market in 2016 (0 = Very low impact, 10 = Very high impact)

Coping with transformative change: priorities for 2016

In such a fluid, fast-changing environment, insurance firms need to build a road map for strategic transformation aligned to new customer imperatives. Refining legacy products and approaches is not enough - what is required is a fresh, outside-in approach that starts with the customer and carries through to digital trends and market shifts, both inside and outside the insurance industry.

1. Position Your Organization for Digital Leadership

Preparing for further digital disruption

As digital service models become more common in other industries, the property-casualty sector will need to align to the rising expectations of consumer and commercial customers. Digital technologies, such as mobility, social media and telematics, will continue to disrupt all parts of the property-casualty insurance value chain - from client acquisition to claims and servicing. Although the industry is ripe for digital transformation, many traditional insurers still display a low level of digital maturity, struggling to develop digital strategies that enhance the customer experience, extract efficiencies and drive future growth.

Priorities for 2016

Lay the groundwork for digital transformation. To meet changing expectations, insurers need to digitize interactions with customers, employees and suppliers. Building new distribution channels and working closely with existing distribution partners to enhance the customer experience is a strategic imperative.

Build a back-office to support the digital frontline. In 2016, carriers must continue to invest in back-office systems to enable digital enterprise platforms. These should be designed to allow for future expansion, omni-channel distribution and an improved customer experience, while minimizing customer service costs and protecting against escalating cyber risks.

Start new market initiatives now. As back-office systems are being readied, leading insurers should not wait for full integration, but push forward with next-generation portals, redefining customer experience, data access, queries and navigation. With the rise of real-time risk monitoring, there is a knowledge shift taking place between customers and insurers. Insurers need to tap into client and industry data sources to take full advantage of this new risk-information flow.

2. Prepare for the next wave of M&A activity

M&A will accelerate in 2016

Uncertain economic and regulatory conditions have caused insurers to cut costs and expand product and geographic diversification. Under growing pricing pressure and competition from non-traditional sources, in 2015 insurers turned to transformative mergers to achieve these goals. This surge in M&A activity is expected to continue in 2016, as acquirers seek to build scale and access US markets.

Priorities for 2016

Establish a well-defined process for post-merger integration. Mega consolidations require immense integration of systems and data. Companies involved in M&A should assemble the necessary building blocks to create single technology platforms, self-service customer portals and omni-channel distribution systems. Replacing duplicative technology, outdated service centers and first-generation mobile-enabled distribution will remove cost redundancies and inefficient processes. Successful mergers could create lower-cost infrastructures, which will enable these combined entities to invest in data sources and analytical tools that improve pricing, risk analysis and claims management.

Gain greater access to insurance buyers through M&A. Consolidation in the insurance broker and independent agent markets has tipped the balance of power toward distribution. In response, insurers in 2016 will look to gain direct customer access by purchasing specialty distribution and continue the trend of underwriters acquiring managing general agencies with exclusive books of business to increase premiums in less price-sensitive lines. Access to captive distribution should help tilt the scales back toward underwriters.

Take steps to protect against tougher competition. Insurers that refrain from the M&A frenzy will require a strategy to compete more effectively against larger, better capitalized companies. Recruiting human capital will become paramount, as will accessing distribution that provides high-retention, profitable business.

M&A activity in 2016 will make insurers vulnerable to takeovers, particularly those with the potential to provide an acquirer with greater product diversification, wider market access, stronger analytics and increased cost efficiencies.

3. Create a culture of continuous innovation

The innovation imperative

The rise in usage-based insurance, digital distribution channels and other disruptors is shaking up the industry. Widespread data availability and advanced analytical techniques are enabling new market entrants to absorb risk that was once the exclusive territory of insurers. Larger and more efficient capital providers entering the industry are siphoning off premium that ordinarily flowed to insurers. To stay relevant, traditional insurers need to shed their conservative orientation and cultivate a culture of innovation.

Priorities for 2016

Explore new technologies and start-up models. Competition is heating up as an array of new Fintech companies offer services that were once the exclusive domain of traditional insurers. To cope, insurers will need to adopt, acquire or even fund new technologies and experimental models that may even compete with their existing businesses. Recently introduced property-casualty insurance products, such as insurance for cyber risk, ridesharing and drone exposures, suggest that insurers can rise to the innovation challenge.

Be prepared to cannibalize parts of your business, before competitors do. The property-casualty insurance industry has not been known as a change leader. A growing asset base is a vital sign of stability for clients, but, as a business grows, more processes are added, creating bureaucratic layers that stymie innovation. To offset these institutionalized barriers to change, insurers will need to develop a culture of innovation that allows for internal competition.

4. Shift from a product to a service orientation

Staying relevant in a fluid marketplace

Changing customer needs are making many of today's insurance services less relevant. With a few notable exceptions, the traditional product suite has been relatively static and has not kept pace with evolving risks. Personal lines insurers are seeing reduced demand for their services because of advanced safety technology, the growth of the sharing economy and changing demographics and customer behaviors. Likewise, commercial lines insurers are coming to grips with new industries, emerging risks and a client base with significant access to their own risk data. Access to better data and analytics empowers customers to retain more risk, and much of the risk at the other end of the spectrum has been taken by capital market alternatives, leaving traditional carriers scrambling for the leftovers.

Priorities for 2016

Think outside-in, not inside-out. To adapt to this fast-evolving marketplace and differentiate themselves from competitors, insurers must enhance their service capabilities while developing products better able to serve new customer needs and behaviors. By providing services that build on the customer experience and changing expectations, insurers can foster stronger, more holistic relationships with clients and ultimately improve policy retention and generate higher margins.

Take a value-added, advisory approach. Customers are increasingly looking to their insurance partners for risk advice, not just insurance products. To enhance their brand and improve performance, insurers must be ready to provide customer-centric services to satisfy these expectations. Insurers will need to analyze their clients' exposures and develop risk-mitigation strategies and insurance coverage tailored to their needs. The rise of real-time risk data in both personal and commercial lines provides an opportunity for innovative insurers to address uncovered or mispriced risks.

5. Build a next-generation distribution platform

The rise of omni-channel distribution

Independent and captive agents have dominated the property-casualty insurance industry for decades. Even today, many insurance buyers rely on a trusted adviser to assist them with personal and business insurance purchases. But the days of a single distribution channel are over for many insurers. Consumers are demanding omni-channel access to insurance products. Insurance buyers want the same flexibility to learn, compare, purchase and report a claim as they have become accustomed to in other industries.

Priorities for 2016

Come to grips with pricing transparency. Creating an effective omni-channel platform is critical, as it allows insurers to promote their customer service capabilities, product differences and claims-response times more widely. But the rise of aggregator and non-traditional comparison models has also made it easier for buyers to shop for the best rates. In a digitally enabled environment of price transparency, there will be further pressure in 2016 for insurers to streamline costly and duplicative infrastructure.

Consider acquiring captive distribution. As insurance products become more commoditized, insurers may want to acquire captive distribution to add customers and boost business. By acquiring managing general agents (MGAs), insurers can gain access to experienced underwriters able to secure and retain profitable business, along with the systems and tools for underwriting and processing that business. Insurers will need to integrate these systems into core underwriting platforms to avoid duplicating costs.

Rethink compensation plans for distributors. Private equity-financed broker consolidation, going on for nearly a decade, will continue to shift bargaining power in favor of distributors. Agent and broker control of profitable businesses has allowed some large distributors to negotiate greater compensation. This power shift is happening at a time when rate softening has become the norm. As a result, insurers in 2016 should consider changing the industry's level-commission compensation standards in favor of greater up-front payments that reward access to new profitable customers.

6. Drive performance through analytics

The new role of analytics

Disparities in frequency and severity trends among several large personal auto insurers highlights the importance of data and analytics in driving underwriting results. Harnessing large volumes of data from real-time sources can help insurers develop new products and refine pricing strategies. When combined with a robust operating strategy, advanced analytics can significantly increase underwriting profitability and provide a valuable market differentiator.

Priorities for 2016

Apply proven analytics to the homeowners market. In 2016, personal lines insurers will increasingly apply analytical capabilities developed in the personal auto sector to the homeowners market. Greater adoption of technological innovation in the home creates an opportunity for both real-time risk assessment and pricing strategies, similar to the trend unfolding in the personal auto market. As insurers move back into the homeowner market, they will be better equipped to understand and price risks.

Use analytics to manage commercial market risks. As risks rise, small business owners are seeking broader insurance coverage and a simpler sales process. Insurers with the analytical capabilities to manage evolving risks and the technological know-how to create an automated sales experience will be better equipped to meet fast-changing customer needs. The experience in using analytics in the small commercial market will provide insurers with a blueprint for gaining efficiencies in the larger commercial market.

7. Develop and attract the right talent to lead change

Coping with a widening talent gap

Existing insurance teams often are not prepared for today's fast-changing digital marketplace. But filling the talent gap can be challenging, because the insurance industry is not often the first choice of new graduates from top colleges and universities. With finance, technology and consulting attracting most of the promising students, a talent chasm is forming in the property-casualty industry. Insurers must recruit and retain next-generation innovators and leaders - while retooling existing teams with new skills.

Priorities for 2016

Develop new roles to facilitate change. As insurers embrace innovation and adopt more advanced digital platforms, they will need to establish new business roles to drive these initiatives. For instance, the stronger focus on analytics is increasing the demand for data scientists - able to apply predictive analytics and other sophisticated quantitative tools to support underwriting and claims- handling processes.

Create an environment that rewards innovation. A culture of innovation will help attract Millennials and entrepreneurial talent with fresh perspectives. Bringing in new ideas and skills will be essential for insurers pursuing technological innovation in an industry not known for change. To acquire and retain this new crop of talent, insurers will need to set up systems to reward innovation and risk-taking in alignment with new strategic imperatives.

Expand risk advisory capabilities. Customers are increasingly interested in working with true risk advisers and finding insurance solutions that match their lifestyles. Traditional product approaches directed at individual risks are falling out of favor as customers seek more holistic solutions. In 2016, insurance teams will need to develop expertise in health, wealth and risk advisory, so that they can bundle products and provide value-added services to customers.

8. Make risk management a C-suite priority

Coping with complexity

Economic, financial and political uncertainty, combined with linked global markets and disruptive technological change, has created a more complex and volatile landscape for insurance firms - heightening the need for best-in-class risk management. Faced with a challenging environment and driven by regulatory demands, insurers have made risk management a C-suite and board-level priority, with risk managers being held accountable for improved financial performance and value creation.

Priorities for 2016

Keep on top of changing regulations. Emerging regulatory regimes include calls for greater uniformity at the state, federal and global levels, but the ultimate form of these requirements is far from settled. As always, insurers will need to stay on top of shifting regulatory frameworks, communicate the industry impacts and respond to changes as they emerge.

Watch for emerging risks, such as cyber-attacks. With access to growing volumes of sensitive data, both large and small insurers are seeking greater cyber risk protection. Corporate boards are becoming increasingly aware of the damage a cyber-attack can cause, including potential liability at the board level and the destruction of reputation and brand. Risk managers must stay ahead of the ever-increasing sophistication of hackers.

Remember, protection is only as strong as the weakest link in the chain. Even if an insurer is well insulated from cyber-attacks, its outside vendors may be vulnerable. Vendors that have access to an insurance company's systems, such as its underwriting platform, can inadvertently provide hackers with a conduit to valuable company data. Risk managers must be careful with data released to third party vendors for any reason, especially when that data is subsequently returned to the company.

This article was written by David Hollander, Thomas Cranley, Gail McGiffin and Jay Votta. To access the full white paper, click here.

This article is an excerpt from a white paper, "Capturing Hearts, Minds and Market Share: How Connected Insurers Are Improving Customer Retention." To download it, click here.

Part 1 of this series explained why retention is so much harder these days. This article explains how insurers can solve the problem.

Know Your Customers

Understand values and behaviors of your customers. Start with available data sources. Augment structured data from traditional back-end systems with unstructured data like those collected through call centers and written correspondence. With these data, you can deduce meaningful patterns and behavior-based customer segments.

Enter into active dialogues to establish meaningful relationships. Use social media analytics and conversations via social networks to increase customer touch points. Use the knowledge gained about their wants and needs to sustain intermittent conversation about things that are helpful to the customer.

Build an environment where sharing data creates mutual benefits for customer and insurer. Transparency is key. Create and publicize a "customer data policy" that specifies how and when you will use data shared directly or generated through means such as "big data gathering," and how customers will benefit. Use shared data to create extra customer value, as detailed in the next section.

Offer customer value

It is no surprise that customer value - that is, the value that a customer derives from the relationship with his or her insurer - drives customer loyalty. In a previous study, we defined customer value as the adequate response to customers' changing needs. How can insurers translate this to understand which value drivers influence retention?

The fairness zone: The first component of customer value we will discuss is - again - price. For most of our respondents, the absolute level of premiums mattered less than individual perception of price fairness - a too-low price has the same negative effect on loyalty as one that is too high (see Figure 5). This means that a customer to whom the price seems right is two to three times less likely to switch in a given year. The fairness of premiums is also an emotional component that insurers need to get right (and tools like social media analytics can support this).

What is the power of brand? The second value factor we examine is brand. What is the retention value of a good brand? According to our data, it's less than expected. Only 21% of our respondents name "reputation" as one of the factors that cause them to stay with their chosen insurers. Could brand still be an implicit value driver?

Our recent consumer products industry study, "Brand enthusiasm: More than loyalty," showed that brand consciousness and brand loyalty are changing, and our data echoes those findings. Only 12% of respondents have a high brand consciousness, and that is the only bracket where it has a strong effect on loyalty in the insurance world (see Figure 6).

This suggests that an extra investment in brand creates limited loyalty returns; a great brand only matters if your customers belong to the few who are brand conscious to begin with. Moving customers to the "high" consciousness bracket might prove difficult to achieve.

So how can insurers, many of whom already have a strong brand, make this work to their advantage? We propose adopting the concept of "brand enthusiasm." Brand enthusiasm is influenced by the level of customer engagement, which we will explore in the next section, and again leads to the increased emotional involvement with the insurer that we call "heart share."

Transparency, not complexity

Last but not least, we examined other product-related value drivers. We suspected that the often high complexity of insurance products has a negative effect on loyalty, but our data proved this hypothesis wrong. Although product complexity might be a deterrent to purchase (which was outside the scope of the survey), even those who perceived the product they bought to be highly complex did not show a higher propensity to switch.

In contrast, transparency about the product strongly influences loyalty in a positive way. Transparency leads the customer to understand and be more comfortable with the product (and the insurer) even when it is complex. Seventy percent of respondents who reported that their product understanding was high expressed high loyalty - almost three times as many as those with low product understanding. High transparency leads to rational involvement: the "mind share" in our study title.

What current technology can help insurers promote customer value? To give customers an emotional connection and involvement with a fair price and a transparent product, telematics is ideal. Regarding fairness, customers can see that the rate is based on their personal risk and influenced by their personal actions. Examples include a "pay-how-you drive" auto product or the use of exercise tracking devices in health insurance. Transparency of this sort of auto product is high, and for many telematics offerings, there is an additional fun factor by seeing how well you drove, thus competing against yourself for better driving scores.

Recommendations: Offer value

Support your customers in areas they personally value, even if they are not directly related to your core business. Offer information to your customers in useful areas that are widely related to their coverage: for example, traffic or weather information for auto insurers. Create communities of interest - in social networks or directly hosted by you - to share news, tips and enhance exchange among like-minded individuals and your organization.

Add risk mitigation or prevention into your products and services. Commercial insurers have been doing this for years. Start offering these at the outset of the contract relationship. Later, add tracking via telematics, plus assistance services.

Personalize offerings and provide pick-and-choose product options. Product flexibility starts in the back end. Your application architecture must enable a modular approach to products and services. Build a roadmap for flexibility using industry standards such as IAA. From the front end, add in-depth analytics to flexibly balance the offered options with market needs.

Fully engage your customers across access points

Incumbents at risk

One characteristic of the Millennial customer is the desire for omni-channel shopping for their goods and services. For insurance shoppers, this extends well beyond using traditional insurers - many Millennials are open to using adjacent providers and new entrants into the market (see Figure 7).

In the short run, offerings like Google Compare mainly replace existing aggregators; insurers still cover the actual risk. In the long run, online service providers - given their good customer knowledge across many products and services - could start to accept risk themselves. In this case, customers' already-stated willingness to switch would become a real threat to incumbents.

In addition, the reason respondents gave for considering those providers should be troubling to insurers: They describe non-traditional providers as faster, more transparent and easier to reach (see Figure 8). To counter this, carriers need to engage with their customers across a broader range of access points than ever before.

The age of mobility

One option is to be more accessible on the go. Ninety-six percent of our respondents own some form of mobile device, most often smartphones (owned by 82 percent of respondents) and tablets (owned by 49 percent); they have become commonplace modern accessories throughout the world. Still, only 13 percent of respondents who bought their insurance online, either directly or via an aggregator, used their mobile devices to buy. On the other hand, 29 percent of all respondents stated they would like their insurers to offer an option to buy through a mobile device, and that this would increase their loyalty.

Expanding mobile offerings outside of searching and buying is an instant accessibility increase with potential loyalty gains. The biggest effects would be in submitting claims (42 percent) and in simple communication (43 percent). Many insurers have already invested in apps for claim submission, but again, they seem to be either unknown or too hard to use.

The effect of expanded mobile offerings differs widely by country, with the more empowered customers in developing markets increasing their loyalty more (see Figure 9). Still, given the larger market sizes in mature markets, investment in mobile services are still expected to generate returns.

Connecting everything, everywhere

Looking toward the longer term, insurers will also need to consider investing in the Internet of Things (IoT) to enhance customer engagement. A growing number of consumers either own or can imagine owning an Internet-connected device like a refrigerator or a washing machine (56 percent of millennials, 36 percent of boomers).

Currently, only a small percentage of customers told us they would be comfortable with insurers using the data from these devices (21 percent of millennials, 15 percent of boomers.) Still, for those respondents, the greater accessibility and convenience of the IoT would lead to an increase in loyalty. Insurers can make use of the IoT if they sell it right: with high transparency regarding how the data is used (and not used).

Recommendations: Fully engage

Embrace mobile to enable constant access for your customers. For your main set of lines of business, envision "customer journey maps." These maps document the typical steps a customer must take during the provider relationship, from needs discovery through information gathering and purchase, all the way through after-sales services and claims processes. For each step, identify interaction options to generate a complete picture of potential mobile touch points.

Support decision making throughout each step of the sales process at the convenience of your customers. Create one unified front end for the customer, whether they come in through an agent, call center, the Internet or mobile devices. Make customer data and product information equally available at all touch points.

Have information available anytime, anywhere to support instantaneous fulfillment of client requests. Equip tied agents, underwriters, claims adjusters and other fulfillment roles with mobile technology like tablets and other handheld devices. This allows you to abandon a fixed workplace in favor of greater fulfillment flexibility - for example, claims can be adjusted directly on-site.

Ready or not - are you capturing the hearts and minds of your customers?

How are you using your in-house sources of customer knowledge? In what ways are you gathering and adding external information, such as that from social networks? How are you combining internal and external information? How is it used to generate greater customer value and loyalty?

Where and how are you using needs-based or persona-based segmentation approaches? How will you deepen your level of understanding individual customers?

To what degree can your customers pick and choose options from your product portfolio? What is your plan to remove the barriers to further customization?

How do you communicate with your customers? What is your approach to staying abreast of the ways they prefer to communicate, now and in the future?

In what ways are you engaging millennials? And how will you stay updated to address the customers of the future, such as Generation Z and beyond?

This article is an excerpt from a white paper, "Capturing Hearts, Minds and Market Share: How Connected Insurers Are Improving Customer Retention." To download it, click here.

There's no shortage of evidence that homeworkers appear to make happy employees, because of, among other things, flexibility, empowerment and better time management. According to experts (http://globalworkplaceanalytics.com/resources/people-telecommute), an estimated three million American professionals never set foot in an office outside of their own home, and 54% say they are happier that way. But what about the 46% who aren't happier?

Almost 12 months ago, I wrote (http://www.riskandinsurance.com/struggling-stress/) on the topic of stress, and how the increased use of homeworking might be good for productivity, but not necessarily so good for the employee. Isolation, work insecurity and lack of personal contact are good ingredients for increased work-related anxiety. Beyond this are the issues of poor working conditions, bad posture, working through sickness and substance abuse (which may be as simple as excessive caffeine but could be worse, much worse).

Employers usually seek to discharge their obligations by providing guidelines to homeworkers, and the better ones also encourage self-appraisals, which are shared with managers. But to what degree are these processes merely lip service? Isn't self-appraisal a dodgy process at the best of times? To what extent would a homeworker be candid about a medical or emotional condition, which might hurt their bosses' view of them? Are homeworkers really best placed to comment on their own posture? What other risks might emerge from homeworking, which don't feature in a self-appraisal, such as tripping over the dog?

Legislation places a duty of care on employers. Losses arising because of failure in discharging that duty of care give rise to liabilities that may be covered under an insurance policy. It's a fine balance between an organization empowering its employees, and leaving itself open to liability, and there's little doubt that homeworking carries with it a significant amount of trust.

There's no clear answer. Some suggest that answers might rest in site visits, furniture provided by the employer, enforced breaks, fixed working hours and wellness programs as an integral part of an employment contract. But don't options like these create other issues?

How does the idea of fixed working hours apply to individuals working across multiple time-zones, which often result in exceptionally long days? In the absence of fixed working hours, could an employee successfully argue that almost any injury in the home has occurred during the course of their work?

How proactive can and should employers be? Providing office furniture that allows an employee to sit, stand or even walk brings new risks, especially where ergonomic experts cite potential injury problems. Wellness programs can compensate for sedentary lifestyles, and normally injuries that occur through work-funded wellness programs are not a matter for insurers as they have occurred outside normal working hours - but what if the wellness program has been mandated by the employer as part of an employment contract?

It's clear that employers cannot contract out of their obligations, and, with the number of homeworkers predicted to rise by 63% in the next five years, doesn't the insurance industry need to think more about this particular aspect of the future? Is there a role for technology as part of the solution? Perhaps some form of workforce analytics has a part to play - maybe even telematics for teleworkers - but were such a thing to emerge, wouldn't the concept of "home" and "work" as two separate entities disappear completely?