The First Appellate District Court of Appeal has closed what could have turned into a significant expansion of the concept of “sudden and extraordinary employment condition” contained in Labor Code § 3208.3(d) with a reversal of a W.C.A.B. decision awarding benefits for a psychiatric injury in Travelers Casualty and Surety Co v W.C.A.B. (Dreher). The applicant was employed as a live-in maintenance supervisor for an apartment complex and had been employed for only 74 days at the time of his injury on Oct. 19, 2009. He was walking in the rain from one building to another in the complex, when he slipped and fell on a slippery concrete sidewalk sustaining multiple significant injuries, including fractured pelvis, injuries to his neck, right shoulder, right leg and knee. He also suffered gait derangement, a sleep disorder and headaches. As a result of those injuries, he developed psychiatric complaints as a consequence of his multiple surgeries and continuing issues. A medical report supported a relationship between his injury and a psychiatric disorder. However, at trial, the WCJ denied his claim for his psychiatric condition on the basis that his employment failed to meet the minimum six-month requirement for employment under Labor Code § 3208.3(d) and further determined the exception for a “sudden and extraordinary employment condition” had not been met. On reconsideration, a split panel reversed the WCJ holding and determined that the applicant’s fall on slippery concrete met the sudden and extraordinary requirement of the statute. The Court of Appeal granted Travelers’ petition for writ of review. After dealing with some procedural issues, the court got to the heart of the matter. Reviewing the multiple cases outlining the criterion for applying the sudden and extraordinary employment condition, the court refused to find that a slip and fall on a sidewalk met the criterion. Citing the landmark decision in Wal-mart v W.C.A.B., the court noted that the mere fact the injury was accidental did not meet the statutory exception: “If the argument were made that an accidental injury constitutes a ‘sudden and extraordinary employment condition,’ we would reject it. For one thing, such an interpretation would mean that psychological injuries resulting from accidents would not be subject to the six-month rule, but such injuries arising from cumulative physical injury would be governed by that limitation; this distinction would make no sense, and we are reluctant to attribute irrational intentions to the Legislature.” See Also: Appeals Court Settles Key Work Comp Issue The court also rejected the argument advanced by applicant that the unexpectedly catastrophic nature of the injury served as a basis for an extraordinary employment condition. “Here, the statute provides that the six-month limitation does not apply if the psychiatric condition is caused by a ;sudden and extraordinary employment condition.' (§ 3208.3, subd. (d).) The statute does not include the nature of the injuries resulting from an incident as a basis for the exception. Had the Legislature intended to include the nature of the injury as a factor in the definition of a sudden and extraordinary employment condition, it knew how to do so…. "Accordingly, although Dreher’s injury was more serious than might be expected, it did not constitute, nor was it caused by, a sudden and extraordinary employment event within the meaning of section 3208.3, subdivision (d). The evidence showed that Dreher routinely walked between buildings on concrete walkways at the work site and that he slipped and fell while walking on rain-slicked pavement.” The court further noted the burden was on the employee to prove the sudden and extraordinary employment condition, and the applicant’s testimony that he was “surprised” by the slick surface did not demonstrate that his injury was caused by an uncommon, unusual or totally unexpected event. The matter was remanded to the W.C.A.B. with instructions to deny the claim for psychiatric injury. Comments and Conclusions: This is a relatively short appellate decision but with a firm result. The court was clearly of a mind that the W.C.A.B.’s interpretation of what constituted a sudden and extraordinary employment condition did not meet the common sense test for legislative interpretation. Commissioner Caplane, in her dissent in the W.C.A.B. decision, had noted that the majority’s opinion on what constituted a sudden and extraordinary event could be applied to virtually every claim because injuries were almost always unexpected when they occurred. While the court did not make a specific comment, the idea that an employee slipping on a wet sidewalk was in any way shape or form “extraordinary” simply did not pass the smell test. The court’s holding that the nature of the injuries sustained did not figure into the equation is also of considerable help in defining application of the rule under Labor Code § 3208.3(d). While the court’s interpretation of Labor Code § 3208.3(d) is helpful for that section, I do not think this decision is going to have any impact on our understanding of the language in Labor Code § 4660.1(c)(2)(B), with the exception created for “catastrophic injuries.” That section clearly intends there be consideration of the nature of an injury in the determination of whether additional psychiatric sequelae is to be included in the calculation of PD.

Selling insurance is complicated. Not impenetrable, but complicated. The sales process is sort of like a tangled piece of string— it’s easy to see the beginning and end but hard to figure out what’s happening in the middle. When you start untangling, you’ll find prospect lists, telemarketing, direct mail, traditional marketing and web-based lead generators uncovering and enticing potential customers. You’ll also find captive agents, independent agents or brokers, wholesalers, direct telephone sales, the Internet, affiliates, carriers and carrier-like entities selling various products. Some of these strategies work in coordination or create feedback loops — a customer sees a TV ad, which prompts him to submit a form online, which adds him to a direct mail list, which points him to an online aggregator, which puts him in touch with an independent agent selling insurance on behalf of a managing general agency… as you can see, the number of distribution permutations is considerable. However, at American Family Ventures, we appreciate simplicity. We classify insurance distribution start-ups using four groupings: lead generation, agency/brokerage, managing general agency (MGA) and carrier. As pictured above, the primary distinctions between participants in each group arise from the amount of insurance risk they bear and their control over certain aspects of the insurance transaction (for example, the authority to bind and underwrite insurance policies). However, many other tradeoffs await insurance start-ups navigating among these four groups. If you consider the evolution of digital customer acquisition, including new channels like mobile-first agencies and incidental channels, choosing a niche becomes even more complicated. In this post, I’ll discuss some of the key attributes of each group, touching on topics relevant for start-ups new to the insurance ecosystem. Please note, in the interest of time and readability, this post is an overview. In addition, any thoughts on regulatory issues are focused on the U.S. and are not legal advice. LEAD GENERATION Lead generation refers to the marketing process of building and capturing interest in a product to create a sales pipeline. In the insurance context, because of the high-touch sales process, this historically meant passing interested customers to agents or call-center employees. Today, lead-generation operators sell to a variety of third parties, including online agencies and digital sales platforms. Let’s consider a few key attributes of lead-generation providers: Revenue model — There are a variety of lead-selling methods, but the most common is “pay per lead,” where the downstream lead buyer (carrier or channel partner) pays a fixed price for each lead received. When pricing leads, quality plays a big role. Things like customer profile, lead content/data, exclusivity, delivery and volume all affect lead quality, which frequently drives the buyer’s price-sensitivity. As a lead-generation provider, you’ll generally make less per customer than others in the distribution chain, but you’ll also assume less responsibility and risk. Product breadth — With the Internet and enough money, you can generate leads for just about anything. Ask people who buy keywords for class action lawsuits. However, start-ups should consider which insurance products generate leads at acceptable volumes and margins before committing to the lead-generation model. Some products are highly competitive, like auto insurance, and others might be too obscure for the lead model to scale, like alien abduction insurance (which, unbelievably, is a real thing). Start-ups should also consider whether they possess information about customers or have built a trusted relationship with them — the former is often better-suited to lead generation, and the latter can facilitate an easier transition to agency/brokerage. Required capabilities (partnerships) — Lead-generation providers need companies to buy their data/leads. Their customers are usually the other distribution groups in this post. Sometimes, they sell information to larger data aggregators, like Axciom, that consolidate lead data for larger buyers. Generators need to show lead quality, volume and uniqueness to secure relationships with lead purchasers, but beyond that they don’t typically require any special partnerships or capabilities. Regulation — While I won’t go into detail here, lead-generation operators are subject to a variety of consumer protection laws. AGENCIES AND BROKERAGES Entities in the agency/brokerage group (also called “producers”) come in a variety of forms, including independent agents, brokers, captive agents and wholesale brokers. Of note, most of these forms exist online and offline. Independent agents represent a number of insurance carriers and can sell a variety of products. Brokerages are very similar to independent agents in their ability to sell a variety of products, but with a legal distinction — they represent the buyer’s interests, whereas agents represent the carriers they work for. Captive agents, as the name suggests, sell products for only one insurer. While this might seem limiting, captive agents can have increased knowledge of products and the minutiae of policies. Finally, some brokers provide services to other agents/brokers that sell directly to customers. These “wholesale brokers” place business brought to them by “retail agents” with carriers, often specializing in unique or difficult placements. An important difference between the lead-generation group and the agency/brokerage group is the ability to sell and bind policies. Unlike the former, the latter sells insurance directly to the consumer, and in some cases issue binders — temporary coverage that provides protection as the actual policy is finalized and issued. Some attributes of agencies and brokerages: Revenue model — Agencies and brokerages generally make money through commissions paid for both new business and on a recurring basis for renewals. The amount you earn in commissions depends on the volume and variety of insurance products you sell. Commission rates vary by product, typically based on the difficulty of making a sale and the value (profitability) of the risk to the insurance carrier. Start-ups should expect to start on the lower end of many commission scales before they can provide evidence of volume and risk quality. Agents and brokers can also be fee-only (paid for service directly and receive no commission), but that’s rare. Product breadth — Agencies and brokerages sell a variety of products. As a rule, the more complex the product, the more likely the intermediary will include a person (rather than only software). Start-ups should also consider tradeoffs between volume and specialization. For example, personal auto insurance is a large product line, but carriers looking to appoint agents (more detail below) in this category usually have numerous options, including brick and mortar and online/mobile entities. Contrast this with a smaller line like cyber insurance, where carriers may find fewer, specialist distributors who understand unique customer needs and coverages. Required capabilities (partnerships) — Agencies and brokerages are appointed by carriers. This process is often challenging, particularly for start-ups, which are non-traditional applicants. Expect the appointment process to take a while if the carrier isn’t familiar with your acquisition strategy or business model. Start-ups trying to accelerate the appointment process can start in smaller product markets (e.g. non-standard auto) or seek appointment as a sub-producer. Sub-producers leverage the existing appointments of a independent agency or wholesaler in exchange for sharing commissions. You could also apply for membership in an agency network or cluster — a group of agents/brokers forming a joint venture or association to create collective volume and buying power. Regulation — Agencies and carriers need a license to sell insurance. Each state has its own licensing requirements, but most involve some coursework, an exam and an application. As we’ve recently seen with Zenefits, most states have a minimum number of study hours required. There are typically separate licenses for property, casualty, life and health insurance. Once you have a license, many states have a streamlined non-resident licensing process, allowing agencies to scale more quickly. MANAGING GENERAL AGENCIES (MGAs) A managing general agent (MGA) is a special type of insurance agent/broker. Unlike traditional agents/brokers, MGAs have underwriting authority. This means that MGAs are (to an extent) allowed to select which parties/risks they will insure. They also can perform other functions ordinarily handled by carriers, like appointing producers/sub-producers and settling claims. Start-ups often consider setting up an MGA when they possess data or analytical expertise that gives them an underwriting advantage vs. traditional carriers. The MGA structure allows the start-up more control over the underwriting process, participation in the upside of selecting good risks and influence over the entire insurance experience, e.g. service and claims. We’ve recently witnessed MGAs used for two diverging use cases. The first type of MGA exists for a traditional use case — specialty coverages. They are used by carriers that want to insure a specific risk or entity but don’t own the requisite underwriting expertise. For example, if an insurer saw an opportunity in coverage for assisted living facilities but hadn’t written those policies before, it could partner with an MGA that specializes in that category and deeply understands its exposures and risks. These specialist MGAs often partner closely with the carrier to establish underwriting guidelines and roles in the customer experience. Risk and responsibilities for claims, service, etc. are shared between the two parties. The second type of MGA is a “quasi-carrier,” set up through a fronting program. In this scenario, an insurance carrier (the fronting partner) offers the MGA access to its regulatory licenses and capital reserves to meet the statutory requirements for selling insurance. In exchange, the fronting partner will often take a fee (percentage of premium) and very little (or no) share of the insurance risk. The MGA often has full responsibility for product design and pricing and looks and feels like a carrier. It underwrites, quotes, binds and services policies up to a specific amount of written authority. These MGAs are often set up when a startup wants to control as much of the insurance experience as possible but doesn’t have the time or capital to establish itself as an admitted carrier. Some important characteristics: Revenue model: MGAs often get paid commissions, like standard agencies/brokerages, but also participate in the upside or downside of underwriting profit/loss. Participation can come in the form of direct risk sharing (obligation to pay claims) or profit sharing. This risk sharing functions as “skin in the game,” preventing an MGA from relaxing underwriting standards to increase commissions, which are a function of premiums, at the expense of profitability, which is a function of risk quality. Product breadth: MGAs of either type often provide specialized insurance products, at least at first. The specialization they offer is the reason why customers (and fronting partners) agree to work with them instead of a traditional provider. That said, you might also find an MGA that sells standard products but takes the MGA form because it has a unique channel or customers and wants to share in the resulting profits. Required capabilities/partnerships: Setting up an MGA generally requires more time and effort than setting up an agency/brokerage. This is because the carrier vests important authority in the MGA, and therefore must work with it to build trust, set guidelines, determine objectives and decide on limits to that authority. Start-ups looking to set up an MGA should be ready to provide evidence they can underwrite uniquely and successfully or have a proprietary channel filled with profitable risks. Fronting often requires a different process, and the setup time required varies based on risk participation or obligations of the program partner. Start-ups should also carefully consider the costs and benefits of being an agency vs. MGA — appointment process difficulty vs. profit sharing, long-term goals for risk assumption, etc. Regulation: MGAs, like carriers, are regulated by state law. They are often required to be licensed producers. Start-ups should engage experienced legal counsel before attempting to set up an MGA relationship. CARRIERS Insurance carriers build, sell and service insurance products. To do this, they often vertically integrate a number of business functions, including some we’ve discussed above — product development, underwriting, sales, marketing, claims, finance/investment, etc. Carriers come in a variety of forms. For example, they can be admitted or non-admitted. Admitted carriers are licensed in each state of operation; non-admitted carriers are not. Often, non-admitted carriers exist to insure complex risks that conventional insurance marketplaces avoid. Carriers can also be “captives” — essentially a form of self-insurance where the insurer is wholly owned by the insured. Explaining captives could fill a separate post, but if you’re interested in the model you can start your research here. Attributes to consider: Revenue Model: Insurance carrier economics can be complicated, but the basic concepts are straightforward. Insurers collect premium payments from insureds, which they generally expect to cover the costs of any claims (referred to as “losses”). In doing so, they profit in two ways. The first is pricing coverage so the total premiums received are greater than the amount of claims paid, though there are regulations and market pressures that dictate profitability. The second is investing premiums. Because insurance carriers collect premiums before they pay claims, they often have a large pool of capital available, called the “float,” which they invest for their own benefit. Warren Buffett’s annual letters to Berkshire shareholders are a great source of knowledge for anyone looking to understand insurance economics. Albert Wenger of USV also recently posted an interesting series that breaks down insurance fundamentals. Product breadth: Carriers have few limitations on which products they can offer. However, the products you sell affect regulatory requirements, required infrastructure and profitability. Required capabilities/partnerships: Carriers can market and sell their products using any or all of the intermediaries in this post. While carriers are often the primary risk-bearing entity — they absorb the profits and losses from underwriting — in many cases they partner with reinsurers to hedge against unexpected losses or underperformance. There are a variety of reinsurance structures, but two common ones are excess of loss (reinsurer takes over all payment obligations after the carrier pays a certain amount of losses) and quota share (reinsurer pays a fixed percentage of every loss). Regulation: I’ll touch on a few concepts, but carrier regulation is another complex topic I won’t cover comprehensively in this post. Carriers must secure the appropriate licenses to operate in each country/state (even non-admitted carriers, which still have some regulatory obligations). They also have to ensure any capital requirements issued by regulators are met. This means keeping enough money on the balance sheet (reserves/surplus) to ensure solvency and liquidity, i.e. maintaining an ability to pay claims. Carriers also generally have to prove their pricing is adequate, not excessive, and not unfairly discriminatory by filing rates (their pricing models) with state commissioners. Rate filings can be “file and use” (pre-approval not required to sell policies), or “prior approval” (rates must be approved before you can sell policies). CONCLUSION In this overview, I did not address a number of other interesting topics, including tradeoffs between group choices. For example, you should also consider things like exit/liquidity expectations, barriers to entry and creating unfair advantages before starting an insurance business. Perhaps I’ll address these in a future post. However, I hope this brief summary sparks questions and new considerations for start-ups entering the insurance distribution value chain. I’m looking forward to watching thoughtful founders create companies in each of the groups above. If you’re one of these founders, please feel free to reach out!

In a previous article, we mentioned the Centers for Medicare and Medicaid Services' (CMS’s) new provider reimbursement model, Medicare Access and CHIP Reauthorization (MACRA), which replaces the current reimbursement formula. MACRA will include an incentive component that will replace those in plans today; performance criteria will roll out in 2019. From the providers’ lens, they are faced with the need to hire more administrative resources to keep up with the tracking of their performance, and the big question is: Are consumers making different choices based on the performance results of a physician or hospital? When there are more than 150 different measures in place today, how is an occasional consumer of healthcare services able to assess the most important criteria in finding the right physician? During a recent employers’ conference on the East Coast, the forum featured two panels consisting of the health plans and the providers. The panels were set in a Q&A format to enlist the leaderships’ views on various topics facing the employers, and it was a fascinating dialogue we have attempted to capture below. In the first panel with the execs of five major carriers, the opening question asked for a one-minute overview of their health plan’s area of focus in addressing the employers’ challenges. The responses were consistent among the leaders — the focus is on the individual consumer and value-based contracting. When the discussion evolved into quality criteria and outcomes to identify high-performing physicians, the leaders acknowledged that defining quality and outcomes is a challenging endeavor, and each health plan has its own formula to assess the providers’ performance. One commented that a physician practicing in the morning could be viewed as a top performer by a carrier, while that afternoon, she could be ranked as a poor performer by another, even though the physician was delivering the same process of care for all her patients. The leaders agreed that employers really needed to weigh in on what was important to them so that there was greater consistency in the scoring logic with the physician community. See Also: Are Your Health Cost Savings an Illusion? The next panel was with the chief medical officers (CMOs) from the major systems and a primary care practice, and a number of relevant things were learned. There was unanimity in the frustration with the variation in the quality metrics being used by commercial carriers and CMS. One physician said he had never been asked for input on the quality metrics, and he was ready to engage in that discussion. The physician leaders asked for the employers to outline what was important to them so there could be a common set of standards for the commercial market — a consistent request from the leaders of both healthcare stakeholders. Two of the CMOs were primary care physicians, and they both acknowledged that we have not given enough attention to the resource that has the greatest opportunity to lower employers’ costs — the family doctor. The primary care physicians can build trusting relationships with employees; they can help avoid the unnecessary services being provided; and they can help educate and channel the patients into the appropriate specialist, when they are equipped with quality and cost information. The CMO from the largest health system acknowledged that there was 30% variation (aka waste) in the way care was being delivered within the community and that there was opportunity to improve the results. If we know there is variation in care even with performance-based contracts in place, what is the catalyst to get serious on consistency? Are there any other services that you purchase with a 30% variance? Would you continue spending money for that service knowing there is wasted spending? After the event, there was a conversation with an employer, and we discussed the employers’ opportunity to help shape and define the quality metrics. This employer stated that he did not have experience or knowledge on how to establish criteria, and he was surprised to hear health plans were looking for his guidance, because he thought it was their role. When the discussion moved to the employer's overall business, he acknowledged its internal business units established the quality criteria in assessing the vendors’ performance. So, how do we move beyond the billboards and the marketing campaigns to understand the healthcare suppliers’ performance? Who has the greatest opportunity to drive change in a free-market system? We believe the one paying the bill has the ability to drive a more consistent outcome for high-quality, cost-effective healthcare. Let’s recognize and reward the physicians who are delivering a Six Sigma approach to healthcare so the other suppliers will be motivated to change. It’s time for employer-driven healthcare.

A convergence between the cyber insurance and tech security sectors is fast gaining momentum. If this trend accelerates, it could help commercial cyber liability policies create a fresh wellspring of insurance premiums, just as life insurance caught on in the 1800s and auto policies took off in the 1900s. The drivers of change are substantive. As companies scramble to mitigate risks posed by steadily worsening cyber threats, insurers and underwriters are hustling to meet overheated demand for cyber liability coverage. The cyber insurance market expanded by roughly 60% from 2014-15, topping about $3 billion last year. ABI Research sees no slowing of that breakneck growth rate and estimates the global cyber insurance market will top $10 billion by 2020. However, for that projection to be realized, the insurance sector must somehow attain the capacity to build reliable actuarial tables that are fundamental to any type of insurance sales. Trouble is, gauging a company’s security posture has turned out to be a much more complex endeavor than anything the insurance industry has mastered before — such as assessing human life expectancy or calculating how much risk to assign a particular driver. There is endless network traffic data, to be sure. But, at present, there is no efficient means to bring it to bear. And to complicate things, companies fear bad publicity and often vigorously resist sharing the type of valuable attack intelligence needed to calculate risk profiles. See Also: IRS Is Stepping Up Anti-Fraud Measures “It’s the wild, wild West,” says Mike Patterson, vice president of strategy at Rook Security. “Everyone is jumping in the market chasing premiums, and they are doing it without a full understanding of the risk involvement, from an underwriting perspective.” Enter the burgeoning tech security sector. Security vendors supply some $75 billion of security hardware, software and services annually. And with cyber threats continuing to intensify, tech security is on track to continue growing at an estimated 5% to 12% annual rate over the next few years. As security vendors develop and deliver more sophisticated prevention and detection technologies, they are amassing larger, richer data sets about the resiliency of company networks. It seems obvious to some, but the accelerating convergence of insurance and security is inevitable. “Underwriters are really trying to figure out how to quantify the risks of the policies they’re underwriting,” says Craig Hinkley, CEO of web application security vendor WhiteHat Security. “We’ve been researching our customers’ websites and web applications for 15 years, so we’re actually swimming in actuarial data right now.” Models to watch The questions of the moment: Who will be the early adopters?; and which collaborations will emerge as enduring models? ThirdCertainty interviewed a handful of tech security vendors at the giant RSA cybersecurity conference in San Francisco in March that are testing the waters. Here is a rundown on three of them: WhiteHat Security WhiteHat recently struck a partnership with Franchise Perils, an insurer of online retail websites —Franchise Perils will contribute toward the purchase of WhiteHat’s flagship service, Sentinel, for any online retailer purchasing a cyber policy. This amounts to a steep discount, enticing clients to use WhiteHat’s cutting-edge technology. Craig Hinkley, WhiteHat Security CEO

Part of WhiteHat’s services include helping corporate clients test their digital defenses with a small army of ethical hackers who “attack” the company and expose weaknesses. If a company quickly fixes its vulnerabilities, WhiteHat will give it a higher score in its WhiteHat Security Index, ranging from 0 to 800 — similar to a credit rating for consumers. “That translates into a safer, more secure website and web application, which reduces the probably of you being hacked,” Hinkley says. “And that’s exactly what underwriters need to know for cyber insurance policies.” For businesses that fix their vulnerabilities, WhiteHat guarantees the companies will not get hacked. If they do get hacked, WhiteHat will pay as much as $500,000 in remediation costs for the data breach. FourV Systems This start-up has just introduced an innovative threat intelligence monitoring and security posture scoring system aimed, for the moment, mainly at large enterprises in financial services, healthcare and government. Casey Corcoran, FourV Systems vice president of strategy FourV’s goal is to enable a large retailer or bank to monitor the status of its network security day-to-day, or even hour-to-hour, much as a business routinely tracks daily sales, says Casey Corcoran, vice president of strategy at FourV. “You could tell by noon whether the pattern that you’re seeing in your risk is shaping up properly for that day of the week,” says Corcoran, a former tech executive at Jos A. Bank Clothiers. “If it’s not, you can fix it.” FourV CEO Derek Gabbard foresees a day in the not-too-distant future when a senior executive will wake up in the morning, glance at her Apple watch and use a FourV app to check the company’s security risk index. Derek Gabbard, FourV Systems CEO The idea is to create “risk discussions that are nontechnical, easy-to-understand and jargon-less for the leadership team,” Gabbard says, “so that they have confidence in the work that the chief information security officer and his teams are doing.” Once FourV gets some traction and amasses large enough data sets, it expects to be able to see — and eventually to be able to predict — risk patterns in vertical industries. Such analysis should be very useful in building actuarial tables, Gabbard told ThirdCertainty. The company already has begun brainstorming how it might go about selling that data directly to the insurance industry, perhaps even by developing a dashboard customized for underwriters. Rook Security This tech security vendor supplies managed security services and does forensics investigations of network breaches. Rook investigators respond like a cyber SWAT team to all types of cyber threats, whether that may be a minor data breach that is easily fixed or a deadly cyber attack that requires teams of cyber investigators to jet around the globe. Listen to a podcast: Drivers behind the rise of cyber insurance Communication surrounding cyber attacks can be messy and full of mistakes that worsen the damage, according to J.J. Thompson, Rook’s CEO. So Rook’s new War Room app has set up a digital command center for tech and security teams to monitor attacks and to respond swiftly. Mike Patterson, vice president of strategy, Rook Security Whether Rook arrives before or after a breach, it quickly gets an inside look at the state of network security. Mike Patterson, Rook’s vice president of strategy, told ThirdCertainty that the readiness of companies varies widely. Some companies boast strong security staffs, resources and planning, while others only have one or two full-time security people — or none at all. “Not everyone is as prepared as they should be,” Patterson says. “But that’s changing, with much more awareness now on the importance of security and taking care of your data.” Rook is seeking to be the default option — brought in by the insurer — for post-breach incident response and forensics. It is also looking to provide a service where Rook would be retained by a company to come in and improve security postures so the client qualifies for cyber coverage or gets better pricing. “It’s a really good opportunity to go shopping for cyber insurance because you’re going to get great rates, and everyone is going to be a little bit slack on the writing terms because they want that business,” Patterson says. ThirdCertainty’s Edward Iwata contributed to this story.

This is part of a series of interviews by Shefi Ben Hutta with insurance practitioners who bring an interesting perspective to their work and to the industry as a whole. Here, she speaks with Hesus Inoma at WeSavvy. Describe WeSavvy in 50 words or fewer: WeSavvy is a digital insurance platform that gives customers cash back on their insurance premiums when they walk, run or cycle. WeSavvy’s mission is to give back customers control over their insurance premiums. Why WeSavvy? We believe the current insurance model is broken. We need to shift the current model from one of indemnification (payout in the event of a claim) to one of loss prevention and control. This can only be achieved by changing the current industry model from one that penalizes to one that rewards the customers for positive behaviors. If we take the healthcare industry in the U.S. as an example, between 2010 and 2015 premiums have increased by more than 26%, leaving customers completely powerless and at the mercy of year-on-year increases. WeSavvy showcases a better way to transform the healthcare insurance industry, by giving the customer full control of healthcare expenses. How did you decide to pursue the idea of WeSavvy? I’m passionate about the digitalization of insurance, yet WeSavvy is personal to me. Back in 2012, I was overweight, and my 2013 New Year’s resolution was to lose weight. I unleashed the power of my community to support me through my journey, and I successfully lost weight throughout 2013 and became very healthy. However, my health insurance premiums went up in 2014, and there was no way for me to effectively communicate my personal journey to my insurer. That’s when I decided, in late 2014, to quit my job and build WeSavvy, a platform that grants the insurer the ability to personalize quotes and empower policyholders to gain back control over insurance premiums. What’s in a name? I wanted a name that reflects our core beliefs that “We” as a community [friends, family, network] can leverage technology and be “Savvy” tackling the obstacles placed in front of us in relation to insurance. Describe your typical client: In everything we do at WeSavvy, we keep the policyholder [our end customer] in mind. Our current business model is B2B2C [business to business to consumer], where we leverage current networks present within the insurance industry to reach the policyholder. Our clients are insurers and agents looking to meet the expectations of the next generation of customers, whether millennials or digital natives. What does competition look like? We’re often compared to Vitality. The difference between WeSavvy and Vitality is the tangibility of our rewards mechanism. We want to ensure customers receive tangible rewards, which increases their disposable income. Vitality’s main focus is the insurer, and [Vitality has] partnered exclusively with one insurer in every new market it has entered. What happens to the other insurers and agents? Our focus is to service the market as a whole and all participants of that market. Our technology will be available to every insurer or agency that would like to better serve its customers. We will leave our user experience for another day! You took part in the Deloitte Digital Disruptor; what did you learn?  The biggest lesson I’ve learned was that the industry wants to embrace innovation, but, at times, the internal infrastructure and culture is not there to move at a pace of a start-up. Insurers that create the internal infrastructure and culture to move at the required pace will be the ones that reap the biggest rewards. You’re currently taking part in the Global Insurance Accelerator; lesson learned? We’ve perceive the main insurance hubs as being London and New York, and it turns out that Des Moines is a hidden gem for our market. The concentration of insurance companies in Des Moines is mind-blowing. Des Moines is truly “Kicking ass, taking names and selling insurance” [to quote the city's slogan]. I’d advise any insurance company that is thinking of setting up an innovation lab or is looking to work with start-ups to reach out to Brian Hemesath and see what he has created here. The conditions for a start-up to succeed are truly embedded in this 100-day program. Where do you see WeSavvy in five years? WeSavvy will be the catalyst in transforming how the insurance industry is perceived. Insurance is an awesome product, but it has failed to communicate its true value to the customer. Insurance is one of the best mechanisms of risk transfer, and it forms the bedrock of every developed society. I see WeSavvy growing from strength to strength, year on year, and moving into other insurance products, which have failed to engage and resonate with the customers. We have no exit strategy, for the simple reason that, if I exited from WeSavvy, my next venture would still be in insurance; and I love what WeSavvy as a company stands for: personal and social empowerment. You never know, we might IPO one day! Best life lesson: “Your Health is your wealth” is one of my best lessons as it taught me [after my mother passed away for cancer] that if there’s anything we could do to extend our time with our loved ones in this life, we should do it! To see more of the “A Word With Shefi” series, visit her thought leader profile. To subscribe to her free newsletter, "Insurance Entertainment," click here.

Actors in the insurance industry put the whole sector under universal suspicion in the minds of customers. Customers want to be able to identify with a company. This can only be achieved by successful branding campaigns that target establishing a relationship between the company and the consumer. If consumers agree with the values a company stands for, they are more inclined to trust the company. Young companies have the advantage of a fresh start; while traditional insurance carriers, as well as traditional insurance agents, are suffering a decline in reputation and need to win back trust, young companies can position themselves as an alternative to an unpopular industry and therefore benefit from unbiased consumers. See Also: A Mental Framework for InsurTech In a way, InsurTech start-ups can provide a more personal service than traditional agents can, making use of marketing and branding advertising, as well as social media presence and availability. This becomes increasingly important as customers will use a vast variety of channels to interact with their insurance agent — brick-and-mortar agents will have a hard time keeping up. Besides reputation, the use of technological advances will be an essential determinant for the success of insurance agents. As consumers use more and more online sources or digital agents to manage their insurance policies, local insurance agents will become less important. A report recently released by consulting firm McKinsey includes a chapter on “the end of an era for the local insurance agent.” This sums up the future of traditional, analogue agents, whose business model will no longer be able to withstand innovative alternatives. In addition to digital solutions and mobile-first applications, traditional agents will face competition from insurance carriers that will focus more on establishing a direct relationship with their customers and will gradually factor agents out of the equation. Technology and simplification are changing nearly every aspect of our lives. Customers have become increasingly used to managing everything from shopping to paying bills with the help of apps. Our always-on culture is bringing more customized options into the very personal areas of finance through technology. Therefore, managing insurance policies offline is beginning to seem like an unnecessary and tedious task. Comparing insurance online has been popular ever since the first portals came up, but the gap in consulting was harder to close. Insurance brokers watched the onset of insurance portals with ease, knowing those portals were unable to provide advice for the mostly helpless customer when it came to insurance. However, the development and distribution of insurance apps that offer an easy-to-understand overview of complicated insurance products, as well as independent advice, led to fierce competition on the insurance market. Consumers don’t want to store tons of paperwork in large folders and block out their spare time to meet their insurance agent for coffee. As a result, these agents are losing customers to the innovative alternative. New players provide comprehensive services, replacing traditional broker services and thereby replacing traditional agents who do not have the resources to develop the tools necessary for better customer service. The new market players figure out what kind of solution consumers want and need, and they adapt accordingly. This can only be forced by pushing into the market and spending money — investors' money that established companies usually do not have. Providers of mobile-first insurance solutions drive change in the insurance industry with a clear focus on advisory automation and mobile service experience. Apps like Knip do not just use technological advances as an addition to traditional services; they change the business model the insurance industry is based on, following a consumer-friendly approach and making products more transparent. That benefit will be hard for traditional brokers and insurers to copy. They can implement technological features and develop their own apps, but their business is based on sales rather than advisory, which will make them lose customers to more innovative companies. Both traditional agents and insurance carriers are pondering this development. Their inflexible organizational structures will be hard to overcome to provide more technology- and customer-oriented services. Sure, traditional brokers and advisers will still be needed as technology advances. Some people prefer to welcome their insurance broker in their home and would not dream of a mobile customer-broker relationship. Yet, this group will continue to shrink and become more specialized with time, something everyone working in this sector should be aware of. Only the best of the best of the traditional brokers will survive, be it because of their special expertise, their marketing and brand advertising success or their operational efficiency. Consumers are so used to digital products they will not hesitate to punish any provider that cannot or does not offer them such. There are still some challenges ahead for start-ups and innovative companies; patience and persistence are crucial. As they are innovating in a very traditional industry, not everyone is excited about digital solutions — mostly because they don’t know what to expect. Informing and educating are important to overcome this fear. It might take a while, but it is starting to work. See Also: InsurTech: Golden Opportunity to Innovate What everyone needs to be aware of is that ignoring the development will not end it. Those who turn a blind eye to it now will end up being left behind. Ten years ago, online banking was something extraordinary. Today, it is hard to imagine life without it, and very few people still fill out transfer forms at their local bank. This development will continue with more innovative ideas and more technological progress. Insurance is undergoing the same process, and, a few years from now, it will be perfectly normal to manage policies online and via mobile. The insurance industry realizes it needs to adjust to customers’ expectations if it does not want to be left behind.

An excellent article by Levi Tillemann and Colin McCormick at The New Yorker lays out the advantages that Tesla has in the race towards driverless cars. Some, however, think that Tesla is driving recklessly toward that goal. Is Tesla racing toward victory or calamity? The answer hinges on a key issue in human/robot interaction. Don Norman, Director, Design Lab, University of California San Diego (Source: JND.org) Don Norman, the director of the Design Lab at University of California, San Diego, argues that the most dangerous model of driving automation is the “mostly-but-not-quite-fully-automated” kind. Why? "Because the more reliable the automation, the less likely the driver will be to respond in time for corrective action. Studies of airline pilots who routinely fly completely automated airplanes show this (as do numerous studies over the past six decades by experimental psychologists). When there is little to do, attention wanders." [Source: San Diego Union-Tribune] Norman contends that car autopilots are more dangerous than airplane autopilots. Airplanes are high in the sky and widely distributed. Pilots are well-trained and have several minutes to respond. Drivers are not nearly as well-trained and may have only seconds to respond. Yet, Tesla’s “Autopilot” follows exactly the “mostly-but-not-quite-fully-automated” model about which Norman warns. I asked Norman about Tesla’s approach. His response: "Tesla is being reckless. From what I can tell, Tesla has no understanding of how real drivers operate, and they do not understand the need for careful testing. So they release, and then they have to pull back." As examples, Norman pointed to Tesla’s highway passing, automatic parking and summon features. Norman considers Tesla’s highway passing feature dangerous because its cars do not have sufficient backward-looking sensors. Mercedes and Nissan, he noted, have far better back-looking sensors. Consumer Reports found serious issues with Tesla’s automatic parking and summon features. Tesla’s sensors had high and low blind spots, causing the car to fail to stop before hitting objects like duffel bags and bicycles. There were also issues with the user interface design. The parking control buttons on the car key fob were not marked. The car continued to move when the iPhone app was closed. Consumer Reports told its readers, “It is critical to be vigilant when using this feature, especially if you have children or pets.” Tesla fixed these problems once Consumer Reports raised its safety concerns. Here’s Don Norman’s observation about Tesla’s quick response: "Good for Tesla, but it shows how uninformed they are about real-world situations." "Tesla thinks that a 1 in a million chance of a problem is good enough. No. Not when there are 190 million drivers who drive 2.5 trillion miles." If Norman is right, Tesla owners will grow less attentive—rather than more vigilant—as Tesla’s autopilot software gets better. Situations where their intervention is needed will become rarer but also more time-sensitive and dangerous. Indeed, customer experience with Tesla’s early autopilot software produced a number of reports and videos of silly antics and near-calamitous cases. Here are just a few: Jump to time mark 2:45 for the near accident: Be sure to read the background comments from Joey Jay, the uploader of the video: Jump to time mark 4:00 for a particularly “fun and scary” segment: If Norman is wrong, Tesla does have a huge advantage, as Tilleman and McCormick note. Other companies pursuing a semi-autonomous approach, like GM and Audi, have been slower to deploy new models with comparable capabilities. Google, which advocates a fully driverless approach for the reasons that Norman cites, is mired in a state and national struggle to remove the regulatory limits to its approach. Even if Google gets the green light, its pace is constrained by its relatively small fleet of prototypes and test vehicles. Tesla, on the other hand, has a powerful software platform that allows it to roll out semi-autonomous capability now, as it deems appropriate. And, it is doing so aggressively. Autopilot is already on more than 35,000 Tesla models on the road—and Tesla just announced a promotion offering one-month free trials to all Model S and X owners. Soon, it will be preinstalled on all of the more affordable Model 3, of which more than 300,000 have been preordered. That’s a critical advantage. The quality of autonomous driving software depends in large part on the test cases that feed each developer’s deep learning AI engines. More miles enable more learning, and could help Tesla’s software outdistance its competitors. The challenge, however, is that Tesla is relying on its customers to discover the problems. As noted in Fortune, Elon Musk has described Tesla drivers as essentially “expert trainers for how the autopilot should work.” Tom Mutchler wrote in Consumer Reports that “Autopilot is one of the reasons we paid $127,820 for this Tesla.” But, he also noted, “One of the most surprising things about Autopilot is that Tesla owners are willingly taking part in the research and development of a highly advanced system that takes over steering, the most essential function of the car.” Telsa’s early-adopter customers are willing, even enthusiastic, about Autopilot. But, should untrained, non-professional drivers be relied upon to be ready when Tesla’s autopilot needs to return control to the human driver? Can they anticipate problems and intervene to retake control without being asked? Will they follow safety guidelines and use the autopilot only under recommended conditions, or will they push the limits as their confidence grows? Imagine the consequences if a new slew of Tesla owner videos ended with a catastrophic failure rather than a nervous chuckle? It would be tragic for the victims and Tesla. It might also dampen the enthusiasm for driverless cars in general and derail the many benefits that the technology could deliver. While the mantra in Silicon Valley is “move fast and break things,” Elon Musk needs to reconsider how much that principle should apply to Tesla’s cars and customers.

Humans have amazing capabilities and, even more, they can be amplified by the power of technology. When both are working in harmony, what was once impossible becomes possible. Technology is now the “X” factor that can help you become more efficient while more effectively serving your base. When it is intentionally aligned with human effort, technology acts a weapon you can wield to strengthen your organization, increase the ability of your team and delight your customers or members. Discovering this human/technology balance is a process we often walk our clients through; many of these clients are in the financial services space, which is an industry being transformed by technology as much as any. There will be winners and losers in the financial space and the defining variable will be how well you can learn to integrate humans and technology to deliver your business model. We call this integration Humalogy. What is Humalogy? Humalogy is the integration of technology and human effort to improve processes and offer a positive and meaningful impact on an organization. That’s only when Humalogy is properly balanced. Understanding the Humalogy balance is critical because if left unbalanced it can be expensive to an organization, highly infuriating to customers or both. The balance you find will enable you to do some magical things. Here are just a few examples: See Also: Tips on Improving Customer Experience

• Increase your individual, team and organizational effectiveness and capacity through lean processes and efficiency
• Increase the quantity of potential and current customers that you are able to effectively reach with your messaging
• Create an environment of profit amplification by both reducing costs through automation while shaping a better customer experience through the use of digital tools
• Implement customer service enhancements through technology-enabled convenience such as self-service
• Enable people in your organization to be more productive and satisfied in their role, because technology has freed their time to accomplish tasks that humans do well while avoiding mundane, automated assignments. Simply, they’re able to focus on the satisfying, cerebral aspects of their careers.

The Humalogy Scale We have developed the Humalogy scale to measure the balance of human and technology effort. We use this scale with our clients, many in the risk insurance space. Some processes lean heavily on humans (H5 on the Humalogy scale), and others primarily rely on technology (T5). Zero is an equal balance of effort from both humans and technology. What is important to recognize is that there is no “universally correct” balance. The proper balance for any space is the balance that yields you the highest level of efficiency combined with the best possible customer or member experience. For example, H5 would be an insurance agent traveling to an accident and manually filling out a claim. Moving across the scale, we find a claimant snapping a picture of the accident using a smartphone and then filing a claim using a mobile app and receiving payment through direct deposit. This requires much less human effort and so is high on the T-side of the scale. By defining where these processes are on the Humalogy Scale, it becomes easier to determine where to apply technology to drive efficiency, scalability or repetition. At the same time, in our technology-augmented world, we need to be conscious that some processes can be improved by adding the human elements that supply empathy, innovation and build trust. Tasks more suited for human work involve rational processing of information, deep thinking, social and emotional intelligence and those tasks that require creativity, intuition and improvisation. Meanwhile, tasks more suited for computers are those that execute rules or processes, involve repetition or mechanization, require big data analysis or are too dangerous or too large or small for a human to accomplish. Finding Humalogy Balance Humalogy is important because when you apply this process to your business, it becomes a lens that can help you improve customer service while creating a lean organization that lowers costs. Have you taken inventory of the technology expectations of your members? No industry is exempt from the evolving expectations of constituents who want access to services easily and instantly. Self-service is how industries are meeting the customer where they are -- customers are now equipped to complete tasks that once required a service representative, often from their personal tablet or smartphone. Defining which processes you can automate and provide self-service using technology will help satisfy your customers and endear them to you. On the other hand, the wrong Humalogy balance can result in poor customer service and a loss of loyalty. If your approach to Humalogy is not planned, often what may have been calculated for good can result in catastrophe. How many times have you felt alienated as a customer because a service provider tipped its Humalogy scale and traded personal touch for an automated call center? If someone wants to speak to a human representative, it is important to offer the opportunity. Humalogy is a tool that can be considered in a number of functional areas. The two primary ways we apply Humalogy in the risk insurance space is through lean and relationship journey mapping. Humalogy-Based Lean to Strengthen Process Efficiency Humalogy-based lean is designed to help organizations improve their back office processes so that they’re more efficient. Some companies follow Lean Six Sigma practices that have emerged from years of optimizing physical and manufacturing processes. These methods are powerful and effective but can be very narrowly focused on the process. At other times, this approach may improve the human parts of the process but fall short when it comes to implementing technology. On the other end of the spectrum, aggressive automation efforts driven by technologists may miss important nuances that may be better handled by humans. In the worst case, a technology-centric approach can result in automating broken processes. How do you get, and stay, on the right path so that you both improve your processes and automate appropriately? We recommend applying a Humalogy lens that lets you examine a process from some distinct angles:

• It lets us decide if a process involves a greater emphasis on human effort or technology effort. This helps us understand which processes are too heavily human and in need of automation.
• It helps determine which processes we should immediately devote attention to improving. We are able to prioritize more effectively.
• It acts as a reminder that a solution isn’t always a technology solution. Often with processes, a greater human involvement is necessary to help a process run more effectively.
• When we analyze processes, we are forced to diagram those processes to understand what is happening at each step. This gives deeper insight into how technology may be used to transform a process.

While Humalogy-based lean can help you improve back-office processes, studying Humalogy from the perspective of your customers will help improve their experience. This is accomplished by mapping the relationship journey. Humalogy to Improve Customer Experience Relationship journey mapping involves walking alongside your customers as they engage with your organization. We develop a subset of very targeted groups based on individual personas. In this process, we analyze together each critical stage of your customer or member journey and evaluate the touch points where you have the opportunity to engage directly with these personas. The goal of journey mapping is to maximize each opportunity and design the best possible experience for each customer. See Also: Keen Insights on Customer Experience The consideration of Humalogy is an important component of our journey mapping process. As you consider each of the personas who interact with your organization, you will also consider their proclivity to use technology at each stage. Would he want you to deliver all correspondence electronically? Would she be more willing to read a print newsletter you’ve sent her in the mail, or would an email with the information that you wish to present her suffice. Is he more likely to use a desktop computer or a smartphone? Would she be interested in a mobile application or online portal? Journey mapping allows you to consider the needs of each individual and then discover ways to satisfy those needs. Developing and using proper journey maps allow you to create a one-to-one experience for each of your customers. You will understand how to provide positive engagements that they will likely choose to discuss with their networks. In short, you can increase your value to your customers, and that’s really what it’s all about. Technology is already transforming your life and your industry. Technology can also, in an incredible way, transform your organization, everything from your day-to-day operations to the way you engage your customers.

There was a time not long ago when a bank originated a loan and kept that loan on the balance sheet until it was repaid. The amount banks could lend was limited to the deposits they had on hand and the banks' own ability to borrow. Today, credit risk is traded regularly, with specialized data and analytical services giving investors confidence they understand the risks they are assuming. But there has been limited opportunity for investors to deploy capital against specific pools of insurance risks, because of a lack of that sort of transparency. With the vehicles that do exist, it has been difficult to structure the transfer of risk to meet investors’ respective objectives and risk tolerances. However, insurance may be reaching a point in its evolution where the information gap will begin to narrow. Up until today, insurance risk had often been opaquely and highly subjectively valued. Today, actuaries set reserves based on highly summarized data, and underwriters set premiums based on claims experience that is extrapolated forward using historical loss development patterns and subjective future “trend” projections (or ad hoc substitute measures for risk), neither of which may represent future risk of loss. Outside of property catastrophe risk, where the data elements are generally available in some detail, granular risk data simply has not existed. However, rapid change could now be approaching. Vehicle telematics, wearable sensors, connected machines and other components of the Internet of Things (and Beings) are producing real-time data that allow us to look at risk in real time, rather than relying on current industry practices. See Also: A Better Way to Assess Cyber Risks? Credible, data-driven risk indices may create a variety of opportunities, including:

• Capital Providers: Investment in specific index-based structured insurance pools that are aligned with respective objectives and relative risk tolerances could improve on the alternatives available today, where those who want to invest in insurance risk are often restricted to investing in insurance companies or risk pools that involve assuming underlying exposure to the operational, asset and credit risk, as well as the insurance risk of the originating insurer’s business.
• Insurance Clients: Clients are likely to observe premium and associated underwriting decisions more transparently and could thus anticipate the cost/benefit implications of decisions taken to reduce risk.
• Regulators: Regulators could gain greater confidence in the balance sheet valuation disclosed by insurance companies, which has the potential to decrease the regulator's view of risk capital necessary to support risk.

One could argue that straightforward consumer and commercial loans are much simpler than the risks underwritten by insurers. However, when taking a critical look at the complexity of the financial projects currently being traded by investors, that notion is hard to support. In fact, many of the underlying risks facing lenders are very closely related to the risks facing insurers. Perhaps the biggest differentiating factor is the lack of standardization of contracts, which creates a degree of complexity. From a contractual perspective, however, complex derivatives, other hard-to-value instruments and non-transparent assets can be at least as opaque and complex. Yet the core elements for assessing risk are available, and credible calculations exist within the valid range of assumptions. The insurance industry could benefit from the increasing availability of relevant data. That data could be the byproduct of other applications, such as route data from fleet management software; vehicle data from predictive maintenance applications; traffic density data from road management applications; or environmental data from various sources. Or, it could be data that has been custom-generated for insurance applications, such as the data from telematics devices used by personal auto insurers to capture driving behavior. I see the biggest promise in using the data exhaust from other applications. I suspect clients would be averse (in many cases) to additional data capture specifically for insurance but would be open to sharing data already captured—as long as there are appropriate safeguards to ensure that it does not disadvantage them as clients. The industry will need to invest in new analytical techniques to leverage these new data sources. In many other sectors of the economy, “big data” is having a real impact. This has required new tools and algorithms that might be unfamiliar to most analytical professionals within insurance. David Mordecai and Samantha Kappagoda, co-founders of the RiskEcon Lab at Courant Institute of Mathematical Sciences, which is among the world’s leading applied mathematics and computer science research institutions, explained the necessary evolution: “The increasingly pervasive proliferation of remote sensing and distributed computing (e.g. wearable tech, automotive telematics), and the resulting deluge of 'data exhaust' should both necessitate and enable the emergence of digitized risk management programs. Ubiquitous peer-to-peer interactions between human 'crowds' and machine 'swarms' promise to dominate commercial and consumer activity, as already observed within omni-channel advertising exchanges and high-frequency algorithmic stock trading platforms. Financing and insurance functions involving risk-transfer, risk-sharing and risk-pooling will increasingly be facilitated by and executed seamlessly within code. Among others, Bayesian statistical and adaptive process control methods (e.g. neural networks, hidden Markov models)—originally employed within the telecommunication, electricity, chemical industry and aviation during the mid-20th century, and more recently adapted for voice, visual and text recognition, along with other supervised and unsupervised data mining and pattern recognition methods—will need to be widely adopted to identify, monitor, measure and value underlying risk factors.” In my opinion, new data and new techniques are likely to create a degree of transparency in insurance risks that has never existed. That transparency could benefit capital providers (both insurance company investors and direct investors in insurance risk), clients and regulators. A new era is quickly approaching where information and analysis have the potential to remove the cloud engulfing insurance risk. There are likely to be substantial benefits for those forward-thinking companies that exploit the opportunity.

An April 2016 study by the Worker’s Compensation Research Institute (WCRI) titled, "Do Higher Fee Schedules Increase the Number of Workers’ Compensation Cases?" found that, in many states, workers' compensation reimbursement rates were higher than group health reimbursement rates. The study stated that cost shifting is more common with soft tissue injuries, especially in states with higher workers’ compensation reimbursement rates. The study found that an estimated 20% increase in workers’ compensation payments for physician services provided during an office visit is associated with increases in the number of soft-tissue injuries being called "work-related" by 6%. This study goes hand-in-hand with another study by the WCRI called, “Will The Affordable Care Act Shift Claims to Worker’s Compensation Payors” (September 2015), which said that if only 3% of group health soft tissue conditions were shifted to workers’ compensation in Pennsylvania, costs could increase nearly $100 million annually — in California, this cost shifting to workers' compensation could increase costs more than $225 million. See Also: What Will Workers' Comp Be in 20 Years? Soft-tissue injuries typically defined as musculoskeletal disorders (MSD) are typically muscle or nerve conditions that primarily affect the neck, back and shoulders and can include conditions such as cumulative trauma, neck, back sprain/strains or any damage to the muscles, ligaments and tendons. They are often difficult to diagnose and treat because there are very few reliable objective tests that demonstrate soft tissue injuries. The diagnosis is often based on the patient’s history and the doctor’s physical examination of the patient. Therefore, the diagnosis frequently depends on the individual’s subjective complaints of pain, as well as the individual’s compliance and genuine effort during the musculoskeletal and neurological phases of the exam. Historically, in workers’ compensation, both the patient’s subjective complaints and his or her effort during the physical exam are often unreliable. Inaccurate histories and poor effort on physical exams can, more often than not, lead to misdiagnoses and ineffective or inappropriate treatments, which increase the cost, shifting burden to the employer even more. In many states, the burden to determine causation of a soft tissue injury and to determine if the medical necessity of treatment falls under workers' compensation or group health resides solely with the treating physician. In fact, states like Florida place an extra burden on doctors because of an apportionment law that states that the individual is responsible for the non-work-related treatment. If there is a major discrepancy in reimbursement between workers’ compensation and commercial insurance, the treating physician is tempted to accept the patient’s history of the event and does not have an incentive to investigate history that may place the causation of the patient’s symptoms in doubt. If clear-cut evidence documenting a pre-existing condition is lacking or not reviewed, the physician’s decision can be affected by secondary gain, and the physician is more likely to state that the soft tissue injury is work-related. In these economic times, the cost-shifting issue is hard to resist for physicians. That is coupled with the fact that soft tissue injuries are often hard to demonstrate radiographically or with objective testing. In addition, radiographic tests are unreliable at timing injuries. X-rays and MRIs can show chronic changes like osteophytes and severely collapsed discs that usually take years to develop, but if a patient states that all of the pain began after a work-related injury, the treating physician may be tempted to attribute causation to the work-related event despite conflicting (yet unclear) radiographic findings. If this trend continues and remains uncontrolled, employers' workers’ compensation costs can skyrocket. The key to this issue is only accepting claims that arise out of the course and the scope of treatment. The law in each jurisdiction has one simple common theme: The employee needs to be returned to baseline. An electrodiagnostic functional assessment soft tissue management (EFA-STM) program can resolve the issues. It is a bookend solution that measures current and new employees before and after a work-related event is reported. It assists in determining if an injury arose over the course and scope of employment (AOECOE) and helps in providing better care for the work-related condition. EFA-STM is non-discriminatory. It objectively determines pre-injury status and whether there is a change in condition after a reported occurrence. A baseline assessment is performed and the unread data is immediately stored in a secure database. When a work-related event is reported, a post-injury assessment is conducted and compared with the baseline test to determine whether there is a change in condition. Without a pre-injury exam for comparison, no radiographic test (including an MRI) can accurately time a soft-tissue injury and, thus, the ultimate opinion on causation of injury can be subject to bias. In addition, it is commonly accepted that an MRI, for example, shows structural abnormalities that are common in asymptomatic patients. The EFA-STM program allows physicians to more accurately determine if structural changes on an MRI are causing nerve/muscle irritation and disturbance. Therefore, more accurate diagnoses are made and more appropriate treatments are recommended. Unnecessary, costly and invasive tests (e.g. discography) and treatments can be avoided. See Also: 25 Axioms of medical Care in Workers' Comp System The EFA-STM program is specifically designed to allow better treatment for the work-related condition and has proven invaluable to prevent cost shifting to workers' compensation. The program provides objective information that enables doctors to more accurately establish causation and to avoid the potential temptation to shift the burden to a work comp carrier if a soft tissue injury is not work-related. Finally, the EFA-STM program minimizes false positive structural abnormalities that are commonly seen on an MRI and allows for more accurate diagnoses so that safer, more cost-effective treatments can be rendered.