With our past few posts on ITL, we have been exploring how insurers can continue to bring more private capacity to U.S. flood (Note: Everything we talk about for U.S. flood is also relevant for Canada flood). We have explored here how technology, data and analytics exist to handle flood in an adequately sophisticated manner, and we have described here the market opportunity that exists. Now, it’s worth a look to explore how a flood program could be introduced, starting from scratch through cherry-picking mischaracterized risks and then to a full, mass-market solution.

What’s a FIRM? It’s not what you think

First, let’s take a quick look at how National Flood Insurance Program (NFIP) rates are determined: the Flood Insurance Rate Maps, or FIRMs. For the NFIP, FIRMs solve two core problems – identifying which properties must have flood insurance and how much to charge for it. The first function is for banks, giving them an easy answer for whether a property to be lent against requires flood insurance – this is what the Special Flood Hazard Area (SFHA) is for. Anything within the SFHA is deemed to be in a 100-year flood zone (basically, A and V zones), and requires flood insurance for a mortgage. The second function sets the pricing and conditions for the NFIP to sell the actual policies. The complexity of solving these two problems should not be underestimated for a country of this size. But it must be remembered that a FIRM is a marketing device and not a risk model.

Considering that FIRMs are a marketing device built on a huge scale, it makes perfect sense that some generalizations needed to be made on the delineation of the various flood zones. The banks needed a general guideline to know when flood insurance was needed, and the NFIP needed rates to be distributed in a way that could result in a broad enough risk pool to generate enough premium to be solvent. While the SFHA has served the banks well enough over the years, the rating of properties has not been so successful. There are plenty of reasons the NFIP is deep in debt (see page 6 of this report); suffice it to say that the rates set by FIRMs do not result in a solvent NFIP.

Cherry-picking

The fact that the FIRMs are a flawed rating device based on geographical generalizations means there are cherries to be picked. By applying location-based flood risk analytics to properties in the SFHA, a carrier can begin to find where the NFIP has overrated the risk. Using risk assessments based on geospatial analysis (such as measurements to water) and their own data (such as NFIP claims history), a carrier can undercut the NFIP on specific properties where the risk fits their own appetite. Note to cherry-pickers: Ensure you account for the height above ground of the building, because you won’t need elevation certificates for this type of underwriting. So far, cherry-picking has been focused on the SFHA for a couple reasons – homeowners need to have coverage, and the NFIP rates are the highest. There is no reason, though, that cherry picking can’t be done effectively in X zones and beyond.

Mass-market solution

The same data and analytics used for cherry-picking can be used more broadly to create a mass-market solution. By adjusting the dials on the flood risk analytics – and flood risk analytics really should be configurable – you can calibrate to calculate the flood risk at low-risk locations. In other words, flood risk can be parsed into however many bins are needed to underwrite flood risk on any property in the country. With the risk segmented, rates can be defined that can (and should) be applied as a standard peril on all homeowner policies. Flood risk can be underwritten like fire risk.

Insurers have traditionally been confident underwriting fire risk. But consider this: While fire is based on construction type, distance to fire hydrants and distance to fire station, flood risk can be assessed with parameters that can be measured with similar confidence but with greater correlation to a potential loss.

Flood will be the new fire

Insurers have been satisfied to leave flood risk to the Feds, and that was prudent for generations. But technology has evolved, and enterprising carriers can now craft an underwriting strategy to put flood risk on their books. Fire was once considered too high-risk to underwrite consistently, but as confidence grew on how to manage the risk it became a staple product of property insurers. Now, insurers are dipping their toes into flood risk. As others follow, confidence will grow, and flood will become the new fire.

Healthcare is broken in this country; I don't think I really have to convince too many people of that. Whether your political leanings are blue or red, whether you're a senior citizen or a teenager, really whether you're rich or poor -- just about everybody senses that something is wrong with how we manage care. This is not a quality-of-service issue, not so much an access-to-care issue and not really a lack-of-options issue. No, the problem most Americans rightly recognize as being wrong in current system boils down to one word: price.

But how do you fix that? For 20 years now, I have tried to help employers manage their healthcare costs for employees and their families. For at least the first 15 years of my career, that job mostly entailed comparing options from the national and regional carriers, negotiating the lowest rates possible, making suggestions to help lower benefits to offset rising premiums and then preparing spreadsheets of all those options for our CEO, CFO and HR director. Basically, my job was to bring in bad news, but to try to bring in the least bad news. All to get new clients and keep old ones.

Any time a business owner would ask me, "Why are our premiums rising so much?" I'd turn the question around a bit and ask what she thought the causes were. Inevitably, I'd hear the same three things. First, those "staggering profits of the insurance companies." Closely behind that is America's notorious "increase in obesity." Then third -- every once in a while -- someone would actually get closer to the truth and say the reason is that "medical costs are rising." And all of these are true, no doubt, to one degree or another. But none explains how health insurance premiums have historically risen at a rate five times or more beyond normal inflation.

When pressed for an answer on higher premiums, I’d explain how we receive very little information from carriers (especially in the fully insured market), but you’ve got a higher-than-desirable loss ratio -- or I might mention the aging employee population, declining overall health, new taxes and regulations perhaps related to the Affordable Care Act. Again, all those reasons, to some degree or another, have a real impact.

The one that kept coming closest to the truth, at least from an insurance insider's perspective, is the steady rise in costs. Or, unfortunately, as most consumers see it, the outlandish profiteering manufactured from the suffering, confusion and fear of others.

To truly find a more meaningful answer -- something consumers and advocates and carriers and even legislatures could theoretically one day use to craft a lasting solution -- I started to look at the actual unit cost of medical care. That's vital, because it strips away taxes, fees, insurance profits and many other considerations like America's decreasing health, or the continued drop in smoking. It clears all that fog and gives you a hard-number comparison. And what I discovered was that we as a nation spend more per unit of care than the next seven most-expensive countries COMBINED.

That deserves repeating. Not only do we as a nation maintain the world's most expensive healthcare system as a whole, but at the individual level you are likely to be billed more for the same procedure than similar patients in China, France, Germany, Canada, Malaysia, India and the U.K. if all their bills were rolled into one.

Comparisons

To put things in better perspective, I looked at other common costs we incur going back as far as before the Industrial Revolution. And what I found was that the price of a car has not wildly changed in all those years. Nor do gas prices rise against inflation. Meanwhile, prices of computers and technology have historically gone down. So how then do healthcare premiums justify such leaps?

Housing is a great example. Since 1970, housing costs have only gone up 15% -- 15% in 45 years. In that same time period, medical care costs have jumped 1,800% -- 18 times greater since 1970. How about since 1935? According to Federal Bureau of Labor Statistics, costs have risen 4,200% in that time.

When further comparing health insurance and healthcare itself against any other goods and services we might buy, I realized that Americans, in general, tend to apply common sense and rational thinking to many other purchases, but that much of that practice somehow goes out the window when it comes to medical care.

We’ve become very good at consuming health insurance, but does that mean we're actually good consumers? The executives at businesses do what they're supposed to: compare costs, co-pays and deductibles presented by their broker/consultant each year. And when these executives do decide which plans to roll out to their employees, they are good shoppers. They compare their employers' costs with their spouses' employers, compare against the Obamacare exchanges (or individual plans pre-ACA) and consider other important factors -- your out-of-pockets, your deductible, your premiums....

The goal is to control overall healthcare costs. But look at other types of insurance.

Many of us likely will shop out our car insurance every few years. After all, 15 minutes could save us 15%, right? Yet we know that any savings only apply to the insurance. We don't expect shopping around for our car insurance to actually affect the price of the car. But the price of the car does affect insurance: A higher price tag means more expensive insurance.

The same is true in healthcare. We CANNOT lower our healthcare costs by shopping our insurance. Our healthcare costs are not at all affected by our insurance costs. This has been proven with the "consumer-driven" model of insurance (which has had limited to no impact on premiums long term). Yet our health insurance costs are almost fully driven by our actual healthcare costs. As a matter of fact, a provision of the Affordable Care Act known as "medical loss ratios" practically guarantees this.

Imagine that your teenager just got his driver's license. After some good old-fashioned consternation and badgering, you’ve agreed to let him take out the car out unsupervised for the very first time, only to go to the corner store to get some much-needed milk. You hand over the keys and try not to stress too much. Of course, less than 15 minutes later, you get the dreaded phone call: He's been in an accident.

Rushing to the scene, you're relieved to discover it's only a fender bender. The other driver, seemingly a reasonable person, agrees to accept your offer to not file an insurance claim, and instead pay him directly for what appears to be, let's say, $1,000 of damage. After all, you've got a $500 deductible, and a claim filed by your teenager just weeks after getting his license could jack your rates up much more than the difference. Or, worse, your carrier could drop you, jeopardizing your freedom completely! So paying out of pocket makes sense, right?

But would we do ever this with our healthcare? Can you imagine anyone walking into a cardiologist appointment, especially with a co-pay plan, and saying, "I don't want my insurance company knowing I may have heart disease, so let me just pay the $500 charge instead of submitting the claim and paying the co-pay"?

And let's look at how oddly blind we are to the actual quality of healthcare we receive. For instance, in an operating room, a strong argument can be made that the anesthesiologist is the second most important person on the surgical team. After all, when you're under general anesthesia, it's her job to control the machines that keep you breathing. She also controls how "under" you go. She makes sure you don't go so deep that you slip into a coma, but, equally important, makes sure you don't wake up mid-procedure. Yet, with all that responsibility in her hands, who among us has even known who the anesthesiologist would be until five minutes prior to being knocked out? After all, for such an important role, wouldn't it be nice to develop a relationship with this doctor, and maybe even have her be the one who administers sedatives for future surgeries? Maybe you'd just like to know if she only graduated medical school last week? That might be pertinent, too.

Instead, we juggle our healthcare purchases like nothing else we buy. Imagine if we consumed hotel stays like we do healthcare. We might have a high-deductible "hotel" plan. Say we had a $500 deductible before our plan covered stays at 100%. So if I'm only staying one night, I might look into cost and quality, maybe compare rooms on Trivago. But what if I needed a hotel room for a week, or a year, and I knew I'd be hitting that $500 threshold no matter where I stayed, from the most rat-infested hotel to a five-star resort? Wouldn't I be inclined to stay at the Ritz Carlton in a $1,000-a-night because I know I'm hitting my deductible either way.

One of the pushbacks I get is that we, as patients, are not doctors and must rely on the pros. After all, when faced with a major medical condition, we're usually not in the best frame of mind to make intelligent decisions. "I should just trust my doctor" is a common reaction, maybe the most common. And a very understandable one. But I'd argue that dealing with a major medical condition is the exact time to be most involved. Most aware. Most informed. The stakes couldn't be higher, and yet our awareness is disturbingly low.

If we bought houses as we buy healthcare, it'd be like finding a reputable real estate agent and then asking him to go ahead and pick out a neighborhood, a house and the price we'll pay. We'll just meet him at the closing. Sounds crazy, right?

Where Insurance Is to Blame

Please know that I'm not holding insurance companies blameless. I do, for instance, blame the insurance industry for a major shift in our overall thinking. I hold the industry responsible for creating an environment in which the cost of care, and therefore the quality of care, becomes irrelevant. This was mainly born out of HMOs, of course, which, you'll recall, lowered costs tremendously at first, and were hailed as the cure to all that ails our system, before things went so horribly wrong.

Here again, comparison can be useful. A while back, I was in a meeting with service department workers at a car dealership. I asked if they'd agree that most people, when paying for their own repair, would care about both the cost and quality. Everyone nodded -- of course they would. I asked how that differed from a customer whose car was still under warranty. In that situation, they told me, the customers generally don't care at all about cost, and, in fact, will likely come to a dealership on a warranty job specifically BECAUSE it's the most expensive. After all, someone else is paying, right?

What most people are unaware of -- mainly because they don't ask -- is that you can get warranty work done at many non-dealer repair shops.

Most people think of their health insurance a lot like they do a car warranty. The total cost, the competitively and fairly priced service, and, to a large extent, how good the work is just doesn't matter so much when we're not reaching into our pockets.

Doesn't that tell us precisely why the "consumer driven" model hasn't worked?

The idea was that if our plans have us paying higher deductible and co-pays, we'll care more about the overall cost. Yet in 2015, the highest out- of-pocket allowed by the Affordable Care Act is just $6,600. If I'm going in for a procedure that may range in cost from $25,000 to $125,000, what exactly is my incentive to go looking for a deal? Or even ask questions? Not when I know I'll be hitting my $6,600 threshold regardless of where I go.

And we inherently associate higher costs with greater quality of care. Is that a fair assumption? Not with the system we have. Actually, the opposite generally proves true.

Transparency

All of these things keep coming back to a singular issue for me: transparency. We simply don't have the information we need to make wise decisions. Like finding out how good a specific hospital is at replacing hips, or how much it actually charges compared with another facility.

However, I believe the reason this information is not systematically available is the same reason why, if it suddenly were available overnight, with the wave of my magic wand, there would still be little impact. What is that reason? Because today, under the system and mentality we have, there's simply no consumer demand for it.

Let's look at it from the pharmaceutical side. The cost at a retail pharmacy for the generic Lipitor can vary from $16 to almost $80, depending on where you go to. But if you have a $10 co-pay, or have already reached your 100% coverage, how can I convince someone to go three miles out of his way to get the lower-cost prescription? How do I get him to even ask the question?

Another argument I hear frequently when I ask customers to identify the problems with healthcare: "Isn't it the insurance company's job to control cost? Don't companies set up networks for this very purpose?"

Yes, they certainly do. But look at what really matters. Walmart started a list of $4 prescriptions. Many other pharmacies quickly followed suit. Try showing your insurance ID card for one of those drugs next time you go. In most cases, you'll find the insurance company would pay a significantly higher price. Why? Because you have much more power than the insurance company does. Having you be willing to spend your money at a store is far more compelling to the business than anything an insurance company can negotiate.

We treat our own health like a discount haircut. We basically know as much about the professionals and facilities charged with saving our lives as we do with the stylists at Supercuts. It's an insanely ill-informed way to manage the most important thing we have.

What can I leave you with in terms of possible solutions? They do exist, even though the Affordable Care Act limits some options.

What needs to happen is we have to encourage patients to care about the quality AND costs of the care they receive.

I envision a day when I can go on my smartphone and, using a basic app, find all the suitable places for replacing my hip, how well they're rated, how often they do the operation and, of course, how much they charge. How many of us would walk into a new restaurant without the benefit of any word-of-mouth or knowing anything about the specialties, pick from a menu but only find out the price when you get your check? We do that every day with sprained wrists, broken bones, personal addictions, genetic illnesses, respiratory issues and even open-heart surgery,

The bigger picture here is really using our consumer dollars to force providers -- meaning hospitals, doctors, drug manufacturers, pharmacies, etc. - to compete on the cost and quality of the services they provide, like nearly every other provider of any products or service we buy.

We've seen it work: In areas of healthcare that insurance typically doesn't cover, like laser eye surgery or even cosmetic surgery, the change is already happening. The costs in those areas have gone down considerably while the quality has increased.

Naturally, I recognize that making the comparisons available and getting consumers to use them would be a huge challenge. What can we do in the meantime?

Well, some tools do exist. There is an online service called MediBid that allows hospitals and providers to actually bid on your medical care. When providers respond, patients can compare costs and quality among those providers.

Another possible solution: Instead of an annual deductible of, say, $2,500, we could have a monthly resettable deductible of something like $200. How would that help? Well, it would give us, as consumers, a little skin in the game year-round. It would encourage us to participate in lowering overall costs by not applying the car dealership model to an already bloated and wasteful system.

Another push, an indirect result of the ACA, is more self-insured products. Many times, these are appropriate for smaller businesses. Not only does the self-insured employer have significantly more transparency on costs but also, more importantly, has real incentive to control those costs.

Some employers negotiate reasonable pricing and, if they use a service like MediBid and it results in a significant savings, may offer to pay the employee's deductible and even cover any travel expenses.

One innovative carrier has actually tied physical activity to a patient's out-of-pocket cost. Any adult on the plan can opt-in to wear a step tracker, like a Fitbit. If certain goals are met, people can earn as much as $4 a day, or $1,000 a year, off their deductible and out-of-pocket.

Which brings up the topic of wellness, which has become a real buzzword in the last five years or so. While I do agree that getting "well" can translate into consuming less care, wellness programs don't address the fact that nearly all people will consume care at some point in their lives and that many diseases are completely unrelated to lifestyle. My approach, the one I believe in: More transparency on the healthcare process and a community of well-informed consumers can help lower costs and improve quality on all care.

Conclusion

I believe that 90% of our problems would right themselves fairly quickly if only patients had the right incentives. If only information were made readily accessible. If only patients were allowed to be consumers, to shop for based on quality AND cost, just as we do with nearly everything else we buy.

This change would naturally force providers to improve their quality and lower their costs at a far more rapid pace. The pattern of unnecessary and duplicate testing would go down. Prices would quickly become far more competitive, as they should be.

And I believe Americans would start to see a more direct link between their financial picture and the decisions they make about their own health. If all this happened, if we had the transparency we need, then that dollar menu at McDonald's might not seem so affordable once we understand the health and cost impact a double-cheeseburger really has down the road.

We all know that digital technology has changed, and continues to change, how people shop for, buy and use goods and services. Power has shifted from the company to the customer. All companies must adopt the digital technologies that create the interaction that consumers now demand and expect. But is digital readiness more of an imperative for some industries than others?

What if you are in an industry that sells a product that most people don't really even want to buy, own or use...that people probably wouldn't even buy if they didn't have to...a product that was confusing and mysterious? Heck, one that isn't even a "product" at all? If you were a company that fit this description and you lagged behind in digital readiness, how long do you think you'd last if a new competitor came along and used digital technology to actually make the experience of buying, owning and using the product you sell more appealing to customers?

Well, this is the position the insurance industry finds itself in. Satisfaction ratings with the industry vary - they're so-so in the U.S. and pretty poor in the U.K., based on research commissioned by Majesco in a report titled "Assessing the Quality of the Customer Experience ," for example - and few customers actually switch each year, but loyalty, if you can call it that, is driven more by inertia than a true feeling of satisfaction and emotional connection to one's insurance company. Quite frankly, it's a royal pain to shop for and switch insurance, and most people are willing to put up with minor annoyances - until they get pushed too far.

The company that can best remove or reduce the pain of buying and owning insurance stands to reap a huge market of consumers who are tired of being treated poorly by the insurance industry, compared with the new benchmarks set by Amazon and Apple.

This is not new news. But the good news is that most leaders in the insurance industry get it. They know they need to act, and they are. Three-quarters of respondents in a cross-industry survey by MIT-Sloan on digital strategy said that digital technologies are important to their companies today, and 93% said they would be important in the next three years.

The issues are easy to talk about, but it's hard to actually make the digital transformation in any industry or company, not just insurance. It's not just implementing new technology. It also requires strategy, leadership, culture, resources and technical capabilities. The MIT-Sloan survey found that most companies are in the early or developing stages of digital maturity. Even those that were in the most advanced "maturing" phase could not be truly considered as fully mature.

Majesco surveyed its insurance customers in the third quarter of 2014 to get a better understanding of the insurance-specific promises and challenges that digital capabilities are presenting them, which are profiled in the report "Digital Readiness in Insurance." The customers overwhelmingly agreed that digital capabilities are the foundation for the future and that this was the biggest driver of their digital strategy work. While their current priorities for digital transformation are focused on specific internal business operations like billing and payments and e-service for customers and agents, they at least are aiming at improving the experience of their two most important stakeholder groups: customers and agents.

Despite these good intentions, most of these insurers reported that these operations are currently only weakly supported by digital technologies. Most said there was little concern in their companies about the strategic priority of implementing their digital strategies, but they are encountering barriers when it comes to integration of systems and the capacity and capabilities of their organizations and technology.

It's great that Majesco's customers recognize the expectation to improve the experience of shopping for, buying, owning and using insurance. The mandate for a compelling digital experience, and the necessity to compare themselves with companies like Amazon, are the first steps on the digital journey. Where are you?

Having credit monitoring instead of identity monitoring is like putting a security system in the elevator but not in the whole office building. The scope of security is limited and leaves the workforce vulnerable. Thus, understanding how monitoring programs differ, how they work and why it matters is critical for safeguarding your identity.

Why should you care?

Victims of identity theft deal with increased stress, hours of work rebuilding their reputation and recovering from major financial losses; all of which have major consequences in other areas of life - like decreased productivity and performance on the job.

• More than one-third (36%) of victims said their identity theft incident caused them moderate to severe emotional distress, and 60% of employees said they have lower productivity at work because of stress.
• Every two seconds someone becomes a victim of identity theft, and over the past year, 70% of companies suffered from fraud.

Given the statistics, if you haven't dealt with the crime in some capacity, it's only a matter of time.

The good news is that arming yourself with credit monitoring and identity monitoring gives you a better chance of stopping identity theft before it gets out of hand, thereby diminishing the negative effects that follow.

What is credit monitoring? How does it work?

There's a broad range of credit monitoring services available in today's market, and each program varies. Credit monitoring is a reactive approach to identity theft that involves checking credit reports for fraudulent activity. Because a credit report shows past activity, it will only reveal fraud or theft that has already affected the victim. That's why it's like only having security in the elevator: Once you realize the culprit is there, he has already infiltrated the building.

Credit monitoring programs will pull a member's report, often quarterly or annually, from any number of the three major credit bureaus and make it visible to the member. On top of that, programs watch credit reports, transactions and activity for changes that could be criminal.

Another aspect of credit monitoring is resolution and recovery assistance, but, again, the levels of assistance vary from product to product. For instance, credit monitoring services will alert a member if they find fraudulent activity on the credit report(s), but some services don’t inform the credit bureaus on behalf of the member.

What is identity monitoring? How does it work?

Identity monitoring takes a more active approach. It not only focuses on credit reports but broadens the security sweep to account for name, birth date, address, email, driver's license, Social Security number and more. Think of it as a security system for the whole office building, with security officers at every door and window.

Top-notch identity monitoring programs will check national databases for suspicious activity, watch out for questionable transactions and ultimately try to keep the member informed with real-time alerts about a data breach or fraudulent act. Touch points could even include scanning criminal record databases, sex offender registries and public records.

Identity monitoring can also give people peace of mind about their biggest worries: More than 70% of consumers are concerned about their Social Security number, credit card, insurance and driver's license number, while less than 60% are concerned about their credit score and transaction history. People want more protection than what's offered by credit monitoring alone, and identity monitoring is the answer.

What is the difference?

One major difference between identity monitoring and credit monitoring is accuracy. The all-inclusive nature of identity monitoring allows for a more accurate assessment of susceptibility to identity theft. For example, credit monitoring may not detect problems like tax fraud or medical identity theft because credit reports don't necessarily show those types of information. Because identity monitoring is more robust, it can discover anomalies and provide protection for more than the financial aspects covered by credit monitoring.

Simply put, identity monitoring provides more coverage than credit monitoring.

For more information, visit clcidprotect.com.

Securities litigation has a culture defined by multiple elements: the types of cases filed, the plaintiffs' lawyers who file them, the defense counsel who defend them, the characteristics of the insurance that covers them, the way insurance representatives approach coverage, the government's investigative policies - and, of course, the attitude of public companies and their directors and officers toward disclosure and governance.

This culture has been largely stable over the nearly 20 years I've defended securities litigation matters full time. The array of private securities litigation matters (in the way I define securities litigation) remains the same - in order of virulence: securities class actions, shareholder derivative litigation matters (derivative actions, board demands and books-and-records inspections) and shareholder challenges to mergers. The world of disclosure-related SEC enforcement and internal corporate investigations is basically unchanged, as well. And the art of managing a disclosure crisis, involving the convergence of shareholder litigation, SEC enforcement and an internal investigation involves the same basic skills and instincts.

But I've noted significant changes to other characteristics of securities-litigation culture recently, which portend a paradigm shift. Over the past few years, smaller plaintiffs' firms have initiated more securities class actions on behalf of individual, retail investors, largely against smaller companies that have suffered what I call "lawsuit blueprint" problems such as auditor resignations and short-seller reports. This trend - which has now become ingrained into the securities-litigation culture - will significantly influence the way securities cases are defended and by whom, and change the way that D&O insurance coverage and claims need to be handled.

Changes in the Plaintiffs' Bar

Discussion of the history of securities plaintiffs' counsel usually focuses on the impact of the departures of former giants Bill Lerach and Mel Weiss. But although the two of them did indeed cut a wide swath, the plaintiffs' bar survived their departures just fine. Lerach's former firm is thriving, and there are strong leaders there and at other prominent plaintiffs' firms.

The more fundamental shifts in the plaintiffs' bar concern changes to filing trends. Securities class action filings are down significantly over the past several years, but, as I have written, I'm confident they will remain the mainstay of securities litigation and won't be replaced by merger cases or derivative actions. There is a large group of plaintiffs' lawyers who specialize in securities class actions, and there are plenty of stock drops that give them good opportunities to file cases. Securities class action filings tend to come in waves, both in the number of cases and type. Filings have been down over the last several years for multiple reasons, including the lack of plaintiff-firm resources to file new cases as they continue to litigate stubborn and labor-intensive credit-crisis cases, the rising stock market and the lack of significant financial restatements.

Although I don't think the downturn in filings is, in and of itself, very meaningful, it has created the opportunity for smaller plaintiffs' firms to file more securities class actions. The Reform Act's lead plaintiff process gives plaintiffs' firms incentives to recruit institutional investors to serve as plaintiffs. For the most part, institutional investors, whether smaller unions or large funds, have retained the more prominent plaintiffs' firms, and smaller plaintiffs' firms have been left with individual investor clients who usually can't beat out institutions for the lead-plaintiff role. At the same time, securities class action economics tightened in all but the largest cases. Dismissal rates under the Reform Act are pretty high, and defeating a motion to dismiss often requires significant investigative costs and intensive legal work. And the median settlement amount of cases that survive dismissal motions is fairly low. These dynamics placed a premium on experience, efficiency and scale. Larger firms filed most of the cases, and smaller plaintiffs' firms were unable to compete effectively for the lead plaintiff role or make much money on their litigation investments.

This started to change with the wave of cases against Chinese issuers in 2010. Smaller plaintiffs' firms initiated most of them, as the larger firms were swamped with credit-crisis cases and likely were deterred by the relatively small damages, potentially high discovery costs and uncertain insurance and company financial resources. Moreover, these cases fit smaller firms' capabilities well; nearly all of the cases had "lawsuit blueprints" such as auditor resignations or short-seller reports, thereby reducing the smaller firms' investigative costs and increasing their likelihood of surviving a motion to dismiss. The dismissal rate has indeed been low, and limited insurance and company resources have prompted early settlements in amounts that, while on the low side, appear to have yielded good outcomes for the smaller plaintiffs’ firms.

The smaller plaintiffs' firms thus built up a head of steam that has kept them going, even after the wave of China cases subsided. For the last year or two, following almost every "lawsuit blueprint" announcement, a smaller firm has launched an "investigation" of the company, and smaller firms have initiated an increasing number of cases. Like the China cases, these tend to be against smaller companies. Thus, smaller plaintiffs' firms have discovered a class of cases - cases against smaller companies that have suffered well-publicized problems that reduce the plaintiffs' firms' investigative costs - for which they can win the lead plaintiff role and that they can prosecute at a sufficient profit margin.

To be sure, the larger firms still mostly can and will beat out the smaller firms for the cases they want. But it increasingly seems clear that the larger firms don't want to take the lead in initiating many of the cases against smaller companies and are content to focus on larger cases on behalf of their institutional investor clients.

These dynamics are confirmed by recent securities litigation filing statistics. Cornerstone Research's "Securities Class Action Filings: 2014 Year in Review" concludes that (1) aggregate market capitalization loss of sued companies was at its lowest level since 1997 and (2) the percentage of S&P 500 companies sued in securities class actions "was the lowest on record." Cornerstone's "Securities Class Action Filings: 2015 Midyear Assessment" reports that two key measures of the size of cases filed in the first half of 2015 were 43% and 65% lower than the 1997-2014 semiannual historical averages. NERA Economic Consulting's "Recent Trends in Securities Class Action Litigation: 2014 Full-Year Review" reports that 2013 and 2014 "aggregate investor losses" were far lower than in any of the prior eight years. And PricewaterhouseCoopers' "Coming into Focus: 2014 Securities Litigation Study" reflects that, in 2013 and 2014, two-thirds of securities class actions were against small-cap companies (market capitalization less than $2 billion) and that one-quarter were against micro-cap companies (market capitalization less than $300 million). These numbers confirm the trend toward filing smaller cases against smaller companies, so that now, most securities class actions are relatively small cases.

Consequences for Securities Litigation Defense

Securities litigation defense must adjust to this change. Smaller securities class actions are still important and labor-intensive matters - a "small" securities class action is still a big deal for a small company and the individuals accused of fraud, and the number of hours of legal work to defend a small case is still significant. This is especially so for the "lawsuit blueprint" cases, which typically involve a difficult set of facts.

Yet most securities defense practices are in firms with high billing rates and high associate-to-partner ratios, which make it uneconomical for them to defend smaller litigation matters. It obviously makes no sense for a firm to charge $6 million to defend a case that can settle for $6 million. It is even worse for that same firm to attempt to defend the case for $3 million instead of $6 million by cutting corners - whether by under-staffing, over-delegation to junior lawyers or avoiding important tasks. It is worse still for a firm to charge $2 million through the motion to dismiss briefing and then, if it loses, to settle for more than $6 million just because it can't defend the case economically past that point. And it is a strategic and ethical minefield for a firm to charge $6 million and then settle for a larger amount than necessary so that the fees appear to be in line with the size of the case.

Nor is the answer to hire general commercial litigators at lower rates. Securities class actions are specialized matters that demand expertise, consisting not just of knowledge of the law but of relationships with plaintiffs' counsel, defense counsel, economists, mediators and D&O brokers and insurers.

Rather, what is necessary is genuine reform of the economics of securities litigation defense through the creation of a class of experienced securities litigators who charge lower rates and exhibit tighter economic control. Undoubtedly, that will be difficult to achieve for most securities defense lawyers, who practice at firms with supercharged economics. The lawyers who wish to remain securities litigation specialists will thus face a choice:

1. Accept that the volume of their case load will be reduced, as they forego smaller matters and focus on the largest matters (which Biglaw firms are uniquely situated to handle well, on the whole);
2. Rein in the economics of their practices, by lowering billing rates of all lawyers on securities litigation matters, and by reducing staffing and associate-to-partner ratios; or
3. Move their practices to smaller, regional defense firms that naturally have more reasonable economics.

I've taken the third path, and I hope that a number of other securities litigation defense lawyers will also make that shift toward regional defense firms. A regional practice can handle cases around the country, because litigation matters can be effectively and efficiently handled by a firm based outside of the forum city. And they can be handled especially efficiently by regional firms outside of larger cities, which can offer a better quality of life for their associates and a more reasonable economic model for their clients.

Consequences for D&O Insurance

D&O insurance needs to change, as well. For public companies, D&O insurance is indemnity insurance, and the insurer doesn't have the duty or right to defend the litigation. The insured selects counsel, and the insurer has a right to consent to the insured's selection, but such consent can't be unreasonably withheld. D&O insurers are in a bad spot in a great many cases. Because most experienced securities defense lawyers are from expensive firms, most insureds select an expensive firm. But in many cases that spells a highly uneconomical or prejudicial result, through higher than necessary defense costs or an early settlement that doesn't reflect the merits but that is necessary to avoid using most or all of the policy limits on defense costs.

Given the economics, it certainly seems reasonable for an insurer to at least require an insured to look at less expensive (but just as experienced) defense counsel before consenting to the choice of counsel - if not outright withholding consent to a choice that does not make economic sense for a particular case. If that isn't practical from an insurance law or commercial standpoint, insurers may well need to look at enhancing their contractual right to refuse consent or even to offer a set of experienced but lower-cost securities defense practices in exchange for a lower premium. It is my strong belief that a great many public company CFOs would choose a lower D&O insurance premium over an unfettered right to choose their own defense lawyers.

Because I'm not a D&O insurance lawyer, I obviously can't say what is right for D&O insurers from a commercial or legal perspective. But it seems obvious to me that the economics of securities litigation must change, both in terms of defense costs and defense-counsel selection, to avoid increasingly irrational economic results.

According to the Identity Theft Resource Center (ITRC), as of Aug. 11, there have been 472 data breaches, exposing 139,278,685 records in 2015 alone. It's a safe bet that much of the personal identification information (PII) exposed in those breaches will be - at some point - used to perpetrate fraud. With all that PII out there, you might wonder what industry will likely fall victim to the fraud. The answer, according to the recently released results of the 2015 Fraud Mitigation Study, is simple: Cyber criminals do not choose one industry over another when it comes to committing fraud. In fact, all industries are targets.

The study, commissioned by the LexisNexis Fraud Defense Network, examines cross-industry fraud trends of all types - including identity-based fraud - and surveyed 400 fraud mitigation professionals from the insurance, financial services, retail, government, healthcare and communications industries. Overwhelmingly respondents (84%) indicated that the cyber fraud cases they investigated within their industry were also connected to another industry. And the impact of cross-industry fraud is significant: 77% of respondents said cross-industry fraud cases had a moderate to extreme financial impact on their organization.

So, what can industries do to mitigate cyber fraud? It's often been said the best defense is a good offense - and that's what's required. That begins with changing how they are fighting fraud. The siloed approach to each sector dealing with the problem on its own - and relying only on data within its industry - isn't adequate. Criminals count on the fact that industries aren't talking to each other. Once the fraudsters have pilfered one industry sector, they move on to the next unsuspecting industry. But what if one industry sent up a flare to the others?

Imagine if data about fraud cases was shared across industries. The dynamic would shift. Through cross-sector collaboration, industry would have the upper hand. In this scenario, the fraudsters would be at a disadvantage. This is not just a pipe dream. Study respondents recognized they need more information to fight fraud; in fact, 74% acknowledged it would be valuable to have information on fraud cases from outside their industry.

75% of study respondents stated that they do rely on external data analytics to detect and prevent fraud; the other 25% do not primarily because of a lack of budget, awareness, knowledge, comfort level or relevant training. The primary question is, what's the most effective way to share information?

This is the mission of the Fraud Defense Network: to facilitate sharing of information, best practices and data around fraud mitigation across industry and government sectors. We have created the LexisNexis Contributory Risk Repository, a cross-industry database that houses information about fraudulent and suspicious events from organizations in finance, retail, insurance, healthcare, law enforcement and government. After the data is collected through the Risk Repository, LexisNexis applies advanced analytics to identify meaningful connections that not only illuminate past fraudulent behavior but also help to flag suspicious patterns on future transactions.

To contend with ever-escalating healthcare costs, Americans will need to come to grips with the cost of end-of-life care. Right now, it's my reality. I am seeing, first hand, rampant and seemingly uncontrollable costs of sustaining life in a system that lacks any semblance of common sense.

My mother is 90 years old and, other than some spending on five healthy sons, has expended very limited healthcare dollars in her lifetime. That is, until now. Suffering mild dementia, she is a resident in a very pleasant assisted-living facility on Long Island. The facility takes good care of her creature comforts, but, medically, she appears to be a case study in why we are all facing a cost crisis. Two of my brothers are medical professionals, and we have a concerned, knowledgeable, family that oversees her care, but we are not with her all the time to manage treatment, and that's where things break down.

At the first sign of an issue, the facility phones an ambulance and ships her off to the nearest emergency room -- three times in the past few months. The first was because of the flu. She weathered the illness but, because of scarcity of resources, was bedridden for a week. As a result, she needed more than a month of inpatient rehabilitation to restore her ambulatory skills. I am guessing that this episode cost in excess of $50,000. The doctor believes that the next two episodes - which occurred in the past 10 days - relate to an allergic reaction, and he has been trying to rule out possible culprits. He took her off Prilosec, and soon thereafter she complained of chest pains, which turned out to be indigestion. So the hospital sent her home. She burned through about $3,000 in costs to figure that one out. Then, after some tinkering with her medication, her blood pressure spiked to 200/113. This has resulted in another in-patient stay. We are planning to keep her moving to avoid another costly rehabilitation; so, for this one, Medicare and her supplemental insurance will probably spend less than $20,000.

The medical expenses she has experienced could have easily been reduced. The problem is that our Medicare system pays for services rendered and not for care management. Care management would have resulted in a much better outcome for my mother, for our family and for U.S. taxpayers.

I am convinced that the Affordable Care Act is not the answer to solve the healthcare crisis, which can only be fixed if we change the way we deliver care at the end of life. And those who lobby for Medicare for all can consider my mother's experiences. That's certainly not the answer.

Ceded reinsurance management is still a technology backwater at insurers that manage their reinsurance policies and claims with spreadsheet software. These manual methods are error-prone, slow and labor-intensive. Regulatory compliance is difficult, and legitimate claims can slip through.

Insurers recognize they need a better solution, and there’s progress. While quite a few insurers have implemented a ceded reinsurance system in the last few years, many more are planning to install their first system sometime soon. They want to have software that lets them manage complex facultative reinsurance and treaties and the corresponding policies and claims efficiently in one place.

Insurers looking to upgrade any kind of system have better choices today than ever about how and where to implement it. While licensing the software and running it on-premises is still an option, virtually every insurer is considering putting new systems on the cloud in some way. Nearly every insurer expects vendors to include a SaaS or hosted option in their RFPs.

That’s not surprising. A 2014 Ovum whitepaper said 52% of insurers it surveyed are currently earmarking 20% to 39% of new IT spending on SAAS, while 21% are spending 40% to 59%.

The definition of SaaS is not set in stone, but let’s try for a basic understanding. SaaS normally means that the insurer pays the vendor a monthly fee that covers everything—the use of the software, maintenance, upgrades and support. The software is hosted more often at a secure cloud provider such as Amazon Web Services that offers a sound service level agreement.

A ceded reinsurance system is an especially good candidate for a SaaS or a hybrid solution (more on that later). It’s an opportunity for insurers and IT professionals to get comfortable with SaaS on a smaller scale before putting a core system such as a policy administration system in the cloud.

SaaS is attractive for several key reasons. One is that it can save money. Instead of paying a large upfront fee for a perpetual software license, the insurer just pays a monthly, all-inclusive “rental” fee. The software vendor and the cloud-hosting vendor provide both the application and underlying software (such as Oracle or WebSphere) and servers. All the insurer needs is a solid Internet connection. And if your building is hit with a flood or earthquake and has to close, business won’t stop, because users can access the system from almost anywhere.

Having the experts run, maintain and upgrade the software is another big advantage. Instead of having internal IT people apply patches and updates, the vendor—which knows its own software better than anyone else—keeps the application going 24/7. Because it is doing the same thing for many customers, there are economies of scale.

Lower upfront costs and the ability to outsource maintenance to experts mean that even small and medium-sized insurers can afford a state-of-the-art system that might be out of reach otherwise. But even big insurers that have the money and funds to buy and staff a system can still find SaaS to be a compelling option. Whether the insurer is big, small or mid-sized, SaaS offers a platform that may never become obsolete.

Additionally, going the SaaS route can get your system up and running faster, as you won’t need to buy hardware and install the system on your servers. How long it will take depends on the amount of customization required and on the data requirements.

Scalability is another plus. When the business grows, the customer can just adjust the monthly fee instead of having to buy more hardware.

A 2014 Gartner survey of organizations in 10 countries said most are deploying SaaS for mission-critical functions. The traditional on-premises software model is expected to shrink from 34% today to 18% by 2017, Gartner said.

While these are powerful advantages, there are some real or at least perceived disadvantages with SaaS. Probably the biggest barrier is willingness to have a third party store data. A ceded system uses nearly all data from the insurance company, sometimes over many underwriting years, and executives must be comfortable that their company’s data is 100% safe when it’s stored elsewhere. That can be a big leap of faith that some companies aren’t ready to make.

A hybrid solution can be a good way around that. More common in Europe, hybrid solutions are starting to catch on in North America. With this model, the software and data reside at the insurer or reinsurer, which also owns the license. The difference is that the vendor connects to the insurer’s environment to monitor, optimize and maintain the system. As with SaaS, the insurer’s IT department has little involvement with continuing operations. All that is work is outsourced.

How much access does the vendor have to the insurer’s data and systems under a hybrid solution? There are various options, depending on the insurer’s comfort level.

What’s the right solution for a ceded reinsurance system to your company? Each company is unique, and the best answer depends on many factors. But whether you go the on-premises route, choose SaaS or use a hybrid solution, you’ll get a modern system that handles reinsurance efficiently and effectively. Your company is going to benefit greatly.

Companies should review their use of intercompany reinsurance, through either individual or pooled quota share agreements. If insurance companies (particularly in the property & casualty (P&C) sector and possibly health maintenance organization (HMO) sector) can do this correctly, they can achieve capital and back-office operational efficiencies without disrupting "business-as-usual" front office operations.

Inter-company reinsurance efficiency opportunities

PwC sees opportunities for:

1. Companies that have intercompany reinsurance pools or quota share agreements in place to become more efficient, and
2. Companies that do not currently use or have limited intercompany pooling and quota share to expand the use of these concepts.

Increasingly, regulators are open to these modifications, provided policyholders are not put at a disadvantage.

A well-designed intercompany reinsurance structure can result in a number of efficiencies. Specifically, by establishing 100% quota share or 0% retrocession pooling agreements, a group of P&C companies can move all retention to a single "lead" company. The goal is to have the lead company retain the bulk of the insurers' capital and investment portfolios while ceding companies maintain only minimum surplus levels. The lead company would become the only company where capital needs to be actively managed and would have a larger, consolidated investment portfolio.

Companies (particularly P&C) that retain a relatively large number of legal entities after simplification may find a single pooling agreement more straightforward than managing multiple affiliated reinsurance agreements. However, multiple quota share agreements may streamline future changes for events such as divestitures and acquisitions. Note that multiple agreements transferring business back and forth between the same legal entities will need review and most likely simplification. In those instances where centralization of capital with the lead company is not possible (e.g. mutual affiliations, regulatory requirements), the pool percentage should follow the capital position of all participants (including the lead company). Even companies that have significantly simplified their corporate structure can tie their remaining legal entities together with a common-sense pooling agreement that supports their operating strategy.

Key benefits

• Diversification of underwriting results and earnings by legal entity: Pooling enables a larger spread of risk, allowing for less variable earnings and more predictable dividend streams by legal entity. For 0% net retention structures, including 100% quota share, the lead company enjoys the same diversification.
• Improvement in capital position or financial strength ratings: If this is not the case already, the companies will be rated on a pooled (p) or reinsured (r) grouped basis, reflecting their combined financial strength. Additionally, this increase in financial size and diversification can improve the A.M. Best capital adequacy ratio (BCAR).
• More efficient capital management: Companies can better centrally manage capital while retaining minimum required capital in pool/quota share participants and allocating premiums based on surplus capacity. This can help insurers manage premium to surplus ratios. Pooling and quota share also provide more efficient access to total capital by centralizing capital and avoiding dividend traps in subsidiaries.
• Operational efficiencies: Pooling integrates various businesses' finance and back-office operations, can provide momentum for more standardized and centralized reporting functions and can reduce frictional costs associated with the record-to-report function. Some potential efficiencies include: fewer intercompany agreements; lower audit fees from increased materiality thresholds and a combined statutory audit; consolidated regulatory exam; a more streamlined investment management function; and simplified reporting requirements (for 0% net retention agreements).
• Marketing and branding: Some companies have been able to go to market as a group entity (particularly by affiliations of mutuals), which carries a larger financial size category (FSC). FSC is particularly beneficial for mid-size companies trying to gain market share in the broker market for commercial lines.

Challenges

While insurers operate within similar structures and against similar pressures, every company is different. There are a few common challenges we have encountered with our clients while designing and implementing intercompany pooling and affiliate reinsurance:

• Disparate organizational groups, processes, and technologies: Affiliate reinsurance requires results from potentially disparate processes that may have different timing and data quality. Recording pooling entries may prove especially difficult for companies on multiple general ledgers. For the close, the combined pool is only as strong as its weakest link. This will be especially evident with subsidiaries that may have a streamlined close process but are dependent on other participants to close their books. We have seen companies undertake significant close process improvements to operate efficiently in a pooling agreement. This can be somewhat alleviated by structuring multiple affiliate quota share agreements in place of a pooling arrangement.
• Additional requirements for generally labor intensive processes: It is not uncommon for insurers to have significant manual processes for calculating incurred but not reported losses (IBNR) or producing relevant disclosures such as Schedule P and F. Having distinctly different timing of key calculations and inputs can be a burden that all participants have to share.
• Data management and quality issues: Companies that generally operate in silos, on separate ledgers, different chart of accounts or even make inconsistent use of chartfield values can find it more operationally difficult to execute pooling and difficult to leverage automated solutions.
• Blending different businesses within results: Disparate operations and reporting groups that previously performed duties related to specific lines of business may find it difficult dealing with the new assumed business. For example, certain reporting disclosures required only for specific lines may become applicable to all participants in the pool.

Thinking "outside the box" to maximize value

Optimizing the benefits of affiliate reinsurance may result in arrangements that have previously been considered non-traditional, or at least lacking significant industry precedents. We encourage companies to maintain an open dialogue with regulators and rating agencies and believe that demonstrating a positive impact to operations, financial strength and overall policyholder benefits, outweighs lack of precedent.

1. Centralizing capital and gross written business, where possible, is often the preferred structure for P&C companies: Zero-net-retention arrangements are a way to improve capital efficiency. While we have generally seen these structured as 100% quota share reinsurance, it may also be also possible to structure or modify a traditional pooling agreement to cede 100% of written premium to a lead company, with a 0% or minimal retrocession. Some key benefits we have seen include:

• Capital management efficiencies - 0% net retention structures allow for minimum retained capital across the legal entities, centralizing on a lead company. This streamlines the capital management process and can simplify asset/liability management.
• Financial reporting efficiencies - Centralizing net written business on a lead company can significantly reduce overall reporting requirements across the organization. Legal entities with 0% net business can discontinue certain laborious schedules (e.g. Schedule P Parts 2-4) and other reporting requirements for net business. Similarly, by retaining minimum capital on legal entities, investment disclosures can be simplified (e.g., fair value disclosures). Overall, we have seen companies reduce the statutory annual reporting pages by 50%, which can be compelling for larger organizations.

You should work with regulators to shift capital to the lead company in the most efficient way (usually at the inception of the pooling agreement).

2. There are benefits for certain lines of business that have traditionally not been considered for pooling:

• HMOs - Requirements for HMOs to have legal entity domicile in each state in which they do business yields a corporate structure with a large number of thinly capitalized companies. Pooling can improve the capital efficiency, as well as reduce some other operational burdens. While this does not have significant industry precedent (within affiliated pools), we see no reason an agreement would be disallowed solely because an HMO is involved.
• Significantly different business - Removing preconceived constraints allows further expansion of potential opportunities and related benefits. We have assisted companies implementing agreements that have a mix of significantly different lines in the pool and have seen specialty insurance business (e.g. excess and surplus, program, crop, reinsurance, etc.) pooled with mainstream personal and commercial insurance. While there can be related challenges, if there are tangible benefits to diversification, then those challenges can be justified and overcome in the long run.

3. The lead insurer does not have to be the parent company. In the same spirit of thinking outside the box for pool participants, we have found the lead company may not always be an obvious choice, particularly where all participants share percentage retention in the pool. The selection of the lead company should take into consideration the following:

• Licensing - Requires licensing in all domiciled states of pool participants, all states of participants for retrocession and for all lines of business.
• Domicile and regulatory environment - It is preferable to choose a lead company in a state of domicile where the organization has a favorable relationship with the regulator. Existing reinsurance arrangements or recent business restructurings are helpful. It is also critical to maintain open dialogue and communication with the regulator.
• Capital size and efficiency - For larger companies or those with a more complex corporate structure, this can be a more difficult decision. Consider the efficiency of passing excess capital to an ultimate parent and avoid potential dividend traps. It is not always a parent company or the largest company that is best-suited to be the lead company.
• Marketing and branding - For some companies, branding and marketing may become a factor in choosing the lead company. Some highly acquisitive companies may find certain lead companies inconsistent with their branding strategy.

Key considerations

We believe that intercompany pooling and quota share arrangements need to align with a company's objectives and strategy and must be operationally feasible. It is often beneficial to have a third-party perspective that is not biased toward specific ingrained processes or behaviors. In particular:

• Assess how well your people, process and technology can meet new demands.
• Look beyond finance to consider various internal stakeholder perspectives, including actuarial, risk, investment, reinsurance and business leaders, as well as external constituents such as regulators, rating agencies and investors.
• Because of the breadth of people, process and technology that will be affected, we recommend implementing a senior-level steering committee to oversee and drive design and implementation.

In conclusion

There can be tangible benefits from re-evaluating or implementing intercompany pooling and affiliate reinsurance. This can further streamline the corporate structure, based on pre-determined objectives and supporting parameters. We encourage insurers to keep an open mind when designing pool parameters, including lead company selection. Maintaining an open dialogue with regulators and rating agencies is critical, particularly when setting a precedent with a particular pooling arrangement.

One of the more interesting and challenging issues to surface is the status of drivers at transportation network companies (TNCs) such as Uber and Lyft. Are some or all of them employees? A federal court in California just ruled that this issue may be resolved in a class action (although this is subject to appeal).

That, alone, is a difficult call. Here are two web sites discussing the issue.

http://www.newyorker.com/magazine/2015/07/06/gigs-with-benefits

http://www.thelegalintelligencer.com/latest-news/id=1202730474534/Avoiding-Penalties-When-Classifying-Independent-Contractors?slreturn=20150602053546

Commentary addressing this issue has focused primarily on the added expense created by employee status. "For an employer, the main difference between contractors and W-2 employees is that employers have to 'withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee,'" according to the Internal Revenue Service.

Apart from these added expenses, status as an employee creates some difficult insurance challenges. Here a few:

--If you write a workers' compensation policy for the TNC's employees, how many employees are you insuring? Only those who work in the office, or the hundreds or thousands of drivers on the road?

--Most statutes or regulations covering TNCs such as Uber and Lyft require them to carry insurance on their drivers in various amounts -- e.g., $1 million from from the time of agreeing on a ride to after the dropoff. Usually, there is a lower amount required for the time the driver is cruising with the app on looking to connect with a fare ($50,000 primary and $200,000 "excess" in California).

If the driver is an employee, these limits become largely irrelevant because the TNC, as the employer, is liable without limit for any injuries caused by an employee driving within the scope of employment. Put another way, the injuries are backed by all of the TNC's assets, including any insurance it may carry.

--But the issue is more complex than that. What if the driver has a collision on the way to the city, but before turning on the app? Usually, when one is going to or coming from work, the commute is not considered to be in the scope of employment - i.e., no liability on the part of the employer. This "going and coming" rule changes, however, when the employee must use her car in the work. Obviously, TNC drivers must use their cars.

Take the case of Judy Bamberger. She used her car during work to visit clients and carry out other work-related chores. On her way home, she decided to stop for yoga and yogurt. As she made a left turn, she collided with a motorcyclist. Is the employer responsible? "Yes," said the California Court of Appeal. In Moradi v. Marsh USA, Inc., 210 Cal. App.4^th 886 (2013), the court held that her driving fell within the scope of her employment because, since she used her car in her work, going to and from work conferred an "incidental benefit" on the employer.

Thus, the TNCs' liability may extend well beyond the "app on-app off" brackets.

--If this is not complex enough, consider this. Many drivers keep several apps on as they cruise. If a driver keeps three apps on and has a collision, is the driver an employee of all three TNCs? Does that change once the driver accepts a fare? What about the going and coming rule? If the app is not yet turned on, is the driver an employee of each company for whom the driver has an arrangement to drive?

One may imagine other "shared economy" scenarios where status as an employee will affect not only expenses line benefits, but also liability and related insurance issues.