We enjoy many technological devices that used to be pure science fiction -- mobile phones, video chat, Bluetooth speakers, touchscreen tablets,  driverless cars and so on. So what's next? Here are four of the coming insurance technology trends:

• More online tools to attract millennials. Millennials are the new Holy Grail group of customers for insurers and agencies. Many of these young people are just now venturing into adulthood, and over the next few decades they’ll be on the receiving end of the biggest transfer of wealth that we’ve seen. This newly intensified focus on millennials will likely mean greater efforts to improve online customer services and mobile-responsive sites. Some of the online tools we’ll see in the coming years—probably sooner than later—include millennial-focused financial planning and educational resources, specialized social media tools and online customer service and policy change options.
• The development of subscription insurance coverage. Insurers will begin offering suspension of coverage options for certain lines to accommodate people who have increasing or decreasing risk. Insurers will need to be prepared by having a flexible front- and back-end system that can keep up with these changes and minimize or automate underwriting efforts as coverage is turned on and off.
• The increased adoption of digital solutions for claims processing. To increase efficiency and accuracy while also lowering costs, claims departments will become more open to embracing digital solutions for both accumulating and analyzing data. Digital solutions help claims in many of the same ways that they help underwriting. They can flag suspicious situations, process more information, help insurers better analyze their underwriting and approval process and pay policyholders faster, thus attracting even more business.
• Insurers will create more apps and tools. Tools allow insurers to collect data on driving habits and health and fitness metrics, thus helping to attract and retain clients, improve policy rating and reduce risks. The app revolution is just beginning. There are still legitimate concerns on privacy and tampering. Some of the recent announcements are marketing with first-mover publicity. Once that is sorted out we will see many more insurance companies offering web apps.

There’s no question that adopting new technology is what’s going to drive our industry and insurers forward. Now is the time to make sure your infrastructure is ready to adopt what’s coming.

No one disputes that life insurance ownership in the U.S. has been on the decline for decades. The question up for debate is what to do about it. The emergence of an insurtech sector is an indicator of entrepreneur and investor confidence in upside potential. The hundreds of millions of dollars being poured into technology by carriers is another. See Also: Key to Understanding InsurTech But before piles of capital are poured into attempts to capture the opportunity, investors and legacy insurers should reflect on the root causes of this seemingly unstoppable trend and prioritize innovations that aim at solving the biggest issues:

• Carriers have evolved, through their own cumulative behavior over decades, away from serving the needs of the majority of Americans to meeting the needs of a shrinking, high-net-worth population
• A declining pool of independent agents are chasing bigger policies within this segment
• The industry has, effectively, painted itself into a corner and is trapped in a business model that, given its own complexity, is difficult to change from within

How have carriers painted themselves into a corner?  Carriers face what Clayton Christensen termed, in his 1997 classic, “the innovator’s dilemma.” While continuing to do what they do brings carriers closer to mass-market irrelevance, today’s practices, products, processes and policies don’t change. They deliver near-term financials and maintain alignment with regulatory requirements. It’s worth acknowledging how the carriers have ended up in this spiral, particularly the top 20, which collectively control more than 65% market share, according to A.M Best via Nerdwallet.

• Demutualization shifted focus to a new shareholder profile. More than 200 mutual life insurance companies have demutualized since 1930. This trend includes major carriers who were either acquired or pursued direct public ownership, beginning around 2000, e.g., Prudential, MetLife, John Hancock, Mutual of New York, Manulife, Sun Life, Principal and Phoenix Mutual.

• Disbanding of captive agent networks for cost reasons has also meant the loss of a (more) loyal distribution channel. The carriers that used to maintain captive agent networks enjoyed the benefits of a branded channel whose agents were motivated to promote the respective carrier’s products. They chose instead to …

• Shift to third-party distribution, increasing dependency on a channel with less control, and where they face greater risk of commoditization. Placing life insurance products in a broad array of third-party channels, including everything from wealth management firms to brokerages and property/casualty networks, has added complexity and increased emphasis on managing mediated, non-digital channels. This focus comes at a time when other sectors are accelerating the move to direct, digital selling, aligning with changing demographics, technology trends and consumer preferences for digital-first, multi-channel relationships.

• Product cost and complexity has raised the bar to close sales and has increased the focus on a smaller base of the wealthy and ultra-wealthy. With the exception of basic term life, life insurance products can be complex. They can be expensive. And, as a decent level of insurance at a fair premium requires a medical exam including blood and urine sampling, it takes hand holding to get potential policyholders through the purchase process. For the high and ultra-high net worth segments, the benefit of life insurance is often as a tax shelter, not simply to protect loved ones from the catastrophic consequences of unexpected earnings loss. More complexity equals more diversion from the mass market.

• Intense focus on distribution has come at the expense of connecting with the client. Insurance company executives have long insisted – and behaved as though -- the agent is the client, if not in word then effectively in deed. The model perpetuated by the industry delegates the client relationship to the agent. This has its plusses and minuses for the client, and certainly has come back to bite the carriers as they contemplate a digital approach to the marketplace where client data and a branded relationship matter. Carriers certainly do not win fans with clients – overall Net Promoter Score ratings for the insurance sector broadly are even lower than Congress’ approval ratings, and for at least one major carrier are reportedly negative.

• The number of licensed agents is on the decline. The average age of an insurance agent or broker has increased from 37 years in 1983 and is now 59, based on McKinsey research. Agents have a poor survival rate: only 15% of agents who start on the independent agent career path are still in the game four years later. Base salary is negligible, and it’s an eat-what-you-kill business. This is a tough, impractical career path for most and has become less attractive over time.

• The industry is legendarily slow and risk-averse. Think about actuaries – the function that anchors the business model makes a living by looking backward and surfacing what can go wrong. That is a valid role, but the antithesis of what it takes to build a culture where innovation can thrive.

What is the path to opportunity? Here are innovation thought-starters to create value for an industry undergoing transformation:

• Clients must be at the center of strategy. Twentieth-century carrier strategy may have been grounded in creating distribution advantage and pushing product, but 21st century success will come to those who put the client at the center of all aspects of execution. “Client centricity” is a way of operating a business, not a slogan.

• Innovation starts with a new answer to the question, “who is the customer.” The agent is a valuable partner, but she is not the client. There is white space in the mass market – the middle class – not being served by the current system beyond a limited offering. Life insurance ownership has been linked to the stability of the middle class. We should all be concerned with the decline in life insurance ownership and lack of attention paid to this segment.

• The orthodoxy, “insurance is sold not bought,” sets a self-inflicted set of limitations that can and should be disrupted. The existing product set may have to be pushed to clients because of its complexity, pricing, target audience, channels and near-term performance dependencies.

• Getting the economics right and meeting the needs of today’s clients will demand a digital-first offering – from being discoverable via SEO and social on mobile screens, to supporting application processing, self-service, premium payments, document storage and downloads and connection to licensed reps whenever clients feel that is necessary. It will require full digital enablement of agents to create the right client experience, and improve revenues and expenses. Ask anyone who has purchased life insurance about his or her decision journey, and invariably you will find out that shopping for insurance is a social, multi-channel experience. People ask people whom they like and trust when it comes to making important life event-based decisions. Aligning to how people behave already is a winning approach, and is what customer-centricity is about.

• In a world of big data, it’s ironic that the insurance sector is one of the most sophisticated in its historical use of data. Winners will realize the potential of new data sources, unstructured data, artificial intelligence and the many other manifestations of big data to personalize underwriting, anticipate client needs and create positive experiences including multi-channel distribution and servicing. Amazon, Apple and Google have set the standard on what is possible in customer experience, and no one will be exempt from that standard.

• Life insurance products may be an infrequent purchase, but the need to protect one’s loved ones can be daily. In today’s product-push model, a continuing relationship beyond the annual policy renewal is the exception. Consider the potential of prevention services as a means of boosting lifetime value and client loyalty. In a world full of insecurity, there is a role for a continuing conversation about prevention and protection. But the conversation must be reimagined beyond pushing the next product to one that places a priority on serving the client.

While working in Amsterdam, I was reminded how insight analysts and leaders can shine brightly in very different contexts. In the Netherlands, a mixture of training and facilitation was helping an events business. What struck me was the similarity of the challenges faced by their insight teams to the challenges I see in the U.K. The more I work with insight leaders across sectors and geographies, the more I see how much they benefit from highly transferable skills. Here are three that are relevant to very different businesses and locations: Prioritization I've yet to work with a company where this isn't a challenge, at least to some extent. As more and more business decisions require considering the customer, it's not surprising that demand for data, analysis and research continues to rise. Most insight teams are struggling to meet the demand of both regular reporting ("business-as-usual") tasks and the range of questions or projects coming in from business leaders. There have been many attempts to solve this struggle, including "projectizing" all requests (which tends to come across as a bureaucratic solution to reduce demand for information) and periodic planning sessions (using Impact/Ease Matrix or similar tools). In today's fast-changing businesses, I've found that local prioritization within "the bucket method" works best. What I mean by the "bucket method" is the identification of the silos (mainly for decision-making) that are most powerful in your business. This often follows your organizational design, but not always. Is your business primarily structured by channel, product, segment or some other division of profit and loss accounts? Each silo should be allocated a "bucket" with a notionally allocated amount of insight resource, which is based on an appropriate combination of profit potential, strategic fit and proven demand (plus acted-on results) Regular meetings should be held between the insight leader and the most senior person possible within that silo. Where possible, the insight leader should meet with the relevant director. The bucket principle relates to the idea that, when something is full, it's full. So, in reviewing progress and any future requirements with the relevant director, you challenge him to make local prioritization calls. Going back to the bucket metaphor, adding more requires removing something else—unless the bucket wasn't already full. Due to human nature, I haven't seen the bucket principle work company-wide or group-wide. However, it can work very well in the local fiefdoms that exist in most businesses. In fact, it can support a feeling that the insight team is close to the business unit and is in the trenches with them to help achieve their commercial challenges. Buy-In When trying to diagnose why past insight work has stalled or why progress isn't being made, stakeholders often identify an early stage in the "project." The nine-step model used by Laughlin Consultancy has a step (prior to starting the technical work) called "buy-in." It takes a clear plan or design for the work needed and sends it back to the sponsoring stakeholder to ensure it will meet the requirements. Often, this practice is missed by insight teams. Even mature customer insight teams may have mastered asking questions and getting to the root of the real business need behind a brief, but they then just capture that requirement in the brief. Too few interpret that need and provide a clear description of what will be delivered. There are two aspects of returning to your sponsor to achieve buy-in that can be powerful. First is the emotional experience of the business leader (or multiple stakeholders, if needed) feeling more involved in the work to be done. As Alexander Hamilton famously said, "Men often oppose a thing merely because they have had no agency in planning it, or because it may have been planned by those whom they dislike." It's so important in the apparently rational world of generating insight to remember the importance of emotions and relationships within your business. Paying stakeholders the compliment of sharing the planned work with them ensures the intended deliverable will meet their needs and is something that often helps. The other benefit of becoming skilled at this buy-in stage is learning to manage expectations and identify communication requirements. With regard to expectations, you should set realistic timescales (which, first, requires effective planning and design), along with openly sharing any risks or issues so that they don't come as a surprise. Communication—and asking how much a sponsor wants to be kept in the loop—can make a real difference to keeping your sponsor happy. Some sponsors will be happy with radio silence until a task is complete or a decision is needed (they value not being disturbed). Others will lose confidence in your work unless they hear regular progress updates. It's best not to confuse one with the other. Communication Training customer insight analysts in softer skills often results in a significant portion of the course focusing on the presentation of findings. This isn't surprising, because, in many ways, that's the only tangible product insight teams can point to, prior to driving decisions, actions and business results. Too frequently, I hear stories of frustrated insight teams that believe the business doesn't listen to them, or I hear from business leaders that their insight team doesn't produce any real insights. Coaching, or just listening to others express such frustrations, regularly reveals that too many analytics and research presentations take the form of long, boring PowerPoints, which are more focused on showing the amount of work that's been done than presenting clear insights. While it's understandable that an analyst who has worked for weeks preparing data, analyzing and generating insights wants her effort rewarded, a better form of recognition is having the sponsor act on your recommendations. Often, that's more likely to occur based on a short summary that spares readers much of the detail. Data visualization, storytelling and summarizing are all skills necessary to master on the road to effective communication. Most communication training will also stress the importance of being clear, concrete, considerate, courteous, etc. Many tabloids have mastered these skills. Love them or hate them, tabloid headline writers are masters of hierarchies of communication. Well-crafted, short, eye-catching headings are followed by single-sentence summaries, single-paragraph summaries and then short words, paragraphs and other line breaks to present the text in bite-sized chunks. Transferable skills Insight analysts and leaders who master such crafts as prioritization, buy-in and communication could probably succeed in almost any industry and in many different countries. Many directors will attest to the fact that sideways moves helped their careers. A CV demonstrating the ability to master roles in very different contexts is often an indication of readiness for a senior general management role.

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

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

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

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

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

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

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

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

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

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

Peer-to-Peer Insurance

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

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

See Also: P2P Start-Ups From Around the World

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

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

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

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

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

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

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

Private-Investor-Backed Insurance

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

See Also: Insurance 2.0: How Distribution Evolves

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

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

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

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

Additional Considerations and Questions

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

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

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

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

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

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

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

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

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

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

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