We hope at least a few of you have lamented –we’ll settle for noticed -- our absence from ITL for the last six months. There are two reasons. First, in the immortal words of the great philosopher Gerald Ford, “When a man is asked to make a speech, the first thing he has to do is decide what to say.” We needed something compelling to say, and at this point yet-another-vendor-making-up-outcomes is old news. In any event, there is now an entire website devoted to that topic. (New news:  US Preventive Medicine is NOT making up its outcomes. It is the first wellness vendor to be validated.) Second, we have spent the last six months answering the perennial question: “So what would you do instead?” by developing www.quizzify.com. Quizzify teaches employees that “just because it's healthcare doesn’t mean it’s good for you,” and does it in an enjoyable Jeopardy-meets-health-education-meets-Comedy Central way, as playing the demo game will show. Quizzify’s savings are, uniquely in this industry, 100% guaranteed. But we digress. The news of the day is that we want to settle once and for all the he said-she said debate about whether wellness saves money, and we'll do it the old-fashioned way: by offering a million-dollar reward for anyone who can show that wellness isn’t a horrible investment. All someone has to do is show that the employer community as a whole breaks even on its wellness investment. The inspiration for this reward came when a group calling itself “The Global Wellness Institute Roundtable” released a report criticizing us for “mud-slinging on ROI.” (In other words, “proving that there is no ROI.”) We are not familiar with this group. Their headliner seems to be a Dr. Michael Roizen. If that name sounds familiar, it’s because he used to work with Dr. Oz, though to Dr. Roizen’s credit he was not implicated in the congressional investigation of Dr. Oz. This $1-million reward is – as an attorney recently posted-- a binding legal contract. It is also totally fair. The “pro” party is allowed to use the wellness industry’s own “official” outcomes report, which was compiled with no input from anyone opposed to wellness. Further, the panel of judges is selected from an independent email list, run by healthcare policy impresario Peter Grant. This is no ordinary independent email list—this is the invitation-only “A List” of healthcare policymakers, economists, journalists and government officials who make, influence or report the decisions and rules we live by. The “pro” party invites two people, we invite two and those four pick the fifth. This is truly the ultimate in fairness. Unfortunately, “fairness” is perhaps the second-scariest word to a wellness vendor (“validity” being the first), so there is no chance of anyone taking us up on this. (There is a slight risk in challenging us—whichever party loses has to pay the expenses of the contest, including the panelist fees. This will run likely $100,000. Still, that makes the proposition at worst 10-to-one odds, and the "pro" forces get their $100,000 back if they win.) Not being taken up on this offer is, of course, the entire point of making the offer. The wellness industry’s inaction will prove what numerous gaffes and misstatements  have already revealed: Wellness industry leaders know that wellness loses money. For them, wellness is all about maintaining the façade of saving money so that they don’t get fired from the employers they’ve been snookering.

I’m aware of no logic, facts or data to support the assertion that options increase workers’ compensation premiums. The exact opposite can be easily demonstrated. Ask yourself, are prices higher or lower when employers have only one product to choose from vs. when they are able to choose among competing products? Texas went from the 10^th most expensive workers’ compensation system in the U.S. in 2003 to the 38^th most expensive state in 2013 through a combination of workers’ compensation system reforms and competitive pressures from employers electing the Texas “nonsubscriber” option – choosing not to be part of the state’s workers’ compensation system. One-third of all Texas employers have elected the option. Employers representing hundreds of thousands of Texas workers evaluated the impact each system would have on their claim costs, compared insurance premiums and exited the state system between 2003 and 2013. Likewise, Oklahoma simultaneously enacted workers’ compensation reform and option legislation in 2013. Workers’ compensation premiums have since dropped more than 20%, and Oklahoma option programs are saving even more. Further debunking the myth option program raise workers’ compensation costs, a 2015 report from the Workers’ Compensation Research Institute studied workers’ compensation claims in 17 states and found that the total average cost per claim for injured workers in Texas was among the lowest. Costs per claim grew in Texas only 2.5% per year from 2008 to 2013, as measured in 2014. In contrast, for National Council on Compliance Insurance (NCCI) states, the average indemnity cost per lost-time claim increased by 4% in 2014, and the average medical cost per lost-time claim increased by 4% in 2014. Texas workers’ compensation is outperforming national averages because Texas employers have a choice. The option creates a greater sense of urgency among regulators and workers’ compensation insurance carriers to manage claims better so they can reduce premium rates and compete with the alternative system. The option also makes implementation of workers’ compensation reforms more manageable, because they happen across a smaller base of claims. Further, consider that most employers that implement option programs have some frequency of injury claims. Very few employers with no injury claims are willing to go to the time, effort and expense of adopting and communicating a special injury benefit plan, buying special insurance coverage, contracting a claims handling specialist and satisfying newly applicable state and federal compliance requirements (which may include a state qualification process and filing fee). Because options take many companies that have injury claim losses out of the workers’ compensation system, workers’ compensation insurance carriers suffer fewer losses and can reduce workers’ compensation premiums. The carriers must compete harder for business, and they have no justification for charging higher premiums when their total loss experience improves. Associations that represent workers’ compensation insurance companies have labeled options an “external threat” to the industry at a time when premium volume and carrier profits are up and losses are at a 17-year low.  Calendar-year 2014 underwriting results, combined with investment gains on insurance transactions, produced a workers’ compensation pretax operating gain of 14%. These insurance companies urge state legislators to protect their monopolistic, one-size-fits-all product and its profits. They also fight to maintain an anti-competitive web of price-setting collaborations that would violate antitrust laws in other industries. As David DePaolo recently noted on WorkCompCentral, in “the business of workers' compensation insurance… investors (the business side) want to know whether they are going to make money, and how much, by financing the system; not whether the system is working ‘correctly’ or not.” This is an important insight in the context of workers’ compensation insurance lobbyist objections to an option. The lobbyists promote the idea that workers’ compensation systems are superior and working fine, but that is not their primary motivation in trying to shut down competitive alternatives. Some insurance association members have defected and embrace free-market competition. More than $150 million in the Texas nonsubscriber option insurance premium was written last year alone. The Oklahoma option insurance market is just starting up. Many “A-rated” insurance companies now oversee the successful resolution of approximately 50,000 injury claims per year under option programs. An option can be authorized by a state legislature before, after or at the same time as workers’ compensation reforms are adopted. Legislators suffering from “workers’ comp fatigue” find option legislation to be dramatically less voluminous, time-consuming, confusing and contentious than major workers’ compensation reform.  And, as proven in Texas and Oklahoma, the option can slash employer claims costs by 40% or more. A single state (like Tennessee or South Carolina) can see lower government regulatory expense and more than $100 million in annual public and private employer savings. That impact grows exponentially through economic development multipliers. Those are dollars that can be used to create private-sector jobs and invest in education, safety, transportation and other legislative priorities. In contrast, when standing alone, workers’ compensation system reforms are typically returning single-digit premium rate reductions that do not move the needle on injured employee medical outcomes or economic development. Even the widely referenced Oregon premium ranking study (like many others) questions the ability of traditional workers’ comp reforms to create significant movement in employer costs or employee satisfaction. Options to workers’ compensation have particularly worked to the advantage of small employers, which pay most of the workers’ compensation industry premiums. Small companies that experience few, if any, on-the-job injuries typically purchase workers’ compensation insurance coverage on a guaranteed-cost (zero-deductible) basis. They get competitive quotes on both workers’ compensation and option insurance products, then typically choose to write the workers’ compensation premium check and be done. However, both big and small businesses can benefit from option programs. There are several Texas nonsubscriber insurance carriers that write policies for hundreds, even thousands, of small employers. In fact, the vast majority of Texas and Oklahoma employers that have elected the option are small, local businesses. Many reputable insurance providers sell “bundled” programs for small business that supply all option program components, including the insurance policy, injury benefit plan, employee communications, claims administration and legal compliance. It is a simple, turnkey service for insurance agents and employers, delivering better medical outcomes and higher employee satisfaction when the rare injury occurs. If an employer that has elected the option does not like it (for whatever reason), it can go back into the workers’ compensation system at any time. These facts are all reflected in the migration of small employers back and forth between workers’ compensation and option programs in Texas, choosing the best route for their companies and employees as workers’ compensation premium rates have moved up and down over the past quarter century. Even if (as seen in Texas) a significant percentage of a state’s employers elect an option, the “pool” of workers’ compensation premiums can still be hundreds of millions of dollars, a figure large enough to spread the risk and absorb catastrophic claims. Those who say that workers’ compensation premium rates will go up when a state legislature authorizes an option need to back up their fear mongering with similar logic, facts and data or admit their true, anti-competitive motivations.

I don't know about you, but when I think of artificial intelligence, I think Steven Spielberg and Arnold. That was until I saw a solution offered by Conversica, a Salesforce partner. AI is here, it's happening now and it's a lot more pervasive than you think. The rise of "robo advisers" in financial services, Ikea's "Anna" customer service rep and Alaska Airline's "Jenn" all point to the growing adoption of technology that personalizes customer experiences....at scale. One of the 5 D's of Disruption in insurance is "Dialogue." And AI is driving it. Today, in insurance, AI is used to create natural dialogue with customers, nurture those leads, prioritize them for agents and follow through as needed. Conversica, for example, gets smarter as it interacts more with customers. And, yes, it has passed the Turing test. It is particularly well-suited for B2C because the volume of interactions with prospects can be overwhelming for insurance agents. As insurers embrace omni-channel, new prospects can be created from any source, whether it be a contact center, social media or a face-to-face meeting. Not only is lead volume increasing, but it takes as many as six before an agent can get a prospect on the phone. This becomes a time and energy suck for agents; he is unable to follow through on every lead, and the quality of interactions goes down. So how are insurers and agents responding? In this webinar, Eric (Conversica) and Alex (Spring Venture Group) explain to me how AI is used to nurture and convert leads. My takeaway: AI is not just a science project. It works. It'll become more invisible to consumers. And it creates real value to both customers and employees. As Marc Benioff, CEO of Salesforce, said recently in Fortune magazine, "We’re in an AI spring. I think for every company, the revolution in data science will fundamentally change how we run our business because we’re going to have computers aiding us in how we’re interacting with our customers."

There are elements of medical care in the U.S. that just plumb confound me. One is the requirement of a prescription for the most mundane of items, particularly when you think about where we could be focusing our efforts. Please indulge me a moment while I 'splain the background on this. I went through a sleep study back in 2002, where I was diagnosed with sleep apnea. Apnea is a condition most identified with snoring, although not all snorers are apnea sufferers. After the diagnosis, I was provided with a CPAP machine, the device most commonly used in the treatment of that particular condition. Sleep apnea is described as a potentially serious sleep disorder in which breathing repeatedly stops and starts. What it really was, however, was a condition that kept my wife awake at night. I don't know why the doctors didn't treat her instead. The CPAP (Continuous Positive Airway Pressure) machine is designed to gently pressurize your airway, keeping it open, providing for a more sound sleep. Mostly for your wife. You see, the CPAP literature says the machine is designed to alleviate apnea episodes and reduce potentially fatal risks. The fatal risk it is most likely to alleviate is stopping your spouse from shooting you in the face with a bazooka at 3 am. I have used the same CPAP machine since 2002, and it has performed very well. I do sleep much better using it, as does my wife. I usually take it with me in my travels, and therein lies the conundrum that has produced this missive. My unit, now about 13 years old, is somewhat clunky for the frequent traveler. This is especially true when one does not generally check luggage. Somewhat bigger than a large box of Kleenex, the device either must be packed within my carry-on or in its own travel bag. As a medical device, it does not count as one of my two carry-on items under FAA rules, but it is nevertheless bothersome to have to tote a fairly significant extra bag around. Prior to the advent of PreCheck, it had to come out of the bag and be run through the X-ray equipment on its own. Until about five years ago, it even had to be pulled aside by TSA for explosives testing. If TSA was efficient, that would occur while I was having my prostate checked by Two Finger Lou. If not, the testing added a few minutes to every pass through security. Today, as a government-fingerprinted "Known Traveler" with my very own "Trusted Traveler" ID number (don't get me started on that), I always fly as a PreCheck passenger. The device no longer has to come out of the bag, so for trips of just a few days I pack it inside my carry-on. Of course, as we all really know, size does matter, and this is an issue for trips longer than just a few days. While I have become a very efficient packer and can get four or five days of clothes into a carry-on with the machine, anything longer requires that the unit be carried separately. With that in mind, I ordered a "travel CPAP": a machine about a quarter of the size of the one I have been using. After I placed the order with an online company, it notified me that it required a prescription for the machine to be on file before it could fulfill the order. I have a prescription for CPAP supplies on file with the company, but apparently being able to buy the supplies is different than buying the machine that uses them. According to the FDA, CPAP devices are considered Class II medical devices and require prescription by law. The issue is that my sleep specialist, whom I have not seen in more than 12 years, changed practices a decade ago, and records no longer exist with the practice where I was diagnosed. Without those records, no prescription will be forthcoming. I frankly don't know what my options are with the practice. I suppose I could set up an appointment, go through another two-night sleep study, spend a couple hundred in co-pays and have my insurance billed God knows what for the effort, all to get a piece of paper confirming something we already know I have. All for a machine whose basic function is blowing air. If we applied that logic here, you would need a prescription just to read my blog. Can someone in the medical community take a moment to explain this to me, an admitted medical ignoramus? Have these machines been abused in some unimaginable way? Were teens buying these machines in droves to huff air? Are they somehow vital in the making of meth? For Christ's sake, in the hands of evil men, what indeterminate hell could they unleash? What aren't you people telling us???? Someone should tell the FDA that CPAPs don't kill people; drugs kill people. Maybe the FDA should focus some of its enforcement zeal toward those things that really matter. Perhaps the FDA has heard of the need for a national prescription drug monitoring database. Unless, of course, I am mistaken, and rogue CPAPs are slaughtering more than the 20,000 people every year who die from prescription drug overdoses. My solution to this dilemma will, I hope, be found through my primary care physician. I have made an appointment with him for the sole and single purpose of getting that magic prescription. It will cost me $30, and my insurance company significantly more, all to tell the good doc that I'm feeling fine and that there is nothing wrong. I just need one of those air-huffing, meth-cooking, chaos-reigning machines -- but a small one to make my travel schedule easier to bear. There is a chance that he will not be able to authorize one without another complete sleep study, in which event it will represent a colossal waste of resources. In the absence of a logical explanation, this scenario simply serves to show the ridiculous waste of time, effort and resources in a system where common sense often struggles for its moment in the sun. In a world where we are trying to figure out how five or six remaining practicing physicians are going to treat 350 million people, is this really where we need to devote so much effort? It simply makes no sense to me. But then again, there may be reasons of which I am not aware. I am sure some medical wizard out there, or a medical-equipment salesperson, should be able to enlighten me and remove my veil of ignorance on the matter. I encourage you to do so, and you don’t even need to be gentle about it. It certainly won’t be my first time.

As I researched recent developments in the telematics space, I thought of the wise words of an unknown car driver: “The worst fault of a car driver is his belief that he has none.” Whenever I speak to a group on telematics, I ask the audience, “Who considers themselves to be a better than average driver?” Every time, at least 80-90% of the hands go up. Even if we are all close to perfect drivers, accidents will still happen. And telematics data can be used to help identify who is at fault. Claims handling might be the new frontier for telematics, in general; beyond the early adopters of telematics-based pricing, many insurers have run pilots and proofs of concept with telematics in areas such as product development, underwriting, new business and market segmentation. They have gathered insights and developed telematics-based solutions for the broader market, often with the support of increasingly sophisticated telematics solution providers in technology or data and analytics. In fact, the SMA 2015 report, "The Changing Auto Insurance Landscape: Influencers Driving Disruption and Change," revealed that, since its introduction to the market in 2010, telematics has come to be recognized as a maturing rather than emerging technology and often gets incorporated into connected car initiatives. The study also discussed how the industry is starting to investigate even newer technologies that might affect the auto insurance market, such as shared transportation and the autonomous vehicle. However, it would be a mistake to move on to newer technologies and initiatives without further considering investments in telematics, especially when the full business value of telematics offerings may not have been reached yet. Right now, particularly in personal lines, telematics is used primarily for market segmentation, product and underwriting purposes. There is a growing appreciation, though, of the value of telematics in claims handling beyond accident avoidance and driver education. For example, at a recent LexisNexis/Wunelli insurance event, it was demonstrated that telematics can play a key role in claims investigations by helping to determine which party is at fault – not always a clear-cut matter. In the specific accident discussed, two cars hit each other in the parking lot of a supermarket. The physical damage did not give a clear picture of who was at fault, and the drivers disagreed in their statements about what actually happened. One of the cars involved, however, was equipped with a telematics device. At the request of the driver of this car, the insurance carrier was able to analyze the data on the location and speed of her car immediately preceding this accident. This analysis made it abundantly clear that the driver of the telematics-equipped car could not have been at fault, which provided the insurer with proof to settle the claim accordingly. I found it even more shocking that it was the insured driver who actually had to point out to her insurer that telematics data was available and that access to that data could be of great help in handling this claim. It was obviously not standard procedure for this specific carrier to look at telematics data in the claims handling process – and in this case, without the driver’s suggestion, the opportunity would have been missed. Unfortunately, I don’t believe that this carrier is unique. I would urge personal lines carriers, in particular, to consider the uses and applicability of telematics data outside of the market segmentation, product and underwriting functions. We can all learn from examples like this one, as well as from the commercial lines telematics applications for risk management and claims handling. Because we all know that, even though we drive better than the average driver, accidents still do happen.

For many years now, risk exposures regarding the use of labor leasing companies have been in the forefront of concerns for insurance professionals. However, many businesses use temporary staffing agencies and look at this process as just a matter of course. Some companies sporadically use these services for one or two people, but others often use hundreds of temps for specific  periods and needs. Insurance agents need to have a discussion with their clients about their use of staffing companies, particularly with those businesses operating in California. There are some terms that need to be defined within this type of employment situation.

• The general employer is the original employer and responsible for loaning the employee to another “employer.”
• The special employer is the other party involved in the “borrowing” of that employee from the general employer.
• The “borrowed servant rule” is a common law doctrine that applies in this type of situation but has typically applied when there is an express or implied contract of hire between the special employer and the employee, or the employee performs work primarily for the special employer and the special employer controls the details of the work.

Effective Jan. 1, 2015, California has revised the state’s labor law by creating joint liability for client companies when the general employer fails to secure workers' compensation coverage for, or pay wages to, workers who are supplied to clients (AB 1897). So, in California, the various obligations of the “borrowed servant rule” no longer need to exist. It is enough that the special employer is using employees supplied by the general employer. What does this really mean? It means that should the labor contractor (general employer) either not purchase workers’ compensation coverage or allow it to lapse, any employee not covered for their work-related injury or illness will be able to look to the special employer for recovery of benefits. The law does provide a number of exceptions, such as:

• Small employers with fewer than 25 employees (which includes the temporary or leased employees)
• An employer using five or fewer employees at any given time
• Municipalities

No problem, right? Your client carries workers’ compensation coverage for their directly hired employees; if an injured temp employee needs benefits because the temporary agency does not have workers’ compensation coverage, then your client’s insurance will respond. That automatic coverage may well be changing. Insurance companies are paying closer attention to the underwriting of this type of risk exposure and are often adding an endorsement that purports to remove coverage. This is done by adding Employee Insured by General Employer Excluded Endorsement (WC 04 03 17), which states: "It is agreed that, anything in this policy to the contrary notwithstanding, this policy does not insure: Any liability you may have as the special employer of an employee who is not on your payroll at the time of injury, based upon your representation that: (1) you have entered into a valid and enforceable agreement pursuant to Labor Code Section 3602(d) with the employee's general employer under which the general employer agrees to secure the payment of compensation for such employee and (2) the general employer has obtained workers' compensation coverage for the employee. " Well, why not? After all, the staffing company is supposed to be insuring its employees for work-related injuries. However, this endorsement creates several issues for the special employer:

• The special employer is automatically jointly liable in California for injury to the employee.
• The special employer must have a valid and enforceable agreement with the staffing company that requires the staffing company to purchase the workers’ compensation coverage, and the staffing company has to obtain the coverage.
• The special employer is required to state that the conditions are in place and sign the endorsement to this effect.
• The special employer should obtain a Certificate of Liability Insurance (ACORD 25) that verifies that coverage has been obtained.

The real problem with this endorsement is that it does not make clear that the policy will respond if the staffing company allows its insurance to lapse and the temporary employee looks to the special employer for coverage. Is it the intent of this endorsement to remove all coverage? Certainly, an argument could be made that it does not, but the language has not yet been tested in court, and your client likely does not want to be the plaintiff in trying to determine whether coverage might apply. If coverage does not apply, what are the ramifications?

• The temporary employee has no coverage available.
• The special employer becomes an uninsured employer and subject to all of the penalties and fines that can be imposed by the state:
• Pay all bills relating to the injury or illness.
• Subject to civil litigation brought by the employee (not covered).
• California Labor Code 3700.5 imposes a misdemeanor with fines not less than $10,000 and up to $100,000 maximum along with imprisonment up to one year.
• The Division of Labor Standards Enforcement will also issue a stop order that prohibits use of employees until coverage is obtained. If this stop order is not observed, the division can seek a misdemeanor criminal action with imprisonment up to 60 days, $1,000 fine per employee, subject to a minimum fine of $10,000 up to $100,000 maximum.

There is a second endorsement that has been filed for use in California and amended specifically because of AB 1897, WC 04 03 60 B (1-15). WCIRB states that: "The form was amended to avoid potential duplicate workers’ compensation and employers’ liability claims as a result of the passage of AB 1897. The revised Employers’ Liability Coverage Amendatory Endorsement form excludes any liability arising from Labor Code Section 2810.3 from the Employers Liability Insurance portion of a California workers’ compensation policy." It appears that the WCIRB considers that coverage exists in the workers’ compensation policy and is simply attempting to remove duplication of coverage and thus, de facto, not creating a situation where the special employer uninsured. Action Items

• Discuss use of temporary staff with your client
• If that exposure exists:
• Verify that there is a labor contract in place
• Verify that the contract requires the staffing company to obtain and keep in force workers’ compensation coverage
• Verify that your client has received a current ACORD 25 indicating workers’ compensation coverage exists
• Verify that the contract includes an indemnification agreement as per AB 1897
• If the underwriter questions the use of temps and adds WC 04 03 17, discuss with the underwriter and attempt to have it removed
• If the underwriter is unwilling to do so, discuss ramifications with the client at the time that you are obtaining the signature on the endorsement
• Your client should seek legal counsel before agreeing to this endorsement
• Your client could attempt to insert a requirement for notification in the event of coverage cancellation into the contract.

Recently, we received an amazing email from Warren Buffett, the Oracle of Omaha himself, congratulating us for InsNerds.com, confessing that he’s a big fan of our efforts and inviting us on an all expenses-paid trip (on NetJets, of course) to have dinner with him to discuss the industry. We had an amazing time over the three-hour dinner at Gorat’s Steak House. The best part was being able to pick his brain about the awesome industry we work in... Sadly, then the alarm clock went off at 5 am, and I realized I was dreaming. There was no email from Warren Buffett, no invitation for dinner and no flight on NetJets.   But all is not lost. Uncle Warren has written extensively about the insurance industry through letters to the shareholders of Berkshire Hathaway, which he has published every year since 1977. All this wisdom is available to anyone online for free, or you can even buy a printed copy. All you need is the nerdiness, dedication and patience to read through all 763 pages of material. Because we know you’re busy, and don’t have the time to do this, we did it for you. We went through all 38 years of Warren Buffett’s letters, and we extracted everything you need to learn about insurance from the Oracle of Omaha himself, largely in his own words, with some of our colorful commentary. There is a lot to learn from Omaha’s Oracle, so instead of overwhelming you with all 38 years worth of knowledge, InsNerds will be publishing a series of articles sharing his wisdom. The letters contain a lot of the history of GEICO, Gen Re, Berkshire Specialty Insurance and his other insurance companies in the letters; we chose not to include that and instead focus on insurance knowledge that can be useful to today’s insurance professionals. Uncle Warren keeps hitting many of the same points over and over; in those cases, we generally chose the wording from the newest letters, because, like good wine, Uncle Warren’s writing got better with time. Our first article will share three insights on the fundamentals of insurance:   1. At the core, insurance is nothing but a promise, and being able to fulfill that promise is key: “The buyer of insurance receives only a promise in exchange for his cash. The value of that promise should be appraised against the possibility of adversity, not prosperity. At a minimum, the promise should appear able to withstand a prolonged combination of depressed financial markets and exceptionally unfavorable underwriting results. ” 1984 letter, page 10. Buffett is indicating that a company must be cognizant of the promise that it is making to its customers, which is that the company will have the funds to indemnify its customers after a loss. The company must manage its reserves and investments wisely to be able to fulfill its promise when there is a claim, so the investments must be able to withstand a down market and a year of catastrophic losses at the same time. One of the main things that makes insurance interesting is that, contrary to most other businesses, we don't know the cost of our product when we sell it. 2. Uncertainty is okay, as long as it's priced appropriately: “Even if perfection in assessing risks is unattainable, insurers can underwrite sensibly. After all, you need not know a man’s precise age to know he is old enough to vote nor know his exact weight to recognize his need to diet.” 1996 letter, page 6. The purpose of insurance is to manage risk. When taking on a given risk, it is not possible to know if you will see a positive or negative outcome. In choosing risks, one must make informed decisions, but if a company waits to make a decision it may lose the business. Insurers must determine how much uncertainty they are comfortable with. The company will likely not be able to attain every single bit of information that it would like before making a decision, but a decision must still be made. 3. Always remember the big picture: “[…]any insurer can grow rapidly if it gets careless about underwriting.” 1997 letter, page 8. Finally, in the business of insurance, a company should take on smart risks. It can be tempting to grow rapidly by writing any piece of business that comes your way. A company may take shortcuts in underwriting to put business on the books. However, if this practice becomes a habit, the profitability of your book will be unsustainable. Playing the long game is necessary in our business. This is something Uncle Warren is constantly talking about in his letters: Underwriting discipline, especially when the market gets soft, is his top priority. These are three key observations about the basics of insurance that we found in reading Mr. Buffett’s letters. There are many more to be discovered, and we look forward to writing about some additional themes.

The integration of technology in the insurance company’s value proposition is turning out to be one of the main evolutionary trends in the sector, and digital initiatives have been for a couple of years now one of the priorities of insurance groups. Until today, though, they have brought only limited improvement when it comes to the competitive abilities of the insurer. The best practices at the international level show that, to obtain concrete benefits, the innovation has to be directed toward clearly determined strategic objectives. An interesting example is the American company Oscar – a start-up that in less than two years has managed to raise more than $300 million at a valuation of more than $1.5 billion. It has radically innovated the customer experience of individual health insurance policies by directing the innovation effort toward two key factors that are crucial for the profitability of the medical spending reimbursement business: deductibles and “emergency” visits. Oscar has created an insurance value proposition based on a smartphone app that incorporates a highly advanced search engine – including a search based on symptoms – allowing the insured to identify and compare the medical structures part of the preferred network. In this way, the client receives support in optimizing direct spending before reaching the deductible; this basically postpones when the insurance company starts to pay and thus reduces the amount of spending (medical reimbursements) by the insurer for the remainder of the year. The company addresses emergency visits by providing chat with a specialist and a call-back system that the insured can choose at will from inside the network. This represents a comfortable alternative and reduces the number of urgent visits. Health insurance and connected health In these last months, I have been considering how to replicate the motor telematics experience for the health insurance sector. Insurance companies see the benefits from a telematics black box and how the return on investment in this type of technology can be maximized by the insurer: This is possible by taking into consideration not only the underwriting of the car insurance policy but by also looking at the services provided to the client, at loss control and at customer loyalty. In health insurance, similar benefits are achievable by using mHealth devices and wearables. The first element is risk selection, seen in car insurance as:

• the capacity of auto selection and dissuasion of risky behavior,
• the integration of static variables traditionally used for pricing with a set of “telematics data” gathered within a limited time and used exclusively for supporting the underwriting phase.

The creation of a value proposition that is focused on the use of wearables and that uses "gamification" makes the product attractive to individuals who are younger and healthier – generating a self-selection effect comparable to the motor telematics experiences. Oscar, since the beginning of January, has been offering clients a pedometer connected to a mobile app. Every day, the app shows a personalized objective that, if attained, means $1 earned by the customer. Each month, the customer can receive a maximum of $20 as cash back from the company. The second source of value generation is services. The use of telematics data represents an incredible opportunity for offering new health services and for offering a better customer experience: for example, the geolocation of medical structures and doctors who are part of the network, linked to a medical reimbursement policy. Medibank, of Australia, has integrated in its health policy (using a smartphone app) a series of services built on informative contents and advice. The services are medical – as done by the Italian insurance fund Fondo Assistenza Benessere, using an app called Consiglio dal Medico (an Italian start-up partnering also with Uber) – as well as related to wellness. Medibank, using this package of services, produced 10% growth in the company’s top line. This Australian player has created an app for noncustomers that gives access to wellness discounts and attracts customers who can later be offered other insurance, too. The ability to provide health services with a high perceived value (from the client’s point of view) can also allow the company to increase the efficiency of guidance inside the preferred network – this is a crucial aspect for controlling the loss ratio of a medical reimbursement product. The loss control actually represents the third area of value creation, just as it does for the auto business. Within the health industry, it will soon be possible to generate significant economical benefits employing telemedicine to optimize spending with medical reimbursements or to link the reimbursement to the actual observance of the client's medical prescriptions. In the medium to long term, the objective is to have behavioral and contextual data to prevent fraud and early warning systems that can spot altered health conditions and that allow preventive and timely intervention. South African-based Discovery has successfully tried out this second approach. It reduced the loss ratio of the cluster of insured who suffer from diabetes – mainly reimbursements linked to complications because of lack of self-control. Discovery provides an instrument for measuring the blood sugar level through a connected app and rewards the insured. Discovery's Vitality program represents the international best practice regarding the fourth axis of value creation: behavior guidance, by using a loyalty-based system that rewards non-risky behavior. The South African company has integrated - in its very complex reward system – devices for measuring physical activity and has incorporated their usage among the “rewarded” types of behavior. Discovery’s experience in several different countries proves the effectiveness of this approach in terms of:

• commercial appeal
• capacity to acquire less risky clients
• ability to gradually reduce the risk profile of the single client.

Pricing based on individual risk is the last benefit achievable with the integration of wearables and health insurance policies. Constant monitoring of the level of exposure to risk lets the insurer create tariffs based on the health state, lifestyle and context of a person. As already done in the auto telematics business, this will be a goal to be attained after some years of data gathering and systematic analysis of the historical series together with information regarding medical reimbursements. Home insurance and connected home Homes are another area in which, at an international level, there has been experimentation with how to integrate an insurance policy with actual sensors. There already exists a replication of the business model used more than 10 years ago in the auto insurance sector -- an up-front discount between 10% and 25% of the insurance premium based on installation of a device at the client’s house and by the payment of a fee for services or a lease for the technology. This approach, which has been adopted in the U.S. by State Farm, Liberty Mutual and USAA and in Italy by IntesaSanpaolo Assicura, BNP Paribas Cardif, Groupama e Poste, is based on two of the five levers of value creation: first, loss control – focused on flooding, fire and theft – and second, value-added services. American companies have even reached the point where they offer clients a wide range of services provided by selected partners (such as Nest) and tied to the home “ecosystem,” which can even include medical assistance services. An interesting and innovative example of the use of such technology for the assessment and risk selection in home insurance is the one adopted by Suncorp with a retail touch to it, and by ACE Group, which focuses more on the insurance needs of high net worth individuals (HNWIs). Both companies have used a partnership with a start-up called Trōv – a smartphone app that allows registering and organizing the information referring to personal objects, including through photos and receipts - to evolve their underwriting approach when it comes to the risk connected to the contents of the house. Domotics, or home automation, is growing at a high rate even in Italy and represents a material part of the revenues generated by the Internet of Things, according to data provided by the Osservatorio of the Politecnico di Milano. A horizontal domotics solution – with thermostats, smoke and water detectors, sensors present in appliances and other household items, sensors at the entrance and antitheft alarms, sensors spread within the building – would let an insurance company track the quantity and level of exposure to risk. This includes, for example, the periods and ways in which the home is used but also the state of the household and the external conditions to which it is exposed (humidity, mechanical vibrations, etc.). The insurer could price based on individual risk, adopting pricing logic based on behavior, as already done in the motor sector. This could open up growth opportunities, such as for secondary houses used only for vacation and rarely insured. This scenario, which sees the growth of solutions built on connected objects within the home – if correctly approached by insurers by reviewing their processes to make the most of the potential offered by gathered data – can lead to important benefits in loss control: Some studies have estimated that there is the potential to cut in half the current expenses for claims. To turn this opportunity into reality, it is essential that the insurer acquire the ability to connect its processes (through adequate interfaces) with the different connected objects. Insurers must create an open digital platform that uses the multiple sensors to be found in the home “ecosystem” – just like those used in the health sector. The change of paradigm doesn’t only concern fundamental aspects of the technological architecture – like data gathering or standardization of data coming from heterogeneous sources - but affects the strategic choices of the business model. For insurers, it becomes a necessity to define their level of ambition for their role in the ecosystem and for their cooperation with other players to create solutions and services around an integrated set of client’s needs. It is extremely interesting to see the journey made by American Family Insurance, which - in partnership with Microsoft – has launched a start-up accelerator focused on home automation. Insurers have to start thinking strategically around how adapt insurance business to IoT, before some new Fintech comers do it. This article originally appeared in the Insurance Daily n. 749 and n. 750 Editions.

The risk management and insurance industry’s looming demographic challenge isn’t new or surprising, but it does bear repeating. There is a projected need for 70,000 new hires yearly, as boomers retire. Yet only about 14,000 individuals are graduating from risk management and insurance programs around the world annually, and there is steep competition for talent with what are viewed as more desirable career options in finance or technology. So, we’re in a tough spot. But there is a collaborative industry solution to this problem: "MyPath: Insurance. It’s Limitless." Not familiar with this initiative? It all started in 2011, when representatives from organizations spanning the industry approached the Institutes to ask if we would helm a collaborative initiative targeted at engaging millennials—that most coveted of generations that’s quickly becoming the largest population in the workplace—and getting them excited about careers in insurance. Reinforcing the difficulty of the effort, a survey of more than 1,600 millennials performed by the Griffith Insurance Education Foundation, an affiliate of the Institutes, showed that many find the industry boring, staid and unimaginative. With these insights in hand, the Institutes, in collaboration with the industry, set out to flip these misperceptions on their heads. MyPath was born. Launched in late 2014, the effort now has nearly 100 partners in organizations that range from some of the largest insurers in the country to family-owned niche companies, as well as academic partners vested in offering collegiate risk management and insurance programs. More than 300 internships have been listed on the website, and more than 1,000 individuals have opted to receive MyPath emails. The initiative has been featured in every insurance trade publication, as well as Bloomberg Businessweek and the Wall Street Journal. On social media, MyPath has racked up 4,000-plus Twitter followers and more than 2,000 Facebook-page likes. More than 600 internship candidates created profiles on the site within the first few months of its launch. It’s clear that, together with the industry, we’re making strides in the right direction, but more work lies ahead. Help spread the word about careers in insurance—become a partner today (at no cost) and share the news of MyPath.