Q: Can I identify my organization’s next crisis? If so, how?

A: Jim Satterfield- Undoubtedly, yes. Knowing what the next crisis might be is a way to think about planning and information. There are warning signs and indicators when we discuss human behavior. Understanding behaviors of concern and identifying them earlier in the process is imperative. It provides an idea of the frequency and severity of a situation.

If we can see those indicators, if we can identify those behaviors, then we can intervene before they become a problem. Sometimes, they are business or financial indicators; sometimes, it’s just human behavior.

On 9/11, I was EVP and chief operating officer of a public technology firm with employees in the States and around the world. When the first plane hit the first tower, we thought it could have been an accident. When the second plane hit the second tower, clearly not an accident. We called a meeting in our boardroom and, while sitting around the table, decided it was a day unlike any that we’ve ever seen.

Our management team decided it would be better to let everybody go home. I turned to our HR director and said, “Could you send a global email out to everybody in the company telling them they could just go home”? She went back to her desk, and she typed this message: “If you want to live, leave.”

The intended message was to be: “If you want to leave, leave.” Those are two entirely different messages. “If you want to live, leave.” “If you want to leave, leave.”

Thinking about your messages when you’re not under stress is very, very critical, and planning makes a difference.

Q: I already have a detailed and updated copy of our organization’s crisis plan. Do I need to have a digital copy, as well?

A: Jim Satterfield- Unless you’re planning to add a psychic on your crisis management team, it’s not going to do you any good to have an outdated or out-of-reach plan. Keeping your plans current and available is crucial. If you can’t get access to the right information at the right time, it’s not going to do you any good. “Oh, the plan’s back in the office, and I’m at home.”

Speed is quality. Getting the right answers to the right people at the right time becomes a critical element in every crisis.

Q: What should my organization’s key messages be to each stakeholder group for vulnerabilities and threats?

A: Jim Satterfield- What we’re going to say internally will be different than what we’ll say externally. Think about who your stakeholders are. If you’re in a business that’s heavily regulated, you have regulators as a stakeholder group. You have employees and investors, as well. If a school, you have parents, students and possibly church affiliation. You have various elements to be dealt with, and that makes a difference in approach.

Q: What resource can help with quick decision-making?

A: Jim Satterfield- What you do is list in one column things that could happen, things that could damage:

• The facility
• The employees
• The data
• The brand
• The reputation

Across two more columns, we indicate what would qualify as a minor event and what is considered a crisis. You then include descriptive terms and circulate it to the entire company.

Immediately, when something comes up, refer to the matrix. If an employee is injured, but did not receive emergency treatment, it remains a minor event. If the employee had to have some medical attention, it rises to the next level. If an employee dies, that’s crisis. It’s at the highest level that management would want to be involved, so creating an event activation matrix is the fastest way to get that quick response with everyone on the same page at the same time.

Q: What are common mistakes people have made during a crisis?

A: Jim Satterfield- These are the five failures that we see over and over and over again in a disaster or crisis:

Failure to control critical supply chains

Failure to train employees for both work and home

Failure to identify and monitor all threats and risks

Failure to conduct exercises and update plan

Failure to develop crisis communications plans

About 70% of employees don’t know what they’re supposed to do in a disaster or a crisis. In addition, 95% don’t have a disaster plan at home. If something happens in your area, and you think your family is at risk, family wins. That’s why people don’t show up in a crisis, because they’re concerned about their family.

We work on these failures through our Predict/Plan/Perform process. First, identify groups. Then conduct exercises and establish how you’re going to monitor and communicate. When you think about your individual plans, think about them in light of these groups. You need to build preparation in from all of these groups that could ultimately be a problem within the organization.

Q: Are school students classified under workplace violence?

A: Jim Satterfield- Yes, because it’s a workplace. The school is a workplace, yes.

Q: Prevention is rare in organizations that have small staffs. Have you found organizations are willing to assign staff to conduct social media monitoring on their time?

A: Jim Satterfield- They can, or you can use an outside service that will do it for you. This route is much more cost-effective. Why? Because that’s the specialist’s full-time job.

Whatever your full-time job is, you’re good at that job. If you only do something every now and then, you’re not going to be as good, and you may miss an important signal or piece of information.

We are finding organizations -- both large and small -- are conducting monitoring as a preventative measure, and we conduct such intelligence gathering for a number of clients.

Most of us have heard the phrase: "Culture eats strategy for breakfast." It could be restated as, "Your actions speak louder than your words." This means that management can dream up any strategy they want, but their behaviors and actions are what create the culture of an organization.

Culture drives how efficient an organization's processes are. Culture drives the success or failure of an organization. Culture is the product of leadership decisions or the lack of decisions.

The best-articulated corporate vision and strategy are of no value if they cannot engage the hearts, minds and work habits of employees at all levels and convey a purpose beyond just profit.

A vision states where an organization wants to go; a strategy defines the path to get there; and the work culture describes how business processes are actually executed along the path toward the vision. The health of a work culture can range from a contagiously high-performance work culture to mediocre or all the way down to a disruptive, confrontational culture that can't get much done on time or done right the first time. A disruptive culture can trump the best vision and strategies every time. On the other hand, if a work culture is nurtured and groomed to align with a carefully crafted vision and strategy, the positive momentum could be unstoppable.

Figure 1 shows possible scenarios of vision, strategy, culture and performance alignment and misalignment. Business process performance (small white arrows) is more correlated with the work culture (small red arrows) than with the vision or strategy (big blue arrow) of an organization. Work culture -- not vision or strategy -- culture drives business performance. The challenge presented by this dilemma is that the work culture is an invisible force that is hard to measure. It shows its good side when you watch it and only displays its bad sides when you look away. The work culture is the product of complex cascade effects inside an organization and is as much affected by leadership actions as it is by the lack of appropriate actions. If left unattended, it will create its own random world of hidden agendas, which will probably not be aligned with the priorities of the organization.

Figure 1 - 3 Possible scenarios of vision, strategy, culture and performance alignment

Corporate visions and strategies are usually rolled out in formal three- to five-year plans. Work culture management and monitoring is too often not in sync with that plan and referred as an “HR thing," even though it is the gate-keeper of business performance. If you do not understand and actively manage the work culture, it will manage you.

Measuring Cascade Effects Risks

It would be wonderful if we could just plug a measurement device into an organization to check its health and the risks of cascade effects (Figure 2). The work culture defines how employees work with each other through communication, coordination and cooperation. It generates multiple slow-motion and rapid chain reactions, ripple effects and cascade effects that greatly affect the mood and attitude of the organization. It predestines an organization for success or failure.

Figure 2 - The challenge of measuring work culture health and risks

How can we measure the health of invisible cultural chain reactions that can drive the success, mediocrity or failure of an entire corporation? I suggest a series of management and employee surveys and brainstorming assessments to test for the presence of 56 different elements of risk that can be present at any level in an organization. (See Figure 3 for a partial view of the survey.) The culture assessment tool shown in Figure 3 should be used for at least three different levels of management in an organization. These three levels of perception will offer triangulation data points, which will show how common or diverse the perceptions are that describe the organizational culture.

Figure 3 - Partial view of a gamified organizational health survey

The Organizational Force-Fields That Drive Success or Failure

Chain reactions, domino effects, ripple effects and snowball effects are similar in that they are defined by the single acts that created them. Once triggered, they will play out their effects depending on the amount of resistance the system presents against them. Cascade effects are different. They are fueled by a hierarchy of multiple interacting triggers at different levels in the system.  Time delays between cause and effect are common, making the direct correlations between cause and effect more difficult to identify. Each element of the cascade effect can create dramatic outputs involving as many as three degrees of separation, rippling through an organization. There are three types of organizational cascade effects:

• Destructive tsunamis of non-cooperation and negativity
• Expanding groups of  status quo herd followers
• Constructive waves of cooperation, empowerment, motivation and positivity

If all of the cascade effects are present in an organization at the same time, the result will be conflict, employee frustration and lack of momentum in the right direction.  A random mix containing equal parts of motivated, frustrated, positive and cynical employees co-located for 40 hours a week is not a formula for success; it is a recipe for mediocrity or even disaster.

Positive Organizational Cascades

These are acts of positivity that multiply and can also spread from person to person. In 2010, researchers from the University of California, San Diego and Harvard published the results from their experiments in an article titled: "Cooperative behavior cascades in human social networks." They showed that cooperative behavior can be just as contagious as bad behavior. They showed that positivity can spread from person to person to person by displaying random acts of cooperation, generosity and other positive behaviors. This creates a cascade of cooperation that influences dozens of people who were not involved in the initial trigger event.

Mediocrity and Consensus Cascades

These cascades are the result of contagious personal decisions to blend in with the crowd and not make any waves (also known as "group think"). Many researchers, including those from the computer science department at Carnegie Mellon University, have confirmed this phenomenon. Forces in organizations and society like peer pressure, blending in, the herd mentality and the band-wagon effect can cause an individual to follow the herd, even if that violates personal preferences and value systems of what is right and what is wrong. This is often done to save one’s reputation in a group and gain acceptance. Efforts to achieve team consensus can create the same phenomena, resulting in conclusions that might not always be the best ones. Teams can assign a "devil's advocate" role to a participant to deliberately challenge "herd decisions" to counter this cascade effect.

In 2013, Forbes wrote an article titled: "Brainstorming is Dead…," which summarized recent criticism by many about how creative people can get suppressed by other personalities during brainstorming events when the main priority is to get consensus on all brainstorming conclusions. Forcing consensus is as useful as it is dangerous. To avoid ineffective and dangerous group-think cascade effects, group decisions should build on each other's ideas, when possible, to create innovative hybrid solutions and not pick one idea and totally discount another idea that might have a flicker of genius.

Negative Organizational Cascades

These are acts of negativity that multiply and spread from person to person in an organization. Risky, combative and uncooperative behaviors all have the unfortunate ability to multiply and spread to three degrees of separation from the original act. This can have a negative impact on dozens and even hundreds of downstream people not involved in the initial negative triggering acts. Negative human interactions can break the bonds of humanity and teamwork. These cascades can destroy the work culture, effectiveness and performance of an entire organization.

The Broad Influence of Cascades

Behavioral researchers have demonstrated with team experiments that positive, mediocrity and negative cascades can all have affect three degrees of separation (friends of friends of friends). Other researchers and computer models have determined that only three to four degrees of separation is what separates everyone in the USA, and only six degrees of separation separate everyone in the world. Exceptions to this rule are the secluded tribes in the Amazon jungle and other remote places. Yes, the world is smaller than we think, and actions really do speak much louder than words. Actions and behaviors can reach beyond the horizon and into different time zones.

The Organizational Forces Survey

The Organizational Forces Survey tests the health of the individual organizational forces that drive chain reactions, cascades and other behavior propagation phenomena. This survey asks participants to assess the presence of positive and negative organizational forces shown in Figure 4 by identifying the forces they believe to be present. This survey is given to all levels of employees and management.

Figure 4 - The Organizational Forces Survey used to assess the health of the work culture.

Figure 5 shows an example of survey responses, using the form in Figure 4, that were attained from the survey for three different levels in an organization: top leadership, middle management and non-management. One sign of healthy communications between management and employees is when organizational risk assessments are similar between different levels in the organization. However, that is not the case here.

In this survey response example, top leadership rated the health of the work culture as overwhelmingly positive (green). They perceived their environment to be a Grand Organization in the making. Unfortunately, non-management employee responses to this survey were at the opposite end of the scale (red). They rated the forces in the organization as overwhelmingly negative, filled with high risk and knocking on the door of a Grand Disaster. Middle management rated the work culture as mediocre (yellow), with some responses slightly positive and others slightly negative. This group of employees was apparently influenced by perceptions of top leadership and non-management.

Figure 5 - The range of survey responses from various levels in this organization shows major discrepancies in their perception of the health for the organizational work culture.

Conclusion

Grand investigations are often done after a loss of life disaster occurs, such as a NASA space shuttle disaster, a passenger airplane crash or an accidental employee death on the job. However, it is hard to find this level of effort and analysis applied to prevent such disasters. Deep and thorough disaster investigations often find flawed undisciplined leadership practices and organizational cultures at the root of the problems. It is also common to discover a zealous ambition to grow the business without really ensuring that a healthy work culture foundation is put in place to safely support such expansion.

Huge opportunities for organizational productivity improvements still exist today by cultivating a high-performance work culture. Breakthroughs can be made when organizations appreciate the fact that  “culture eats strategy for breakfast,” a phrase coined by Peter Drucker, a famous management consultant, educator and author. True organizational greatness can be achieved when organizations look beyond trying to just manage the bottom line and learn how to manage, analyze and monitor the cultural forces and cascade effects that drive success or failure.

A grand vision and strategy can only revolutionize a company when the work culture is healthy, engaged and aligned with those concepts. Taboos on talk must be broken. Open, frequent and candid communications must exist between all levels in the organization. Employee issues and concerns must be addressed in a timely manner as proof that a functioning communication and countermeasure system are in place. Only then can an organization really have a chance to break its barriers to greatness.

Over the last three-plus decades, employers have grappled with dramatic increases in healthcare and workers’ compensation costs, according to the Centers for Medicare and Medicaid Services. Workers’ compensation costs climbed more than 40% just in the last five years in California, according to the Oregon Workers’ Compensation Premium Rate Ranking Summary. At the same time, the lost time and productivity associated with injuries and illnesses add to the urgency to find a new approach to managing these costs.

Wellness programs that support and encourage employee health are popular, deployed today in more than 60% of companies with three or more employees, according to Kaiser Family Foundation and Health Research and Educational Trust research. While some believe that the benefits of wellness programs are overstated, all of the recent attention on wellness and the costs of healthcare and workers’ compensation warrants a new look at the bigger picture.

Employee health and its associated costs continue to be managed in a silo — separate from, and somehow unrelated to, workers’ compensation and "lost time" programs. Yet, these initiatives are related, and smart companies should be integrating data around workers’ comp, healthcare and productivity, to identify ways to support employees, thereby reducing costs, increasing productivity and ultimately resulting in a healthier workforce.

Breaking Down the Silos

In many organizations, group health plans and workers’ compensation programs are managed separately, often with finance responsible for workers’ compensation and HR managing the health plan. Because of the occupational/non-occupational nature of the claims — and the two distinct systems for their management — this historic division made sense when overall healthcare costs were a small component of organizational spending.

However, research is finding that viewing these programs — along with their corresponding components, such as safety, wellness, disability and leave management — as competing concerns in separate silos is short-sighted and counterproductive.

For example, based on recent research by Kaiser, we now know that smokers in the workforce are 40% more likely, and obese workers twice as likely, to have a work injury than non-smokers or leaner counterparts. Other corresponding data demonstrate similar links — obese workers who have a work injury generate seven times greater medical costs and spend 13 times more time away from work.

Organizing in traditional silos can create a hidden incentive to shift cost and risk to another internal program (“that injury happened on the job, didn’t it?”) rather than working together to reduce or eliminate the costs for the benefit of the company as a whole. Viewing these issues in a vacuum masks the true nature of healthcare costs, as is easily seen when data is analyzed in an integrated fashion. The traditional silos prevent organizations from (a) realizing improved productivity and the profit it brings and (b) maximizing the potential of internal efforts such as safety or wellness programs.

Taking an Integrated Approach

Kaiser Permanente has studied this approach and offers some startling numbers. Figures provided by the Workers’ Compensation Insurance Ratings Bureau of California (WCIRB) show the losses per indemnity claim nearly doubling since 1998, to a total of nearly $90 billion. The holistic view provided by new data enables Kaiser to look at employee health, workers’ compensation and workplace safety through a broader population health management lens.

Other insurance companies are starting to roll out programs that look at synergistic and more holistic opportunities for employee health to drive down costs, improve productivity, boost the bottom line and help employees enjoy better health. These programs help companies understand the total cost of health and safety by looking at the employee benefits and workers’ compensation costs, as well as absenteeism and "presenteeism" (an employee who is physically present at work but unproductive because of health problems or personal issues). These programs look at lost productivity, as well as identifying the specific risk factors that are driving up costs. By determining what can be modified, and creating specific action plans, employers are able to realize lower health costs, fewer on-the-job injuries and faster recoveries.

Let’s use smoking as an example. In addition to increased workers’ comp costs, numerous government and academic studies tell us that:

• Smokers lose an average of 6.0 workdays per year — almost double the absenteeism of non-smokers;
• Smoking exacerbates the effect of chronic disease on productivity;
• Smokers are less likely to exercise and more likely to be heavier drinkers;
• Smokers are estimated to spend between eight and 30 minutes a day in unsanctioned smoking breaks. This equates conservatively to more than 33 hours per year of lost time, just because of unsanctioned smoking breaks. At 15 minutes per day, the total lost productivity rises to 62.5 hours annually;
• Lower direct healthcare and lost-time costs equal improved profit, as does greater employee productivity and morale. Combining these efforts strengthens efficiencies and drives greater profit improvement.

While the concept and math are simple, changing deeply entrenched organization models, long-standing procedures and practices and the outmoded personal attitudes and behavior they encourage and reinforce is challenging. But it can and should be done. By finding the right consulting partner, companies can tear down the silos and look at the world through a broader lens of integrated, holistic safety, health and wellness. Everyone — the organization, its people and the stakeholders — will win.

What if we told you that “pry, poke, prod and punish” wellness programs are bad for morale, damage corporate reputations and cost more money than they save? You’d say: “Al, you, Tom Emerick and more recently Vik Khanna have been telling us that for years.” You might add: “And while your opinions are usually well-reasoned and based on good data, we’d have to hear the true believers’ side of the story.” But what if we told you: “That is the true believers’ side of the story”? Yep, the wellness industry’s leading luminaries – 39 of them, representing 27 vendors and one consulting firm (Mercer) -- have all gotten together under the aegis of both their trade associations – Health Enhancement Research Organization (HERO) and Population Health Alliance (PHA) -- and reached that “consensus.” We don’t know if they simply didn’t read their own report before reaching this consensus, or whether they just all decided to tell the truth. Frankly, we’re fine either way. (This is also the second time in five months that a major wellness true believer admitted wellness doesn’t save money. The first time was a meta-analysis in the American Journal of Health Promotion that concluded that “randomized clinical trials show a negative ROI.” After we started quoting the analysis, the editor wrote a 2,000-word essay walking it back.) Because our claim that we are laying out “the true believers’ side of the story” would otherwise require a certain suspension of disbelief, we are going to rely more heavily than usual on screenshots. We also recommend reading the report itself, or at a minimum our analyses of it. (Our analyses are going to be a 10-part cycle. Make sure to “follow” the website They Said What? to not miss a single episode.) Page 10 of the report lists 12 elements of cost. The first element itself contains about 12 elements, making this a list of 23 elements of cost. (Add consulting fees, which were overlooked even though three Mercer consultants sat on the committee and even though page 14 calls for use of “consulting expertise,” and you get 24.) You’ll see damage to employee morale and corporate reputations listed as “tangential costs.” But, as two people who run a company, we would call damage to those intangibles much more than tangential. Our company runs on morale. Pulling people away from their workstations to poke them with needles, weigh them, measure their waists and test to see if they are lying about their smoking habits couldn’t possibly be good for morale. We are equally curious about the blithe dismissal of legal challenges as a tangential cost. No firm wants its name dragged across the wire services because it is being sued for its wellness program (just ask CVS and Honeywell). Getting dragged into the courts (and, hence, the media) for running a wellness program isn’t a tangential cost -- and it’s an unforced error. On Page 15, as the report discusses how to measure the return on investment, the authors select only one of those 24 costs – vendor fees – as the basis for comparison. Omitting the other 23 costs, plus incentives, makes it easier to show an ROI. The fees are listed as “$1.50 per employee per month,” or $18 a year, even though the rule of thumb is that wellness programs cost many hundreds of dollars per employee per year. Further in, on page 23, the authors list the related savings: $0.99 per “potentially preventable hospitalization,” abbreviated as PPH. (The fact that we have to do the math on our own by comparing figures across pages suggests this admission of losses was a gaffe rather than deliberate honesty.) The savings figures are based on reductions in event rates that (1) are about twice what typically gets achieved; and (2) somehow overlook the natural decline of 3% to 5% a year in cardiac events even without a wellness program. Even without adjusting for those two mistakes, savings fall $0.51 PMPM short of vendors fees alone. And losing $0.51 per employee per month is the best-case scenario. The “savings” includes benefits from disease management (which is not covered by the $1.50 PMPM in vendors fees), and omits the offsetting costs of all the extra doctor visits that come from overdiagnosis and overtreatment. So, here are the two conclusions:

• According to proponents' own consensus, wellness loses money.
• Even worse, their savings are wildly overstated (yes, according to government data), and their costs, by their own admission on page 10, are wildly understated.

Don’t take our word for either of these. Write to us, and we will send you an ROI spreadsheet that you can use to do your own calculations. One way or the other, what RAND’s Soeren Mattke called the wellness wars are over. Wellness has surrendered. How Will the Wellness Industry Respond? HERO and its assembled luminaries will probably ignore this gaffe, to prevent a news cycle that their customers might notice. However, if the problem gets covered broadly, they will respond. This was their modus operandi the last time they got “outed.” We had shown them in 2011 that one of their key slides, for which they even gave themselves an award, was made up. We presented our proof many times and even put it in both our books…but it wasn’t until Health Affairs shined a bright light on it that they acknowledged wrongdoing. They said that the slide “was unfortunately mislabeled” by an as-yet-unidentified culprit, but that no one noticed for four years. (Rather than relabeling the slide in a "more fortunate” way, they took the slide off the site.) To clarify that their position is indefensible, we have offered a reward of $1 milliion for them to simply convince a panel of Harvard mathematicians that they have any idea what they are talking about beyond the fact of the gaffe itself.  Their refusal to claim this reward speaks volumes. Implications for Brokers The implications for brokers are profound. First, stop placing wellness programs -- or at a minimum get a “release” from your clients saying that they’ve read this article but want to proceed anyway. The disclosure by the wellness industry’s own trade association that wellness loses money increases your liability because you “knew or should have known” that losses were to be expected. Second, you can probably offer your client the chance to abrogate vendor contracts, especially if the vendor was one of the 27 that reached this “consensus.” That might reduce your revenue in the short term but will cement your relationship. And you want your clients to find out about wellness' problems from you, not from the media. But whatever else you do, follow future installments here on Insurance Thought Leadership as we plow through this report and deconstruct more of not just their crowd-sourced math but also of their crowd-sourced alternative to reality, in which prying into employees’ personal lives, poking them with needles in blatant disregard for government guidelines, prodding them to get worthless checkups and punishing them when they don’t is all somehow going to save employers millions of dollars.

Increasingly, we live in a world of now. Instantaneous access to digital real-time data and news has simply become a given. You may be surprised to know that the Federal Reserve has taken notice. To this point, GDP data from the U.S. Bureau of Economic Analysis (BEA) has arrived after the fact. From the perspective of a financial market and investors that are always looking ahead, GDP data is “yesterday’s news.” Moreover, revisions to GDP can come to us months or even years later, essentially becoming an afterthought for decision making. Recently, though, the Atlanta Federal Reserve has developed what it terms a GDPNow model. It essentially mimics the methodology used by the BEA to estimate inflation-adjusted, or real, growth in the U.S. economy. The GDPNow forecast is constructed by aggregating statistical model forecasts of the 13 components that compose the BEA’s GDP calculation. Private forecasters of GDP, such as the Blue Chip Consensus, use similar approaches. Their forecasts are usually updated monthly or quarterly, but many are not publicly available, and many do not specifically forecast the components of GDP. The Atlanta Fed GDPNow model circumvents these shortcomings, forming a relatively precise estimate of what the BEA will announce for the previous quarter’s GDP. The model is still young, but it is beginning to be discovered more widely among the analytical community. The reason we highlight this new tool is that we’ve incorporated it into our continuing, top-down review of the U.S. economy. More important to our “here and now” thinking is the current reading of this new model. As you can see in the next chart, the forecast by the Atlanta Fed for Q1 2015 U.S. real GDP growth is 0.1%, up from 0% at the end of March. As is also clear from the chart, as of the end of the March, Blue Chip economists were collectively predicting 1.7% growth -- quite a difference. Chart Source: Atlanta Federal Reserve Why the drop in the Atlanta Fed real-time forecast for Q1 2015 real GDP? As we look at the underlying numbers in the model, we see recent weakness in personal consumption. Many had predicted an increase in consumption with lower gasoline prices, but that has not played out, at least not yet. Weakness in residential and non-residential construction has also played a part in the downward revision. Weather on the East Coast has not been kind to builders as of late, but that’s a seasonal issue easily overcome by sunshine. Importantly, slowing in U.S. exports and equipment orders meaningfully influenced the March drop in the Atlanta Fed model. We know global currencies have been weak; the highlight over the last six months has been the euro. With a lower euro, European exports have actually picked up as of late, and the message is clear: The strong dollar is beginning to hurt U.S. exports. We do not see this changing soon. (As you know, the importance of relative global currency movements has been a highlight of our discussions over the past half year.) Finally, durable goods orders (orders for business equipment) have been soft as of late because of slowing in the domestic energy industry. Again, that is a trend that is not about to change in the quarters ahead given dampened global energy prices. Like any model, the Atlanta Fed GDPNow model is an estimate. Whether Q1 U.S. real GDP comes in near zero growth remains to be seen, but the message is clear, there is downward pressure on U.S. economic growth. This pressure is set against a backdrop of already documented slowing in the non-U.S. global economy. Perhaps most germane to what lies ahead for investors in 2015 is what the U.S. Fed will do in terms of raising interest rates -- or not, if indeed the slowing that the Atlanta Fed model predicts materializes. We believe this slowing will become a real dilemma for the Fed this year and a potential issue for investors. The Fed has been backed into quite the proverbial corner. Whether the U.S. economy is slowing, the Fed is going to need to start raising interest rates for one very important reason. It just so happens that the end of the second quarter of 2015 will mark an anniversary of sorts. It will be six years since the current economic expansion in the U.S. began. As of July, ours will be tied for the fourth-longest U.S. economic expansion on record (since the Fed began keeping official track in 1945). There have been 11 economic expansions over this period, so this is no minor feat. The second quarter of this year will also mark the 6 1/2-year point for the U.S. economy operating under the Federal Reserve’s zero interest rate policy. You’ll remember that, during the darker days of late 2008 and early 2009, the Fed introduced 0% interest rates as an emergency monetary measure. That was deemed acceptable as crisis policy. Given that the FED has maintained that policy, it is essentially saying that the current economic cycle has not only been one of the lengthiest on record, but simultaneously is the longest U.S. economic crisis on record. As we look ahead, the “crisis” in the eyes of the Fed will come to an end as it contemplates higher short-term interest rates. Although it still remains to be seen what the Fed will decide and when, there is one very important consideration that must be entering their interest-rate-policy decision making at this point in the economic cycle -- a consideration they will never speak of publicly. Let’s start with a look at the history of the federal funds rate (the shortest maturity interest rate the Fed directly controls). Alongside the historical rhythm of the funds rate are official U.S. recession periods in the shaded blue bars.   Chart Source: St. Louis Federal Reserve There is one striking and completely consistent behavior: The Fed has lowered the federal funds rate in every recession since at least 1954. There are no exceptions. You can see the punchline coming, can’t you? Just how does one lower interest rates from zero to stimulate a potential slowdown in the economy? Of course, in the European banking system and in the European bond market (government and corporate paper), we are witnessing negative yields. Capital is essentially so concerned over principal safety, it is willing to pay to be invested in a perceived safe balance sheet. Will we witness the same phenomenon in the U.S.? A move to negative interest rates in the U.S. would further punish pension funds, which are not only starved for return but are still underfunded despite fantastic returns for financial assets over the past five years -- and Baby Boomers have been rapidly moving into their retirement/pension collection years. Without venturing into negative-interest-rate territory, the Fed is essentially out of interest rate bullets in its monetary policy arsenal. It’s out of the very ammunition it has employed in each and every recession of the prior six decades. If the U.S. were to enter a recession, the Fed would be unable to act on the interest-rate front, as it has for generations. Is the U.S. teetering on recession? Not as far as we can see, despite the Atlanta Fed GDPNow model's reading of very close to 0% growth. We need to remember that U.S. GDP growth has been below average in the current cycle and that the cycle is not young. But the time to contemplate questions such as we are posing is well before a recessionary event. If the Fed is going to raise interest rates, it should be while the economy is still growing. Although the Fed will never speak of this publicly, it cannot be trapped at the zero bound (0% interest rates) when the next U.S. recession ultimately arrives. The proverbial clock of history is ticking just a bit louder as we enter the second quarter of 2015. Is this, perhaps, the key reason the Fed will need to at least begin raising interest rates this year regardless of the near-term tone to the economy?

An alarming number of cloud-based apps used by enterprise employees don’t encrypt data at rest or require two-factor authentication. And an astounding number of employees are still uploading highly sensitive data to the cloud and sharing files on unsecured platforms, according to the Cloud Adoption Risk Report Q4 2014 from cloud security vendor Skyhigh Networks. Security & Privacy News Roundup: Stay abreast of key developments on cybersecurity and online privacy topics The recent breach of 80 million records at health insurer Anthem was an example of how cloud services that don’t encrypt data leave personal records exposed to savvy cybercriminals. The Q4 report was based on usage data from 15 million employees at 350 companies worldwide. It found that the average company used 897 cloud services in the fourth quarter of 2014, up from 626 the year before. Data at Risk While the number of cloud providers that have invested in key security features more than doubled last year, still only 11% encrypt “data at rest” -- inactive files stored in data bases. Only 17% have multifactor authentication. “In light of the recent breaches, that’s alarming,” says Kamal Shah, Skyhigh's vice president of products and marketing. “The Anthem breach is a great example of how, if you’re not careful, cloud services can be used to exfiltrate data out of the organization,” he says. More than a third of users uploaded at least one file with sensitive information to a file-sharing cloud service, Skyhigh found. Some of that information included customer Social Security numbers (SSN), date of birth, credit card or bank account numbers and personal health records. Skyhigh also found that 22% of files uploaded to cloud-based file sharing apps had sensitive or confidential information. At the same time, 11% of documents were shared outside the enterprise, and 18% through third-party email services like Gmail, Yahoo and Hotmail, which don’t encrypt data at rest. File-Sharing Exposure The growing trend in file sharing is driven by the limitations of email, Shah says. Besides having size constraints as files get larger, email is a static environment. “File-sharing is much more active -- a living, breathing space,” he says. Less surprising in the study was the number of compromised identities -- especially given the record number of breaches and vulnerabilities in 2014. Skyhigh found that 92% of companies have compromised credentials, with 12% of users affected, on average, at each company. “A lot of people use the same passwords for their work life as they do for their personal life, and when they’re compromised, those credentials can be used to steal corporate data,” Shah says. The trends driving the rapid cloud adoption are driven by legitimate business needs, Shah notes. Which means the old way of doing business -- by simply restricting app usage -- no longer works for IT managers. “Shadow IT is not bad because employees are using these cloud services for the right reasons,” he says. “The old way of blocking services is no longer effective.” What that means for IT administrators is the need to educate their employees about the risks of apps that are not enterprise-ready, he says. (Skyhigh’s definition of enterprise-ready includes cloud services that rank one to three on a scale to 10 based on attributes like encryption, two-factor authentication, legal condition of service and so on.) Despite all the breaches, the use of cloud adoption will continue to accelerate rapidly, Shah says. “For enterprises, there’s urgency to take action before it’s too late,” he says. “If you don’t act now, the problem will get bigger and bigger.” This article was written for ThirdCertainty by Rodika Tollefson.

Once upon a time, an insurance COO was walking along a beach, deep in thought. His CEO had just asked him to increase the motor business. The COO was in a sweat, knowing that he could quickly increase sales by dropping premium rates and excesses, but that claims would also follow. The loss ratio was already 103 – a marketing push like that would certainly throw them further over the edge! On he walked. As he strolled, deep in thought, he came across a strange glowing bottle, rolling back and forth in the surf as waves gently lapped on the beach. He picked up the bottle and marveled at its exquisite beauty, yet simple design. Wondering what on earth could be inside such a work of art, he pulled off the cap. Suddenly, purple smoke erupted from the opening, which gradually took the form of a smiling genie. “Who the heck are you?” the stunned COO asked. “I am the career genie. I grant three wishes that help people along with their jobs,” the genie replied. “OK,” the COO thought, “let’s test this guy out.” He said, “Genie, for my first wish, I would like safe drivers to buy my motor insurance product.” The genie crossed his arms and blinked. “It’s done,” he said with a smile. “Safe drivers will actively choose your insurance product over those of your competitors.” “Amazing!” the COO thought. “OK, genie, for my next wish, I want to find a way to charge more premium for dangerous drivers before they have an accident.” Again, the genie crossed his arms and blinked. “Your wish is my command. Poor drivers will automatically get smaller discounts. You will know how well your policy holders drive as they drive. In fact, you will be able to coach them to be better drivers as they go. Bad drivers won’t like the net premium you charge and will move to your competitors.” “Awesome!!” the COO thought. “OK, genie, for my last wish, I want you to reduce claims and fraud -- make my motor line of business really profitable.” Once again, the genie crossed his arms and blinked. “Your wish is granted. Claims will drop by at least 20%, and fraudsters will find my magic accident reconstruction technology difficult to overcome and will move to easier pickings with your competitors.” The insurance COO was dumbfounded. He stammered: “Oh great career genie, what is your name?” The genie replied, “Some know me as UBI the Amazing; others know me as Telematics the Fantastic. I am a magical creature who simply likes to help mortals such as you to find better ways to do business. I hope your wishes work out for you.” In a flash, the genie disappeared, and the COO was left alone, with his loss ratio sitting at 80, his customer renewal rate at 96% and his customer satisfaction going through the roof. Happily, he headed back to the office, ready to recommend a brisk beach walk to all the other senior executives. Yes, this story is a fiction, but the results are very real. Usage-based insurance (UBI) is fast becoming a mainstream game-changing offering for general insurers in the U.S., Europe and elsewhere directly because of the outstanding results it delivers for insurers and customers. The first truly successful UBI program was Progressive in the U.S. with its patented Snapshot technology that was introduced in 2010. As of the end of 2013, the program has achieved more than US$1.5 billion in annual premiums, with nearly 35% of motor customers having signed up. Customers are given discounts of as much as 30% by opting into the program. Snapshot works through a device linked to the vehicle’s On Board Diagnostic Interface (OBDI), which captures the distance driven, braking force and the time of journey and transmits the journey data back to the insurer, enabling the calculation of premium discount. Progressive continues to enhance Snapshot and is currently planning to add GPS location data. A number of other large U.S. P&C insurers have become fast followers, most notably Allstate with Drivewise, State Farm with Drive Safe and Save, plus another 10 carriers with similar programs. In Europe, some legislation has stepped in to help drive UBI adoption. In the past, some premium rating factors discriminated based on gender, with young males paying more premium than young females. This practice is now banned under EU regulations and has spurred one UBI program called “Drive like a girl,” which combines a clever social media pitch to promote safe driving habits in young drivers while premium discounts are calculated in a gender-neutral fashion, based purely on how the insured drives. A recent study shows UBI programs in the UK, Ireland, France, Germany, Spain, Italy, Belgium, Netherlands, Denmark, Finland and Sweden involving considerably more than 50 insurers. It also estimates the global policy count to be more than 5 million as of mid-2013. Here in Asia, I am aware of established UBI programs in Japan, China and Australia. The UBI genie is out of the bottle, and more and more markets are catching on. The value proposition is really game-changing: • Safe drivers will tend to opt in to UBI programs as they believe they will get a better deal and be rewarded for their superior driving skills; • Poor drivers will migrate away simply based on price, if they can get a cheaper base deal; • Overall, the UBI approach appeals to people’s common sense – you drive less, you pay less; you drive more, you pay more – you pay for what you use; • Driver behavior/style is monitored, and, where UBI provides feed-back, drivers tend to drive more safely; • UBI programs are statistically proven to reduce claims, and in some instances have achieved 30% reductions – this has the biggest impact on insurers’ bottom lines where typically motor makes up 65% of the portfolio and claims make up 70% of expenses; • Claims are much more difficult to stage, because the UBI device records much of the vehicle’s performance data and geo-location data. When UBI is coupled with dashcams, accidents are easy to reconstruct, thereby chasing away fraudsters to competitors; • Because UBI provides rich data and customer engagement, claims can be settled faster, thereby improving customer satisfaction; and • Because the pricing is dynamic based on how you drive, it becomes more difficult for customers to do an apples-to-apples comparison between different insurance providers policies when shopping around. In the past, you bought your policy, tucked the schedule in the glove compartment and forgot about it until you had a claim, at which time your insurer became your adversary. With the UBI model, your insurer is right there in the vehicle with you on every journey, telling you when you brake too hard, alerting you when you accelerate too quickly, letting you know when you are swerving and swapping lanes too much. Your insurer is engaging with you – partnering with you to avoid accidents, and to be a better, more efficient driver. This is a perfect platform for introducing value-added services. The UBI program is serving up a great data set from which the insurer can potentially craft personalized services with relevance to each individual driver. Ideally, the value created will entice the insured to share even more data from which further services can be fashioned. With UBI customers focused on value, it becomes much more difficult for other insurers to compete simply on price. Policy retention rates and customer satisfaction will naturally increase. It is clear that insurers in the region are starting to look at UBI. The rewards are immense for those that adopt this game-changing approach. Do not wait to stumble over your own genie on the beach. Do your career and your customers a big favor by checking out this new approach to motor insurance. After all, if you don’t, your competitors certainly will.

The benefits of next-generation underwriting for complex risks are quantifiable and real. So, when, where and how to start? When? Now. The sooner, the better. Where? It all starts with understanding the possible. You need to know what is realistically possible with the offerings that are available today. It is equally important to figure out what will be possible in the not too distant future. Once you’ve got a grip on the possibilities, it’s time to set priorities. Describe the capabilities that go on the priority list using business terminology. This makes it much easier to have meaningful conversations between the business and IT interests. It is very important to look at how your plans for underwriting will align and work in concert with your policy administration system. Figure out what the best path for your organization is, and then just make it happen. How? The most effective path for making progress depends on the characteristics and culture of the company. For some insurers, shifting focus to the possibilities for underwriting gets things moving. Other organizations might need some help or just a kick-start. You can move the ball forward significantly by bringing in advisers who can describe what the options are and then put the value in context for your company. The important thing is to make progress one way or another. Time is of the essence. Simply put, the goal of underwriting is to maximize efficiency and effectiveness. SMA’s concept of modern underwriting capabilities can best be described by using the 5 I’s: Intuitive, Intelligent, Interconnected, Informative and Insightful. The next-generation insurers are embracing solutions that embody these characteristics, and they are reaping the benefits. What do these 5 I’s mean for you? Let’s explore: Intuitive — A user-experience-centric desktop, an intuitive desktop, saves time spent hunting and searching for information, and it eliminates rekeying into several systems. It also reduces the learning curve and ties directly to the main goals of underwriting: efficiency and effectiveness. Intelligent — For complex risks that require the touch of an underwriter, the modern underwriting workstation can significantly augment the expertise and experience by incorporating and taking advantage of new sources of data and models. This new level of intelligence automation will help make better decisions and provide controlled discipline. Interconnected — Modern underwriting capabilities are delivered through a variety of solutions that are tightly integrated with everything underwriting needs and feeds. The required capabilities extend beyond what a single solution can deliver. The requirements include an interconnected, intelligent, modern platform that facilitates easy integration and synchronization with core systems, tools, spreadsheets, models and data, as well as external data sources. Informative and Insightful — Modern platforms provide underwriting with data and analytics like never before. Emerging technologies, as well as an abundance of new information, are generating new possibilities for underwriting and new ways to accomplish far-reaching transformation for the next generation of underwriting excellence. It is now possible to make smarter, more informed decisions by using new sources of data and models. New levels of sophistication in the information about both risk and customer intelligence are possible. Looking back on my past-life as an insurer, I am in awe of today’s possibilities. The power that data and analytics are giving our industry is boundless. Just thinking about how far underwriting has come in a very short time makes me even more excited for the future! This is why at SMA we consider “Interconnect Intelligence for Underwriting” an imperative. It is critical to becoming a next-gen insurer. The world is moving as fast as we think it is. Any steps you can take to gain an edge by improving efficiency and effectiveness are must-take steps!

Recently, I participated in an NACD Master Class. I was a panelist in discussions of technology and cyber risk with 40 to 50 board members very actively involved, because this is a hot topic for boards. I developed and shared a list of 12 questions that directors can use when they ask management about their organization’s understanding and management of cyber-related business risk. The set of questions can also be used by executive management, risk professionals or internal auditors, or even by information security professionals interested in assessing whether they have all the necessary bases covered. This is my list: How do you identify and assess cyber-related risks? Is your assessment of cyber-related risks integrated with your enterprise-wide risk management program so you can include all the potential effects on the business (including business disruption, reputation risk, inability to bill customers, loss of intellectual property, compliance risk and so on) and not just IT risk? How do you evaluate the risk to know whether it is too high? How do you decide what actions to take and how much resource to allocate? How often do you update your cyber risk assessment? Do you have sufficient insight into changes in cyber-related risks? How do you assess the potential new risks introduced by new technology? How do you determine when to take the risk because of the business value? Are you satisfied that you have an appropriate level of protection in place to minimize the risk of a successful attack? How will you know when your defenses have been breached? Will you know fast enough to minimize any loss or damage? Can you respond appropriately at speed? What procedures are in place to notify you, and then the board, in the event of a breach? Who has responsibility for cybersecurity, and do they have the access they need to senior management? Is there an appropriate risk-aware culture within the organization, especially given the potential for any manager to introduce new risks by signing up for new cloud services? I am interested in your comments on the list, how it can be improved and how useful it is – and to whom.

The words "disruption" and "innovation" are in everyday lexicon surrounding many concepts, products and services. At times, it seems almost impossible to navigate the full range of opportunities for insurance innovation. This makes it extremely difficult to make the right choice to adopt a specific technology or strategy to redefine or reinvent a business. Certainly, budgets are not limitless, and time is scarce. How do we ensure that we invest in the right technologies at the right time and prioritize the investments in proper order? How do we make sure that the opportunity to adopt a new technology is not being overlooked or unintentionally delayed? Innovation Teams Many insurance carriers deployed innovation teams to stay on top of the technological landscape and drive forward-thinking decisions. These teams have done a marvelous job. Yet, even with these teams in place, most organizations seem to drastically fall behind in adopting the technology early enough to make the most impact. With modern, cloud-based SaaS offerings that can be fielded without internal IT investments, with very little set-up requirements and with lean operations provided by young ventures that drive most of the innovative technologies to the front lines, why do we still find it difficult change? In a recent article, Steve Blank, a serial entrepreneur recognized for customer development methodology that led to the Lean Startup movement, described two of the most common issues with deploying innovations teams to drive organizational change. The first: making it easy for innovation teams to drive the selection of the right business units to field the solutions as soon as possible. The second: ensuring that the organization separates the execution part of the business, which operates an existing business model, from the innovation business unit, which is modifying the existing model or creating one. Beyond the Innovation Noise The key to a successful continuous innovation cycle is looking beyond the hype and the related group think about innovations. Technologies such as big data, analytics and Drones receive a lot of attention. However, getting full value from them is far from simple. Big data, for example, interprets information with analytics tools. To derive value from it, however, it is important to identify what purpose is to be achieved, what data is important and where to acquire it -- before using the analytics. Experts say the most critical, time-consuming and expensive part of adopting big data comes from the effort required to analyze the business and all of the data sources, so the upfront investment is quite high. The spotlight on drones often seemingly ignores the limitations of the technology. In certain weather conditions, like wind, rain and fog, the control of the drone becomes challenging, and the video quality drops. In addition, use of drones is highly unscalable, as one operator can only control a single drone within the line of sight. In addition, satellite imagery can be significantly more effective in collecting real-time aerial imagery of an area hit by a storm, if visibility allows. This is a possible threat as real-time satellite technology becomes more affordable to the masses. Is there a future in drones? Absolutely, but it will take time to perfect this technology, as the industry is still exploring the right fit in the field. This is where looking outside the box provides the clues that prevent falling into a common innovation trap. Think Outside the Box, Think ROI Sometimes, looking too closely at a solution creates a commitment to a technology that has a much longer innovation and implementation cycle than expected. Playing with new technology is always fun, and there is value in being recognized as the first to explore new tools for the organization. However, the goal has to be generating a competitive advantage that provides the highest benefits – the best ROI. Today’s most important technologies are the ones that can be implemented with very low up-front investments in IT support and employee training and the ones that can simplify or even eliminate the largest, most unscalable and expensive operations. Technologies that deliver enhancements to existing business processes like mobile tools, real-time video communications, litigation document management solutions and field resource planning and dispatch platforms are easier to acquire and evaluate. These technologies are less expensive and cause less conflict with an existing part of the business. At the same time, they deliver substantial tactical improvements in operations and can be quickly deployed within the necessary workflow. Larger-scope solutions such as claims management, policy management and billing systems typically require a significant modification or a complete replacement of existing systems. Implementation or upgrade of these systems is a high-risk exercise, while the projected ROI is mostly strategic -- long-term efficiency, productivity and other future capabilities. To assess the value of investment in a specific technology, most enterprises have adopted the Lean Startup model, piloting software before full adoption. There is, however, a significant difference between a proof-of-concept and a proof-of-value approach to identifying the right technologies. Proof of concept starts at the business problem and validates a solution using specific technologies, while proof of value begins by looking for a specific solution to a known business problem. The first validates that the technology works; the latter ensures the investment is worthwhile. For any organization looking to continuously change and innovate, the right approach is in proof of value – being able to quickly assess and adopt solutions with the lowest barriers, fastest implementation and highest returns.