Senior executives from some of the top California workers' compensation carriers identified emerging trends that are of great importance to California employers at the 2015 California Workers' Compensation and Risk Conference.

Panelists were:

• Moderator: Pamela Ferrandino, national casualty practice leader at Willis North America
• Mike Mulray, chief underwriting officer at Everest National
• John Dickey, regional president at Liberty Mutual
• Mike Hessling, chief client officer at Gallagher Bassett
• Glen-Roberts Pitruzzello, vice president of workers' compensation, group benefits claim strategy and clinical operations, at the Hartford

The WCIRB projects the estimated average medical cost-per-claim will be the lowest since 2007. What do you think are the key drivers behind this improvement?

• The independent medical review (IMR) process. IMRs are being upheld in favor of the employer - around 90% of the time. That is showing that evidence-based protocols are being followed.
• Medical inflation has decreased. Effective utilization review (UR) programs have had a positive effect on controlling medical costs.

Will the greater use of generic drugs in the California drug formulary materially lower workers' compensation costs?

• Texas is a good example. We have not seen any major pushback from what Texas has done. Texas communicated to the providers, so they know how to work within the new environment. There are reports showing that the new system has been successful.
• It could help decrease employers' costs by 10% to 15%. There could be much broader implications to the claimant, as well. It is not just about the money, though; the upside is also the social benefit of avoiding addiction issues.

How do you see medical marijuana affecting employers?

There are three areas:

1. Intoxication policies come into play when you have an employee using marijuana not related to a workers' compensation claim.
2. To date, New Mexico is the only state that ruled for compensable treatment, but the employee was already using marijuana prior to injury. This will likely continue to be challenged in various states.
3. Medical advocacy will continue to prove effectiveness vs. the alternatives, like opioids.

What insights have you gleaned from predictive modeling?

• We have had some great success from the claims standpoint. There have been some great advances in tools to help with predictive modeling over the past five to 10 years, like text mining, which allows modelers to look for keywords in cases that show a trend.
• Predictive modeling can be used to see how to prevent claims from even happening. It is more effective to try to keep the claim from occurring, rather than controlling costs once a claim has occurred.
• We are using predictive modeling more to drive early intervention in claims to reduce the costs, but we also are trying to see how we can use this information for risk control and reduce claims altogether.
• Almost all predictive models have a level of false positives. We need to learn to filter out the white noise that is not providing useful information.

Collectively, do you think SB 863 improvements will continue to adhere, or will they be chipped away just like the others?

• The instant you change the rules, people try to find new loopholes. You cannot stop. One or two years of results is not a trend line to claim a victory. We will probably see erosion, and we will have to come up with solutions as an industry.
• I'm not sure if we are seeing SB 863 play out as intended, because of issues like IMR and liens. There will probably be tweaking.
• Many stakeholders are trying to prevent erosion, so there is cautious optimism.

What are trends to look for?

• Formulary - we could adopt the Texas system, and, while it wouldn't play out here exactly the same way, I think we need it.
• Ways to reduce frictional costs for employers, like IMR.
• The impact of a new president and immigration reform on the workers' compensation system.
• Attracting talent for claims adjuster positions.
• The next generation of workers entering the workforce and becoming injured workers. Engaging with them as injured workers will be vastly different from how we have engaged with workers in the past. They will have different expectations.
• Changes in the market cycle and how it affects the health of the workers' comp system.

In my career, I've written hundreds of thousands of words on change. I was preparing another article for your consideration, when three articles, one invoice and one memory made my ramblings about speed unnecessary. Consider the following, then decide - is the market being transformed?

1. The memory - In 1978, I represented the Famex Insurance Program through Fireman's Fund. This was a property and casualty offering to GM's dealers throughout the country. In those days, the No. 1 concern of GM and her dealers was that GM would reach 65% market share, and then Uncle Sam would break up "Mother GM" into Cadillac, GMC, Olds, Pontiac and Chevrolet. That fear was, of course, never realized. Back in the '70s, the fantasy of GM was that she was invincible. Today, the bankruptcy of GM is reality…. Too big to fail is BS.
2. The first article: Fast Company (November 2015) - "Hot Sauce U.S.A.," by Elizabeth Segran. "Where once was Tabasco, there is now sriracha, gochujang and more. What the condiment aisle says about American consumers....While Tabasco accounts for 18% of the hot sauce market, there are now hundreds of varieties available in the U.S. - from Tapatio to Texas Pete - and more than a few of them with foreign roots." Once, a "local" company controlled the hot sauce market worldwide -- today, the global market is served by a much more diverse group of pepper pickers and processors. (In the name of full disclosure, I live within 10 miles of Avery Island, LA, the home of Tabasco. I love Tabasco and was able to enjoy this delicacy in every town I visited in Europe during my year [1972] of service with the Army in Germany.)
3. The second article: The Week (Oct. 30, 2015) - "Issue of the Week: Walmart's Wobbly Empire. "What would Sam Walton think if he were alive to see Walmart today?" Brian Sozzi asked. The founder of the behemoth would probably be shocked to see that his pioneering profit formula - low operating costs and extra-discounted prices - is now virtually impossible to maintain. "Walmart understands the challenges it faces, but its decline may be practically inevitable," David Graham said in theAtlantic.com.
4. The third article: The Week (Nov. 13, 2015) - Editor's Letter. "I recently had one of those 'welcome to the future' moments that you think only happen in sci-fi movies and dystopian novels. I'd agree over email to get coffee with a friend of a friend, and he cc'ed his personal assistant, Amy, to set up a mutually convenient date. Amy and I emailed back and forth to find an available time slot. She was efficient and gracious, considerate of my schedule constraints and so polite in her responses that, with the meeting arranged, I began typing a brief thank you. Then I glanced at her e-mail signature. There, written in small type, it read 'powered by artificial intelligence.' That's when it hit me: Amy wasn't actually human. She was an algorithm. I'd been corresponding with a machine all along and hadn't even realized it."
5. The invoice - Wired magazine. I received my 4^th reminder to renew my subscription. The cover price for one year was $143.76. "Your special low renewal rate" was $20, plus a "second subscription to your friend for free." I'm guessing the mailing costs alone for one year exceed the $20 price to me. Wired is a good magazine. I've enjoyed it. But in today's easy access world I'm oversubscribed and under read.

Should we be Wired, too? Because competition and technology will allow innovators to deliver what we sell at a price below our costs? Is it now time to reinvent our organizations to compete in the world as it will be?

In closing, I acknowledge Bob Dylan, one of the first modern-day philosophers, who saw and spoke to the world of change. Our parents thought Dylan was a "flake" or a "fad." In retrospect, he was right, and they were wrong. Ours is a world being transformed. Suggestions of incremental change are BS!

"The Times They Are A-Changin'" - Bob Dylan (1964)

Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'
For the loser now
Will be later to win
For the times they are a-changin'.

Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

Come mothers and fathers
Throughout the land
And don't criticize
What you can't understand
Your sons and your daughters
Are beyond your command
Your old road is
Rapidly agin'
Please get out of the new one
If you can't lend your hand
For the times they are a-changin'.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin'
And the first one now
Will later be last
For the times they are a-changin'.

Here is a baker's dozen (plus one) of technology firms that I find exciting or interesting and feel are companies to watch. Some, like Guidewire and Salesforce, I have followed and written about for many years. Others are technology firms I have recently written about (e.g. Clari). Some technology firms are public, and others are private.

Caveats:

• The following 14 companies to watch (including two pairs of partnerships) are technology firms that I think insurers should be watching or possibly consider whether to use in 2016.
• I didn't use any "scientific reasoning" or market share data to include (or exclude) companies. Other than Apple, Google and IBM, I do not own shares in any of the technology firms. (Not that I own enough shares of any of these companies to retire to the beaches of Maui anyway....)
• By including technology firms on this list, I am in no way implicitly or explicitly saying that I will only follow/research/write about these firms in 2016. That is not the case: I plan to write about other technology firms in 2016.

My personal list of exciting or interesting technology firms

Here is my list in alphabetical order:

1. Apple-IBM partnership (specifically the insurance industry applications)
2. Box
3. CafeX
4. Clari
5. Dropbox
6. Facebook
7. Google (specifically, Google Compare)
8. Guidewire
9. Librestream-Symbility partnership (Symbility is Librestream's partner to go to market in insurance)
10. Salesforce
11. Slack
12. Vlocity

Going forward

Do with this list what you will.

Next year, I plan to create short snapshots of these firms (or partnerships) in which I discuss why insurers should care about these technology firms.

However, I do suggest that you - whether an insurer or technology firm - create your own watch lists. Add to them, delete from them and otherwise keep your lists (and the reasons you have certain firms on the list) vibrant.

Cyber security placed first in a list of emerging casualty risks among insurance buyers, according to a survey of 135 insurance professionals conducted by London-based specialty lines broker RKH Specialty. 70% of respondents put cyber risk in the top spot. According to a Best’s News Service article about the survey, healthcare and retailers have been the major buyers. Logic will tell you that the reason for the growing demand for specialized cyber coverage is the simple fact that losses stemming from cyber-related attacks and business interruption can be catastrophic.

Of course, not all policies are created equal, so here are some things to consider when purchasing cyber security coverage to help ensure that policyholders are adequately protected from the losses after a cyber attack.

#1 If your business has a cyber attack, will your operations cease or be interrupted? If so, you need to make sure the cyber coverage you procure has "business interruption coverage."

#2 Does your cloud contract stipulate that your third-party cloud vendor must meet all the federal regulatory requirements in encrypting personally identifiable information (PHI) and healthcare records? If not, you need to verify how the third-party vendor is protecting your employees' and patients' information from cyber attacks and whether its cyber coverage will protect you.

#3 Do all mobile devices - such as smartphones and tablets - have proper encryption software to protect personally identifiable information and healthcare records? HIPAA security regulations require healthcare providers to use encryption as a means of protection for their patients electronic PHI. If they don't do so, healthcare providers can be heavily penalized by federal regulators. Most cyber policies have a stipulation that, to be covered, all insureds must adhere to the most recent encryption requirements for electronic protected health information (ePHIs).

#4 Does your legal counsel have experience responding to cyber attacks? Businesses often have their own attorneys and use them frequently for everyday operations. However, the likelihood is that the in-house counsel does not specialize in the legalities of cyber attacks. Having an attorney who specializes in data breaches can make the process run more smoothly and ensure that important details are not missed or mishandled - such as notifying regulatory agencies, properly setting up notification of employees and patients as well as advising PR staff on all media inquiries and other external communications.

#5 Does your business have an expert consultant they can call on to make recommendations on cyber coverage or risk management strategies to reduce the risk of attacks - or to help manage the crisis after an attack? Enlisting the help of a cyber-liability expert and mapping out a plan can help mitigate the potentially catastrophic losses related to a data breach event.

In Ernest Hemingway's The Sun Also Rises, a character is asked how he went bankrupt. "Two ways," he says. "Gradually, then suddenly."

In my experience covering innovation for nearly three decades, that's how disruption has come to a host of industries: IT, newspapers, books, retail, music, etc. What I think of as the Hemingway model for disruption -- gradually, then suddenly -- is thus how I expect transformation to come to the four main areas that have yet to see huge changes driven by IT: healthcare, higher education, government and our favorite, insurance.

If history is any guide -- and it usually is -- many insurance executives will miss the warning signs and be caught unawares, just as executives in other industries have been. In 1997, my frequent co-author, Chunka Mui, and I sat in the office of the CEO of Sears and tried to convince him that the gradual change he was then seeing in retail would become sudden once the Internet matured. We argued that he should search for a new business model, using Sears' brand name and experience with tools and appliances to become the nation's handyman. He demurred, convinced that the "sudden" part of disruption wasn't coming. That same year, we sat down with the president of a very large distributor of music and told him that "sudden" was just around the corner because of MP3 players. We argued that he should sell the business and run for the hills. He, too, was unconvinced.

Even though insurance executives now have two decades of disruption in other industries as evidence, I'm seeing many focus on the "gradual" part of Hemingway's formulation and hoping that "suddenly" either isn't coming or doesn't hit until after they've safely eased into retirement.

I came across an article the other day by an old friend and colleague of Chunka's and mine that takes a different tack and offers some concrete ways to monitor for disruption -- or, rather, for what the article, How Old Industries Become Young Again, calls the "dematuring" of an industry. The author, John Sviokla, was a partner of ours at Diamond Management & Technology Consultants, now part of PwC. Before that, he was a professor at Harvard Business School, where he co-wrote a thoroughly prescient piece in Harvard Business Review in the early 1990s (years before most of us even discovered the Internet) that described the contours of what the authors then referred to as the "marketspace" and that we now think of as e-commerce.

In describing how to watch for coming problems and opportunities, Sviokla writes, "What most industries experience as disruption is typically not a sudden change from one source, but the accumulated impact of a range of interacting factors. If you want to be prepared for disruption, it's critical to understand the more gradual, prevalent and multifaceted dynamic that underlies it: a phenomenon called dematurity....You can think of dematurity as a crescendo of mini-disruptions that add up to great effect."

He says to look for changes in five areas, to understand how rapidly the industry will change and to see how to prepare:

• New customer habits
• New production technologies
• New lateral competitors
• New regulations
• New means of distribution

Because Sviokla only touches on insurance, I'll channel my inner John and offer some thoughts on the five areas, three of which are clearly dematuring the industry and a fourth of which seems to be well on its way.

New customer habits

This is clearly an area of change. The discussion among insurers mostly concerns Millennials, and that's fair enough as far as it goes, but the issue is much broader. All sorts of customers have come to expect more transparent pricing and convenient service because of the examples that Amazon and other e-commerce giants have set. Mobile technology drives even more changes in customer behavior, increasing demands for immediacy, among other things. Other technologies, such as health-related wearables, are catching on, with consequences that are unclear at this point but that could be profound. Demographics are changing, and not just because of Millennials. And so on.

New Production Technologies

Another area of clear change. The inputs that can go into the writing of an insurance policy are exploding -- cameras, sensors, previously unscrutinized notes from salesmen, from customer service reps, from social media, you name it. Silos within companies mean that insurers can't yet take full advantage of the new inputs, but change is coming. Agile production technologies will soon mean that it won't take six to eight months to get a new product to market. It will take six to eight weeks or even six to eight days.

New Lateral Competitors

There has been lots of speculation. Is Google coming? Facebook? Amazon? Will there be an Uber of insurance? Some other start-up that revolutionizes the industry? The answers are still a bit unclear, but it seems to me that new competitors are emerging and that the pace will pick up. You can already see effects in reinsurance, where some risks can be so fully quantified that they are being covered in the capital markets rather than through traditional insurers.

New Regulations

Obamacare has certainly shaken up parts of the health insurance market, but, in general, regulations will slow the dematuring of insurance, not accelerate it.

New Means of Distribution

This will take a while to sort out, but at least parts of the sales process will go direct -- the agent may still advise on the content of the policy but won't handle as many logistical details. The increasing reliance on mobile devices will accelerate the move to direct interactions with insurers.

However, you see Sviokla's checklist of five areas to watch, I'd encourage you to read his article. A lot of the discussion about the potential for disruption can get emotional -- The British are coming! The British are coming! No, they're not! No, they're not! -- but John, as usual, has managed to take a dispassionate, scholarly look at the issues.

In Ernest Hemingway's The Sun Also Rises, a character is asked how he went bankrupt. "Two ways," he says. "Gradually, then suddenly."

In my experience covering innovation for nearly three decades, that's how disruption has come to a host of industries: IT, newspapers, books, retail, music, etc. What I think of as the Hemingway model for disruption -- gradually, then suddenly -- is thus how I expect transformation to come to the four main areas that have yet to see huge changes driven by IT: healthcare, higher education, government and our favorite, insurance.

If history is any guide -- and it usually is -- many insurance executives will miss the warning signs and be caught unawares, just as executives in other industries have been. In 1997, my frequent co-author, Chunka Mui, and I sat in the office of the CEO of Sears and tried to convince him that the gradual change he was then seeing in retail would become sudden once the Internet matured. We argued that he should search for a new business model, using Sears' brand name and experience with tools and appliances to become the nation's handyman. He demurred, convinced that the "sudden" part of disruption wasn't coming. That same year, we sat down with the president of a very large distributor of music and told him that "sudden" was just around the corner because of MP3 players. We argued that he should sell the business and run for the hills. He, too, was unconvinced.

Even though insurance executives now have two decades of disruption in other industries as evidence, I'm seeing many focus on the "gradual" part of Hemingway's formulation and hoping that "suddenly" either isn't coming or doesn't hit until after they've safely eased into retirement.

I came across an article the other day by an old friend and colleague of Chunka's and mine that takes a different tack and offers some concrete ways to monitor for disruption -- or, rather, for what the article, How Old Industries Become Young Again, calls the "dematuring" of an industry. The author, John Sviokla, was a partner of ours at Diamond Management & Technology Consultants, now part of PwC. Before that, he was a professor at Harvard Business School, where he co-wrote a thoroughly prescient piece in Harvard Business Review in the early 1990s (years before most of us even discovered the Internet) that described the contours of what the authors then referred to as the "marketspace" and that we now think of as e-commerce.

In describing how to watch for coming problems and opportunities, Sviokla writes, "What most industries experience as disruption is typically not a sudden change from one source, but the accumulated impact of a range of interacting factors. If you want to be prepared for disruption, it's critical to understand the more gradual, prevalent and multifaceted dynamic that underlies it: a phenomenon called dematurity....You can think of dematurity as a crescendo of mini-disruptions that add up to great effect."

He says to look for changes in five areas, to understand how rapidly the industry will change and to see how to prepare:

• New customer habits
• New production technologies
• New lateral competitors
• New regulations
• New means of distribution

Because Sviokla only touches on insurance, I'll channel my inner John and offer some thoughts on the five areas, three of which are clearly dematuring the industry and a fourth of which seems to be well on its way.

New customer habits

This is clearly an area of change. The discussion among insurers mostly concerns Millennials, and that's fair enough as far as it goes, but the issue is much broader. All sorts of customers have come to expect more transparent pricing and convenient service because of the examples that Amazon and other e-commerce giants have set. Mobile technology drives even more changes in customer behavior, increasing demands for immediacy, among other things. Other technologies, such as health-related wearables, are catching on, with consequences that are unclear at this point but that could be profound. Demographics are changing, and not just because of Millennials. And so on.

New Production Technologies

Another area of clear change. The inputs that can go into the writing of an insurance policy are exploding -- cameras, sensors, previously unscrutinized notes from salesmen, from customer service reps, from social media, you name it. Silos within companies mean that insurers can't yet take full advantage of the new inputs, but change is coming. Agile production technologies will soon mean that it won't take six to eight months to get a new product to market. It will take six to eight weeks or even six to eight days.

New Lateral Competitors

There has been lots of speculation. Is Google coming? Facebook? Amazon? Will there be an Uber of insurance? Some other start-up that revolutionizes the industry? The answers are still a bit unclear, but it seems to me that new competitors are emerging and that the pace will pick up. You can already see effects in reinsurance, where some risks can be so fully quantified that they are being covered in the capital markets rather than through traditional insurers.

New Regulations

Obamacare has certainly shaken up parts of the health insurance market, but, in general, regulations will slow the dematuring of insurance, not accelerate it.

New Means of Distribution

This will take a while to sort out, but at least parts of the sales process will go direct -- the agent may still advise on the content of the policy but won't handle as many logistical details. The increasing reliance on mobile devices will accelerate the move to direct interactions with insurers.

However, you see Sviokla's checklist of five areas to watch, I'd encourage you to read his article. A lot of the discussion about the potential for disruption can get emotional -- The British are coming! The British are coming! No, they're not! No, they're not! -- but John, as usual, has managed to take a dispassionate, scholarly look at the issues.

The Internet is now an integral part of our daily lives, and we would struggle to imagine life without it. However, to date, growth has largely been driven by access to content and by speed.

We are now moving into the new phase of growth where the everyday "things" around us will be connected to the Internet. This is the Internet of Things (IoT) - it will have a profound impact on our daily lives and change the way we interact with our environment. It will also have a big impact on how industries operate and relate with their customers. This is particularly true for insurance companies, where there is an opportunity to move from being passive and reacting to losses, to being proactive and helping prevent them.

In short, the IoT will be a game changer for insurers.

In the commercial sector, we are familiar with the benefits of connectivity in smart buildings. When we go to a hotel, door locks are controlled with smart cards, and there are links to lighting and air conditioning to save energy and improve security. Fire systems are networked to sprinklers. Indeed, I'm not sure I'd book a hotel that gave me a metal key. More significantly, most modern commercial buildings would struggle to get insurance coverage without new technology.

The IoT will bring this same level of intelligence to the home.

Standard devices such as light switches, thermostats and door locks are being networked. Smartphones allow us to monitor and control air conditioning, as well as access and monitor security and lighting, with alerts if there is a problem. The first wave of connected appliances is now starting to roll out. Just as with commercial buildings, "interoperability" will become standard in homes because it makes them safer, more energy-efficient and easier to manage.

The smart home is already going mainstream. Big-box stores like Lowe's, Home Depot, Best Buy, Target and Sears have started to offer their own DIY smart home solutions. They are competing with the major service providers such as AT&T, Comcast, TWC and others that have developed their own consumer offerings. The entry of Apple, Google and Microsoft into the space with different consumer strategies is a clear sign that the market has arrived.

Many of these new entrants have recognized that data will be key to their future success in a connected world where devices will generate as much as we can handle and the ability to refine and exploit it will decide the winners and losers in many industries. This data is going to be particularly important to insurers, which have traditionally based their pricing on risk assessment. If a competitor has better data on which to base judgments, it will have the edge.

The IoT and access to data will reshape industry boundaries and create opportunities.

The IoT will allow insurance companies to move from the traditional passive role of underwriting risk to take a more active position by supplying smart home products and services. Other industries have already adopted this type of strategy. For example, the major cable companies and telcos now offer smart home products over the top of their broadband. These provide new revenue streams, leverage their core competencies, increase customer loyalty and provide a platform for growing new value-added services. Insurance companies could take a page out of the service providers' playbook and offer their own solutions to realize similar benefits.

The IoT and smart home can give insurers a more direct relationship with the consumer through daily interaction using touch points in apps and messaging. Insurers could also become more competitive by adopting pricing strategies that include direct sourcing and bundling with policies. Contrast this to consumers' traditional negative experience of bill paying on an annual or semi-annual basis for something they most likely didn't use.

Consumers would see insurance companies as a logical source for products and services that protect people and their property. Smart home systems can be DIY, offering protection for security, fire and flood. Moreover, they bring new levels of protection with innovation. For example, low-cost leak detectors and temperature sensors can automatically shut off the water supply when triggered.

The IoT is a real growth opportunity, and any business can scale as new connected devices come along. This can be done by offering devices and sensors that improve in-home healthcare and appliances that can be remotely monitored to reduce warranty support costs. These products and value-added services can drive new revenue streams, improve customer retention and reinvent the way consumers perceive their insurance provider. More importantly, the IoT secures access to the data from the things in the home that would help insurance companies manage risk.

If there is a nervousness to step outside the traditional industry boundaries, the alternative is to forge new partnerships with the companies that are deploying smart home solutions.

These companies have access to the data that will help insurance companies manage risk. For example, Lowe's has partnered with a number of leading insurance companies to trade data from the Iris smart home system. Clearly, data privacy is a major issue, so customers have to approve sharing. This can be achieved by offering a benefit on the policy, usually in the form of a discount.

Clearly, the IoT market is moving extremely fast, and it will challenge conventional wisdom. Just five years ago, the only connected device in home improvement retail was a smart door lock, and now there are hundreds - even dog bowls and toothbrush are becoming connected. If the IoT grows as predicted, every powered device will be IP addressable in the next 10 years. Ignoring this market is not a smart move.

While competing in the smart home space by offering consumers new products and services may seem daunting, the IoT will disrupt traditional industry boundaries, and attack is sometimes the best form of defense. Moreover, actively entering the market has the biggest upside. At a minimum, there is a need to find ways to partner to protect your position and get access to data to remain competitive. The leading insurance providers will be those that embrace the IoT and its impact.

Property and casualty insurers are as rich as Croesus, awash in capital and having a tough time figuring out where to put it. They can certainly invest (and largely do) in the equity and bond markets, but the paltry returns give deep pause for additional consideration. So a few insurers are stashing at least some of their cash in a venture capital fund.

As cash piles grow bigger, property/casualty insurers that have had limited success in launching new technologies to support their businesses are now choosing to buy rather than build. Over the last two years, roughly a half-dozen property/casualty insurers have formed venture capital funds, among them AXA, XL Catlin and American Family. Not only do these funds present the possibility of big winnings by betting on an investment in a unique start-up venture, these same ventures may be of use to the companies in their underwriting, claims management and sales and marketing strategies.

The industry has long been branded a technology foot-dragger, the perpetual latecomer to the digital party. Potential disintermediation by established technology players Google, Amazon and Apple is the 800-pound gorilla sitting in the boardroom. Few insurers were prepared, for instance, when Google launched Google Compare to sell automobile insurance. Even fewer imagined Zenefits, a start-up on track to displace insurance brokers in the provision of employee benefits. The company in May was valued at a staggering $4.5 billion.

Why didn't a seasoned insurance company or brokerage invent Zenefits, which allows small and mid-size businesses to manage employee benefits in a very simple way? Chalk it up to a pronounced lack of leadership and intellectual capital-visionaries and software architects with real technology chops.

Insurers simply have not grown their workforces to spawn the technology leadership of a Steve Jobs, much less the programming savvy of a Steve Wozniak (Apple's founders, of course). While many carriers are just now beginning to create digital ecosystems, they'd like to goose the process. That's where the venture capitalists come into the picture.

"We've been investing a lot of time and money in process improvements and digital technologies, but the truth is we weren't doing particularly well in getting access to new and innovative ideas in the insurance and technology spaces," conceded Manish Agarwal, general partner of AXA Strategic Ventures, a venture capital fund launched by AXA in February 2015. "We weren't seeing the ideas that could be game-changers."

Other carrier venture capitalists were set up for the same reasons. "Not all the innovation happens inside our company or inside our industry," said Dan Reed, managing director of American Family Ventures, the venture capital fund formed by American Family Insurance in 2013. "A lot of brilliant stuff happens outside the marketplace."

Just the stuff these carriers are looking for, too. Their venture capitalists are investing millions of dollars to buy small stakes in a stellar array of extremely innovative businesses, most of them creators of novel digital technologies that may be useful to the funds' parent companies in future.

"We're looking to fund or create ventures that can significantly improve the cost or the effectiveness of insurance," said Tom Hutton, managing partner at XL Innovate, the venture capital initiative launched by XL Catlin in April 2015. "These include new models for providing, distributing and capitalizing insurance."

As the old refrain goes, "If you can't build it, buy it." Besides, why should the venture capitalists at big firms like Andreessen Horowitz have all the fun and make all the money?

You Gotta Put It Somewhere

Property/casualty insurers may well be smart in their decisions to launch venture capital funds to invest in myriad tech and other startups. The challenge for the industry in recent years has been where best to invest its massive cash hoard, built up from years of low losses, particularly on the property-catastrophe side of the house.

Meanwhile, the pile is growing, according to a study by BlackRock last month (October 2015). With all this excess money lying around, the asset management firm believes that insurers are experiencing trouble determining where to invest it. That's causing more than a few insurers to simply sit on the cash, sticking it under the mattress like Grandma used to do.

Certainly, every insurer would like to buy more high-quality bonds, but there aren't enough to go around. Consequently, 40 of the insurer respondents to BlackRock's study plan to use derivatives to gain exposures to assets they'd like to buy but can't. Others are turning to alternative assets with longer-term yields matching their liabilities, such as infrastructure debt.

Then there are those placing their bets on a tech start-up becoming the next Uber or Zenefits. Not that this is unique. "Insurers have always made investments in areas that were either directly or tangentially aligned with their business models," said Robert Hartwig, president and chief economist at the Insurance Information Institute.

In the 19th century, insurers were heavy investors in railroads, Hartwig noted. In the post-war 20th century, they were big investors in real estate, "looking to both diversify their investments and generate an additional revenue stream off a physical asset-in this case property and buildings," he said.

Hartwig is not surprised that insurers have formed venture capital funds to invest in technology and other start-up businesses. "The industry has record capital to invest on a global scale and is suffering like any institutional investor from low yields on traditional investments," he explained. "It makes sense to look outside the traditional range of investments so long as they are not risking policyholder money."

Because the sums are small relative to the insurers' overall investment portfolios, Hartwig is not worried. "Some of them will produce strong returns, but not all of them at the same time," he said. "Besides, these investments in technologies like next-generation [automobile] collision avoidance systems can be a hedge against current business risks." He's referring to the reduced automobile premium volume insurers have experienced as cars become increasingly safer and accidents fewer and less catastrophically severe.

Each of the venture capital funds has capital provided solely from its parent company. The money is earmarked to invest in start-ups or slightly older businesses with a unique product or service twist on underwriting, selling, marketing and distributing insurance, among other traditional insurance functions.

AXA Strategic Ventures, for instance, has two investment strategies: early-stage to seed money to a new company and later-stage to do the same for more established entities. AXA has allocated 200 million euros (about $290 million) to the venture capital fund for both purposes. The fund is set up in a separate general partner/limited partner structure, its returns not reflected on the parent company’s balance sheet.

Over the past year and a half, AXA Strategic Ventures has made seven investments in the U.S. (three of them made public) and 10 in Europe. Among them is PolicyGenius, creator of an online platform for consumers to review insurance coverages and research and compare quotes for term life, long-term disability, renters and even pet insurance.

"The reason we made the investment had less to do with the idea of buying something online, which is not really new or novel," Agarwal said. "What we especially liked was the great front end they had created to engage customers. It really stands out." (See for yourself at www.policygenius.com/.)

Another investment was in Limelight Health, designer and developer of a mobile, cloud-based technology that helps smaller companies simplify the process for providing health insurance and other benefits information to their employees. "Today this process typically involves a lot of work with an agent, with multiple paper-based quotes and a lot of faxing things back and forth," Agarwal explained.

He said that the technology enables brokers and carrier representatives and underwriters to immediately respond to customer quote requests, compare this information and model the different benefits provisions and quotes against real-time market data (a concept that sounds similar to the Zenefits model).

American Family Ventures has invested in approximately 30 companies so far, according to Reed. They fall into three categories: companies in the data analytics space; those that make technology tools considered of use in the insurance value chain; and those that provide Internet of Things (IoT)-type connectivity, as this relates to the insurance products and services of its parent company. With regard to the latter, Reed provided the examples of autonomous vehicle technologies and the smart meters turning on our air conditioners, lamps and appliances. "These are new digital signs of risk," he explained.

Among the investments (or "partnerships," as Reed called them) is ImageVision, a provider of visual search and analytics tools leveraging machine-learning technology, and SNUPI Technologies, a sensor and services company focused on home safety and security. "Its customers use a wireless device that alerts them when a hazardous event occurs in their home," Reed said.

XL Innovate is investing in businesses identified as offering new underwriting opportunities, such as New Energy Risk, a provider of data analytics and performance warranty products. The eight-month-old venture capital fund is in the midst of acquiring a cyber analytics company, whose name Hutton was not at liberty to divulge. "We're also in early talks about an investment in a property data company," he said.

Several life insurers have recently formed venture capital funds, among them Massachusetts Mutual Life Insurance. Many of the same reasons apply. "A lot of amazing innovation occurs outside the industry in the entrepreneurial community, and when there is equity ownership in these companies this tends to spur innovations faster," said Eric Emmons, managing director of MassMutual Ventures. "By partnering with these companies, it keeps senior management aware of what is coming down the road."

Small Steps, Big Gains—Maybe

Other insurance companies, like the Hartford and Transamerica, also have venture capital units but were unable to provide comments by press time. In all cases, the parent insurers are not dabbling-there's plenty of cash going into these activities, albeit nothing along the lines of Sequoia Capital, the Silicon Valley giant that has invested in start-ups that command more than $1.4 trillion in combined stock value today. (Source: "Inside Sequoia Capital: Silicon Valley's Innovation Factory," Forbes.com, March 26, 2014)

Still, the nearly $300 million invested in AXA Strategic Ventures and the reported $50 million invested in American Family Ventures isn't chump change. Neither are the sizes of their investments, with American Family Ventures typically investing between $100,000 and $2 million in early-stage companies. "We generally receive 5% to 10% [of equity] in return," Reed said.

Down the line, maybe one of these funds will become the equivalent of the next Uber, not to mention Google Compare or Zenefits. Not only would this be great for the insurers' investment income, but it may also help differentiate their value propositions, products, services and operations.

Besides, it would be a heck of a lot of fun. Who says insurance companies are stodgy? Not the folks running their venture capital units.

This article was originally published by Carrier Management.

Group and voluntary benefits providers vary in a hundred different ways. If you are a supplementary benefits provider that only provides one product to the group market, your data integration issues with multiple brokers and employers may still be complex. The more products you sell into the group and voluntary space, the more difficult your data integration will be.

Let's say that your organization carries group life, voluntary supplemental life, dependent life, LTC and AD&D products. Without modernization, it is likely that your organization will have several hurdles to surmount. The first is to develop one consolidated repository from all of the data that is likely held on multiple systems. The second is to make that set of data available to the many different people and institutions that have a vested interest in access. On the flip side, insurers need to be able to receive data efficiently, as well. Carriers must be able to import data received from various benefit partners into their source systems through a single point of entry. Without this, entry or import issues could lead to benefit integrity issues, where data is are correct on one platform but incorrect on another. These types of basic data errors will quickly erode relationships with employees and benefit partners.

One way to help alleviate potential data issues is for insurers to focus on providing simple products with simple rate structures. Focus on guaranteed issue limits. Anything that has to be approved or underwritten after payroll deductions begin will cause deduction and billing issues. An exception could be made if an insurer is able to provide automated underwriting decisions at the point of sale.

The data requirements for employers and enrollment partners vary widely (in part because no standards exist), which places more of the data integration responsibility on individual carriers to interact with individual employers or benefits companies. So, the easier it is for your IT teams or vendor partners to make those connections, the better off you are likely to be when it comes time for an employer to renew their contracts. It makes sense to pursue a course that keeps your systems agile.

What about a fresh start?

When it makes sense, we regularly recommend that, instead of attempting to migrate current and past business to a new platform, insurers start fresh with a new system dedicated solely to the one program. If an insurer is moving into a new market or launching new products, why not learn from past system issues and product issues and embrace a clean slate, eliminating the need to translate and carry cumbersome legacy programming into a new environment? Start with a brand new set of products and filings, a brand new marketing plan...perhaps even a brand new name to signify the difference.

Within group and voluntary benefits, this approach makes its case when looking at just a few of the benefits, including simplified testing, fewer resources required to launch, less expense, less risk to the old system and old data and dramatically increased flexibility in data usage, capability development and integration points. Managers who touch the system are far more likely to trust the data they see, reducing a "checks and balances" approach to billing, reconciling, correspondence and a dozen other areas where the need for clean data and quick visualization are essential.

We'll discuss more about data strategies in the coming months, including ways you can build effective technology bridges and keep a high level of data integrity.