In our first article on this subject, we gave an overview of baseline testing, compared it with a post-offer physical exam, updated recent legal decisions under the Americans With Disabilities Act (ADA) that allow baseline testing and concluded with a legal case highlighting the benefits of a baseline program. While all stakeholders won in the case we cited, we all need to remember that the focus in workers' comp needs to be the injured worker.

That isn't always the case, as recent court rulings have shown. Last week, a Pottawatomie County judge in Oklahoma issued a ruling that may erode the exclusive remedy provision for workers' compensation (Duck vs Morgan Tire). This ruling comes after Miami-Dade District Judge Jorge Cueto ruled in August that the exclusive-remedy provision of the state's comp statute was unconstitutional. Both cases make a strong case that the rights of injured workers have been deteriorating and that workers no longer have enough protection. (The cases are under appeal.)

The workers' compensation system is overburdened with red tape: In some states, there are onerous mandates for doctors, delays in legal proceedings, disputes over acceptance of cases...and on and on. An injured person is caught in the middle. Frequently, necessary care is delayed -- which often results in even greater damage and costs. Carriers and employers are frustrated, too. With increasing federal mandates complicating this already tangled system, they feel they are being asked to accept claims that "aren't ours." They worry about liability and uncontrolled costs, even while knowing that delaying appropriate care can lead to prolonged disability, inefficient medical care and higher costs.

So the question remains: How do we do the best for the injured worker while protecting ourselves?

This article focuses on the heart of the matter: Better diagnosis leads to better patient care. Peel away the layers of comp laws and reforms, and this is what the industry should be about.

Baseline testing helps identify a change in condition, so the person can get the best care possible for work-related injuries. Does this actually happen? Does baseline testing work with soft-tissue injuries, specifically those that appear to be based on subjective complaints, with typically little or no objective findings? (Soft-tissue injuries, although often unsupported by clear and convincing evidence, are the leading drivers of cost in the system.)

Here is a case that shows that it's possible to use baseline testing to avoid over-treating or under-treating and to do the right thing:

Mr. Jones works for the same employer as was mentioned in Part 1 of this article. He is 34 years old and is employed as truck driver. He underwent a baseline test in June 2014 and was injured at work in September 2014. He was driving his truck when he hit a bump. He was wearing a seat belt but hit his head. He continued to work. He later felt diffuse neck pain and reported the incident.

The following day, he saw a doctor, who couldn't issue a diagnosis. Mr. Jones had a history of chronic neck pain, so the doctor couldn't tell if anything was "new." He thought the pain would go away, but it persisted.

Because Mr. Jones had undergone a baseline evaluation, he was sent for the post-incident, electrodiagnostic functional assessment (EFA). The comparison of the two evaluations revealed a change in condition. The testing indicated he could have an industrially related left cervical radiculopathy. Treatment was redirected to this area, and he received the appropriate care on an expedited basis.

This is a person who had diffuse pathology and a substantial pre-existing condition. As a result, his workman's comp carrier delayed care, and he pursued treatment by his chiropractor on a non-industrial basis. He was off work, not receiving benefits, while waiting for the causation of his injury to be determined. He potentially could have gotten lost in the system with unresolved treatment and escalating bills while without benefits and out of work.

The employer truly wants the best care for its injured workers and, as soon as the comparison demonstrated a change, ensured that he received all the appropriate care and benefits for his work-related injury.

We truly believe that everyone in this workers' compensation system wants to do the "right thing" but that is hard to do without objective evidence. Accurate diagnoses lead to better patient care, which is the very basis of workers' compensation. So is baseline testing really worth the effort? You bet it is!

As the first month of the new year unfolds, some of you may be facing the challenge of starting a new job, or at least a new or expanded role. Psychologically, many people seem to prefer starting new life challenges like this at major milestones, like the turning of the year. Whether that is the case for you, or you're in the equally challenging position of hiring a new starter, you know how vital it is to start well and make a positive impression.

Anxiety about this type of change has, of course, fueled a whole industry of self-help books and management advice. Perhaps the most famous text on the subject is "The First 90 Days," by Michael Watkins. Although his approach to the first three months can feel like a relentless standard to meet, the structure does discipline you to: set goals; network with stakeholders effectively; listen to your team; and determine actions to be taken (rather than getting trapped in analysis-paralysis on strategy). So, I would recommend it as the classic text on the subject.

However, both from my own experience and from seeing too many new leaders struggle and fail to achieve what is expected, I believe more support is needed to ensure senior hires succeed. This is crucial not just for them, but also for the organization and individuals who hired them. With the high costs of recruitment and potential doubling of those costs if a replacement needs to be found, it is more important than ever to invest in helping your appointment succeed.

A recent article in Coaching at Work magazine, "Gainful Employment," by Pacifica Goddard, caught my eye as it looked into this very challenge. She quotes Lynne Hardman, CEO of Working Transitions, who has found that the recent recession and cost of recruitment have caused companies to reduce the number of on-boarding programs, even though 40% of new hires don't work and even though research shows that programs significantly reduce the likelihood that new hires will leave before the cost of their recruitment is recouped.

Given that the costs of hiring a senior customer insight leader can be anything from 50%-200% of annual salary, more businesses are seriously looking at on-boarding strategies. One growing solution, investigated in the Coaching at Work article, is on-boarding coaching, which allows people in senior roles to get more comfortable with not having all the answers. It provides a safe environment for the expression of concerns or issues that would otherwise feel too vulnerable. Such new hires also mention the benefit of having time set aside in their busy schedules to look at the bigger picture (something I've heard before from my clients).

Top tips from the "Gainful Employment" article include:

1. Arrange to first meet new hires prior to start date or induction;
2. Plan to achieve goals of individual and the organization;
3. Identify "quick wins" and support early actions to generate support and feedback;
4. Provide feedback -- to client, line manager and stakeholders, identifying next stages, goals the necessary continuing dialogue.

The growing evidence that such interventions are helpful and cost-effective does not surprise me. What is of interest is that a technique that had previously been reserved for the more senior directors is becoming more widely applied to empower strong early performance across key senior and middle-management roles. So, this is of direct relevance for new customer insight leader hires.

While speaking at industry events throughout 2014, I became aware of the scale of the talent wars happening in the customer insight recruitment market. Many companies are struggling to recruit even the analysts they need, let alone their customer insight leader, and are finding the need to pay more and take gambles on imperfect candidates to achieve their targets. Although this is a problem for the industry, it should also be an opportunity for coaches with a background in customer insight.

It will be interesting to see how the fusion of niche technical expertise and coaching practice develops to meet the needs of all those companies who need to ensure their new customer insight leader has a productive first 90 days.

As is often said, beauty is in the eye of the beholder. To me, that means your personal context colors your perspective; similar people can look at similar circumstances and reach dissimilar conclusions. In workers' comp, that axiom applies to "success."

Various stakeholders define success differently. To an injured worker, success could be regaining health to his or her pre-injury state while building a retirement nest egg. To a treating physician, success could be restoring health to the patient at a fair price. To an employer, success could be the quick and safe return to work of a colleague that does not raise its workers' comp premiums. To a carrier or third-party administrator (TPA), success could be the proper management of a claim that yields a satisfied customer while maximizing profit. To an attorney representing the injured worker, success could be maximizing the financial payoff for the client and the law firm. To a vendor (pharmacy benefit manager, bill review, utilization review, transportation/translation or surveillance company), success could be providing services that provide recognized value to a customer.

In some cases, the definition of success can be both positive (appropriate services for a fair price) and negative (maintaining the revenue stream through means that might be inconsistent with "appropriate services" or "fair prices"). It is the business conundrum in workers' comp - how to balance the need to provide appropriate services with the need to stay financially viable in a system that sometimes rewards the latter more than the former.

Let's simplify what true success is for workers' comp: restoring the health of the injured worker and settling the claim efficiently.

Realistically, the worker might not be restored fully to pre-injury health, but regaining as much as possible is certainly the goal. When it comes to managing chronic pain that will likely never completely go away, good treatment can be inadvertently sabotaged by issues of tolerance, dependence and addiction. The prescription drug abuse epidemic illustrates that the outcome of overtreatment and inappropriate treatment can often create more problems than it resolves.

For those who have received inappropriate treatment with sub-optimal results, success may be less about a full return to health and more about a return to some level of function. That could be something as simple as taking 500 steps a day (thewalkingsite.com offers guidelines for 10,000 steps a day). Maybe return to work is no longer viable, so success is now more about being a meaningful member of family and community. Maybe detoxification is appropriate, but abstinence is not attainable, so finding a lower number and dosage of appropriate drugs is success. For those stuck in a cycle of victimization, low self-esteem and poor socioeconomic circumstances, perhaps success is more about acquiring skills to properly cope with pain and change (and life in general).

In other words, maybe success is a lot simpler than we think - if the injured worker wins by regaining health and function, then everyone else wins too.

Diane Meyers, director of corporate insurance for YRC Worldwide, manages the insurance and associated risks of one of the most hazard-prone industries in the world - trucking. YRC is the largest long-haul trucking company in U.S., operating in all 50 states and Canada. It has 14,500 tractors and 46,500 trailers and ships 70% of all transported cargo throughout the U.S. each year. YRC's origins trace back to 1924 to the Akron, Ohio-based company Yellow Cab Transit before the independent trucking companies of Yellow, Roadway, Reimer and others were combined in 2009 into the YRC banner.

I asked Diane about her biggest challenges in managing the risks associated with the YRC fleet, including 32,000-plus employees (a number that has grown in busy times to more than 50,000) and 400 physical locations. She said her top three hot buttons are: collateral, collateral and collateral.

For anyone familiar with high-deductible or self-insured workers' comp programs, insurers and state governments rely on a company's posted collateral (aka security deposit) as the financial backstop should the company go bankrupt or default in its obligations. Companies with high-risk jobs can experience workers' comp costs that can easily be 400% to 500% greater than white collar jobs. Posted collateral needs to cover the costs expected to be associated with the life of each claim and can be a huge drain for any company, including YRC.

Diane, who reports to the treasurer, says YRC negotiates collateral requirements with one excess workers' comp insurer for its high-deductible program in 24 states. Collateral is typically posted using LOCs (letters of credit) or surety bonds. YRC's self-insured program in the remaining 26 states means meeting the collateral demands of their 26 separate governing entities.

Meeting with the YRC's carrier's actuary along with her own actuary every three months, Diane also has to deal with each state at least annually. "Working with multiple sets of actuaries is a whole other challenge, since I have to educate them on the realities of our own workers' comp program and its achievements, like return-to-work," she says. "Besides that, in working with actuaries, I have to speak their language and understand how they work their crystal ball."

Diane added: "These are monies that are tied up for decades to come that cannot otherwise be used for our company’s operations. I have to find ways to save the company from the ever-changing collateralization demands through ongoing, complex negotiations with insurers and regulators. Safety and loss control programs have to demonstrate traction and real savings to our workers' comp and liability exposures." Diane noted that safety is so important that each YRC operating division has its own safety department.

As with most large companies, YRC is self-insured for most of its liability risks. To assist Diane with vehicle and general liability claims, YRC uses its own, as well as outsourced, legal counsel to manage risks up to its retention level. There are also a myriad of state and federal rules and regulations regarding long-haul trucking that require strict adherence and attention to changes.

When asked about her unique challenges at YRC, Diane said, "I have to understand the legal demands and expectations of all 50 states, Canada, and D.C."

She also faces the complexity of working with a corporation that has grown through acquisitions of older companies. To find key claim-related data, she says, "I have had to go through various insurance policies and records of the companies we acquired going back as far as the '60s!"

With the ever-changing demands for long-haul transportation by various industries, YRC experiences significant fluctuations in its workforce. There have been times when the workforce has expanded more than 50%, and, during recessions, there have been significant reductions. A swing either way can create huge risk management challenges, especially when there are continuing workers' comp claims to deal with. This is made even tougher because most of YRC's employees are in the Teamsters union, and some issues could require collective bargaining or at least close communication and cooperation between labor and management.

In the world of mechanical engineering, stress testing involves subjecting a mechanism to extreme conditions, considerably beyond the intended operating environment, to determine the robustness of the device and the circumstances under which it might fail. Financial stress testing is much the same.

What is a Financial Stress Test?

Generally speaking, a stress test is an assessment of the financial impact of changing a specific variable, without regard to the likelihood of this change.

Often, all other factors remain constant (even if this is not especially realistic). Sometimes the point of the test is to determine failure modes: A reverse stress test determines the magnitude of change necessary to induce financial ruin.

The term scenario test is often used to describe an assessment of the financial impact of a specific event (again, without regard to that event's likelihood), in which the testers seek to reflect realistically the impact of this event on all aspects of the firm.

So, a scenario test involves a more holistic look at possible circumstances rather than altering a specific variable in isolation.

Unlike probabilistic simulation modeling, stress testing:

• Is concrete and intuitive
• Does not require selection of probability levels
• Does not require understanding of overall dependencies among linked risks
• Avoids "black-box syndrome"

Stress tests can be used as a primary risk measure: assessing the level of a specific risk, measuring aggregate risk level, setting risk tolerances or evaluating the benefit of risk mitigation. Tests can also be used to verify the calibration of more complex risk models.

Examples of Stress Tests

Stress tests and scenario tests have a long history and have been broadly applied. Deterministic financial projections readily lend themselves to stress testing.

For example, Willis Re's eNVISION financial forecasting model allows users to easily change the value of a single parameter and see how that change affects key metrics.

Click image to see it at full size.

An example of scenario testing is Standard & Poor's use of past market stress events, pegging them to a rating level. In other words, a company with a BB rating should be able to get through a "BB event" without defaulting.

A blend of stress and scenario testing can be seen in the A.M. Best approach. Since 2011, the rating agency has asked insurers to estimate the impact of the largest potential threats to the firm arising from six different types of risk: market risk, credit risk, underwriting risk, operational risk, strategic risk and liquidity risk - each using a specific "Risk / Event / Scenario" combination designed by the company.

For example, in terms of market risk one could consider a stock market scenario based on the events of 2008, or a three-percentge-point rise in interest rates such as that experienced in 1994.

The lessons of recent events have also led regulators to look to stress tests to assess how well the market could stand up to adverse events.

The Solvency II process has seen the European Insurance and Occupational Pensions Authority (EIOPA) run such a stress test in 2011, which examined resilience under three scenarios of varying severity.

Each included deterioration in market, credit and insurance risk variables. Regulators will increasingly expect insurers to evidence such stress testing as part of their overall solvency management.

While it is easy to develop scenarios that reflect prior experience, it is a much more difficult proposition to consider scenarios that factor in emerging or as yet unknown risks.

The Lloyd's emerging risk reports provide interesting examples of the extensive work that is being carried out to try and increase understanding and awareness of risk.

Natural Catastrophe Analysis

Another example of stress testing can be seen in the realm of natural catastrophe analysis. While sophisticated simulation models are quite well accepted for certain perils and regions (such as U.S. hurricane and earthquake), other catastrophe models are not so far advanced.

For example, the modeling of severe convective storm -- tornado and hail -- still faces significant shortcomings and is subject to significant model risk; for other perils, such as brushfire and sinkhole subsidence, there may be no model at all.

That's why many companies prefer to use stress tests and scenario tests to assess their catastrophe exposure, supplementing stochastic models in some cases.

Willis Re's SpatialKey geospatial platform, including stress testing apps such as eXTREME Tornado, is one example of a tool that facilitates this approach.

We understand that the International Association of Insurance Supervisors (IAIS) is considering a scenario test approach for its developing insurance capital standards for Globally Systemically Important Insures (G-SIIs) and Internationally Active Insurance Groups (IAIGs).

Calibration and Interpretation

When creating a stress test, analysts typically calibrate by ensuring that it ranks among real events of appropriate magnitude -- and, while likelihood is not necessarily considered in stress testing, the frequency of real events of comparable magnitude may guide the design of the stress test.

An understanding of this calibration provides context for the numerical results of the stress test.

When reviewing the results of a stress test or scenario test, the first question to ask is: What does this say about the firm's resiliency? As in the Standard & Poor's example, the results may indicate a level of security that is either higher or lower than desired.

Given the concrete, intuitive nature of stress tests and scenario tests, these results facilitate communication with senior managers, the board of directors and other stakeholders.

When only a single variable is test, the explanatory power of the test is clear. And when using a scenario test, the "story" of the scenario enables company leaders to think concretely about its financial effects, how the firm could respond and what might be done to prevent a loss that large in the first place.

Overall, stress tests and scenario tests deserve a prominent place in a strong enterprise risk management program: they do much to foster a healthy risk culture.

This article originally appeared on WillisWire.

I recently read another post about why people hate their jobs and what employers can do about it. The post, published in USA Today and titled "The Motley Fool: Why you hate your job," is just another attention grab. It really contains very little from a fresh perspective.

To their credit, they do cite the well-referenced Gallup survey that 52% of workers are not engaged in their work and that a further 18% describe themselves as "actively disengaged." The author goes on to drive home the point that American productivity is a victim of this epidemic: "The most strategic act that any organization can take is to better engage and inspire team members." That's the best advice in the post.

The post contained three suggestions for how the leadership of an organization can fix this problem of employee engagement. As a response, I'd like to bust three myths about engagement.

Myth No. 1: Employee engagement can be fixed by external stimuli

Do we believe we engage our workers better by allowing them to take all the time off they want or by letting them write their own job descriptions? Do we believe that people are like animals; if we train them properly, they'll roll over or wag their tails when we wave a treat in their presence?

People want to matter. "Do X, and they'll respond Y" is a myth busted by treating people as free agents. The best people aren’t better than the non-best people. The best simply appreciate our goal and like doing their job. They want to be a part as "we" achieve the goal. They aren't better than the other people; they fit better. Fit requires clear understanding of goals. Many people don't understand their own motives. When they experience disinterest in the organization's goals, they pursue their own. People who freely appreciate the organization's goal and provide a valued contribution become more valuable and experience more joy. They freely join and consequently require less energy to manage. They bring their best energy and manage their own engagement as long as the organization holds up the other end.

Myth No. 2: People are generally selfish

This myth treats engagement as a transaction where leaders feed worker selfishness in exchange for workers feeding the leaders' goals. I often hear that everyone is just working for the weekend or for a paycheck. Sure, based on the Gallup poll, seven out of 10 people are pretty much consuming more than they produce. So that must be the rule. Or is it?

People engage when they believe a goal is compelling. Many, maybe even most, people will sacrifice for what they believe to be noble causes. In the book "Delivering Happiness" by Tony Hsieh, you can learn how the company evolved to be the best customer-service organization on the planet. People who want to take part in providing WOW and giving people an exceptional customer experience make it happen. They are creative in the ways they solve for that goal. People are family there. Turnover is low, and engagement is very high. Zappos is just one example of what happens when you give people a chance to be part of something bigger than themselves.

Myth No. 3: What works for one person will work for others

There are people who have no interest in your cause. They're not motivated by your rewards. Sure, we'd like to engage them. But they must fit. If we're engaging people we like and we're growing our team, don't let the people who fail to engage slow you down. Remember the quote from Vince Lombardi, "If you aren't fired with enthusiasm, you'll be fired with enthusiasm." Zappos pursues culture at all costs. It famously pays people to leave. Find people who engage with your goals and culture, and you don't have to work on engagement.

Please, let's stop the mechanical "do this, and they'll do that" discussion about employee engagement. Create a compelling vision. Equip, energize and empower passionate people to pursue a vision they consider worth the effort, and give everyone else a chance to find their passion elsewhere. Those are the keys to creating an environment where people volunteer engagement. You can't pull it out of them. You create a place where you're engaged, and, if those reasons appeal to others, they will engage and grow, too.

This post originally appeared on Smartblog on Leadership.

The event drew little fanfare and scant attention last week, but it still rocked the healthcare world.

The headline I wrote for Forbes was an attempt to capture the full effect, but headlines are tough that way. On the one hand, you have to grab a reader quickly. On the other, headlines have to be accurate and truthful. In this day and age -- where everyone has a keyboard and a Wordpress (or LinkedIn) account -- it can be hard to separate the wheat from the chaff and too easy to discount headlines that scream "disruption." I elected to run with the popular technique of using a question as the headline:

The fact is -- this particular pricing tool is very disruptive -- and not for the reasons that are readily apparent. The first reaction by many was, so what? There are tons of consumer pricing tools already on the market. I highlighted three that are "consumer facing."

1. Health Care Blue Book
2. Fair Health
3. ClearHealthCosts

These are all great examples in their own right, of course (and there are many others), but they are all attempts to circumvent the mechanism that keeps true "in-network" provider pricing from becoming transparent. They're mostly designed with the fervent prayer that consumers will influence pricing by shopping with their feet.

But that's not the full effect of the new pricing tool -- by a long shot. One of the key pricing targets is the providers that Blue Cross Blue Shield of North Carolina (BCBSNC) negotiates with. In the course of one short week (since launch), one provider has already called BCBSNC to ask that its prices be lowered.

In. One. Week.

Full credit goes to BCBSNC for its bold vision. This cannot have been easy. For decades, in-network pricing (hotly negotiated between payers like BCBSNC and their various networks of providers) has been a closely guarded secret. Prices were considered proprietary -- and serious legal effort was expended to ensure their secrecy -- often including non-disclosure agreements, with serious penalties for breach.

That changed this month, and I posit it will have a profound impact on the healthcare system as a whole. Why? Because it's a Blue Cross Blue Shield organization (one of 37 around the country), and because the footprint for the Association of Blues is enormous. Not just in North Carolina (lives covered by BCBSNC equal about 40% of the population in North Carolina): The association either administers or provides health coverage for about 1/3 of the entire U.S. population (roughly 105 million Americans).

It will be hard for other Blue Cross Blue Shield plans to ignore this precedent-setting move by BCBSNC.

Will this be the impetus that forces payers to disclose in-network contract pricing more broadly? That's a big unknown, of course, but the pressure is enormous and growing. BCBSNC was the first, but I doubt it will be the last.

I ended the article on Forbes this way: "Some said this could never happen. Others said it never would. The fact is -- it just did. I'm betting other payers (every color stripe) will follow."

At the very least, the pressure of true, in-network contract pricing transparency is clearly evident... and mounting. The whole healthcare industry needs as much disruption as everyone can create. The surprise here was the source. Way to go, Big Blue!

The 2014 WC Benchmarking Study by Rising Medical Solutions depicts a claims industry with nowhere to hide and a lot to answer for. This very detailed and intelligent survey deserves some serious attention.

The survey is particularly revealing because it boldly juxtaposes four critical topics rather than focus on a single issue. The covered topics are:

1. Core competencies
2. Talent development and retention
3. Impact of technology and data
4. Medical performance and management

Surveying these four topics together prevents industry excuses. By contrast, any single-topic survey leaves the industry with room to equivocate and retort with presumptuous hope about the holistic system. For example, a survey on talent management might conclude that there is a woeful lack of investment in recruiting and training new adjusters, yet the editorial response might assert that efforts in work-flow technology can take up future slack. Further, a single-topic study showing a higher cost for WC medicine vs. non-occupational care might evoke an editorial response touting the latest strides in "managed care" that surely hold hope for future corrections to this problem.

Well, when a side-by-side evaluation of the four survey topics show consistent deficits in all areas among more than 400 responders I don't think there is enough fresh coffee in any PR department to conjure up a reassuring response.

High-level findings include:

- Claim providers can easily cite the critical core competencies for adjusters: return to work, medical management and compensability investigations, etc. However, many do not measure performance based on these competencies, nor support active efforts to develop these talents. Only half of responders report using positive or negative reinforcement of core competencies.

- Regarding adjuster training, 48% of responders have no or "unknown" budgets. Only 36% have formal training for new hires, most of which is 40 hours or less.

- Fewer than 40% of responders use outcome-based claim measures.

- Fewer than 30% measure medical provider performance, indicating that the network discount is all important and that the care itself an afterthought.

- The IT/data areas indicate no clear focus or vision or investment in workflow, cross-system integration or predictive modeling. (Only 25% report using predictive analytics. Being a proud skeptic of this folly, that is fine with me, but hold that thought for a future article.)

There is creative cross-referencing one can do among this survey's sections, which I believe shows responders' disregard for outcome in favor of profit. For example, one section measures the use of cost-containment applications, while a separate section asks for ranking of cost-containment applications based on how critical they are. Nurse triage is listed as having the third most critical impact on outcome yet is in 7^th place among tactics responders use. In contrast, bill review is number one in use, by 95% of responders, yet ranks as only 6^th on scale of impact on outcome.

I conclude that, in spite of bill review's low impact on outcomes, many claim-service providers deem the "percentage of savings" cash flow stream as most important. Let's not forget there is a huge IT investment in bill scanning and processing centers. So, despite pressure on other aspects of IT, there apparently is an IT budget available when it supports cash flow.

Bottom line, claim providers do little to invest in long-term improvement, while focusing on short-term savings and cash-flow streams.

My suggestion for future studies by Rising Medical is to totally split for-profit insurers and TPAs from in-house, self-administered responders. The former chases profit; the latter chases outcomes. I predict a very telling dichotomy among this split.

Bernard Marr is one of the big voices to pay attention to on the subject of big data. His recent piece "Big Data: The Predictions for 2015" is bold and thought-provoking. As a P&C actuary, I tend to look at everything through my insurance-colored glasses. So, of course, I immediately started thinking about the impact on insurance if Marr's predictions come to pass this year.

As I share my thoughts below, be aware that the section headers are taken from his article; the rest of the content are my thoughts and interpretations of the impact to the insurance industry.

The value of the big data economy will reach $125 billion

That's a really big number, Mr. Marr. I think I know how to answer my son the next time he comes to me looking for advice on a college major.

But what does this huge number mean for insurance? There's a potential time bomb here for commercial lines because this $125 billion means we're going to see new commerce (and new risks) that are not currently reflected in loss history - and therefore not reflected in rates.

Maybe premiums will go up as exposures increase with the new commerce - but that raises a new question: What's the right exposure base for aggregating and analyzing big data? Is it revenue? Data observation count? Megaflops? We don't know the answer to this yet. Unfortunately, it's not until we start seeing losses that we'll know for sure.

The Internet of Things will go mainstream

We already have some limited integration of "the Internet of Things" into our insurance world. Witness UBI (usage-based insurance), which can tie auto insurance premiums to not only miles driven, but also driving quality.

Google’s Nest thermostat keeps track of when you're home and away, whether you're heating or cooling, and communicates this information back to a data store. Could that data be used in more accurate pricing of homeowners insurance? If so, it would be like UBI for the house.

The Internet of Things can extend to healthcare and medical insurance, as well. We already have health plans offering a discount for attending the gym 12 times a month. We all have "a friend" who sometimes checks in at the gym to meet the quota and get the discount. With the proliferation of worn biometric devices (FitBit, Nike Fuel and so on), it would be trivial for the carrier to offer a UBI discount based on the quantity and quality of the workout. Of course, the insurer would need to get the policyholder's permission to use that data, but, if the discount is big enough, we'll buy it.

Machines will get better at making decisions

As I talk with carriers about predictive analytics, this concept is one of the most disruptive to underwriters and actuaries. There is a fundamental worry that the model is going to replace them.

Machines are getting better at making decisions, but within most of insurance, and certainly within commercial lines, the machines should be seen as an enabling technology that helps the underwriter to make better decisions, or the actuary to make more accurate rates. Expert systems can do well on risks that fit neatly into a standard underwriting box, but anything outside of that box is going to need some human intervention.

Textual analysis will become more widely used

A recurring theme I hear in talking to carriers is a desire to do claims analysis, fraud detection or claims triage using analysis of text in the claims adjusters' files. There are early adopters in the industry doing this, and there have emerged several consultants and vendors offering bespoke solutions. I think that 2015 could be the year that we see some standardized, off-the-shelf solutions emerge that offer predictive analytics using textual analysis.

Data visualization tools will dominate the market

This is spot-on in insurance, too. Data visualization and exploration tools are emerging quickly in the insurance space. The lines between "reporting tool" and "data analysis tool" are blurring. Companies are realizing that they can combine key performance indicators (KPIs) and metrics from multiple data streams into single dashboard views. This leads to insights that were never before possible using single-dimension, standard reporting.

There is so much data present in so many dimensions that it no longer makes sense to look at a fixed set of static exhibits when managing insurance operations. Good performance metrics don't necessarily lead to answers, but instead to better questions - and answering these new questions demands a dynamic data visualization environment.

Matt Mosher, senior vice president of rating services at A.M. Best, will be talking to this point in March at the Valen Analytics Summit and exploring how companies embracing analytics are finding ways to leverage their data-driven approach across the entire enterprise. This ultimately leads to significant benefits for these firms, both in portfolio profitability and in overall financial strength.

There will be a big scare over privacy

Here we are back in the realm of new risks again. P&C underwriters have long been aware of "cyber" risks and control these through specialized forms and policy exclusions.

With big data, however, comes new levels of risk. What happens, for example, when the insurance company knows something about the policyholder that the policyholder hasn't revealed? (As a thought experiment, imagine what Google knows of your political affiliations or marital status, even though you've probably never formally given Google this information.) If the insurance company uses that information in underwriting or pricing, does this raise privacy issues?

Companies and organizations will struggle to find data talent

If this is a huge issue for big data, in general, then it's a really, really big deal for insurance.

I can understand that college freshmen aren't necessarily dreaming of a career as a "data analyst" when they graduate. So now put "insurance data analyst" up as a career choice, and we're even lower on the list. If we're going to attract the right data talent in the coming decade, the insurance industry has to do something to make this stuff look sexy, starting right now.

Big data will provide the key to the mysteries of the universe

Now, it seems, Mr. Marr has the upper hand. For the life of me, I can't figure out how to spin prognostication about the Large Hadron Collider into an insurance angle. Well played.

Those of us in the insurance industry have long joked that this industry is one of the last to adopt new methods and technology. I feel we've continued the trend with big data and predictive analytics - at least, we certainly weren't the first to the party. However, there was a tremendous amount of movement in 2013, and again in 2014. Insurance is ready for big data. And just in time, because I agree with Mr. Marr - 2015 is going to be a big year.

The insurance industry is in the midst of a historic shift. That might sound like an overstatement, but Strategy Meets Action's research and observations from working with insurers back up this claim. For the past six years, SMA has been tracking and supporting the industry's evolving maturity - by doing research and providing services - for insurers and the entire insurance ecosystem. For the first time, SMA's research is revealing significant shifts in company modes; strategic investments; and project priorities that reflect success, maturity and a positive momentum across the industry. These shifts are resulting in a bifurcation of the industry, with a gap emerging and expected to widen between the leaders and the laggards.

Leaders and Laggards

The general state of insurers, what SMA calls the "company mode," has changed dramatically. For many years, SMA research revealed that 3% to 5% of North American insurers were just surviving " struggling to be profitable. Today, 11% of insurers define their company mode as struggling, up from 4% in 2014. When combined with insurers in “sustaining mode,” the result is that one-third of the industry is not doing well. On the other hand, two-thirds of industry participants are growing or transforming. In fact, the percent that are transforming has grown from 13% back in 2010 to 34% in 2015. This supports what SMA and others have been saying - that the companies investing in technology and innovation are separating from the pack and positioning for higher growth.

Customers and Agents

Business drivers for strategic technology investments have typically been related to growth, cost management and business optimization. Now, for the first time since SMA surveys have tracked the drivers, customer demands and expectations and agent expectations are both in the top five on the list of business drivers. This is leading to a shift in technology investments. The way this manifests in individual IT projects is that they are grouped and integrated to support the major strategic initiatives. Customer experience, enterprise analytics and new product initiatives are examples of major initiatives that often require multiple supporting IT projects.

Investments will continue in core system modernization, but, as insurers complete their modernization, the shift in type and amount of spending will accelerate to these new strategic initiatives that address customer and agent needs and enable insurers to respond to new marketplace realities and opportunities. As a result, in 2015, customer engagement and experience is the number one strategic initiative for insurers. These types of investments beyond core systems are aimed at winning in the areas where traditional industry boundaries are fading, and in the digital world at large. Many insurers have arrived at the inevitable conclusion that becoming a digital insurer is mandatory.

Innovation and Transformation

The technology investments taking place by leaders today are not just step-changes aimed at improving operational efficiencies. They are positioning the company for major business strategy changes - launching new business models, partnering with companies outside the industry and venturing into new product and service areas. To accomplish this, insurers must create agile technology platforms and harness the power of emerging technologies, tasks that require innovation. And, as it turns out, innovation is sweeping the industry. One-third of insurers now have active, formal innovation initiatives, and the number is growing daily.

2015 promises to be an exciting and eventful year for the insurance industry. Every insurer has a choice to make. Embrace innovation and aggressively transform to capture new opportunities - or just continue with business as usual and run the risk of becoming a casualty in the new competitive battle.

For more, read SMA's new research report, 2015 Strategic Initiatives: Making Sense of the Shifts.