This week’s announcement by the National Insurance Crime Bureau (NICB) that vehicle theft is down by more than 50% compared with 1991, despite an increase in population and registrations of more than 60 million cars, caused me to consider the much bigger implications of shrinking frequency in the entire category of auto claims and what it means to the $200 billion-plus U.S. auto insurance industry. In an impressive achievement, auto claims frequency has been creeping down slowly but surely since the 1986 new vehicle model year, when high-mounted brake lights became standard equipment by federal mandate. While fluctuations did occur in some years, caused by a variety of macroeconomic factors, the trend is assuredly downward. Factors include an aging driver population, reductions in miles driven because of a protracted recession and increasing gas prices, increased migration to more urban areas and the emergence of alternative transportation models. Without becoming distracted by the nuances of frequency variations between various lines of auto insurance coverage (physical damage; collision and comprehensive and liability; bodily injury and property damage), the fact is that the net overall accident frequency trend continues downward. Indeed, adjusted loss ratios for auto insurance carriers fell to an industry average 65.8 in 2013, and some carriers posted even better results. Lower auto claim frequency was clearly a factor. Add to this: the increasing introduction by almost all automakers of driver-assist and crash-avoidance technologies; the rapid penetration of telematics that enable real-time driving hazard and safety alerts; and the specter of fully autonomous (self-driving) vehicles coming faster than anyone might imagine. Further dramatic auto claim frequency reduction can be considered a certainty. The auto insurance premium pie is set to get smaller. Younger consumers, increasingly urban dwellers, are shunning vehicle ownership for improved public transportation systems, municipal-sponsored bicycle-sharing programs and vehicle and ride sharing. And, over the recent prolonged recession, those who did purchase auto insurance become comfortable with higher deductibles as a means of reducing premium costs. That behavior is not likely to change. Usage-based insurance (UBI) programs, at least so far, have attracted mainly drivers with safer records, as well as low-mileage drivers. So, UBI has further eroded auto premium. The claim and loss-cost improvements from these programs anticipated by carriers may or may not materialize in time, but that will depend on carriers learning to leverage data and create custom products much more effectively. Ironically, the auto claim was known as “the moment of truth” for auto insurers – their chance to reinforce the loyalty of policyholders by making good on their service promises at a challenging time for the customer. As the number of opportunities for carriers to provide claim service excellence diminishes, they will have to find alternative customer engagement strategies. Risk reduction and accident avoidance could just be that opportunity. Regardless, the bottom line is this: Auto insurance carriers (as well as their key trading and supply chain partners) should start today to position themselves to survive in a market that is slowly but surely shrinking and changing.

Over the years, I’ve had no shortage of people ask me how they can get my job as a senior risk leader. They get a glimmer of the possibilities from a distance and develop a strong sense that risk management just might be a pretty interesting career track. Those in manufacturing, healthcare and some other sectors insisted that any leader in their ranks, most especially a risk manager, needed to come from within their industry. They were the true believers and were typically inflexible about this minimum requirement. They believed their industries were just too specialized for a risk manager from another industry to succeed. Needless to say, I disagreed vehemently with this view and with others in the insurance industry who take these inflexible positions. Happily, in the last five years, some more progressive leaders in certain industries like healthcare are beginning to revise these positions in favor of seeing the value in having the new eyes, ears and perspectives that can only come from those experienced in industries other than their own. A good trend, indeed. My forte since 2001 and the future of the discipline, enterprise risk management, calls for a very specific move in a strategic direction that aligns with the long-term interests of enterprises. So is there a preferred best strategy to preparing for a career in risk management? The truth is that, while many of us developed the skills and experience that have been most valuable by rotating through the various insurance industry disciplines, there are now a myriad of ways you can find your path into risk management and make it a career. From finance to legal to audit and especially to operations, all these experiences pave part of the way toward success. They are a portion of what risk leaders need most to succeed in this era of a broader more diverse practice of risk management, call it ERM, SRM, IRM or just plain risk management, as I prefer. In fact, a successful risk manager is one who needs a broad exposure to most core functions common to most entities of any complexity. At the end of the day, it’s hard to go wrong in preparing for a risk career, no matter where you spend time getting knowledge about the many sources of exposure that must be “risk managed.”

The California district attorney offices in 22 counties recently filed 171 felony and 28 misdemeanor charges against 187 people for alleged auto fraud involving 40 insurance companies. While these numbers are staggering, the truth is that 49 other states could probably do the same. Insurance fraud is becoming more of a norm than an exception, particularly in the wake of a shaky economy. In fact, 24% of those polled by the Insurance Research Council said it’s acceptable to pad an insurance claim to make up for a deductible, and 18% said it’s okay to pad a claim to make up for premiums paid in the past! In auto insurance, fraud involves several little white lies, including:

1. Falsifying the garaging address
2. Underestimating annual miles driven
3. Omitting some drivers in the household
4. Overstating the extent of damages when filing claims
5. Fudging when and how an accident occurred
6. Forgetting to report changes that may affect applied discounts. According to a 2010 report by Quality Planning, premium leakage cost auto insurers $15.9 billion in 2008. False reporting of vehicle rating factors, including annual mileage and rated territory, accounted for $6.5 billion in lost premium. Driver rating factors, such as unrated operators, accounted for $8.9 billion.

Fortunately, through smartphone-based usage-based insurance (UBI), auto insurers finally have a way to deter and detect fraud, and to recapture a portion of the dollars lost to premium leakage. Here are some reasons:

1. First and foremost, usage-based insurance has a built-in deterrence factor. Those who are more prone to fraudulent activity are least likely to sign up. Therefore, the quality of your policyholder pool naturally improves as a byproduct of UBI.
2. False garaging addresses are easy to detect thanks to the GPS element of a smartphone UBI platform.
3. Annual mileage driven becomes a non-issue because the usage based insurance app periodically communicates with the vehicle’s odometer.
4. Certain smartphone UBI apps develop driver signatures over time and are able to detect when other people are driving by comparing current driving behavior to the normal policyholder driving behavior. This capability could flag the possibility of unreported drivers.
5. Smartphone UBI apps also detect hard braking and sharp cornering events, as well as a vehicle’s geographical location at any given time. This data could be used to corroborate a policyholder’s claim. For example, if a policyholder says a tree limb hit his car in his driveway at 9:09 p.m., but the UBI data shows that the car had a hard braking event that occurred 22 miles away from home at 9:09 p.m. on the date of the reported damage, further investigation may be warranted.

As you calculate the potential costs and returns of usage based insurance, make sure to include the potential impact of fraud reduction in your equation. That figure could be just as important as the new market share you plan to attract.

Waiting on hold. Faxing underwriting forms. Apologizing to customers for insurance-company errors. Sound familiar? Up until now, you and your staff accepted this conduct as the status quo. Your customers did, too. They won’t now! Today’s consumer expects a different experience. She expects to control her interaction with your agency on her terms, 24/7. This change in behavior occurred because of advancements in technology. Propelled by the Web and the computing power of the smartphone, consumers today expect to be able to digitally purchase a policy, make a change to the policy or file a claim. Several forward-thinking carriers anticipated this trend at the turn of the century and started to upgrade their technology platforms. The goal: Speed transaction processing and reduce cost. Many executives complained, however, that the benefits of their technology improvements couldn’t be fully realized because agents refused to improve their technology. Fast forward to today. Because of the advent of cloud computing, agile software development and more powerful processors, agencies can transform their customer experience quickly, at low cost. Leading management systems enable an agency to reconfigure its operations to provide a robust, up-to-date, real-time customer experience. This is one of the greatest advances for the independent agency system in many years. With agile technology and an online presence, successful independents are slowly but surely recapturing market share from less agile captive-agency behemoths. Unfortunately, many agencies encounter a roadblock -- their carriers’ outdated, inflexible systems. This creates a competitive disadvantage for the agency because it detracts from the customer experience. In today’s market, it’s too easy for a customer to switch. Agency owners can no longer put up with a carrier’s antiquated business processes. Remember that point the next time you are looking at two competitively priced quotes from two different insurers. Ask yourself, which one has the best technology interface that leverages your modern agency management system? It’s as important a question today as the commission rate. What You Should Expect From a Carrier’s Technology Platform Customer access: Does your system allow my customers to access your policy processing system from our agency website?

1. Claims filing: Does your first-notice-of-loss system alert my agency by email or text when a customer files a claim? Does your claims system allow my customers to access your first-notice-of-loss process from our agency website?
2. Data analytics: Do you have data analytics tools to allow me to determine the risks to target in my local community?
3. Agency management system integration: Do you interface with my agency management system?
4. Straight-through processing: How much do I have to interface with carrier personnel to issue a policy, make policy changes and adjust a claim?

Since presenting on the topic and writing an article for the Chartered Insurance Institute's' Journal, I've continued to hear a demand for more understanding of Behavioral Economics (BE). It appears the majority of insurers have delegated the challenge of understanding behavioral economics to their risk and pricing teams, and few are engaging actively with their marketing and customer insight teams. I think this is a missed opportunity, not just for better compliance with Financial Conduct Authority (FCA) expectations, but also for the commercial gains to be made from better-designed communications. That said, I suspect the majority of you have at least heard of BE. In recent years, the success of popular books on the subject has ensured plenty of media coverage and social media debate on implications and appropriateness. Easy-to-read books, as introductions to the subject, have included “Nudge” by Richard Thaler and Cass Sunstein. More comprehensive and challenging is a classic text like“Thinking Fast and Slow” by Daniel Kahnemann. Both are well worth reading, and there are now many others to choose from. What makes this subject of greater relevance to the financial services industry is the influence of behavioral economics on the thinking of both the UK government and the FCA. Government policy is being influenced by the work of its “nudge unit.” Meanwhile, the FCA has said that it expects companies to consider how their customers actually make decisions. So what exactly does behavioral economics teach us with regard to how people make decisions? There are numerous experts and many slightly different approaches, but I believe the categorization proposed by the FCA is a good place to start. In its first occasional paper on the subject, the FCA proposed the following list of 10 behavioral biases:

1. Present bias. This is an overvaluing of the present compared with the future. This might be manifest in choices that look like immediate gratification or in ones that look like procrastination. An insurance example might be customers only considering premium cost now, not a full comparison of the cover provided for the future.
2. Reference dependence and loss aversion. Loss aversion can be seen in tests where people will consistently seek to avoid a loss that is certain, even if having to take a gamble or pay more to do so. Reference dependence is the assessing gains or losses in comparison with a subjective reference point. Retailers use this a lot. I’m sure you’ve experienced supermarket product pricing manipulated to make a relatively expensive choice look more mid-market by comparing that choice with higher, “dummy prices.” For an insurance example: Customers might make different decisions if just shown the costs of monthly or annual premiums on a renewal letter, as opposed to seeing a comparison with last year’s premium, as well.
3. Regret and other emotions. Here we are dealing with irrational actions to avoid experiencing such negative emotions in the future. This might involve procrastinating on important decisions, like being checked out by a doctor, or willingness to pay for products that avoid decision making (like premium products promising to cover everything you need). A worrying example for insurers is consumers' unwillingness to engage with a need for life insurance, because of their discomfort with imagining the death of a loved one.
4. Overconfidence. That is, overconfidence about the likelihood of future events or our abilities, or rationalizing past events (with the benefit of hindsight). For instance, almost all drivers believe they are above average. Another example is what’s called the planning fallacy, where most people consistently underestimate how long it will take them to get something done. Within insurance customers, we can see this bias at work in consistent under-estimating of cover needed or assuming an ability to self-insure or financially cope without protection.
5. Over-extrapolation. Here we are dealing with making predictions on the basis of too few data points. A classic example is in the behavior of most investors. Most people will underestimate the level of uncertainty and buy or sell shares on the basis of insufficient data to make a robust forecast. One could say that the same behavior is also exhibited in consumers' use of insurance comparison sites. Undue importance can be given to simply the cheapest price or known brands, to shortcut decision-making time, rather than make a rational comparison of cover, service, recommendations, etc.
6. Projection bias. This is the expectation that your current feelings, attitudes and preferences will continue into the future. So, you underestimate the potential for change. A classic example of this is the effect of the weather on sales of houses and cars. The feel of a house, or looks of a car, on a sunny day is projected into the future and bought without sufficient investigation -- leading to higher sales on sunny days. An insurance example could be seen in the low engagement of the working population with critical illness cover or health insurance, because of a projection of current good health into the future.
7. Mental accounting and narrow framing. This is the behavior whereby people treat money or assets differently according to the purpose assigned to them, and consider such decisions in isolation rather than look at the overall impact. For instance, people not paying off debts while putting funds into savings accounts with lower interest rates. An insurance example is perhaps the estimates made of sum insured, which are more driven by impact on regular premium and budget allocated, rather than purchases made and value of possessions.
8. Framing, salience and limited attention. This means reacting differently to essentially the same choice, because it is presented differently, partly because of limited attention to all but the most salient points. For example, shoppers are more likely to buy meat labelled 75% lean than meat labeled 25% fat. For an insurance example, consider the different responses to financial statements when the same information is simply presented in different ways. Simpler presentation that causes the most important information to be salient can change engagement and action.
9. Decision-making “rules of thumb,” or heuristics. This is the tendency to simplify complex decisions by choosing more familiar, status quo or less ambitious questions instead. An example is where interviewers will choose candidates most like known colleagues or be swayed by stereotypes. For insurance, one sees customers simplifying many decisions in this way, for instance: “Is my pension fund performing well, and do I need to increase my contributions to achieve my goal?” can be simplified to: “Is anything wrong, and do they say I have to do anything now?”
10. Persuasion and social influence. This behavior includes being persuaded because a seller is likable or comes across as a good person. There are examples of people being unduly swayed by apparent social norms, like increases in recycling because local government shares the percentage of others in your area who are recycling. For insurance, the change in consumers assuming that they “should” use comparison sites to shop around, because of an impression that everyone does so now, has been influenced by consistent advertising on TV and other media. It is interesting to see this reflected in customers who make a buying decision first, then find some evidence on a comparison site to justify the choice afterward.

There is much more I could share on BE, but this is a long enough post that I hope you can judge your interest in this topic. Do comment if you'd like to see more on this topic, especially how to apply this theory in practice.

We can know, looking back at last year, how much risk an insurer was exposed to. And we can simply look at the balance sheet to see how much capital they held. So that is the way we have tended to look at solvency. Backwards. Was the insurer solvent at the end of last year? Not really useful information. Unless… Unless you make an assumption about the future. Not an unusual assumption. Just the common assumption that the future will be like the past. That assumption is usually okay. Let’s see. In the past 15 years, it has been correct four or five times. But is that record good enough for solvency work -- a system that might give the right answer a third of the time?! There is a solution. Regulators have led us right up to that solution but haven’t yet dared to say what it is. Perhaps they do not know, or even are not thinking that the backward looking problem has two aspects. We are making two heroic assumptions:

1. We are assuming that the environment will be the same in the near future as it was in the recent past.
2. We are assuming that the company activity will be the same in the near future as it was in the recent past.

The regulatory solution based on these two shaky assumptions is:

1. Stress scenarios
2. A look forward using company plans

Solution 1 can help, but solution 2 can be significantly improved by using the enterprise risk management (ERM) program and risk appetite. You may have noticed that regulators have all said that ERM is very important. And that risk appetite is a very, very important part of ERM. But regulators have never, ever, explained why understanding risk appetite is important. Well, the true answer is that it can be important. It can be the solution to one part of the backward-looking problem. The idea of looking forward with company plans is a step in the right direction.  But only a half step. The full solution is the Full Limits Stress Test. That test looks forward to see how the company will operate based on the risk appetite and limits that management has set. ERM and risk appetite provide a specific vision of how much risk is allowed by management and the board. The plan represents a target, but the risk appetite represents the most risk that the company is willing to take. So the Full Limits Stress Test would involve looking at the company with the assumption that it chooses to take the full amount of risk that the ERM program allows. That can then be combined with the stress scenarios regarding the external environment. Now, the Full Limits Stress Test will only actually use the risk appetite for firms that have a risk appetite and an ERM program that clearly functions to maintain the risk of the firm within the risk appetite. For firms that do not have such a system in place, the Full Limits Stress Test needs to substitute some large amount of growth of risk, because that is what industry experience tells us can happen to a firm that has gone partially or fully out of control with regard to its risk taking. The connection between ERM and solvency becomes very substantial and realistic:

• A firm with a good risk management program and tight limits and overall risk appetite will need the amount of capital that would support the planned functioning of the ERM program. The overall risk appetite will place a limit on the degree to which all individual risk limits can be reached at the same time.
• An otherwise similar firm with a risk management program and loose risk appetite will need to hold more capital.
• A similar firm with individual risk limits but no overall risk appetite will need to hold capital to support activity at the limit for every single risk.
• A firm without a risk management program will need to hold capital to support the risks that history tells us that a firm with uncontrolled growth of risk might take on in a year. A track record of informal control of risk growth cannot be used as a predictor of the range of future performance. (It may be valuable to ask all firms to look at an uncontrolled growth scenario, as well, but firms with a good risk control process will be considered to have prepared for that scenario with their ERM program.)
• A firm without any real discipline of its risk management system will be treated similarly to a firm without an ERM program.

With this Full Limits Stress Test, ERM programs will then be fully and directly connected to solvency in an appropriate manner.  

Most workers don’t aspire to leadership roles. That’s the key finding of a study conducted by CareerBuilder and Harris Poll. Based on the responses of more than 3,500 workers across the U.S., only about one-third (34%) aspire to leadership positions. This is interesting data for organizations and leaders everywhere. First, it might settle the nerves of managers and supervisors because it confirms that not every employee is looking to rise up through the ranks. My research with Beverly Kaye found that one of the key reasons managers don’t engage in career conversations with their employees is fear. Fear that everyone will want a promotion. Fear that they can’t deliver on those expectations. Fear of the disappointment and disengagement that will ensue when these two conditions collide. But the good news is that two out of three employees aren’t coveting the manager’s – or any other leaders’ – job. At the same time, this data is also unsettling because it demonstrates a fundamental challenge with the way organizations are structured. Unfortunately, some of the 66% of employees who are uninterested in leadership positions will pursue them anyway.  That’s because, in too many organizations, "up" is the only way to develop. Those without a genuine appetite to lead will chase down promotions because it’s their only chance to grow. So, what’s an organization to do?  Plenty!

• Distinguish between the 34% and the 66%. Ensuring job satisfaction, engagement and, ultimately, results demands that you understand employees, their motivations and their aspirations.
• Work with those who possess an authentic desire to lead, finding ways to cultivate these skills and talents – even before opportunities for promotion open up. Leadership isn’t reserved for certain levels. It’s a state of mind and a set of skills that can be practiced regardless of role.
• Don’t assume that, just because people don’t aspire to leadership, they’re happy where they are. Many aren’t. Many of your 66% are bored, going through the motions and not contributing to their greatest capacity. Figure out what interests them, where their passions lie and what they would like to accomplish. Then work collaboratively to help facilitate opportunities for development and growth in their current roles.
• Find ways to reward employees for deepening their knowledge and skills… without changing roles. (Let’s be honest, many of the 66% are pursuing leadership because it comes with a pay bump.)
• Consider treating leadership as a discipline rather than a level. What if advancing to leadership was a lateral rather than vertical move? What if it didn’t come with an automatic raise? What if people moved into leadership because they really wanted to do that kind of work?

Information like that generated in the CareerBuilder study can be a powerful tool for organizations to look differently at leadership, who wants it and why. The information also helps organizations produce better results by ensuring that 100% of employees are doing the work they want to do most.

As we near the gift-giving season, here are some books on risk management you might consider as gifts for yourself, your team or a friend with a passion for risk management. First, here are two from one of the gurus of risk management. Felix Kloman styles himself “a long-time student of the discipline of risk management” despite being a risk management practitioner, author and thought leader for the best part of half a century. If you are interested in the views of this sage and especially the development of risk management over time, you might want to look at these (both are available in paperback and for the Kindle):

• Mumpsimus Revisited: Essays on Risk Management (2005)
• The Fantods of Risk: Essays on Risk Management (2008)

John Fraser has co-written two massive tomes, each a collection of contributions by highly regarded risk management practitioners and academics (including Felix). They are full of useful information with chapters such as "Enterprise Risk Management: An Introduction and Overview"; "ERM and Its Role in Strategic Planning"; and "How to Plan and Run a Risk Management Workshop." The books are:

• Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives (2010)
• Implementing Enterprise Risk Management: Case Studies and Best Practices (2014)

Finally, Paul Sobel has made a contribution that merits consideration, especially by internal auditors. Paul brings an excellent mind to the topic, even though he may not have the many years’ experience that Felix (in particular) and John possess.

• Enterprise Risk Management: Achieving and Sustaining Success (2012)

Have you read any of these books? I would like to know what you think of them. I am also interested in whether there are other books on risk management you would recommend. (Nassim Nicholas Taleb is a controversial author and holds views that I don’t fully endorse, so I am not recommending him here.)

I want to start by saying that I am knowingly writing an article that is going to throw fuel on a fire. Being from New England, this article strikes me as the equivalent of writing an article in the Denver Post that says New England Patriots quarterback Tom Brady is better than Denver Broncos quarterback Peyton Manning. Letters will be written. Darts will be thrown. So, I will make sure I put on my steel vest before I publish. I already started writing on this topic, in a recent article titled, “Apple HealthKit – The Next Step to the End of Employer-Based Health Insurance.” In this article, I will provide a more detailed analysis of why the premise presented in my first article may come true -- that within five to 10 years employers will be out of the health risk business. I will then provide a plan for what I think benefit brokers should do to prepare. Taking action may be the difference between those that survive and thrive in this new health insurance world vs. those that may struggle or even fail. What do I mean when I say employers will be out of the health risk business? To repeat what I said in my last article, “By health risk, I mean the cost of the employee’s health insurance will not be priced by the employer. It won’t be a function of average age of the employee population, claims experience or any of the standard underwriting/pricing rules today.” In fact, health insurance will most likely become an individually purchased product, and the insurers of the future may not be the companies that dominate the market today. As a consultant to benefits brokers, I educate them on technology and advise them on how they can maintain a competitive position. My future depends on brokers' remaining significant, so I am as concerned about their future as any broker would be. If you study the significant market events over the past few years, you get a picture of what the future may be like. While many may think Obamacare is the big market change, I believe that the health insurance market is going to change much more dramatically and that, while the government may be nudging things along, competitive market forces will drive the change. So let’s get to the point. I believe that within five to 10 years health insurance will be delivered primarily through staff model health maintenance organizations (HMOs). These will be Kaiser-like plans where the providers of care will also be the risk takers/insurers. Individuals will pay a fee directly to a healthcare system that will be responsible for the health, wellness and treatment of the person. Employers may still give employees money to pay for some of the cost, but they won’t be in the “risk” business. We are beginning to see this evolution today through the expansion of what people are calling accountable care organizations (ACOs). However, the future will go well beyond the limited risk sharing of today’s ACOs. Four Catalysts to Change If you had been in the health insurance business in the '80s, you would say we tried this before, and it didn’t work. Well, today, things are different. There are four major differences that will be the catalysts for the coming changes: Changes in consumer buying behavior In the '80s, employers often paid for 100% of an employee’s health insurance and a large part of the family's. When cost wasn’t an issue for employees, they looked at access to providers as the No. 1 variable. So, all the HMOs and preferred provider organizations (PPOs) tried to expand their networks to appease more people. Today, cost is the No 1 issue. As a result, we are seeing networks shrinking to save cost. Expansion of government health insurance programs, combined with the reduction in Medicare and Medicaid reimbursements to providers. If I am a healthcare provider and am getting less money to perform services on a growing population, then I need to do things differently. I need to get money from healthy people and from people needing less care. I would also need to keep people healthy or provide care in more cost-effective settings. Advancing mobile technology With advancing technology, it will be easier for providers to have real-time access to a patient’s medical information. Things like weight, blood pressure and blood glucose levels can be measured in the home, sent via Bluetooth to a mobile device, and immediately be available to the primary care physician in the individual’s web-based medical/wellness record. Other health metrics will also soon be possible. Systems can automatically notify the responsible physician of any changes in the metrics that warrant attention. Information will help provide proper treatment in a timely manner. Change in tax laws, allowing personally purchased insurance on a pre-tax basis With Republicans taking over Congress, the idea of making an individually purchased insurance policy tax-deductible is now on the table. While this is not a necessary catalyst for change, it certainly would put the nail in the coffin and get employers out of the health risk business. Not only is there a perfect storm forming for the coming changes, but I believe the majority of the participants in today’s healthcare market will welcome this change. We have all heard the saying that “healthcare should be between the doctor and her patient.” We know the government wants this. I think employers, employees and healthcare providers would want this, too. It is the insurers, and by extension benefits brokers, that may not want this. However, as we all know, there is little sympathy for the insurance companies. Employers would want this because I don’t think employers got into the health insurance business after World War II to be in the position they are in today. While I don’t think they mind giving employees money to pay for health insurance, they don’t want their profit margins affected by the health of their employees. Bad claims experience, and their profits go down. Every year, they agonize over the health insurance renewal, deciding whether to charge their employees more or make changes in plans (delivering bad news, either way) or absorb increases in the business. I don’t think employers want to be in the wellness business, either. They may want to provide wellness programs to make people feel better, be more productive at work or boost morale, but not to control or reduce healthcare costs. Employees want change, too. Do employees want their employers asking for things like health risk assessments? My health should not be my employer's business. To me, there is a slippery slope as it is. I do want my physician to care about my health. I want my doctor to know my weight and blood tests and care whether I got a colonoscopy when I turned 50. I often joke that I get an email from Jiffy Lube saying that my car is due for an oil change, but my doctor never sends me an email to get a check-up, test or whatever is needed to keep my engine running the right way. I believe doctors and other healthcare providers want change, too. They want to practice health care. This would include helping their patients make the right lifestyle decisions and keeping them informed about what is good for them vs. what is not. Providers don’t want the paperwork. They don’t want third-parties telling them what to do, and they are getting tired of reduced reimbursements from the government. The Market Reacting I am not the only one using the term “Kaiser-like.” Emanuel Ezekiel, one of Obama’s healthcare advisers, expects healthcare insurers to be obsolete by 2025. According to Ezekiel, “ACOs and hospital systems will become integrated delivery systems like Kaiser or Group Health of Puget Sound. Then they will cut out the insurance company middle man -- and keep the insurance company profits for themselves.” (Source: New Republic – March 2014) Now, I am not going to just listen to Emanuel as my source. I am listening to the market. Hospital systems have been acquiring physician practices and entering the insurance business across the country. In my own backyard, there was this acquisition highlighted in the Boston Globe. State insurance regulators Friday signed off on Partners HealthCare System Inc.’s acquisition of Neighborhood Health Plan, a transaction that will put the state’s largest hospital and physician organization into the health insurance business for the first time.” (Source: Boston Globe September 2012) In Massachusetts, this is very big news. Partners HealthCare owns some of the leading hospitals in the country, including Mass General and Brigham and Women’s Hospital. Hospital systems getting into the health insurance business is not limited to Massachusetts. In New York, New Jersey, Pennsylvania, Maryland, Michigan and all across the country hospitals are getting into the health insurance business. (See Kaiser Health News.) Concurrently, insurance companies are getting into the healthcare business. According to Hospital and Health Networks Magazine January 2012, the following insurers have made healthcare acquisitions:

• WellPoint bought CareMore.
• Optum bought Orange County's Monarch HealthCare and two smaller independent physician associations (IPAs).
• United Healthcare acquired a multispecialty group in Nevada in 2008.
• Humana purchased Concentra, which provides occupational care and other medical services.

Aetna Making Moves What I have find most interesting is the acquisitions by Aetna and some of the comments by CEO Mark Bertolini. Let’s first look at some of the comments Bertolini has been making over the past few years. “The end is near for profit-driven health insurance companies. The system doesn’t work, it’s broke today. The end of insurance companies, the way we’ve run the business in the past, is here.” “We need to move the system from underwriting risk to managing populations,” he said. “We want to have a different relationship with the providers, physicians and the hospitals we do business with.” In his presentation titled “The Creative Destruction of HealthCare,” he states: “Not too far away from now – in the next six to seven – 75 million Americans will be retail buyers of healthcare. And they’ll come to the marketplace with their own money and either a subsidy from their employer or a subsidy from their government. And it doesn’t much matter – they’ll be spending their money.” Aetna is not just talking. If you look at Aetna’s acquisitions and partnerships over the past few years, you can see that Aetna is preparing for the future that Bertolini describes. The company has spent billions of dollars acquiring technologies that can be critical to the future in managing healthcare and healthcare information, including:

• iTriage – Mobile App for employee to check symptoms – Find doctor – Make appointment
• ActiveHealth – View and update personal health record (PHR) – Personalized alerts and content – Communicate with doctor
• Medicity – Promotes coordination of care – Real-time patient data

(Source: Aetna 2013 Investor Presentation) According to Aetna’s website, Aetna was ranked #52 on InformationWeek's 2013 list of the 500 leading technology innovators, surging ahead of many of the top names associated with technological innovation. Aetna ranked first among health insurers. To move to this new model, healthcare providers will need to add capabilities that insurance companies currently have. For example, hospitals provide care but don’t have the actuarial skills to price their patient population in the event they were to get into the risk business. Many also don’t have the capital to assume risk. Those with enough capital can simply buy an insurance company. Others will have to partner with an insurance company that has the capital and reserves to share risk and provide the needed services. So if I am an insurance company, I can either buy providers to stay viable or provide some products, services or capital that the new healthcare systems will need. Buying hospitals or physician groups across the country can be very expensive. So it may appear that a company like Aetna is setting itself up to be the technology, actuarial, reinsurer and other service provider for these future healthcare systems. I won’t claim to know if Aetna thinks the market will move as far as I am saying, to a Kaiser-like model, but the company certainly is preparing for a different healthcare model. Some may think that this is somewhat what insurance companies are doing today. Here is the critical difference. Today, the risk-sharing arrangements are still in a fee-for-service environment. In the future, a hospital system may be in close to a 100% capitation environment (where the system receives a set amount per period for each person covered by the arrangement). Provider systems that purchase these services or develop a risk-sharing relationship with an insurance company in such an environment can’t have two such relationships. They will need a single risk pool to properly manage the population and risk. There won’t be a Blue Cross version, a United HealthCare version and an Aetna version of a local ACO/staff model system. A good example of healthcare financing is my own healthcare. Since I moved back to Massachusetts 16 years ago, I have had the same primary care physician and used the same hospital facility on a number of occasions. Yet I have had seven different health insurance programs. Assuming an average insurance premium of $10,000 per year for my family, over the 16 past years I have paid $160,000 in premiums. I understand insurance, spreading the risk and all the other insurance arguments about where that money goes, but think of how it could be different if all $160,000 went to the system that was actually providing care to my family and me. What Benefit Brokers Can Do Okay, so the world may change. What would I do if I were a broker today to prepare for this change? First, change does not happen easily and overnight. The whole country of healthcare consumers, distributors and providers will need to adapt. As a benefits broker, your buyer may no longer be the employer but the employee. If this is the case, then some existing services may not be needed.

• No more risk analysis/actuary and underwriting
• No more claims analysis tools
• No more wellness programs to reduce healthcare costs
• No more disease management programs
• No more company medical renewals

Before someone points out the obvious to me, I will say that I do know that most groups with fewer than 100 employees are community-rated and those with more than 100 employees are experience-rated. Small employers are still faced with balancing budgets based on their healthcare renewal. This anxiety will go away. Most of these types of services are a core competency of many of the national benefits firms and the larger independent brokerage organizations. These services are viewed as key differentiators. For these firms, change may be even more dramatic because providing these types of analytical skills is part of their culture. So let’s talk about the things brokers can do. I am going to break this down to a list of tasks. 1.       Understand what the players in your market are doing – Brokers should start analyzing their local medical market and see what the providers are doing in this area. Have they made acquisitions? Have they created new partnerships? What is their leadership saying publicly? Whatever they say or do, believe them. 2.       Add an employee call center – Employers will welcome the support in helping employees move to a new environment. Provider systems will welcome and pay for the support in helping those same employees navigate the market. 3.       Add personal financial consulting – It is estimated that close to 40% of employees lose some productivity at work because of financial stress. The healthcare insurance purchase is going to be a major decision for an employee, and it should be made in the context of an employee’s entire financial position. 4.       Understand the new technologies – How many of you who have read this up to this point understand what Aetna’s technologies for the consumer are? Do you know how to "Bluetooth" your weight from a scale to a smartphone? The place of employment can also be a great place to help employees with technology to track health information. Could an employer have a scale at work that is Bluetooth-enabled to send a person’s weight to their smartphone? Could the employer have a blood pressure machine at work? How about setting up a private room with teleconferencing capabilities so an employee can consult a doctor face-to-face via the web without leaving the place of employment? Could a broker make himself available to consult employees one-on-one as to how this whole system will work? 5.       Develop technology engagement and education strategy – After you learn what you need to know about the new technologies, are you ready to deliver? I believe the provider systems (the new Kaisers) will welcome the opportunity to educate the population through the employer. At the employer level, you can reach a large amount of people fairly easily. And the employers will care that their employees understand this new healthcare delivery system. Employers don’t want stressed employees, because stressed employees are not as productive. I believe employers and these new provider systems will pay to help these individual consumers. 6.       Invest in new internal technology and processes – If your entire infrastructure is geared around engaging the employer, then things will need to change. Can you record a phone call? Can you engage in online chat with an employee? Are you prepared to sell individual insurance? To sell a high volume of individual policies and service employees, you will need extremely efficient internal operations. 7.       Start thinking about helping employers exit the risk business - Rather than advise employers how to control costs and mitigate risk, should you start advising them on how to get out of the risk business? I guess private exchanges and defined contribution plans are the start. However, if the healthcare market changes, the pace will accelerate because there will be more options for the employer to get out. 8.       Engage new providers – Carrier reps are always calling on brokers, but these new organizations may not call on brokers in the same way. You may need to reach out to them. If you have something of value for the new provider system, you will need to engage the carriers. To move to this new model, it will require that brokers invest in technology and people. To attract the provider systems benefits, firms will need to have the services, size and scale to deliver. Most independent benefits firms either don’t have the capacity or capital to move to this model. They will either have to sell to a larger firm or join forces with peers who share the same vision and are willing to collectively invest in preparing for the future. The national firms and larger independent firms with the capital and resources will need to have the will to change. In today’s environment, many brokers may not feel the need to make these changes. Other firms have already started preparing for a much different future. For example, several national firms have opened call centers for employees. Whether that is for a future market I have described, or simply to service employees today, I don’t know, but the centers are a sign that the benefits game is changing. I may not end up being right with my market predictions, but my advice is to pay close attention. There is change going on out there, and I think a picture of the future is being drawn that looks much different from the healthcare market today.

For property and casualty insurance carriers, growth is hard-fought in an environment of compressed margins, regulatory scrutiny, increased competition and customer expectations for anywhere/anytime service. Add unsteady economic conditions, low interest rates that decrease investment income and catastrophic losses from significant events such as Hurricane Sandy into the mix, and insurers are finding that their tried-and-true business methodologies that worked well pre-2008 are in desperate need of a facelift. Growth is especially challenging for insurance carriers with inflexible legacy technology systems, as well as small and mid-size carriers that lack the resources to make the product and operational changes they need to remain relevant and profitable. Insurance carriers must navigate an environment that rewards nimbleness and flexibility, but to do so requires that insurers modernize their current systems and processes. Consider the example of bringing a new product to market. At most insurers, the process may take six months or more, with a price tag reaching seven figures. By the time the product is ready to launch, the dynamics in the market have shifted, or perhaps a new regulation has been legislated. The insurer has two equally unappealing choices: Launch the product as is and never realize a return on investment, or delay launch and retool the product, increasing the R&D price tag and losing potential revenue and market share. There is a better way: Updating legacy systems with flexible and scalable Software as a Service (SaaS) computing capabilities allows P&C insurers to rapidly capitalize on opportunities and support growth. This article presents seven imperatives for the P&C insurance industry based on industry research and analysis, and outlines how a SaaS implementation can address each imperative. IMPERATIVE 1: INCREASE SPEED-TO-MARKET  In an Accenture survey of insurance industry professionals, more than seven of 10 (72%) respondents indicated that it takes their organization six months or more to launch a major product. In today’s constantly changing environment, six months is a long time indeed, and it’s likely that the market looks different than when product development began. However, insurers that are able to rapidly offer innovative products and services through multiple channels can take advantage of shifts in the market and exploit the slowness of competitors. Today, “slow and steady” doesn't win the race. Compared with legacy system-based product development, which requires coding, scripting and testing, a SaaS infrastructure by design incorporates more nimble and configurable software, significantly reducing development time and eliminating the cost of hiring a vendor or consultant to make coding changes. In addition, SaaS provides rapid provisioning of live and test environments to further increase speed-to-market. Lastly, SaaS requires minimal investment in hardware, software and personnel. Insurers can use a pre-configured infrastructure to reduce development costs by more than 80% over comparable legacy systems, according to Donald Harrell, senior vice president of marine, exploration and production for Liberty International Underwriters. This, in turn, reduces the risk for product launches. IMPERATIVE 2: QUICKLY RESPOND TO MARKET AND COMPETITIVE CHANGES Those insurers not able to turn on a dime may be in trouble because so many of their competitors are preparing to invest in technologies and processes that will help them design, underwrite and distribute products and services more quickly. More than 80% of insurance CEOs are planning to increase investment in technology, and more than 60% plan to develop their capacity for innovation. Innovation must continue after product launch, and SaaS allows insurers to retool products as market drivers dictate. The ability to revamp an existing product is particularly attractive to small or mid-size insurers launching products to a relatively small target market. With SaaS, insurers are able to bring niche products to market that would otherwise not deliver enough ROI to justify the investment. Likewise, if a product is not profitable, an insurer can make changes and quickly reconfigure the product rather than being forced to offer an unprofitable or marginally profitable product because it’s too costly to make changes. Insurers can also more effectively price products. SaaS is charged on a subscription or consumption basis, so costs are more closely aligned with the revenue being generated by the new product. IMPERATIVE 3: REDUCE COSTS TO MAINTAIN PROFITABILITY As the U.S. economy slowly improves, P&C profitability is starting to improve as well. However, there is little cause for celebration. Fitch Ratings warns insurers that the current pricing cycle may be running out of steam, forcing insurers to cut expense levels to maintain profitability. Now is the time for insurers to put in place cost-saving strategies. With a SaaS infrastructure, insurers can innovate and offer new products and services without incurring capital expenses. Rather than implement an expensive technology infrastructure, SaaS allows insurers to leverage preconfigured infrastructure and reduce IT resource requirements, staffing and professional services fees. In fact, SaaS up-front costs are typically less than 20% of the development costs of legacy systems. SaaS pricing models have also matured, giving insurers access to a variety of bundled and unbundled pricing options. IMPERATIVE 4: AUTOMATE AND STREAMLINE UNDERWRITING A survey of insurance professionals by FirstBest Systems found that 82% of respondents believe that their insurer’s underwriters spend less than half of their time actually underwriting, with the majority of underwriter time spent on data collection and administrative tasks. Insurers understand that giving underwriters the automation tools they need to do their jobs effectively is key to improved underwriting, but many believe that the technology is problematic, with 81% citing lack of data integration as limiting underwriting productivity. In contrast to legacy underwriting systems, SaaS allows insurers to easily incorporate rules to automate the underwriting process and increase underwriting ratios and revenues. SaaS also allows for streamlined data integration as opposed to off-the-shelf packages that often need extensive modification, thus eliminating a major stumbling block to optimal productivity for underwriters. IMPERATIVE 5: SUPPORT NEW DELIVERY CHANNELS Mobile technology continues to be top-of-mind for many carriers, with more than 60% planning to add new mobile capabilities for policyholders and agents. Notes Novarica partner Matthew Josefowicz, “As the use of smartphones and especially tablets displaces the use of desktops and laptops in more areas of personal and professional life, support for these platforms is becoming critical to insurers’ abilities to communicate electronically across the value chain.” The problem for carriers is that legacy systems were not designed to run on mobile devices. However, SaaS, with its more modern coding, is able to provide both a better user interface and operational efficiency for smartphones and tablets. SaaS allows insurers to distribute products through a variety of new channels (e.g., banks, car dealerships) that would not be possible with legacy systems. Creating and recreating websites and portals quickly and inexpensively means that insurers can more readily compete with “disrupters” that use a direct-to-consumer model. Insurers can design multiple portals for different geographies, languages and associations in near-real time. Deloitte reiterates the importance of mobile and other delivery channels for insurers: “No one can afford to take their distribution systems for granted. More insurers are likely to grow bolder in exploring alternative channels to capture greater market share, catering to the needs and preferences of different segments while cutting frictional costs.” IMPERATIVE 6: COLLABORATE WITH THIRD PARTIES Insurers are increasingly relying on third parties for a variety of integration services, including regulatory compliance, sophisticated data analysis, geo-location capabilities for risk assessments and risk ratings for more accurate underwriting and risk pricing. Integration between carrier legacy systems and third-party providers is typically problematic because of proprietary file formats and other issues that make it difficult to share data. In contrast, SaaS provides links to existing interfaces for access to third-party databases. Integration reduces costly, error-prone and time-consuming manual intervention. IMPERATIVE 7: IMPROVE THE CUSTOMER EXPERIENCE The majority of insurers (91%) believe that future growth depends on providing a special customer experience, according to Accenture’s survey. However, getting the relevant and up-to-date data they need to give customers a personalized experience is a critical challenge for 95% of respondents. In the same survey, only 50% of insurers say that their carrier leverages data about customer lifestyles to determine the products and services most likely to meet customer expectations; 70% rate themselves as “average” or “weak” in their ability to tailor products and services to customers’ needs. A similar number (64%) give themselves low ratings for their ability to provide innovative products and services. Poor service -- or even average service -- is no longer acceptable. Consumers are accustomed to personalized experiences such as shopping on Amazon or booking airline tickets on a travel site, and expect a similar type of experience from their insurer. Thomas Meyer, managing director of Accenture’s insurance practice, says, “To pursue profitable growth, insurers need to achieve the kind of differentiation that allows organizations like Apple to charge a premium while building customer loyalty. As Apple has shown, the answer is consumer-driven innovation that creates an exceptional user experience.” SasS enables insurers to access the data points they require to differentiate their products throughout the customer experience. In a market commoditized by regulations and related factors, insurers that can leverage SaaS to deliver a straightforward, simple process to customers will give themselves a competitive advantage.  CONCLUSION In an accelerated market where change is the new constant, P&C insurance carriers cannot afford to continue to do business as usual. Imperatives such as speed-to market, responsiveness to customer demands, new delivery channels, cost reduction and improved underwriting make it necessary for insurers to explore new methods of providing products and services to customers. SaaS, with its flexibility, scalability and low cost, is a technology imperative if carriers hope to grow and remain competitive. For the full white paper Oceanwide, click here.