Finance functions and actuaries face regulatory pressure to enhance reporting, markedly improve response times and provide increasingly demanding business partners with better and more actionable information about their businesses. Advanced analytics from IT improvements will help achieve the strategic objectives. Naturally, insurers should provide themselves with the best reporting platform they can reasonably afford. However, unlike in years past, cutting-edge reporting is just table-stakes, not a competitive advantage. Rather, competitive advantage will come from:

• An information strategy that enables transparent and compliant financial analysis and facilitates the ability to make informed business decisions.
• Information management capabilities that are foundational and support finance (broadly defined) and the business overall.
• Establishing a clear and practical vision: Identifying what will make the vision a reality will enable organizations to create a road map for change.
• Gauging the appropriate spending rate to determine how quickly the company can implement the roadmap.

Companies that do not go beyond their reliance on core reporting systems for their financial insight will be at a competitive disadvantage. There is no silver bullet for building needed capabilities, and companies will need to rethink their IT portfolio allocations and approach to spending. A steady investment will help companies build their strategic information infrastructure and effectively assess their needs on an iterative basis. The case for change Many insurance companies have invested in cleaning data for the purpose of reporting and analysis. Whether your company has started doing this or not, the following are important considerations to keep in mind:

• No organization has the financial resources to cleanse and array all the data and information it may ever want and make it available whenever it wants it. Efforts to boil the ocean fail.
• Companies will need to build capabilities in three areas:

–        Develop focused information strategies to support actuaries, financial executives and the other people in the organization who rely on financial and reporting information. –        Frame the future-vision build and fund a flexible road map for implementation. Ensure that the road map prioritizes the most important things first and that it can change to meet new demands and realities as they arise. –        Manage data and information, including data ownership, data governance and the ability to cleanse and provide the data in such a way that it can be presented in advanced tools and manipulated by end-users, while maintaining integrity in the source-information.

• Companies currently spend a great deal of time and money on information management, but the information tends to reside in disconnected platforms, projects, data-bases and tools. Investment levels need to match the company’s vision, and there needs to be an organizational awareness that combining disparate efforts into a cohesive information strategy can partially offset high costs.
• While finance and actuarial are the primary drivers of insurance modernization because of their needs to report and book results, there is a related need for all business partners to supply, receive, analyze and explain financial and related operating data.
• Furthermore, insurance modernization will create the foundation for an enterprise-wide range of data and analytics. HR, marketing, customer, distributor and operations information and analytics all will rely on the same core capabilities, disciplines and infrastructure. A uniform approach is what will provide a real competitive advantage.

Characteristics of a modernized company In a modernized company, a synergy of efficient, well-tuned processes with clearly defined expectations by stakeholder group exists between the risk, finance, actuarial and IT functions.

• Data – Data strategy is defined, and the organization executes its responsibilities according to this strategy. Rather than the traditional bottom-up data approach where the analysis capabilities flow from the collected data, data is strategically viewed top-down. The company identifies analytical needs and then adopts a data strategy that supports them. In a modernized company, data flows from a “single source of the truth” and can be extracted for analytical purposes with minimal manual intervention.
• Tools & technology – Tools and technology enhance the effectiveness of the finance and actuarial departments by providing them information faster, more accurately and more transparently than traditional ad hoc, end user computing analyses (usually performed in Excel). Specifically, tools that focus on data visualization can more effectively convey trends and results to management. Algorithms can be programmed to automate first-cut reserving analyses each quarter based on a rules engine (e.g., how loss development factors are selected or weighting methodologies), which can help point staff to business segments that may require deeper analysis in the quarter.
• Methods & analysis – Modernized organizations emphasize robust methods and analysis that yield superior insights over traditional methods. Examples include predictive analytics, which have transformed personal lines pricing and are currently being adopted in the commercial arena, and stochastic analysis, which adds additional statistical rigor to deterministic analysis and thereby helps actuaries transparently prepare reserve range indications that help management understand reserve risk.
• Organizational structure – Delivering superior business intelligence to management is often dependent on organizational structure and resources, and many companies are debating the merits of centralized, decentralized or hybrid organizational structures. PwC believes the organization of the future will align its capabilities as much as possible with the end-user, with IT serving as a backstop that can provide what end-users need.
• Spending – A concerted, cohesive insurance modernization program will require a change in the portfolio spending on information management. Spending will change from covering disparate efforts to strategically aligned ones.

The benefits The primary benefit of insurance modernization is better and more responsive reporting, actuarial analysis and the ability to support financial decisions. The second, and perhaps more critical benefit, is improved analytics and decision making for the rest of the organization. More specifically, insurance modernization:

• Aligns data management initiatives and governs the success of their implementation by clearly articulating both the company’s strategic mission and a measurable definition of success.
• Aligns projects and initiatives with desired outcomes by creating a road map with measurable milestones from vision to project completion.
• Facilitates prioritization of capabilities and initiatives based on overall goals and objectives, as well as realizable benefit.
• Measures the business value of initiatives and projects by linking desired outcomes (goals) and measuring progress against objectives.
• Enables measurement of program progress during rollout and informs the release planning and investment process by linking performance indicators and objectives.

The thought of potentially overhauling entire systems, processes and functional areas may understandably seem overwhelming for company executives as they set out to modernize their organizations. Modernization, indeed, is a long journey that will most likely have a high price tag. However, even if the ideal goal of modernization is holistic improvement, there is value in identifying the individual areas that most need modernization. As one area becomes more streamlined and efficient, then other areas will begin to reap the benefits. Critical success factors Business leaders are frequently frustrated by the fact that tactical initiatives’ results do not reflect their organizations’ mission or vision. Frequently, strategic goals are mistranslated or forgotten when it comes to defining and developing how to achieve them. In addition, efforts to improve organizational effectiveness tend to focus narrowly on the execution of existing tasks. As a result, functional improvement efforts often fail to result in meaningful benefits for the organization overall. Strategic business architecture (SBA), which we advocate using, translates high-level business direction into tangible goals and objectives. SBA documents business-driven priorities and decisions and aligns projects and initiatives with desired outcomes. As a result, business and technology leaders can prioritize initiatives and measures their progress. At the same time, operational business architecture (OBA) documents how functions and the overall organization realize business strategy and goals. OBA helps improve the functional core by identifying relevant stakeholders within the context of the larger architecture. OBA aligns operational stakeholders in a consistent way with the strategic and technical stakeholders that may not be involved in a given functional or process improvement initiative. Call to action – Next steps Insurance modernization is not about technology modernization for its own sake. It is about how technology can enable risk, actuarial and finance to share a “single source of the truth” and serve the entire enterprise with consistent, actionable information. Strategies to realize effective organizational modernization will require a holistic consideration of all data, methods/analyses, tools/technology, processes and human-capital requirements and will need to address the business and operational changes necessary to deliver new business intelligence metrics. Any weak links between these closely connected components will limit the effective realization of a modernization effort. If we view dimensions of insurance modernization as gears that spin together (i.e., efficiencies/ inefficiencies in one dimension(s) have repercussions for other dimensions), then improvements in any dimension will yield improvements in all dimensions and vice versa. Although a modernization vision should be holistic to avoid “digging up the road multiple times,” it is possible to tackle modernization issues in logical, progressive ways.

One of the most undertreated and misunderstood mental illnesses in the workplace is depression. The mood disorder is more than a passing feeling and is a major—but treatable—illness. Depression affects all walks of life and even a formerly outstanding employee can be affected. No job title, organization, or personality type is immune. It is likely that you, and every employee in your place of work, know someone who has struggled with depression, anxiety, alcohol or maybe even an eating disorder.  In fact, it is estimated that about one-third of those with a mental illness are employed. Nearly a quarter of the U.S. workforce (28 million workers ages 18-54) will experience a mental or substance abuse disorder, according to the National Institute on Mental Illness. How can employers address this issue? Early intervention and prevention programs can be fundamental in preventing progress toward a full-blown disease, controlling symptoms of mental illness and improving outcomes. Anonymous online screenings are an effective way to reach employees who underestimate the effects of their own condition and are unaware of helpful resources. A screening program can also work well for small organizations that lack official employee assistance program (EAP) services. Quality mental health programs for employees can reduce stigma, raise awareness, teach managers how to recognize symptoms and help organizations deal with depression and effectively and compassionately manage employees. How should employers address mental health in the workplace? Framing prevention efforts in light of nationally recognized days is a great starting point. Oct. 9 is National Depression Screening Day (NDSD), which is a day to promote education and awareness of common mental health disorders. This year, NDSD will focus on viewing and treating mental health with the same gravity as physical health. Your organization may provide free blood pressure screenings, or encourage weight-loss support groups. Treating mental health with the same importance as physical health reinforces that your workplace is one devoted to overall health of your employees. Encouraging a Mentally Healthy Workplace In addition to highlighting nationally recognized days, the following are several areas to consider when making your workplace mental health-friendly.

• Employee wellness programs that incorporate mental health
• Manager training in mental health workplace issues
• Support for employees who seek mental health treatment or who require hospitalization and disability leave
• An EAP or other appropriate referral resource
• Health care that treats mental illness with the same urgency as physical illness
• Regular communication to employees regarding equal opportunity employment, wellness and similar topics promoting an accepting work environment

The National Action Alliance for Suicide Prevention’s Workplace Taskforce has additional information and resources. Promoting National Depression Screening Day is a great way to introduce mental health topics with your workforce. From employee morale to the company’s bottom line, mental health can affect all areas of the workplace. When the mental health of one employee is made a priority, the entire organization will benefit.

I’ve spent a substantial amount of my insurance career reviewing workers' comp claim files in my capacity as a claim supervisor, a manager and a consultant for a large insurance broker. Those years allowed me to come to the following conclusion: Unless the employer is prepared, it's wasting its time sitting through a workers' comp file review. I know…pretty simple, right? While it seems like common sense, you’d be surprised how many employers don’t do their prep work. Many times, I’ve seen an employer sitting in the meeting nodding approvingly while the examiner provides a lackluster or imprecise update. The employers -- neither being experts nor adequately prepared -- don’t know the difference. And because they allowed themselves to be bamboozled, the file reviews are basically for naught. Don’t get me wrong. I’m not saying file reviews are total rubbish. The mere fact that you requested the file review shows you are somewhat interested and will most certainly motivate the examiners to update files. But a file review will only scratch the surface. You might as well call the file review, “Tell-me-what- you-want-me-to-know-in-three-minutes-or-less.” I always advocate for an actual file audit on occasion to supplement your quarterly file reviews on all high value/high exposure cases. When it comes to a file audit, there’s no place to hide. Stone after stone will be unturned so no doubt remains as to whether the file was handled right by the examiner. You see, oftentimes what the examiner tells you -- and what the file ultimately reveals -- are totally different scenarios. The audit isn’t a way to catch the examiner slacking but rather to find out if your money is well-spent on that particular examiner or, more importantly, on that third-party administrator or insurance carrier.  Basically, an audit answers the nagging question: Am I getting the bang for my buck? Back to file reviews: So what constitutes prep work? This is pretty straightforward. It all boils down to how much you know about the injured worker's current situation. Do you know his diagnosis and the effectiveness of the treatment regime? The treating physician? The return-to-work situation? Claimant attorney? Employee’s work history? Personnel history? Medical history? Did the examiner establish a plan of action and stick to it? Did he share that plan with you prior to the claim review? Most importantly, did the examiner continually move forward in regard to file management and expedition to closure? Some employers would say, “Why would I need to know all that when the file review will tell me everything I need to know?” If that’s the case, I’d suggest you go back and read the first paragraph. An employer can’t be an active participant if it doesn't what it's dealing with. You must also remember you’re most likely sharing the examiner with several other employers, and the examiner only has so many hours in a day. Her time will be focused on the employers who either squawk the most, or (and this is crucial) closely follow their files. Disinterested employers will always fall to the wayside. Yes, it will take time to keep up to speed on the claims. But it’ll pay dividends when it’s time for the file review because you’ll be a functioning part of the decision-making. So be interested. Be involved. And do you prep work. If you’re not prepared, it’s pretty easy for an examiner to gloss over prior missteps, especially if the employer is a workers' comp neophyte…and missteps cost the employer money.

If you are like most companies, the annual ritual of filling out the business interruption worksheet is a nuisance administrative task. The worksheet is generally required by the insurance company to track changes in the business and may be used as the basis to price your program.  Along with general industry knowledge, this worksheet may be the most important item that underwriters have at their disposal to price your risk. However, the worksheet is woefully inadequate to explain the intricacies of most businesses and is biased to err on the high side – which usually means a higher premium for you. For a routine that is regularly glossed over, the results can have some pretty substantial consequences.

The worksheet is meant to estimate the business interruption exposure for the policy period by estimating a value for the coming year. The business interruption value (BI value) is revenue minus certain specific direct variable costs, possibly adjusted to account for the payroll of for skilled wage employees who may be retained even if operations cease for a period. The result is an annual ratable BI value that assumes a complete outage for 12 months with no mitigation.

Only by coincidence can this BI value number come close to a realistic exposure to business interruption loss.

What does the ratable BI value tell the underwriter? In theory, the premiums required to cover the risk. How can this be when the number used is so unrealistic?

The underwriter would like to know more about your business. His problem is that he needs some mechanism to measure your risk against others in your industry. The BI values worksheet is an attempt to do this.

But, if the worksheet is so far off, what else can you do to tell your story?

You need to supplement the ratable BI value with information to differentiate your business from the pack. Developing realistic, worst-case loss scenarios, known as maximum foreseeable loss (MFL) and probable maximum loss (PML), and measuring them using a methodology that would actually be used in a claim is a better way to present your exposure. Measuring MFL and PML exposures will allow you to highlight your ability to mitigate losses through business continuity planning (BCM).

Just as improved physical safeguards generate lower premiums, adequate business continuity planning should also result in premium savings. This step is completely missed when providing the worksheet alone.

The effort to identify and measure exposures can be challenging -- after all, it is impossible to predict everything that might happen. History of actual claims and current industry experience can be very helpful. In most cases, it is best to tackle this project in manageable pieces and try not to do it all at once. For example, start with the largest or most troublesome businesses or locations and work down from there.

This may end up being a multi-year project that will require some dedicated effort from you and third parties. But chances are the cost of a project like this will be justified by allowing you to make more precise decisions on coverage and possibly reducing premiums.

The risk management practices of insurance companies have been scrutinized by rating agencies, regulators, analysts and others for years because insurers are financial institutions that deal with high levels of risk that, improperly managed, could not only hurt their creditworthiness but damage the financial well-being of their customers. As a result of this scrutiny, insurers have developed robust and comprehensive risk management processes, increasingly known as enterprise risk management (ERM). The ERM process covers the entire company, from strategy setting to core business operations and even relationships with external stakeholders. The maturity of insurers’ models means that there are some best practices worthy of emulation or adaptation by other industries. A selection of these is presented in this article: aggregation of risk, correlation of risk and opportunity risk management. Aggregation of risks Within the ERM process step of “risk identification,” insurers pay special attention to aggregation of risk. How much of the same risk can be prudently taken, and how much risk is represented by one catastrophic event? A simple example would relate to how much property insurance is being written in Florida, which is prone to hurricane losses. Or, how much workers' compensation is being written for one industry group that could be affected by a pervasive occupational health hazard such as mesothelioma. A proper assessment requires: 1) knowledge of what business is being written (sold), 2) fine-tuned understanding of that business (e.g., not all property in the state of Florida is subject to the same degree of hurricane loss), 3) recognition of what could be a potential risk issue within a book of business (e.g., workers in industries that still handle asbestos or operate in older buildings that have not been remediated). Having taken account of accumulations, insurers proceed to reduce their exposure to them. This can take many forms, including: 1) writing less business within the geography, customer segment or type of coverage making up the accumulation, 2) adding exclusions or sub-limits into the insurance policy to eliminate or reduce what is covered if the risk produces a loss, 3) requiring/ helping customers to make themselves less vulnerable to the risk and 4) developing rapid responses to minimize the extent of loss after the risk has created a loss. Moving outside the insurance company realm, any company can be subject to a variety of types of aggregations that can be above a normal, acceptable range of risk. Some examples might include: • Shopping center management companies with many centers in neighborhoods with poor economic outlooks • Banks with loan portfolios too heavily balanced toward governments or businesses in countries with low ratings for economic or political stability • OEM manufacturers that supply parts to only one industry -- one that may be in the process of technological obsolescence or some other life cycle dip • Consumer goods manufacturers with narrow product lines that are tied to one demographic group that is fickle or is becoming economically pinched Consider a large company with many silos, one that is not very good at sharing information and not tightly managed. What would happen if: 1) one unit of that company placed its call center in one of the BRIC countries (Brazil, Russia, India and China), 2) another unit opened a major manufacturing plant in that country, 3) another unit outsourced its IT code development to that country and 4) the finance unit invested in bonds from that same country -- and that country suddenly had a debilitating natural catastrophe, the government or currency collapsed or a nationwide problem developed? The point is that the company in the example should be aware that it is creating an aggregated risk potential by having so many ties to that country with varying exposures. Any significant concentration of geography, market segmentation or product offering can pose a risk to a business. What makes ERM so powerful is that all important risks get identified, whether insurable or not, especially strategic risks, and that these risks get addressed through mitigation action plans. It is surprising how often companies do not see the magnitude or variations of risks they are facing; an effective ERM process should prevent that blindness. Having identified an aggregation risk, companies can create mitigation plans for managing the risk. Mitigation tactics for aggregation risks in non-insurance businesses could include: • Diversification in geographic spread • Diversification in product portfolio • Diversification in customer segmentation • Innovation around uses of current products • Innovation around ways to be more profitable with current products such that margins could increase while sales decrease • Growth limits in risky areas; growth goals in less risky areas Correlation of risks Insurers have also become adept at identifying correlated risks. These are risks that may not appear to be connected but could be realized as part of the same event. Or they could be risks that have a cause and effect relationship on each other -- a domino effect. Correlated risks could dramatically strain an insurer’s ability to pay claims or remain fiscally viable. A hurricane, for example, might not only trigger covered property damage but also business interruption, supply chain, losses from canceled event and so on. Unless the insurer understands the totality of correlated losses, it cannot determine how much business it should write in any single hurricane-prone territory. Also correlated to the hurricane is an increase in the cost of repair and rebuilding property because of what is termed “storm surge” -- when goods or services are in greater demand after a major event. So, the insurer is not only paying out on claims from different policies (or lines of business) but may also be paying more than usual because of inflated costs. The concept of correlated risk is not very prevalent in non-insurance companies but could be just as serious an exposure. Consider an electrical power company. It knows that its dependence on an adequate supply of water leads to a risk that drought could affect its output capabilities and its customer satisfaction. The utility may not be fully cognizant of the correlated risks. Therefore, its risk mitigation and contingency planning may not include those risks. These might include: 1) the risk that government subsidies or support could be cut as the government attends to other issues arising from drought; 2) the risk that the cost of water or expense for routing the water supply will increase because of low water levels; 3) the risk that malfunctions will occur with power plant equipment because of lower or inconsistent water supply feeds, or 4) the risk that business customers that do not get sufficient water for their operations may sue the supplier. Without a robust ERM process to help identify both insurable and non-insurable risks, these risks may go unrecognized and unmitigated and without an effective response plan. In fact, all companies fear that “perfect storm” where many risks materialize at once that could damage and destabilize the business. Yet, some correlations might have been identifiable and action taken to ameliorate the risks, had an effective ERM strategy been in place. Opportunity risks There is risk in both taking and missing a potential opportunity. It may be too much to ask businesses to identify the risks and calculate the cost of not taking every opportunity that management decides against for strategic, risk-related or other reasons. However, it is expected, within an ERM oriented business, that the risks of taking or avoiding an opportunity are considered and addressed. When an insurer offers a new type of coverage for exposures such as supply chain, or cyber or reputation for the first time, the risk is great. That is because there is often no historical loss data upon which to estimate losses and price the product. For initial losses, there is no historical data to use in setting up an adequate reserve. Additionally, there is no guarantee that enough business will be written to create a large enough pool of policy holders (law of large numbers) to spread the odds of loss enough to produce favorable outcomes. The ERM process that insurers employ compels them to look for opportunity risks and to devise ways to ameliorate the risks. How do insurers do this? They build their risk mitigation action plans using expertise across their many functions. For new product risk, insurers might start out by: 1) offering low limits, 2) requiring higher deductibles or self-insured retentions, 3) buying more reinsurance or partnering with a reinsurer on the new book of business, or 4) charging prices that may appear to be high but that take into account the risk-adjusted cost of capital. In other industries, new products also pose opportunity risks. Key questions to ask include: Will the new product reach the required ROI set for it within the timeframe set? Will the new product cannibalize some existing product or products? Will the new product create issues related to product recall, patent infringement or other lawsuits? Through the application of a robust ERM process, all or most of the risks can be identified and mitigation action plans developed. This creates a safety net for the company and makes it more likely that it will get more comfortable and proficient at product innovation. There are so many types of opportunity risk beyond new products. ERM can help with each of them.

Ray Rice hit his fiancé in an elevator. The video is shocking, and the response by the NFL and Commissioner Roger Goodell has been infuriating to many. How this will all play out, no one knows at this point. It feels as if we are only in Act One. As a leader, you will almost certainly face at least one crisis during your career. In business, “stuff rolls uphill.” Knowing how to effectively handle a crisis may mean the difference between survival and devastation. The keys are:

• be truthful
• be pessimistic
• be definitive

In one of my previous companies, we created and ran a program for future Fortune 500 CEOs. Our faculty consisted of the most respected chief executives of a generation: Anne Mulcahy, A.G. Lafley, Jim Kilts, Carlos Gutiérrez, Jack Welch and more than two dozen others. One topic that would consistently come up in discussion was what should a senior leader do when confronted with a crisis. While their individual approaches were as personal as their leadership styles, here are four things that top CEOs stressed any leader should do in a crisis. 1. Get the facts. Quick. Ask your direct reports to get every detail of the facts out on the table. Then ask again. During a crisis, those who work for you at all levels of the organization will be reticent to bring you more bad news. But finding out later will often lead to a far worse outcome. Be relentless in your pursuit of what really happened. The good, the bad and the ugly. 2. Come clean with the truth, the whole truth and nothing but the truth. You must act as though all of the facts you have now discovered will eventually be public -- and they almost always will be. Isolated crises turn into full-blown organizational meltdowns not typically from the initial act, but from the response to those acts. Heed the lessons of Nixon and Clinton. It’s the cover-up that leads to impeachment. 3. Estimate the broadest possible fallout from the crisis. Then triple it. I remember a specific discussion with Welch and a small group of CEOs about this topic. Jack said that, in nearly every single public crisis he was confronted with in a five-decade career, the final damage was far worse than anyone had estimated at the onset. By being aggressively pessimistic about the outcome from the beginning, he found his leadership teams were much better prepared to deal with the ultimate reality of the situation. 4. Realize that someone big is going to fall. “I wasn’t aware of it!” “It was the act of a rogue employee.” As a leader, it is impossible to keep your eye on everything. You can’t control the actions of everyone you lead. So, when a crisis occurs, it is tempting to rationalize that it wasn’t your fault. How can you or senior people on your team reasonably be blamed? But, in the end, the organization and the public will demand definitive action, and someone senior will ultimately take the hit, including potentially you. The more you resist, the angrier the villagers will get, and the more heads they will go after. Make the difficult decisions earlier than later, or your options will quickly turn from bad to worse. Here's hoping you navigate your entire career without ever having to face a crisis. But the odds are against you. Be prepared to act truthfully and decisively, and you may just make your way through the storm.

One lament I often hear when I advise large company executives on the need to “Think Big” is that their biggest innovation challenge is not thinking big—it is thinking too much. Purportedly great ideas come from the front lines where the organization interacts with products and customers. They come from technology or marketing wizards keeping a sharp eye on disruptive market trends. They come from executives and board members grappling with questions at the organization’s strategic horizon. The challenge is that organizations are overwhelmed with more ideas than they can sort out, much less pursue.

Perhaps the best advice on how to deal with the challenge of too many ideas comes from Peter Drucker, who offered this general principle:

Innovation begins with the analysis of opportunities. The search has to be organized, and must be done on a regular, systematic basis.” Don’t subscribe to romantic theories of innovation that depend on “flashes of genius.”

Rather than relying on randomness or organizational influence to dictate which ideas find a receptive ear, here is a three-point plan for initiating a systematic process for uncovering, assessing and scaling the best ideas.

1. Inventory Opportunities Start by casting a wide net. For example, sponsor a series of innovation contests and workshops to educate, build alignment and uncover potentially good ideas. Hold scenario planning sessions with senior executives and board members to explore both incremental and disruptive future business scenarios. Questions to ask might include:

• Can you augment your customer interfaces to reveal customer preferences and to customize the customer experience, as Amazon and Netflix do?
• Are there opportunities to better utilize the big data being generated by your business processes, including customer, operational or performance data, for innovation?
• How might you reimagine key business, customer, and competitive issues if you could start with a clean sheet of paper?
• How do the six disruptive technologies affecting other information intensive companies apply to you?
• What extreme competitive threats, i.e., doomsday scenarios, might new entrants wielding these disruptive technologies pose to your organization?

Opportunities should include both continuous and discontinuous innovations. Continuous innovations offer incremental or faster, better, cheaper-type optimizations, such as shedding costs, reducing cycle times and generating incremental revenue. Discontinuous innovations are those that rise to the level of game-changing potential.

2. Develop a Holistic View Using an Innovation Portfolio Next, assess each opportunity based on competitive impact and investment type using the portfolio analysis framework as shown in Figure 1. Figure 1: Portfolio Analysis Framework Competitive impact measures differentiation against what competitors might deploy by the time an idea is launched.

Remember Wayne Gretzky (who famously said he skates to where the puck is going, not to where it is)! A key mistake is evaluating an idea against one’s current internal capabilities, as opposed to where the competition is going. This dimension forces an explicit calculation of an idea’s future potential competitive impact. Investments can be one of three types:

• Stay in Business investments (SIB) are for basic infrastructure or non-discretionary government mandates. SIB investments should be assessed on how adequately they meet regulatory or technical requirements while minimizing risk and cost.

• Return on Investment opportunities (ROI) are pursued for predictable, near-term financial returns. Standard measures, such as net present value (NPV), return on equity (ROE) or other well-understood metrics are applicable here.

• Option-Creating Investments (OCI) are pursued to create business options that might yield killer-app-type opportunities in the future. OCI investments do not yield financial returns directly.  Instead, they build capabilities and learnings that can be translated into future ROI opportunities. Like financial options, OCIs should exhibit high risk and offer tremendously high returns.

After arraying opportunities in the framework, eliminate those that fall outside of acceptable boundaries. For example, companies should not pursue opportunities that, once completed, are already at a disadvantage against the competition.

For the remaining opportunities, develop an initial sizing of investment levels and potential benefits according to each investment category. Filter as appropriate. For example, eliminate ROI opportunities that do not meet standard corporate hurdles rates. Eliminate OCI opportunities that do not exhibit extraordinary option value. Eliminate SIB ideas that do not adequately minimize cost and risk—be very skeptical of SIB opportunities aimed at providing ROI or OCI benefits. Such opportunities should be judged directly as those investments types. 

Figure 2 illustrates how the analysis might look at the end of this stage. Figure 2: Portfolio Analysis Results

3. Balance the Innovation Portfolio In personal investment portfolios, it is important to not place all hopes in one or two investments. The same is true for corporate innovation portfolios. To ensure competitiveness in the near term and in the future, they should include a mix of incremental and disruptive innovations. The right balance and prioritization depends on a company’s investment capabilities and competitive circumstances.

For example, as shown in Figure 3, a market leader might field a portfolio geared toward aggressive growth by enhancing its infrastructure, investing heavily in near-term profitable opportunities and developing a small number of killer app options for sustaining its competitive advantage.  (My experience is that the right number of such options is on the low end of the magic 7, plus or minus two. That is because the limiting factor is senior executive attention, which is very limited, not investment dollars. Market leaders have lots of money to waste, but no project with true killer app potential can succeed without significant senior executive attention.) Figure 3: A Market Leader’s Balanced Portfolio Other illustrative portfolio profiles are shown in Figure 4.

Commodity businesses tend to minimize SIB and OCI investments. Companies that are retooling might emphasize infrastructure and near-term investments and make only minimal investments in future options. Underperforming companies tend to invest in programs that barely achieve competitive parity, or worse, and do little to prepare for the future in any of the three investment categories. Figure 4: Illustrative Portfolio Profiles

* * *

By adopting appropriate financial and competitive metrics and measures for each type of investment, companies avoid planning theatrics where guesses are disguised as rigorous forecasts. This can happen, for example, when infrastructure and other SIB investments are required to demonstrate explicit returns on investment. Or, it can happen when advocates of OCI efforts are required to calculate net present value of very uncertain long-term initiatives. Such forecasts can, of course, be made by savvy proponents. But the analyses are better testaments to rhetorical and spreadsheet skills than certainties about the future.

At the end of this three-step process, companies should have a prioritized and staged investment plan that represents a coordinated enterprise innovation strategy and follows the think big, start small and learn fast innovation road map. Achieving an adequate understanding of the entire landscape of possibilities facilitates and encourages thinking big. Continuing management of the innovation portfolio provides clear criteria for evaluating other big ideas as they come up. It also demands the discipline of starting small and learning fast in the pursuit of disruptive innovations that will shape the company’s future strategic prospects.

There seems to be a lot of misperception about what price optimization really is, largely driven by publicized assumptions that it will only serve the best interests of the company and hurt the consumer. Basically, price optimization boils down to applying analytics to available information to develop more quantitative and targeted pricing policies and processes. Price optimization is currently used extensively in many industries. The benefits and rewards to both the companies and the customers are plenty, with the customer rewards being highly visible. Through the use of price optimization, retailers are able to present highly personalized and appealing offers to their customers based on past shopping and buying patterns coupled with predictions of customer wants and needs. Retailers are able to keep their best customers informed of sales and special offers that are of real value to them. The travel industry uses price optimization to manage profitability and, equipped with insights that give them the ability to fine-tune the metrics, are able to offer very attractive options to travelers. Capacity that would otherwise have gone unused attracts happy customers and often brings them back. For the insurance industry, it is important to understand that price optimization does not replace risk-based pricing; rather, optimization is the next level of sophistication for risk-based pricing. With price optimization, insurers are able to explore product options and then find an optimal balance point among all options and constraints within complicated rating orders and large sets of data. This makes it possible to construct and present more appealing, more targeted product and service offerings. Personalized offerings can be shaped to meet personalized needs. The laws of large numbers can be optimized for the individual situation. Today, price optimization is being used most often by insurers in personal lines -- in many cases, those that are trying to innovate and capitalize on the next wave of analytics. The goal is to improve the bottom line and increase market share by using newly available types of analytics, models, tools and methods. These insurers don't see price optimization as an independent exercise; they view it as a key part of the business's journey to the next level of maturity. Recognizing that rate changes and the resulting customer reactions have an immediate and very significant tie to new business and renewals, and understanding that informed consumers expect offers that meet their personalized requirements, insurers see optimization as a journey that is essential for profitable growth in personal lines. It is only a matter of time before the principles involved are applied to commercial risk pricing, especially for smaller and middle markets. As the comfort level increases and experience with the insights and tools matures, price optimization will likely become a significant aspect of the collaboration and negotiation process for mid-market and even large, complex cases. The business benefits of price optimization are undeniable. Improved insights give insurers greater ability to achieve specific financial objectives for growth and profit. Fortified with intelligence, including a better understanding of customer demand and buying behaviors by segment, insurers can make business decisions and tradeoffs based on agreed-upon metrics rather than emotion and historical understandings that sometimes morph over the years. While the benefits are clear, the reality is that price optimization is a complex endeavor. It involves deep analytics, advanced business intelligence and ready access to complete and accurate data. Many companies are spending lots of time and resources building sophisticated models of loss cost, expenses and customer demand, incorporating competitive position and market data. Price optimization brings them all together, aligning to specific business goals and the regulatory framework, enabling companies to clearly understand the trade-offs between various pricing strategies. The extent of the use of price optimization in the insurance industry is small in terms of the number of companies that have implemented optimization or are conducting pilots. It is, however, important to note that price optimization is being adopted by the largest insurance companies -- those that have the most market share -- so the portion of the industry that being affected is significant. It won’t be long before a very large percentage of the premiums being written will be based on rates developed by using advanced analytics capabilities that involve price optimization. In many insurance companies, there are both real and perceived hurdles that impede progress in price optimization. Project capacity is limited, and price optimization does not always make the list of top-priority efforts. For some insurers, there is an inherent cultural resistance to change, particularly when today's models have been delivering growth. Price optimization is complex; it requires special skills -- deep experience in predictive modeling and advanced analytics. Price optimization involves a transformation of the entire pricing process. But the insurers that are embracing and implementing price optimization are finding ways to overcome these challenges. Obviously, most national insurers have the volume of data that is necessary to get pricing optimization right, but they can also be burdened with an overwhelming amount of data that originates from multiple sources and isn’t always clean and consistent. In contrast, it is not unusual for regional insurers to think they don't have enough data. The reality is that most insurers do have more than enough data to build and use customer demand models. Price optimization will work for more insurers than one might expect. Now is the time to lay the ground work for competing effectively in the long run.

Right now, we would be launching the long-anticipated shift from ICD-9 to ICD-10 -- except that the Centers for Medicare and Medicaid Services (CMS) was ordered to make yet another change to the deadline. Instead of taking effect Oct. 1, 2014, the newest deadline for ICD-10 is Oct. 1, 2015. The inevitable is put off for another year. Delaying implementation of ICD-10 is a relief for some but grinding for others. Without a doubt, continued delays significantly affect costs and benefits for the healthcare system. According to Michele Hibbert-Iacobacci, vice president of information management and support at Mitchell International, “On March 31, 2014, the ICD-10-CM/PCS (International Classification of Diseases -- 10th Revision, Clinical Modification and Procedural Coding System) implementation was delayed in the United States [because] the Senate approved a bill (H.R. 4302). This update to the obsolete ICD-9-CM/PCS was a requirement in the Health Insurance Portability and Accountability Act (HIPAA) for all covered entities. Workers’ compensation has been excluded as an industry that is not covered under HIPAA; however, the providers submitting the medical bills to workers’ compensation payers are covered entities. By proxy, the workers’ compensation industry needed to prepare to accept ICD-10-CM/PCS by the implementation date of Oct. 1, 2014, and the majority of payers and vendors were ready to process bills by that date.” The move from ICD-9 to ICD-10 reflects substantial advances in medicine that have occurred during the past three decades. ICD-9 includes 17,000 diagnostic codes, whereas ICD-10 has 155,000 codes, reflecting much more detail and differentiation in diagnoses. The result of the expanded and updated coding will enhance definition of diseases and injuries and make payments more accurate. Yet continued delays have placed time and cost burdens on billers, suppliers and payers throughout the healthcare and insurance industries. Organizations have spent millions of dollars on training personnel for the upgrade; now, they have spend more on refresher courses and on training for new people who are replacing trained personnel who have left. The delays also create a challenge because ICD-10 codes will be used sporadically before and after the deadline, requiring handling both sets of codes. There will be those who begin using the new coding early and those who never believed the day for the switch would come. The latter group could lag a long time. Accommodation will be made for old coding and dual coding. Bills will be submitted using either and both. Therefore, decisions must be made regarding payment. Will the paying organization assume the task of converting the codes? Should reimbursement be denied those not in compliance on codes? Systems will need to accommodate both to navigate the transition. The drop-dead date for ICD-10 will come, whether it occurs in October 2015 or later. When the day comes, reimbursement will depend on accurate and timely coding. There are those who are thankful for the delay because they were not ready. They now have time to meet the new deadline. Those who were ready for the launch can now perfect the processes they created. The test for them is to sustain readiness for another year. That is costly. It is also tiring.

"This American Life" teamed up with ProPublica for a blockbuster story that Federal Reserve regulators defer to mega bank Goldman Sachs on compliance issues. Thanks to whistleblower Carmen Segarra, the report about the culture at the Fed was so explosive that Sen. Elizabeth Warren called for an investigation within 24 hours. The whole mechanics of the story highlight the problems with our current system. But for a whistleblower coming forward, no one would likely learn of the big bank’s conduct or of regulators' deference to it. Once she provided authentic, unimpeachable audio, a compelling broadcast led a legislator to call for an investigation, but any probe may or may not yield  findings of  wrongdoing. The main result seems likely to be publicity for lawmakers, regulators and bankers. All pretty much par for the course, underscoring the concern I expressed in an earlier piece that a lack of control by the Fed could leave banks and markets in the same sort of condition that led to disaster in 2008. These issues are consequential for insurers not least because the industry holds $120 billion in mortgage-backed securities for commercial and multifamily real estate,  $336 billion in collateralized debt obligations (CDOs), commercial mortgage-backed securities (CMBSs) and asset-backed securities (ABSs) and $365 billion in residential mortgage-backed securities, according to the Mortgage Bankers Association and Federal Reserve. The insurance industry relies on these investments for significant portions of its operating profits, so it needs a safe and efficient financial system. A solution is at hand. "Interactive finance" addresses the insurance industry’s transparency needs with large banks by powering real-time monitoring and compliance as it creates efficient markets  and reduces regulatory costs. Marketcore, a firm I advise, is pioneering interactive finance to generate liquidity by rewarding individuals and institutions for revealing information that details risks. Interactive finance crowd-sources market participation by rewarding individuals, organizations and institutions seeking loans, lines of credit or mortgages or negotiating contracts with monetary or strategic incentives. These  rewards are  offered in exchange for risk-detailing, confidence-building disclosures that increase trading volumes. Whether risk takers are a bank, insurance company or counter party, all granters define rewards. A reward can constitute a financial advantage — say, a discount on the cost of information or transaction. The sale of the information more than makes up for the discounted fee. The time-sensitive grant of advantage can actually be directed to specific products, benefiting traders. All this transpires on currently existing electronic displays broadband, multimedia, mobile and interactive information networks and grids. Interactive finance realizes a neutral risk identification and mitigation system with a system architecture that scans and values risks, even down to individual risk elements and their aggregations. As parties and counter parties crowd markets, each revealing specific risk information in return for equally precise and narrowly tailored rewards and incentives, their trading generates fresh data and meta data on risk tolerances in real time and near real time. This data and meta data can then be deployed to provide real-time confidence scoring of risk in dynamic markets. Every element is dynamic, like so many Internet activities and transactions. Interactive finance constantly authenticates risks with constantly refreshing feedback loops. Risk determination permits insureds, brokers and carriers to update risks through “a transparency index. . . based. . . on the quality and quantity of the risk data records.” Through these capabilities, Marketcore technologies connect the specific, individual risk vehicle with macro market data to present the current monetary value of the risk instrument, a transparency index documenting all the risk information about it and information on the comparative financial instruments. Anyone participating receives a comprehensive depiction of certainty, risk, disclosures and value. There will be vastly more efficiency once interactive finance provides timely information that allows for easy monitoring by regulators and lawmakers, provides incentives for compliance by big banks and stimulates efficient markets. There will be no more need for whistleblowers if interactive finance provides timely information that allows for easy monitoring by regulators and lawmakers that forces compliance by big banks and markets.