Do people want faster response by the police to a burglar alarm, or do they want lights they can control remotely? That is a core question that the alarm industry faces as it undergoes seismic changes.

Does the alarm industry sell security, including fast response by police, or does it sell the “connected” home? Many are leaning toward an emphasis on the connected home. That’s why Google bought Nest, known for its smart thermostats, for $3.2 billion in early 2014 and then announced recently that Nest would buy Dropcam for $555 million.

Dropcam uses small cameras to provide security services, though not as the alarm industry is doing. The alarm industry connects cameras to a central station, where feeds are monitored and police notified if there is a break-in. Dropcam uses motion sensors to alert the user to any possible problems; the user then checks the video feed from his phone or computer and, if necessary, contacts the authorities for help.

Whether the alarm industry chooses to emphasize fast police response or follows Google and tries to offer broad home automation solutions, there will be broad ripple effects, including for insurers.

From a risk-management perspective, there are two issues. The first is whether the home automation improves police response and reduces losses. Ultimately, however, the second issue is even more crucial: Do the new home automation services actually introduce new risks and enable high-dollar losses through remote vandalism, including frozen pipes and catastrophic water damage?

Concerning the first issue: At a time when declining budgets are forcing police to reduce the number of officers responding to property crimes, home automation has hijacked a large slice of the alarm industry and is minimizing police response. Catching burglars and reducing property crime has become secondary to lifestyle convenience features and home automation revenue streams. Increasingly, alarm/security is proposed as just one more feature in home automation.

But the new offerings generally use legacy alarm solutions, which have a false alarm rate of 98%. As a result, these alarms are only assigned a priority 3 by law enforcement, so police response is slow, if it happens at all.

By contrast, new alarms – based on monitored video feeds, and with break-ins verified -- are treated like a crime in progress, a priority 1. Responding officers run hot because they expect to make an arrest.

In an effort to confuse the issue and continue to sell legacy alarms, home automation suppliers sell the ability of the homeowner to remotely view cameras in the home as “video verification.” This claim is exploiting a naïve consumer. Home automation cameras are not monitored by the central station, and they do not provide faster police response. Remote viewing by the owner ends up being a glorified nanny cam.

Unfortunately for insurers, home automation has become the primary message of some of the historical burglar alarm companies, which have reengineered their companies. Security companies are now chasing smartphone thermostats and Wi-Fi-based lighting instead of focus on delivering police response to an alarm.

A joint study by the San Bernardino, CA, sheriff and police departments in 2011 found that the arrest rate for a traditional burglar alarm was only 0.08%. A five-year study completed by Pharmacists Mutual in 2013 found that, when police response was less than five minutes, the officers made arrests 21% of the time. This means that the likelihood of an arrest for monitored, video-verified alarms and priority police response is more than 250 times better.

Video-verified alarm systems monitored by a professional central station represent real loss control for the insurer. Video-verified alarms reduce claims. Monitored video alarms actually mitigate losses by delivering faster police response to an actual incident. Police make arrests and prevent the loss itself.

Concerning the second risk-management issue: Home automation introduces new threats for the insurer – catastrophic claims caused by remote vandalism. Imagine the damage to a Minnesota home whose furnace was turned off by malicious hackers while the owners were on a winter vacation. The costs for bursting water pipes and flooding the property for days would make most burglary claims seem paltry in comparison.

The problem is that home automation and the connected home create risks that have not been adequately identified and considered by insurers. Much has been written regarding identity or data theft caused by hackers exploiting weak computer networks for passwords and credit card info. The financial losses from this type of crime have had little impact on traditional property/casualty insurers, but home automation changes the risk exposure because now remote vandals can invade the network and take over the infrastructure and appliances of a homeowner to maximize damage without ever setting foot on the property.

Home automation devices become a Trojan horse for vandals, and the more devices are connected, the larger the risk as each device introduces another potential hole.

The press is finally beginning to educate readers about the issue. A July 30, 2014, article in Computerworld headlined “Home Automation Systems Rife with Holes” explains, “A variety of network-controlled home automation devices lack basic security controls, making it possible for attackers to access their sensitive functions, often from the Internet, according to researchers from security firm Trustwave. Some of these devices are used to control door locks, surveillance cameras, alarm systems, lights and other sensitive systems.”

Security Today published an article on July 16, 2014, about how hacked light bulbs can reveal a homeowner’s Wi-Fi password and actually give the hackers control over the home automation system itself. This excerpt describes the problem: “It’s all the new craze: the connected or smart home, where at the touch of a button on your smartphone you can dim your living room lights, close the garage…. But, with sophisticated technology comes risk if you aren’t vigilant in applying the latest security updates to your smart home. In fact, the latest risk involves LED light bulbs that can be hacked to change the lighting and reveal the homeowner’s Wi-Fi Internet password.”

The entire home automation system is only as secure as its weakest link or device – devices that need to be kept updated with security patches as flaws are discovered. Unfortunately, many of these connected home devices are static and not even capable of being updated with new software patches. The connected home is now the Wild West of home security, and property/casualty insurers are likely going to be the ones left paying the bill.

The bottom line is that the home automation industry introduces threats that run counter to the risk mitigation insurers have traditionally found by using discounts to promote monitored alarm systems.

In analyzing these risks, David Bryan, Trustwave researcher, states, "Anybody could have turned off my lights, turned on and off my thermostat, changed settings or [done] all sorts of things that I would expect to require some sort of authorization.”

The proliferation of devices, protocols, apps and portals mean that the problem is getting more complex instead of calming down. It is time for insurance companies to review their “alarm discount” and make sure that the discount encourages behavior that actually reduces claims. The alarm industry is promoting home automation to the consumer, but the features and benefits don’t actually reduce risk.

Underwriters can reduce risk and minimize losses by encouraging their policy holders to install monitored, video-verified alarm systems that deliver faster police response. Any insurance policy that offers discounts for home automation systems is encouraging new and unexplored risks posed by remote vandalism, and possibly worse.

Insurance companies, agencies and vendors really like animals. We like them partly because we insure them. But mostly we like them because, in an industry that struggles to translate its core values to tangible brand attributes, a cute and fuzzy or large, strong animal can help convey the right message and generate attention. These 12 brands, while completely different in size and essence, found the perfect animal to communicate their offerings and stand out from the herd (or pack or pride or. . . ).

1. Aflac Duck

2. Bolt Horse

3. Car Insurance Gorilla

4. Elephant Auto Insurance Elephant (What Else?)

5. Geico Camel

6. Geico Gecko

7. Geico Pig

8. Giraffe Professional Insurance Agency -

Giraffe

9. Hartford Stag

10. ING Lion

11. MetLife Snoopy

12. The Zebra - Zebra

Catastrophe models from third-party vendors have established themselves as essential tools in the armory of risk managers and other practitioners wanting to understand insurance risk relating to natural catastrophes. This is a welcome trend. Catastrophe models are perhaps the best way of understanding the risks posed by natural perils—they use a huge amount of information to link extreme or systemic external  events to an economic loss and, in turn, to an insured (or reinsured) loss. But no model is perfect, and a certain kind of overreliance on the output from catastrophe models can have egregious effects. This article provides a brief overview of the kinds of traps and pitfalls associated with catastrophe modeling. We expect that this list is already familiar to most catastrophe modelers. It is by no means intended to be exhaustive. The pitfalls could be categorized in many different ways, but this list might trigger internal lines of inquiry that lead to improved risk processes. In the brave new world of enterprise risk management, and ever-increasing scrutiny from stakeholders, that can only be a good thing. 1. Understand what the model is modeling…and what it is not modeling! This is probably not a surprising "No. 1" issue. In recent years, the number and variety of loss-generating natural catastrophes around the world has reminded companies and their risk committees that catastrophe models do not, and probably never will, capture the entire universe of natural perils; far from it. This is no criticism of modeling companies, simply a statement of fact that needs to remain at the front of every risk-taker’s mind. The usual suspects—such as U.S. wind, European wind and Japanese earthquake—are "bread and butter" peril/territory combinations. However, other combinations are either modeled to a far more limited extent, or not at all. European flood models, for example, remain limited in territorial scope (although certain imminent releases from third-party vendors may well rectify this). Tsunami risk, too, may not be modeled even though it tends to go hand-in-hand with earthquake risk (as evidenced by the devastating 2011 Tohoku earthquake and tsunami in Japan). Underwriters often refer to natural peril "hot" and "cold" spots, where a hot spot means a type of natural catastrophe that is particularly severe in terms of insurance loss and is (relatively) frequent. This focus of modeling companies on the hot spots is right and proper but means that cold spots are potentially somewhat overlooked. Indeed, the worldwide experience in 2011 and 2012 (including, among other events, a Thailand flood, an Australian flood and a New Zealand earthquake) reminded companies that so-called cold spots are very capable of aggregating up to some significant levels of insured loss. The severity of the recurrent earthquakes in Christchurch, and associated insurance losses, demonstrates the uncertainty and subjectivity associated with the cold spot/ hot spot distinction. There are all sorts of alternative ways of managing the natural focus of catastrophe models on hot spots (exclusions, named perils within policy wordings, maximum total exposure, etc.) but so-called cold spots do need to remain on insurance companies’ risk radars, and insurers also need to remain aware of the possibility, and possible impact, of other, non-modeled risks. 2. Remember that the model is only a fuzzy version of the truth. It is human nature to take the path of least resistance; that is, to rely on model output and assume that the model is getting you pretty close to the right answer. After all, we have the best people and modelers in the business! But even were that to be true, there can be a kind of vicious circle in which model output is treated with most suspicion by the modeler, with rather less concern by the next layer of management and so on, until summarized output reaches the board and is deemed absolute truth. We are all very aware that data is never complete, and there can be surprising variations of data completeness across territories. For example, there may not be a defined post or zip code system for identifying locations, or original insured values may not be captured within the data. The building codes assigned to a particular risk may also be quite subjective, and there can be a number of "heroic" assumptions made during the modeling process in classifying and preparing the modeling data set. At the very least, these assumptions should be articulated and challenged. There can also be a "key person" risk, where data preparation has traditionally resided with one critical data processor, or a small team.  If knowledge is not shared, then there is clear vulnerability to that person or team leaving. But there is also a risk of undue and unquestioning reliance being placed upon that individual or team, reliance that might be due more to their unique position than to any proven expertise. What kind of model has been run? A detailed, risk-by-risk model or an aggregate model? Certain people in the decision-making chain may not even understand that this could be an issue and simply consider that "a model is a model." It is worth highlighting how this fuzzy version of the truth has emerged both retrospectively and prospectively. Retrospectively, actual loss levels have on occasion far exceeded modeled loss levels: the breaching of the levies protecting New Orleans, for example, during Hurricane Katrina in 2005. Prospectively, new releases or revisions of catastrophe models have caused modeled results to move, sometimes materially, even when there is no change to the actual underlying insurance portfolio. 3. Employ additional risk monitoring tools beyond the catastrophe model(s).  Catastrophe models are a great tool, but it is dangerous to rely on them as the only source of risk management information, even when an insurer has access to more than one proprietary modelling package. Other risk management tools and techniques available include:

• Monitoring total sum insured (TSI) by peril and territory
• Stress and scenario testing
• Simple internal validation models
• Experience analysis

Stress and scenario testing, in particular, can be very instructive because a scenario yields intuitive and understandable insight into how a given portfolio might respond to a specific event (or small group of events). It enjoys, therefore, a natural complementarity with the hundreds of thousands of events underlying a catastrophe model. Furthermore, it is possible to construct scenarios to investigate areas where the catastrophe model may be especially weak, such as consideration of cross-class clash risk. Experience analysis might, at first glance, appear to be an inferior tool for assessing catastrophe loss. Indeed, at the most extreme end of the scale, it will normally provide only limited insight. But catastrophe models are themselves built and given parameters from historical data and historical events. This means that a quick assessment of how a portfolio has performed against the usual suspects, such as, for U.S. exposures, hurricanes Ivan (2004), Katrina (2005), Rita (2005), Wilma (2005), Ike (2008) and Sandy (2012), can provide some very interesting independent views on the shape of the modeled distribution. In this regard, it is essential to tap into the underwriting expertise and qualitative insight that the property underwriters can bring to risk assessment. 4. Communicate the modeling uncertainty. In light of the inherent uncertainties that exist around modeled risk, it is always worth discussing how to load explicitly for model and parameter risk when reporting return-period exposures, and their movements, to senior management. Pointing out the need for model risk buffers, and highlighting that they are material, can trigger helpful discussions in the relevant decision-making forums. Indeed, finding the most effective way of communicating the weaknesses of catastrophe modeling, without losing the headline messages in the detail and complexity of the modeling steps, and without senior management dismissing the models as too flawed to be of any use, is sometimes as important for the business as the original modeling process. The decisions that emerge from these internal debates should ultimately protect the risk carrier from surprise or outsize losses. When they happen, such surprises have a tendency to cause rapid loss of credibility from outside analysts, rating agencies or capital providers.

In a popular article published earlier this year, Mark Walls examines the complex relationship between the Affordable Care Act (ACA or PPACA) and workers’ compensation. While I recommend the entire article, today I want to focus on one point that Mark highlights. In preparing for the effects of the fully implemented ACA, Mark advises that employers should: "Carefully manage the approach to healthcare premium rebates, which could affect how payroll is calculated under workers' compensation." I’ll be honest – until I read Mark’s article, I was happily leaving all of Zywave’s ACA discussions to our own Erica Storm, an attorney who’s been monitoring and writing about healthcare reform for several years. But the words payroll and workers’ compensation jumped out at me. If workers’ comp payroll can be affected by the rebates, then so can experience mods and workers’ compensation premium. How much impact are we talking about? With Erica’s help on the ACA side of things, I delved deeper into the topic. Premium rebates introduced by healthcare reform The concept of health insurance premiums affecting workers’ compensation payroll is not new, but ACA-mandated rebates, which began in 2012, have introduced a new level of complexity in the accounting. ACA requires insurers with a certain medical loss ratio (MLR) to issue a rebate to employers. Guidance to employers on rebate options is vague, but options may include

• passing along MLR rebates to employees,
• applying rebates to future premiums, or
• applying rebates to benefit enhancements.

Whatever option is chosen, the plan sponsor must follow the fiduciary duties of prudence, impartiality and acting for the exclusive benefit of plan participants. When employers pass along any portion of the rebates to employees, such rebates must be counted as payroll for the purposes of workers’ comp. Note that this rule applies as long as the rebate to the employee is through the employer and not directly from the insurance provider. The rule also applies regardless of whether the rebate distribution is taxable or non-taxable. Payroll rules in more detail Payroll for the purposes of workers’ compensation is defined in the applicable bureau manual; the majority of states use NCCI’s Basic Manual for Workers Compensation and Employers Liability Insurance. Rule 2-B-1 lists payment types included and rule 2-B-2 lists payment types excluded for the purposes of calculating workers’ compensation payroll. But most helpful with regards to rebates is a separate NCCI article, The Patient Protection and Affordable Care Act and Workers Compensation Premium Determination. Be sure to check out the handy tables to make sense of how both insurance premiums and rebates can be included or excluded from payroll. A sample scenario An employer’s decision on what to do with a rebate can be complex, depending on the type of group health plan and whether the rebate is considered a plan asset.  The workers’ compensation aspect is admittedly almost an aside. Yet as we all know, even small impacts add up. For an employer that passes along a rebate to its employees, how much impact might that employer experience on its mod and premium as a result? To answer that question, it’s first important to note that the state and insurer matter. In many states, the average rebate paid in 2013 (for 2012 premiums) was less than $100 per family. Clearly, for many employers, that isn’t going to significantly affect payroll through rebates. However, in some states and for some plans, the average rebate was much higher. According to government data on 2012 premium rebates, 10 states (excluding territories) had large group rebates averaging from $340 to more than $1,250; eight states had small group averages of $300 or more. Using that information as a rough model, I constructed a sample “high rebate” scenario to test its effects on workers' comp premium. I imagined:

• a 100-employee manufacturing business in Illinois
• an average hourly wage, including most benefits, of $35.00 (roughly based on June 2013 Employer Costs for Employee Compensation data for goods-producing occupations from the Bureau of Labor and Statistics). For simplicity’s sake, I’ve assumed that all costs are reportable for workers’ compensation purposes.
• 80% of the workers in payroll code 2797 – manufacturing
• 20% of the workers in payroll code 8810 – office work
• a relatively high level of losses that has driven the company’s mod to 1.20, while the minimum mod, based on zero losses, is 0.61 (these values were determined using ModMaster)
• two rebate levels to analyze, assuming for each that the full amount is returned to employees:
  • a high but not unrealistic $1,000 rebate
  • a probably unrealistic $3,500 rebate

First let’s take a look at the calculation of this sample company’s manual premium, followed by its final premium at various mod levels. Before any health insurance rebates, our sample company has a mod of 1.20 and associated premium of more than $800,000. Note how low the minimum mod and premium could be. When a $1,000 rebate is introduced, the manual premium is increased by the same percentage as the effective total payroll increase – in this case 1.4%. But what I was very curious to see was whether, in the mod calculation, the increase in payroll was enough to increase expected losses and thus lower the mod, thereby offsetting some of the manual premium increase. As you can see below, this was not the case. Although expected losses (not shown) did increase, they didn’t increase enough to actually change the minimum mod or current debit mod values. A $1,000 per employee rebate edges up payroll, but not enough to significantly change the mod calculation. The effective rate of the payroll increase therefore applies to the final workers’ comp premium regardless of the mod value. So how large would rebates need to be to actually affect the mod as well as the premium? I experimented with several rebate levels and for this payroll scenario found that the magic number was somewhere around $3,500: A $3,500 per employee rebate affects payroll enough to change both the current and minimum mod values. That mod decrease in turn mitigates the overall premium increase. When $3,500 is added to each employee’s salary, the resulting increase in expected losses in the mod formula is enough to drop the minimum mod by 0.01 and the current debit mod by 0.02. For this example, that offsets the 4.8% payroll and premium increase to only 3.1%. In summary The above example is considerably simplified; in reality, the included/excluded payroll calculation would be more complex, and additional premium credits and debits would likely apply. Results could vary greatly with company size, as well. Nevertheless, the example suggests:

• As a rule of thumb for employers considering their rebate options, it seems reasonable to use the total amount being rebated to employees divided by the original included payroll as an approximation of the employers’ workers' comp premium increase. The actual increase may vary when accounting for a change in the mod value or effects of other premium debits and credits.
• Even a rebate of less than 1% may, if returned to employees, add up to thousands of dollars of premium expense for all but the smallest employers, in addition to the administrative costs of processing the rebate.
• While relatively high-dollar rebates may be rare, employers should be especially sensitive to their increased impact on premium.

Employers should also keep in mind that, per NCCI, “an employer is required to keep records of information needed to compute premium. In addition, the employer must provide those records to the carrier, when requested, for the purpose of auditing the employer’s workers compensation policy.” While some insurance professionals suggest that rebates may diminish with time and premium stabilization, others disagree. There’s also been discussion in the press of possible policy endorsement or other changes to protect employers from additional premium charges as a result of rebate distributions. The one thing we can all agree on is that the “bigger picture” relationship between ACA and workers’ compensation is a blurry image that will take years to fully develop. Have you or your clients experienced a mod or workers’ compensation premium increase because of distributing a MLR rebate to plan participants? I’d love to hear your experience in the comments below.

As discussed in Part 1 of this series, business succession and exit planning for an owner of a successful business is crucial yet challenging. A comprehensive plan considers the central role that the business plays in an owner’s overall financial, retirement and estate plan. This presents opportunities for the business owner and advisers to address:

1. Business continuation. Transferring control to a family member, key employee or third party.
2. Key talent retention. Ensuring continued success of the business through retention of key employees using special benefits (golden handcuffs).
3. Retirement. Securing a comfortable retirement (which may not be primarily dependent on the business).
4. Legacy issues. Preserving the business for family members or realizing its value to provide financial security for surviving family members while treating heirs fairly.

This article, the second in a four-part series, addresses how an owner can:

• Attract, reward and retain key employees; and,
• Protect the value of the business upon the eventual departure of a key employee.

Business owners, especially those who have lost a key employee to a competitor, know first-hand how hard it is to attract and retain good talent. Not only does the departure of a key employee hurt the bottom line, but valuable time must be spent to find and train a suitable replacement. If the executive was a possible successor to the business, the owner may have to consider other, less appealing options. Indeed, for many businesses owners, the most important assets of the company are the key employees and executives. They drive revenue and are important to business perpetuation.  But in today’s economy, key employees are less loyal and might be tempted to leave for even slightly greener pastures. Executive Compensation One way a company can retain and attract top people is to reward them with additional executive compensation. A supplemental executive retirement plan (SERP) is a viable option to provide special compensation for special people. Highly compensated employees are typically not able to put away enough through the company’s 401(k) and profit sharing plans to adequately replace the executive’s pre-retirement income. With a SERP, the company agrees to provide a benefit to an executive based on satisfaction of terms and conditions such as sales goals, performance and longevity. The business owner chooses who participates, the level of benefits, the types of benefits and the plan provisions. Benefits typically include retirement income, survivor benefits and disability payments and are subject to the company’s creditors. By offering valuable benefits like these, business owners will attract more top talent, increase their productivity and make it more difficult for them to consider leaving the company. Family Business Applications A SERP can be especially useful in a family-owned business setting where a key employee, such as a CFO, is not a family member. Because these employees are unlikely to receive equity in the company as a benefit of employment, they can be provided with “equity-like” benefits through a SERP so they will stay with the organization and perform, especially as the business is transferred from one generation to the next. Informal Funding Most businesses earmark assets and current cash flow to pay future SERP liabilities. Otherwise, the “pay when due” approach may put too much financial pressure on the business. When the promise to pay isn't backed by assets, a slowdown in business can mean a slowdown in benefits paid out, as well. To avoid these pitfalls, most organizations choose to informally fund SERPs with taxable investments, such as equities, or with tax-favored corporate-owned life insurance (COLI). Both offer attractive, growth-oriented investment opportunities. Assuming the executive can medically qualify for the coverage, COLI can provide additional tax advantages: tax-free gains on investment earnings in the policy, tax-free access to cash values through policy withdrawals and loans and an income tax-free death benefit at the passing of the executive. In a rising tax environment, the benefits of tax-favored COLI can make it an even more compelling option. The coverage can be even designed to allow a company to eventually recover all or a portion of its SERP costs, including benefit payments and policy premiums. An Example Suppose a company has a key employee it wants to retain. A SERP could be established with a COLI policy on the executive’s life that is sufficient to provide the future benefits outlined in the agreement, such as a retirement income benefit of $100,000 a year for 15 years. The business would own the policy, pay the premiums and serve as beneficiary. In specific cases, a business may be in a position to borrow some or all of the premiums and make interest payments to a lender rather than premium payments to an insurance company. At the executive’s retirement, the company would access policy cash values to provide the agreed-upon income benefit to the executive. The retirement benefit would be taxable to the executive and deductible to the company. When the executive eventually passes away, the company receives the tax-free death benefit proceeds as a mechanism for cost recovery. If the executive dies before retirement, the death benefits are paid income tax-free to the company. The business can then provide the benefits promised to the executive’s beneficiaries and use the excess funds to recover the cost of the plan and protect the business from the loss of the executive. If the executive decides to leave before retirement or meeting the terms of the SERP agreement, the executive may forfeit some or all of the promised benefits, which should make him think twice about departing. Even if the employee leaves, the company still owns the policy and can use it as source of funds to hire a replacement. Although the premium payments are not tax-deductible to the business, using COLI can be extremely tax-efficient because: Cash values grow tax-deferred and can be accessed tax-free via policy loans and withdrawals; payments to the key employee (or employee’s heirs) are tax-deducible to the company; and death benefits are paid income tax-free. Next Steps It is comforting for a business owner to know that, with a SERP, there is a tool at her disposal to efficiently recruit, retain and reward the industry’s top talent. Consulting with a corporate attorney and a knowledgeable life insurance professional, who is experienced in designing COLI products, is the place to start. Part 3 of this four-part series will address business owner retirement, to ensure the business owners and their families maximize the value of the businesses they worked so hard to create.

Looking behind the curtain of reinsurance, you find a most unusual business. Here are 13 anomalous features:

--Reinsurance is for the most part unregulated, but users -- insurance companies -- are regulated.

--Insurers must use a system of accounting that makes reinsurance attractive: If a reinsurer gives insurers a discount off a list price (ceding commission), they may show on their books that they paid the list price and may treat the discount as income.

--Reinsurance may be marketed by independent brokers that owe the insurance companies no fiduciary duties. The broker leads insurance companies to believe that it has their best interests at heart, but courts have ruled that the broker does not even have a duty to not inflate its commissions. The broker's relationship with the reinsurer is much more important than the broker's relationship with the insurers.

--The reinsurer can insist that all disagreements must be arbitrated, and that the arbitration does not set precedent or provide guidance should a similar issue arise in the future. That way, the reinsurer can argue the same issue over and over and over. The findings of arbitration are not only not recorded, they are often confidential.

--The outcome will not be determined by legal construction and interpretive rules but by the "custom and practice" of the industry -- but which "custom and practice" is neither written down nor uniformly agreed upon or adhered to by those in the industry. That is, the contract can specifically say one thing, and the wording can be ignored in any arbitration finding if it is not in line with "custom and practice." A reinsurer can do all this and at the same time argue that the lopsided arrangement is an "honorable engagement."

--The reinsurance contract likely has an "entire agreement" clause, meaning that nothing from outside the contract can be used to establish rights or obligations. That is, the four corners of the contract supposedly set the parameters of the agreement. You may ask: Isn’t "custom and practice" contained outside the contract? Yes, it is. So, at the same time that there is the argument that the contract is the entire agreement, there is also the provision that unwritten rules outside the contract determine the interpretation of the contract.

--If there is a disagreement as to what the contract says, the dispute must be arbitrated as not a legal obligation -- yet the contract says it applies the laws of the state where the insurer is based.

--Who is responsible for writing this convoluted and lopsided contract? Often, that is the broker -- which is not a party to the contract.

--If a broker fails to even issue a memorialization of the product to the insurer, nine months after having "sold" the product, it is the insurance company that is punished, not the broker or the reinsurer.

--Even though some states specifically provide that reinsurance falls within the statutory definition of a regulated product, states do not regulate reinsurance directly. Reinsurance should be regulated federally, because it is clearly interstate commerce and falls within the U.S. Constitution’s commerce clause, but the federal government does not actually regulate reinsurance, apart from income tax issues. So, reinsurers do not have to obtain regulatory approval for rates or for products.

--Talk about a lobbying force. Legislatures have been convinced that taxing it would raise the price of everything for the general populace. That argument could be made for any business, because all taxes are ultimately borne by the general populace, but has not caught on for other industries.

--Reinsurance is amazingly simple. It comes in essentially one of two forms: treaty (for groups) and facultative (for individuals). Treaty comes in essentially two varieties: proportional and non-proportional. But reinsurance becomes esoteric by design. It has cloaked itself in mystery by avoiding the courts as a venue and by taking advantage of the fact that few legislators have ever dealt with the product.

--Although with similar financial products, courts would find that third parties might have rights, third parties have no rights under reinsurance.

I have not figured out why reinsurance is not fully regulated, as is insurance. I have heard the logic that the parties to the contract are equally sophisticated, and therefore no regulation is necessary. The problem with that logic is that the premise is false. Many of the parties do not have equal bargaining power; they are not equally qualified to enter into the transaction; and there are no real arm's-length negotiations. Many small companies spend a great deal on reinsurance each year.

So why not at least tax reinsurance? I have heard the logic that this would be "double taxation," because the original (the insurance) transaction was taxed. However, that ignores the realities of reinsurance. Reinsurance is not insurance of insurance. It is insurance on the performance of an insurance company's core business, which happens to be insurance. Why does insurance covering loss from a collection of insurance products get to escape taxation on premiums when insurance covering loss from a fleet of cars does not? The same hurricane can cause loss to the core business of the car dealer and the insurance company, but coverage for the car dealer carries taxes on premiums while coverage for the insurance company does not.

I have also heard that reinsurance is like any other wholesale business, where sales tax is not applied. This logic ignores the realities of reinsurance. Reinsurance is not a commodity that is purchased in bulk to then subdivide into smaller units for sale by insurance companies. Reinsurance is a retail sale; it is not a wholesale transaction.

I am not necessarily advocating for regulation or taxation of reinsurance, but I am advocating for leveling the playing field and bringing transparency to the process of reinsurance.

I think that could be done with the abolition of any mandatory arbitration in reinsurance contracts by the NAIC. The plaintiff’s bar has a history of efficiently "regulating" where no regulation exists, if given the proper venue. Arbitration has not brought lower costs and timely determinations. Indeed, arbitration has proven to have none of the benefits and all of the problems of litigation.

It really is about time that reinsurance is made to come out from the shadows and to fully participate in the 21^st century judicial system, rather than allowing it hold on to the faux vestiges of yesterday’s "gentlemen’s agreements."

A leading workers' comp insurer once asked me to review its provider network strategy. The problem was that it didn't have one.

The insurer readily admitted that after, a decade-long relationship with its preferred provider organization (PPO) vendor, the insurer could not identify a single quality medical provider in the network.

It was no wonder, because the entire business relationship with the PPO was based on discounts from network providers. The only document produced was an Excel spreadsheet showing total billed vs. total paid charges; nothing about what was paid for or to whom it was paid.

The entire foundation of the insurer's network strategy was what is known as "percentage of savings" arrangements with the PPO and corporate clients. Corporate clients typically pay 33% of these savings to insurance companies and third-party administrators, making them a major cash cow.

When I asked to see a breakdown of providers by specialty and how they matched up with the insurer's clients' work locations, I was met with blank stares. I asked, "If a client is billed for a discount on an MRI that was not medically necessary, how is that a savings?" The reply was a proud, "The more MRIs ordered, the more money we make."

Not a thing in the PPO network criteria included selecting credentialed, high-quality providers who were experienced in the diagnosis and treatment of work-related injuries and illness. That was a new concept to the insurer. It was not looking for the best doctor in town; it wanted the cheapest.

I found memos in which both the utilization review team and the unit that handled self-insured clients were completely in favor of developing a network based on the quality of care. But they were not invited to the table on corporate network strategy. Nothing was going to change that network strategy and cash cow.

Corporate clients have been paying for phantom savings for decades through these "percentage of savings" PPO arrangements.

That must change.

A corporate-wide network strategy must start at the moment of injury and consist of a pre-planned strategy at the local worksite. People say that all politics is local, and that is true with healthcare. All healthcare is local. Injured workers need to be treated by the best and most appropriate medical provider from the moment of injury. That should be the only network strategy. Period.

Paying the best provider a fair and negotiated fee, while establishing a pre-planned communication and claims process with input from local case managers and other medical providers around key work locations, is the foundation of a real strategy. This approach has been working for many well-informed and progressive companies for decades.

Why is this approach not promoted? Because there is no cash cow on discounts for managed care vendors, insurers and TPAs.

I have worked with major national corporations developing local hubs at key worksites across the country by utilizing front-line providers such as urgent care centers, primary care providers, specialists and facilities, all trained and credentialed in workers' comp and industrial medicine.

In establishing these pre-planned hubs, we were able to establish excellent working relationships with handpicked network providers that worked closely with corporate clients by actually visiting work locations or reviewing videos of job requirements. The entire process of best practices from injury notification to return-to-work was put in place.

These custom-built networks truly reduced corporate costs 30% or more, savings that were documented using various benchmarks and metrics developed during the process but, more importantly, documented by the causality actuaries in their annual FASB financial statements. Those are savings that went directly to the bottom line and stock price. Instead of paying money to the insurer or TPA for 33% of the savings arrangements on broad-based PPOs and putting millions in PPO vendor bank accounts, I put money in the client's bank account.

It is time for companies that pay for workers' compensation to put the "preferred" back in their PPO strategy. A "preferred" provider isn't offering discounts but is providing high quality medical care and better patient outcomes in compliance with evidence-based medicine practices.  Preferred providers diagnose and treat a given condition and get that injured worker on the road to recovery from day one.

That is a network strategy.

A fresh approach may be needed to address how best to protect Medicare’s interest in a workers’ compensation settlement. Today, the Workers' Compensation Medicare Set-Aside Arrangement (WCMSA) is a routine part of most settlements. The WCMSA takes a part of the workers' compensation settlement and allocates it specifically for future medical expense. If this is done correctly, the Medicare beneficiary is then free to spend the non-allocated portion. The widespread acceptance of the WCMSA is based on a recommendation by the Centers for Medicare & Medicaid Services (CMS), the agency responsible for the administration of the Medicare Trust Fund.  The WCMSA has become the de facto rule because CMS can ignore a workers’ compensation settlement agreement between parties if it believes there has been an attempt to shift responsibility to pay for future medical care to the Medicare Trust Fund. In recent years, however, some have objected in certain types of claims because changes to the review process have increased the dollar amounts that need to be set aside for the WCMSA, to preserve the Medicare Trust Fund. Some feel that the amounts have become unreasonable.  The result has been some failed settlements, contrary to a public policy that favors settlements. In establishing a WCMSA, information is submitted to the Workers’ Compensation Review Contractor (WCRC), and it is evaluated to provide an allocation number for the set-aside that CMS will accept. There are obvious tensions. For instance, the contractor may require extensive documentation for medical care that goes beyond what is necessary for the workers’ compensation claim. This requirement can delay the process or even require the parties to the workers’ comp claim to start over. The contractor may also increase the amount that has to be allocated for the WCMSA, as medical treatment that is unrelated to the workers’ compensation claim can make it into the set-aside. CMS allows for the use of structures to fund the allocation that can save some money by avoiding the need for an up-front, lump sum payment. However, there is little flexibility to discuss disputes over treatment, prescription use and costs. H.R. 1982 is the legislation, supported by the insurance industry, that represents the present attempt at reform. Introduced on May 5, 2013, by Republican Congressman Dave Reichert from Washington’s 8^th Congressional District, and co-sponsored by Democrat Congressman Mike Thomas from California’s 5^th District, the bill was immediately referred for consideration to two House Committees with jurisdiction over Medicare issues:  Energy and Commerce and Ways and Means. But little else has occurred. Today, as the close of the 113^th Congress draws near, H.R. 1982 has 14 co-sponsors, evenly split between Republicans and Democrats, but no companion legislation exists in the Senate. It is difficult to imagine a path for this bill to become law. Members are getting ready for the August recess, to campaign. When they return, larger issues of foreign policy and immigration will take center stage. Passage is not impossible, and it is important to continue support through the end. It is also important to plan ahead, as about 9,170 bills are currently pending, and only about 5% are expected to become law when this congressional session ends on Dec. 31. Revisiting the strategy of H.R. 1982 is important to improve chances of success should re-introduction be necessary. Revision would necessitate assembling likely stakeholders. This meeting should take place as early as possible to allow for an early introduction in the 114^th Congress. The process should follow that adopted by the Medicare Advocacy Recovery Coalition (MARC), which led to the successful SMART (Strengthening Medicare and Repaying Taxpayers Act) at the close of 2012. Broad-based support is critical to success in a Congress that is expected to be even more divided in the next session. The purpose of H.R. 1982 is to increase the number of workers’ compensation settlements with Medicare beneficiaries. This must be an important goal of any rewrite. Because H.R. 1982 is designed to amend the Medicare Secondary Payer Act (MSP), already considered to be “one of the most impenetrable texts within human experience” (Parra v. Pacificare of Arizona, Inc., 2013 U.S. App. LEXIS 7861), another goal must be to have it be easy to understand. A third objective must be to avoid unintended consequences, by clearly defining terms and reconciling conflicts with existing MSP terms. There can be no doubt that H.R. 1982 favors the workers’ compensation plan. The workers’ compensation industry would go from having no ability to raise legitimate disputes to being freed from constraints. CMS, neutered by the proposed law, could do very little to seek increased protection for the Medicare Trust Fund. This is most likely the Achilles heel of the present legislation. Congress enacted the MSP law in 1980 to stem the red ink of the Medicare Trust Fund. Congress passed the Medicare & Medicaid SCHIP Extension Act of 2007 in furtherance of that objective. Any succeeding legislation must be consistent with such protections. This can be achieved and still provide immense benefit for all stakeholders. To see how, here is a look at the major areas covered by H.R. 1982 and how they could be revised to increase the likelihood of adoption: Thresholds H.R. 1982 may be too aggressive in codifying what is already well-established CMS policy for situations where Medicare’s interest need not be considered. Already, in situations where the claimant’s treating physician does not reasonably expect continuing medical treatment, the parties are free to settle without an allocation for a set-aside. All that is required is documentation from the treating physician. Similarly, no allocation can be required if medicals, as alleged or claimed, are not being released (in other words, if the medical portion of the claim is not being settled). Rather than have legislation codify where Medicare’s interest need not be considered, a better approach would be to require CMS to adopt regulations. One issue that can only be addressed through legislation is a value-based threshold that involves a release (or settlement) of medicals. The H.R. 1982 threshold value includes settlements of as much as $25,000; below that level, Medicare’s interest would not have to be taken into account. Today, CMS does not review such settlements but expects that they will “consider” Medicare’s interest. The necessary analysis can be expensive and so time-consuming that contractors will exceed CMS limits on workload. A way around the analysis of smaller settlements could be for Congress to authorize the CMS actuary to determine a threshold based on the cost to the government of review. The threshold should work out to at least $25,000. Qualified Medicare Set-Aside The term “Medicare Set-Aside” is not currently codified in the MSP law. Stakeholders should study the potential unintended consequences of codifying the term in ways that have the force of statute. CMS has established policy and procedures that it recommends on when to submit a WCMSA for approval. H.R. 1982 does not add any benefit by adding definitions and can be simplified by omitting them. The critical component that should be discussed by stakeholders is whether the rewrite should establish a “safe harbor” settlement amount in which a certain percentage is paid to CMS by lump sum or stream of annuity payments that legally “considers” Medicare’s interests. This approach prevents codification of the WCMSA and still achieves the objective. The percentage of the settlement amount would need to be analyzed to maintain cost-neutrality of the bill. As a starting point to demonstrate neutrality, Medicare Set Aside stakeholders should be able to provide Congress data on the ratio of the MSA allocation to the amount of the settlement. Authorizing CMS to Receive Allocation Amount This is long overdue. While it sounds like such a feature would add revenue to Medicare, helping the bill to pass, government accounting won’t recognize this approach. The Congressional Budget Office must score each bill to determine if it costs or saves money, and the CBO doesn’t count as revenue money that is received in advance of when it needs to be paid out. This method is counterintuitive, but stakeholders must take it into consideration. Nonetheless, for the benefit of the injured worker, and non-interruption of Medicare or Social Security benefits, letting CMS receive the WCMSA allocation amount is important and would make sense to Congress.  It is important to have the legislation authorize both a lump sum and stream of annuity payments. Limiting Conditional Payments to the Fee Schedule Stakeholders should discuss the issue of healthcare providers that, under present CMS regulation, may collect more than is allowed under the fee schedule. H.R. 1982 is designed to deal with considering Medicare’s interest in workers’ comp settlements, and it might be wise to limit legislation to that area rather than also taking on the issue with fee schedules. Simplifying the legislation might avoid drawing unintended adversaries who might lobby against it. Applicability of Fee Schedule CMS already accepts the workers’ compensation fee schedule or, in its absence, the usual and customary rate. H.R. 1982 would like to extend the use of the workers’ compensation fee schedule, but some plans may already have better rates. Stakeholders should discuss how medical services and items, including pharmacy, should be priced. There must be no cost to the Trust Fund because of any legislation. In fact, there are ways in which the fee schedules could benefit the fund. Right of Appeal Last year, the Strengthening Medicare and Repaying Taxpayers Act (SMART) became law, providing for an appeals process for workers’ compensation laws or plans. The legislation requires appeals over any “determinations” by CMS. Because an approved WCMSA is a CMS “determination,” it would logically be subject to the appeals process. But, because the WCMSA process is recommended and not required, the appeals process may not be triggered. When parties use the WCMSA, they also waive any right of appeal. The appeals process specified by SMART therefore has no applicability unless the WCMSA is required by an actual law. Stakeholders should consider adding legislation to strengthen the SMART right of appeal. A fair, two -way process to discuss legitimate disputes is essential to increasing settlements. Respecting State Decisions Recently, CMS issued an updated user guide for WCMSA submissions. A section was added that has resulted in confusion on the application of state law. Section 4.4.1 states that CMS will respect the allocation of non-medical portions of a settlement by a board with appropriate jurisdiction, after a hearing on the merits. By implication, what’s left over in the settlement is for medicals, and CMS likely would respect that allocation, as well. But CMS may disagree. Stakeholders should discuss clarification of how state law should work with the Medicare Secondary Payer Act. This may require an analysis of pre-emption rules, as well as defining the types of hearings. H.R. 1982 has both positive and negative implications, creating mixed support. CMS will most likely oppose it if it moves in the present Congress, as it prevents CMS’ ability to enforce the MSP and protect the Trust Fund. Providers, MSP compliance companies and structured-settlement companies would also line up to oppose the bill. It is not clear where beneficiaries and beneficiary organizations will line up – while, in the short run, H.R. 1982 would cause more cases to settle, the adverse impact to the Trust Fund may result in delay in the delivery of benefits as well as their reduction. Nonetheless, there are positives to H.R. 1982. A fresh approach is needed with all stakeholders involved to secure broad-based support to resolve problems for the injured worker, CMS and the workers’ compensation law or plan. With the right legislation, a fix can happen, and one is sorely needed.

Imagine that your job involves negotiating with international criminal organizations or, at the very least, assisting those who do. No, you do not work for some mercenary military force or in illicit arms and drug deals; you work in insurance. It may seem like the start of a movie, but it is a very real segment of the insurance industry, generating hundreds of millions of dollars in premiums annually. What is this line? It’s kidnap and ransom (K&R) insurance, which, in the modern world of global expansion and technological revolutions, is a virtual necessity for major players in every market and a major opportunity for the insurance industry. An emerging line K&R insurance originated following the kidnapping (and eventual murder) of Charles Lindbergh’s baby in 1932. It remained a niche coverage form, covering celebrities and their families, and was relatively unused in the U.S. until the Patty Hearst abduction in 1974. From that point on, policies became more and more popular among the Hollywood elite. Today, the major purchasers of this coverage are large companies with a significant international presence. The policies are designed to protect individuals and corporations operating in high-risk areas around the world. Over the years, policies have evolved from covering named individuals to covering named categories of persons (family, employees, employers, etc.) of a covered individual. The coverage is typically offered along with other management liability lines such as directors and officers. Lloyd’s of London, which has a reputation for focusing on just this kind of specialist insurance in the international market, has a long tradition of providing kidnap and ransom policies. While there is personal lines availability for persons such as freelance journalists, mission workers or high-net-worth families, this article focuses on commercial K&R coverage. There are four major perils covered by the typical K&R policy: kidnapping, extortion, detention and hijacking. Some policies now cover cyber-threats under their extortion coverage, which may overlap with companies’ cyber-perils policies. Overlapping cover can also occur in the context of piracy at sea, where traditional marine cover may meet the cost of the ransom but will not meet the (usually very substantial) costs involved in the crisis management process. K&R policies are indemnity policies; they reimburse for losses incurred by the insured. Types of losses can widely vary, and include: ransom payments, loss of ransom in transit, medical expenses for the victim, psychiatric expenses, reward payments, asset protection, funeral expenses, child care expenses, business interruption expenses and, perhaps most importantly, the fees and expenses of crisis management consultants. All major K&R policies include the cost of services of crisis management and security consultants, which can be thought of as loss mitigation teams. These consultants provide advice to the insured’s family or employer on how best to respond to the incident. Should the local authorities be contacted, or even trusted? How can you make the kidnappers prove they have your employee? Where should you meet with the kidnappers? How should you deliver the ransom? These are not easily answered questions, and most likely should not be answered by someone at your company. Crisis managers have accumulated a wealth of expert knowledge about economic kidnappings. They take the tremendous burden of dealing with kidnappers away from a company or a family and prevent emotions from taking over and exacerbating an already tenuous situation. These firms have a relationship with kidnappers. They know who to trust, who can be bribed and how much resolution is going to ultimately cost. Typical policies do not cap the expenses that can be paid to crisis management teams. Coverage for a unique population A unique feature of K&R policies is that the personnel covered by a policy most likely do not (and cannot) know that they are covered. Policies are typically purchased by a company to cover key personnel traveling in dangerous areas of the world. If those covered were aware of it, it would likely change their activity, potentially increasing the risks they take. In extreme cases, it could even lead to collusion between kidnappers and potential victims. For instance, if a covered individual knew that a company had coverage and would pay in the event of a kidnapping, he or she might work with kidnappers for a portion of the payout. Clearly, it is in the best interest of the companies that those covered remain unaware of the coverage or, more realistically, unaware of the limits and conditions of the specific policy purchased. This scenario leads to some obvious ethical questions and some unusual adverse selection questions. Does the existence of this coverage actually increase the propensity for organizations to commit kidnappings? While evidence exists that the number of kidnappings has increased dramatically over the last 20 years, especially post-9/11, it is not possible to differentiate between the potential moral hazard inherent in a K&R policy and the increased “riskiness” of doing business because of globalization, population increases and global financial unrest. In the 1980s, the United Kingdom’s Prime Minister Margaret Thatcher launched an investigation into the policies. She was concerned that the existence of the coverage might encourage policyholders to pay ransom and might allow them to be less cautious about the amount of ransom they paid. Nothing came of that investigation and, while tension between governing authorities and insurance providers remains, the coverage continues to grow today. Another potential dilemma arising from the existence of this coverage is whether a victim’s company will even inform the insurance company. The vast majority of kidnappers demand that no one be informed about the occurrence. Companies need to balance this demand with the need to contact authorities or the insurance company. If a company does not inform its insurer of the kidnapping, the insurer will likely try to deny coverage; however, if it does inform their insurer, it is potentially jeopardizing the employee’s life. As mentioned, there is also the potential ethical dilemma of negotiating with, and potentially making payments to, kidnappers. In the event that the kidnapping is perpetrated by a known terrorist organization, as is becoming more common in Middle Eastern states, the victim’s company may be placed in the awkward position of having to negotiate with terrorists, against the advice and publicly stated goals of Western democracies. It is important to remember that negotiating with terrorists is not encouraged. Financing kidnap and ransom policies Typical K&R policies are relatively inexpensive (when compared with directors and officers coverage) but are also very profitable because of the low frequency of the losses. Basic policies start as low as $500 a year, though pricing depends on the situation. Underwriting a K&R policy is like underwriting any other type of insurance. There are pricing incentives for good (less risky) behavior and penalties for bad (riskier) behavior. Underwriting characteristics used vary from company to company but often include the nature of a company’s business, total revenue, number of employees, travel patterns and foreign locations of employees, as well as previous loss experience. The market, while still small, is growing. Kidnapping is estimated to be a $500 million a year criminal activity (as of 2010), a large portion of which comes from K&R payments, most of which is funded by insurance companies. At the same time, it is nearly impossible to know how many policies are in force worldwide. This is primarily because of the secrecy of the coverage. The presence of the coverage will never be mentioned in stories about a kidnap victim’s release. The policies are not paying the ransom; they are almost always reimbursing the company that does. Because of the secret nature of the policy, information about specific cases is hard to come by. Beyond that, according to Red24, a non-broker specialist in crisis management circles, it is estimated that 30,000 “traditional” kidnappings (i.e., those with ransom demands), occur every year worldwide, though the New York Times reports that only 10% of kidnappings are reported to the authorities. While it is difficult to gauge potential future markets for this coverage, it is also difficult to determine who already has the coverage in place. What is not difficult to see is the financial impact the kidnappings themselves are having on companies. The non-profit group Oceans Beyond Piracy reports that maritime attacks by Somali pirates alone cost the shipping industry more than $5 billion in 2011, and the Economist estimated that Somali pirates alone generated more than $200 million in annual premium at the peak of their attacks in 2010. Most common targets of kidnappers are the oil and gas industry, because of the perception that energy companies are exploiting Middle Eastern nations’ wealth for their own benefit. Media outlets are also prime targets, primarily because of the exposure a kidnapping would generate. A new breed of kidnapping risk It is not just kidnappings for ransom and pirate attacks that companies need to be cognizant of. A relatively newer phenomenon is that of the “express kidnap,” of which there are on average 6,000 a year in Mexico alone. In these instances, there is no demand for a ransom made by a third party. Instead, the kidnappers take their victim to an ATM or a hotel room and make the victim access cash or personal valuables. The vast majority of these instances go unreported, mainly because of the corruption of the local law enforcement. In fact, studies say that half of the express kidnappings in Mexico are perpetrated by law enforcement agents themselves. So, not only do kidnapping and ransom policies have to cover the low-frequency, high-severity, kidnap-for-ransom losses, they also must cover (relatively) high-frequency, low-severity, express kidnappings. An evolving risk It appears that kidnappings are increasingly being thought of as a business opportunity. Groups that have previously kidnapped purely for political purposes are now realizing the economic value. Most kidnappings are now orchestrated by professional gangs and groups, and dealing with them is more similar to a business negotiation than with a criminal organization. Kidnappers are getting smarter and are, on an increasing basis, being aided by crooked politicians and law enforcement agents. Kidnapping victims are seen as inventory and, as with any other business, the goal is to sell the inventory, not destroy it. As kidnappers get smarter, companies that deal in areas that present a high risk for kidnapping must also learn to prevent losses. Having a kidnapping and ransom policy protecting key employees is common sense and should be regarded as an industry best practice for risk management. As globalization continues to expand, companies should see the need to take precautions to protect their “human capital.” Clearly, avoiding zones with a high level of kidnappings is ideal, but in the event that your company must do business in these areas K&R coverage can provide an important backstop. Kidnap insurance will always be veiled in secrecy out of necessity, but that does not mean there is not a place in the industry for growth and innovation. As the demand for the coverage increases and the market continues to grow, it is natural to expect innovation in pricing. Clearly, there is very little historical loss data from which to develop reliable models, and most pricing is done on the basis of expected loss ratio. However, there is likely value to be gleaned from analyzing travel patterns, regional economic/political unrest and companies’ international strategies. K&R coverage is currently buried in the “other liability” line of the NAIC annual statement. At present, it is an extremely profitable coverage. But, like other lucrative practices, as more and more insurance companies see the potential for profits, loss ratios will go up as premium rates are minimized. A company that can most accurately forecast aggregate kidnapping activity and price policies accordingly stands to gain significant profits. The goal, of course, is to reduce the opportunities for kidnapping. K&R policies encourage those who have personnel at risk to manage that risk more effectively, by providing rate relief for firms that engage in less risky activity. Insurers want to do all they can to minimize their policyholders’ risks, to reduce the likelihood they will have to pay out at all. The insurance companies do not profit from the loss occurrences; they prevent their insureds from having to liquidate assets because of acts of terrorism. The policies align with the government goals of reducing terrorist activities. They do not exacerbate the problem; they play a necessary role in reducing the impact of traumatic events. This coverage will grow significantly as the number of companies operating internationally increases and as international markets in which companies operate continue to expand. It is vital that these companies obtain this coverage for their key employees. It could save their business…or an executive’s life.

News and comments about the recently announced Apple and IBM partnership is flooding the mediasphere. As it should. But for me, this partnership will only succeed if both firms have come together to perceive and support the corporation as a consumer writ large. That means enabling corporations to compete in a mobile-first, customer-driven mediasphere. There are so many technology capabilities flying at us as consumers and as employees in corporations that the nature of commerce is changing; the nature of entertainment (at least the delivery of it) is changing; the nature of collaboration and communication is changing. At the core of all of these changes is the mobile device, which we keep closer to us than our one true love. In some cases, the mobile device may be our one true love. We are a mobile-first society. As consumers, we know this. We live it, we love it … mobility is us. But do the companies we do business with know it? Are they showering us and our mobile devices with the love we (rightly) demand? Remember “City Slickers?” Curley made a big deal of there being one truth. I don’t remember his ever revealing it, but I’ll reveal what Curley’s one truth would be now: Every firm is a media firm. Regardless of industry, every firm generates, consumes, stores, manages and “publishes” information. If that isn’t the essence of a media firm, then I don’t know what is. For those of us in insurance, our industry is entirely information (well, with a legal wrap around a financial promise of paying a claim, but even all of that – legalese and money – is entirely information flows). Insurers are being bombarded with waves of unstructured – and semi-structured – data from customer calls, agent/broker calls, social media sites, blog posts and sensor-embedded tangible assets. Enough data to choke a mainframe or two (or three). Big Data indeed! But how are insurers handling all of these waves of data (big, small or in between) - other than running and re-running the same view against refreshed data? (I readily admit I’m shunting aside the catastrophe modeling and pricing models that property and casualty (re)insurers are doing. But I don’t think that I’m doing all that much damage to the insurance industry’s analytical reputation.) Now we’ve arrived at the heart of the matter: what the Apple-IBM partnership can bring to the table.

• Apple is a consummate media consumption technology firm. Apple lets you explore, intuitively create and expose your verse, whether it is composed of text, still pictures, sound, video or mix of any of these media components.
• IBM is an applied research-driven enterprise-focused technology firm. (Its acquisition of PwC consulting only made IBM stronger in the enterprise space).

Without knowing exactly what the apps will be for the insurance industry, I fully expect that the apps will be:

• elegant, usable and fun
• secure
• well-mannered -- the data serving as the foundation of the apps will be well-governed, well-defined and well-understood.

Because all of the above is what re-perceiving corporations as consumers means to me. In fact, all the above are my table stake expectations from this partnership. But it’s not a strawberries-and-cream world. Our newly announced partners will not find smooth sailing in the insurance industry. Why? I think that our partners will find that insurers do not consider ERP systems to be systems of record. That honor falls to the 30- to 40-plus-year-old policy administration, billing and claim management systems. Additionally, agency management systems and other channel management systems are important sources of customer and prospect data. Apple and IBM will find that insurers expect, or should expect:

• the security of the apps to be doubly or triply proven
• to be able to easily clean, govern and otherwise manage stored data and data flowing into the company through the multitude of value chains
• employees to be able to use the mobile apps as collaborative platforms to discuss, annotate and analyze data
• employees to intuitively interact with the analytically driven visualizations.

Finally, when will this partnership deliver IBM’s Watson on-demand, through a click on an app? (I would like a silhouette of Sherlock Holmes on the app, please.)