We may look back to this time as a period when one out of every 10 injured workers faced the risk of criminal prosecution and deportation for the act of submitting a legitimate workers compensation claim. Michael Whiteley of WorkCompCentral reports that law enforcement agencies in at least two states recently adopted strategies to arrest undocumented workers on the grounds that using an invalid Social Security number in their claims submission defrauded the insurer. First report of injury forms include a field for a Social Security number. The number links the claimant to personnel and payroll data on the employers books. Normal payroll deductions are taken for the number to hold for future Social Security and Medicare benefits, to which the claimant may never be able to enjoy. By definition, the Social Security number on an undocumented workers claims record is invalid. The eight million undocumented workers comprise about 6% of the total civilian workforce. By studying estimates of undocumented worker penetration by occupations ranked by injury risk, one can reasonably project that undocumented workers sustain one out of every 10 work injuries. This high volume is invisible to almost everyone except for adjusters, case managers, lawyers and others who work directly with injured workers and have learned their work and life patterns. The rate varies greatly, from maybe 2% in West Virginia, a low foreign-born population state, to over half within the fruit- and vegetable-producing counties of southern California. At my request, the Workers Injury Law Advocacy Group asked if its members were aware of intimidation, claim denials or arrests that arose from the use of other persons Social Security numbers. Within a few hours my email inbox lit up like a Christmas tree. A Florida attorney with whom I had spoken earlier sent adjuster notes obtained through discovery for a June 2012 injury at a dairy. The adjuster wrote on June 27, 2012, "claimant, three children, obtained SSN from his brother when his brother returned to Mexico. Married, 9th grade educ in Mexico." In March 2013, the adjuster wrote: "SIU check found that SSN was issued in Puerto Rico sometime between 1936 and 1950." In March 2013, the adjuster wrote that the case had been referred to a West Palm Beach, Florida, investigator. On April 4 the notes state that the claimant was arrested for using a false number to gain employment and false filing of a workers compensation claim. The legal basis for the arrest was not given but was most likely insurance fraud statute, 440.105 (4)(b), currently being challenged in superior courts (Florida v Brock). This workers guileless comments about the passed down number shows how accustomed undocumented workers, their employers and workers compensation claims payers are to tacitly accommodating illegal work status while processing workers compensation benefits. In all but a few jurisdictions, undocumented workers can legally obtain benefits, a right assured by state law and state superior courts. Whats changed, it appears, is the climate. Perhaps tacitly going along is viewed by some as a form of amnesty. Maybe workers compensation fraud teams are hungrier for results and see identity theft as easier to document than traditional fraud such as faking disability. Step back to consider the implications on the industrys commitment, as phrased by the National Council on Compensation Insurance, to "help foster a healthy workers compensation system." Some applicant attorneys allege that defense lawyers sometimes ensnare their undocumented clients by teasing out during depositions information they then package over to law enforcement. Sometimes, they tell me, there is a threat. "Retaliation and threats of retaliation have created a culture of fear," The National Employment Law Project asserts, citing its recent survey that illegal immigrant workers are hesitant to file workers compensation claims or assert other rights out of fear of retaliation. Workers compensation benefits and work safety join in a circular flow of cause and correction. Len Welch, Chief of Workplace Safety for Californias largest workers compensation insurer, the State Compensation Insurance Fund, says that immigration reform could be the most important work safety advance in the next five to 10 years. "When you have undocumented workers, the odds of accidents go way up. Its the tip of the iceberg of the massive underground economy in the state," he said. James Baldwin, debating William Buckley at Cambridge University in 1965, described the legacy of slavery as the tragedy "when one has absolute power over another person." To the undocumented worker, her or his employer holds nearly absolute power over safety. A work injury could result in jail time and deportation. Neither the workers compensation system or worksite safety are healthy when one tenth of injured workers are in a constant state of vulnerability.

The chief innovation officer of a Fortune 1000 company relocated to a Silicon Valley outpost far from her New York corporate headquarters. She now spends most of her time holding court with venture capitalists and entrepreneurs about stakes in hot start-ups. It is never clear who is courting whom in those meetings, though the general attitude in the Valley is that there is more dumb money than good start-ups. Her goal is not to maximize financial returns on her investments—even a 200% return would not be material to her corporation’s financials. Instead, she is essentially outsourcing her company’s innovation strategy to start-ups. Do these stories sound familiar? Like too many of their peers, these smart and savvy veterans were stymied in their efforts to get their companies to innovate. They resigned themselves to a conventional wisdom that has taken root in recent decades: that start-ups are destined to out-innovate big, established businesses. Consider, such pessimists contend, that 227 of the companies on the Fortune 500 list just 10 years ago are no longer on the list. Based on personal experience with hundreds of large company innovation successes and failures, and research into thousands more, however, I have found that this conventional wisdom just isn’t true. Or, at least, it need not be. Yes, small and agile beats big and slow, but big and agile beats anyone—and that combination is more possible than ever. There are three reasons why innovators at large companies should be optimistic about their ability to beat start-ups. 1. Start-ups aren’t all they’re cracked up to be. Yes, Silicon Valley has the cachet, but Harvard Business School research shows that the failure rate for start-ups runs as high as 95%. Start-ups, as a group, succeed largely because there are so many of them, not because of any special insight. What’s more, the National Bureau of Economic Research (NBER) found that entrepreneurs are saddled with most of the risk while financiers capture most of the rewards. Entrepreneurs invest their time, reputations and accumulated expertise for modest salaries and long hours in the hope of gaining huge rewards at “exit,” when the start-up goes public or is acquired. NBER researchers found, however, that start-ups rarely pay off for the entrepreneurs who slave away at them. Of companies that reached an exit (after a median time of 49 months from first venture funding), 68% resulted in no meaningful wealth going into the pockets of the entrepreneurs. These numbers add up to pretty long odds for corporate innovators looking to find greener pastures as an entrepreneur. The story is not much better for strategic investors chasing start-ups through venture capitalists. Numerous studies, including a 2012 study by the Ewing Marion Kauffman Foundation and a more recent one by Cambridge Associates, show that venture capital has delivered poor returns for more than a decade. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in venture capital. Risk and reward have not correlated. Vinod Khosla, a billionaire venture capitalist and cofounder of Sun Microsystems, tweeted a revealing line from an executive at one of his companies in 2012: “Entrepreneurs really are lousy at predicting the future… VCs are just as bad.” 2. Scale is more valuable than ever. In the context of today’s immense technology-enabled opportunities, large companies have growth platforms that would take start-ups years to build. Incumbents have products with which to leverage new capabilities such as mobile devices, pervasive networks, the cloud, cameras and sensors. Social media can amplify brand power and customer relationships. Large companies also sit on mountains of market and customer data and are therefore in the best position to extract knowledge from big data. The possibilities are startling. And tapping into them isn’t optional. A perfect storm of six technological innovations—combining mobile devices, social media, cameras, sensors, the cloud and what we call emergent knowledge—means that more than $36 trillion of stock-market value is up for what some venture capitalists are calling “reimagination” in the near future. That $36 trillion is the total market valuation of public companies in the 10 industries that will be most vulnerable to change over the next few years: financials (including insurance), consumer staples, information technology, energy, consumer goods, health care, industrials, materials, telecom and utilities. Incumbent companies will either do the reimagining and lay claim to the markets of the future or they’ll be reimagined out of existence. 3. The roadmap for leveraging scale while avoiding innovation landmines is clearer than ever. Since the start of the Internet boom some two decades ago, so many companies have looked to information technology to innovate that there’s now a track record showing what works and what doesn’t. The problems that have stifled innovation in large companies are now known and can be avoided. These problems are not inherent to bigness. 273 companies that were on the Fortune 500 list 10 years ago are still thriving and remain on the list. Compare that 55% success rate against the 90%-plus failure rate of start-ups. Large companies can out-innovate both existing and start-up competitors by undertaking a systematic innovation process of thinking big, starting small and learning fast. I outlined this roadmap for how to—and how not to—innovate in a recent LinkedIn post. It is also thoroughly annotated in my books Billion Dollar Lessons: What You Can Learn From The Most Inexcusable Business Failures of the Last 25 Years and The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups (both written with Paul Carroll). * * * I am not arguing that there is no place for entrepreneurship or start-ups. Start-ups as a group will continue to be an economic engine driving innovation, jobs and wealth. But any individual start-up, or even a small portfolio of start-ups, is far from a better bet for corporate veterans seeking better jobs or more successful innovation. Rather than jumping from the frying pan into the fire, corporate innovators should consider staying put and focus on tearing down the barriers stifling their company’s innovation efforts. Yes, small and agile start-ups look very attractive when viewed from the confines of a big and slow bureaucracy. Big and agile is an even more attractive position. Do you agree? I'd love to get your thoughts!

Movies offer a window to another lifetime, another life; sometimes to follow a dream, other times to freeze from horror. Regardless of which emotion you are after, a movie allows you to escape your own world for an hour or two and be part of someone else’s. The following list of movies will make you want to call your insurance agent and make sure you have the proper coverage.

Health/Life Insurance

 1. The Fault in Our Stars

2. Steel Magnolias

3. Erin Brockovich

 

Data Breach

 4. Identity Thief

5. Date Night

6. Catch Me If You Can

   

Crop Insurance

 7. A Walk In The Clouds

 

Scheduled Property

8. The Dark Knight Rises

 

Fine Arts

9. The Thomas Crown Affair

 

Windstorm Coverage

10. Twister

     

WCRI (Workers’ Compensation Research Institute) recently released a report identifying predictors of injured worker outcomes. While the report reflects only a few states, the information can logically be extrapolated to other areas. When seeking answers in medical management, the issues remain fundamentally constant regardless of location because they are medical, not jurisdictional. “Better information about the predictors of poorer worker outcomes may allow payors and doctors to better target health care and return-to-work interventions to those at risk,” stated Dr. Richard Victor, WCRI executive director. Moreover, data systems can search for the predictors in claims so that appropriate attention is focused on them from the beginning, mitigating the damage. Preventive communication Having said that, the first predictor of poor outcomes identified in the WCRI study will not be found in the data. WCRI found that, when injured workers are strongly concerned about being fired after the injury, outcomes will be poor. Managing worker understanding is an employer risk management issue, one that can best be handled with good communication. Contacting injured workers early and continually with reassurances of continued employment will drive best results. Moreover, the approach is easy and costs nothing. Other risks identified in the study require a different approach. Comorbidity risk WCRI research identified three comorbidities of concern: hypertension, heart disease and diabetes. When these comorbidities are combined with a workplace injury, the result is longer durations of disability. Workers with heart disease had disability durations four weeks longer than those without heart disease. Those with hypertension and diabetes exhibited 3% and 4% higher rates of not working three years after their injury. Comorbidity risk is a generally known truth, gained either logically or through experience. I call it corporate wisdom. The study validates the theory. Monitor ICD-9s Search for these and other conditions in claims by monitoring the data continuously. Each condition has a set of ICD-9s (International Classification of Disease) for the disease. ICD-9s appear on medical bills, so a continuous search for them in the bill review or claims systems is reasonable. Moreover, the search can be extended to other comorbidities. Other risky comorbidities Other comorbidities have been identified through industry research as complicating injury recovery and generating poorer outcomes. Search Google to find specific diseases or to find a myriad of studies that bear this out. Such studies are proof of the notion that when certain diseases are coupled with workplace injuries, outcomes are poorer, disability durations are longer and costs are higher. Examples of search requests are, “Opioids in Workers’ Compensation” or “Obesity in Workers’ Compensation.” Use a search engine to find industry studies regarding other comorbidities such as specific mental health conditions like stress or depression. The research provides an argument for actively managing claims where the comorbidities exist. Opportunity gain Industry research is invaluable. Leverage the work of serious researchers rather than engaging in pricy statistical modeling. Statistical modeling uses advanced mathematical methods to identify high risk claims. Still, an affordable alternative method is available. Customize for the organization To learn the comorbidities of most concern to an organization, do a query of the highest-cost claims in the data over the past few years. List the diagnoses in those claims and identify the comorbidities most commonly associated with them. Then look for industry research on those diagnoses to establish rationale for implementing the monitoring and intervention procedures. 'Coattail' to predict If statistical modeling is not within practical reach, "coattailing" on industry research is a viable alternative. Determine the highest-risk comorbidities within the organization, search the research and begin monitoring the data to find claims where they occur. Monitoring the data allows for a proactive approach by tagging claims at risk soon after injury, thereby modulating the damage. Plan of action Establish standard medical management processes for responding when identified comorbidities or other high-risk diagnoses appear in a claim. Identifying claims that portend risk, whether from comorbidities or anything else, is a cost-savings measure only if an action plan is in place for responding to it. Gaining the information is nice, but it must be tied to an intervention plan to make a difference. Because these are medical situations, automatic referral to a medical case manager makes the most sense. An organization should establish protocols and procedures for approved intervention. Appropriate attention focused from the beginning will abate the damage, thereby improving outcomes.

One of the main UK newspapers has just published the best – and worst – UK insurers based on customer surveys. The scoring was based on communication, speed to settle a claim, helpfulness, value for money and overall service. Those at the top of the list will be invariably patting themselves on the back, and those at the bottom of the list will have some soul searching to do -- a bit like the England team that crashed out rather unceremoniously from the World Cup in Brazil and failed to reach the knock-out stages of the soccer championships. Of course, the problem wasn’t the quality of the England team, but rather the quality of the opposition -- and in that spirit, let’s not think about the quality of the insurers in the survey but rather the quality of their policyholders. We used to think of policyholders as all being pretty much the same. One size fits all. But the insurance industry has increasingly realized through customer analytics and micro-segmentation that actually there’s a lot of diversity among their existing and potential customer base. In terms of buying behavior, insurers are starting to use segmentation that is much more familiar to our retail colleagues. At a major multi-industry conference, the head of innovation for a global insurer spent all his time in the retail workstream. "I know what my competitors are up to," he said. "Here is where I will find my advantage." Obviously, we know which are the most costly customers in terms of risk and product. But with all the big data and analytics captured, has any organization identified which are the highest-maintenance customers, the ones who are most problematic to cope with, especially at the point of claim when, if it’s going to go wrong, that’s when it will happen? My own opinion – entirely based on 30 years of experience and without a hint of analytical insight -- is that the most difficult insurance customers are, in no particular order, teachers, policemen and retired insurance professionals. Journalists come in pretty close, as well. With three of the four, it’s probably a question of having an inquiring mind and wanting to understand the basis of every decision. With insurance professionals, I suppose that means you and me. I’ll leave you to figure out why we're so difficult…

Now, your humble blogger knows what beloved subscribers, Twitter followers and random Google search visitors (who keeps Googling, "humble logger"?) are collectively thinking: “I am so desperately craving a blog post on the going and coming rule – that’s my favorite rule of all! Don’t disappoint me, Greg.” In fact, I'll give you two. The First Incident For those not in the know, the going and coming rule basically sets a giant wall between coming to (or from) work and work itself. Like all good rules, this one is riddled with giant exceptions through which elephants can comfortably march in rows of four, but in certain instances the rule kicks in to shield the employer from liability. And, it’s not just workers’ compensation liability; the rule can also shield employers from liability to third parties caused by the negligence of employees. So, I bring to your attention the recently writ-denied case of Aguilar v. BHS Corrugated North America. Therein, a worker gingerly hopped into a car rented by his employer to go off-site for an unpaid half-hour lunch break. A co-worker was at the wheel. As you can imagine, on the way back, the worker sustained an injury and filed a claim for workers’ compensation benefits. The matter proceeded to an AOE/COE trial, and the judge was persuaded by the applicant’s position – that the employer benefited by having the driver/co-worker have a car available for personal and business reasons. Defendant sought reconsideration (as defendants often must). In a split panel, the WCAB granted reconsideration, reasoning that the “lunch rule” would lead to a take-nothing order -- in other words, that even if the applicant won he would not be entitled to damages. Of special interest here is that the WCAB majority rejected the argument that the fact the employer rented the car for the co-worker-driver makes this incident compensable: “[T]he applicant’s personal decision to travel off premises in that rental car as a passenger during an unpaid lunch break did not render service to the employer and, therefore, did not grow out of or was incidental to employment.” Had this been a split decision that favored the applicant, I would, of course, say you should read the dissent. Being a hopelessly biased defense hack, I have no need to say such a thing. I will note that the dissenting opinion pointed out some fairly relevant facts: The lunch was at the insistence of co-workers whom applicant considered his supervisors; the lunch was spent discussing work matters; and the lunch was paid for on a company card. In short, it is a reasonable interpretation that the employer was receiving benefit from the employee’s presence in the car and attendance at the lunch. Now, a panel decision makes for weak authority before a workers' compensation judge, and a split panel makes for even weaker one, but it is interesting to get this peek at the surgical distinction the going and coming rule often calls for, and the continued evolution of this law. The Second This case for you to hold and cherish comes from the Court of Appeal: Lantz v. WCAB/SCIF. Applicant Lantz was a correctional officer who was, tragically, killed after a car crash on the drive home from work. Now, this would not be a blog post if we could simply say “going and coming rule – take nothing!” The facts in this case complicate the matter to the point where the Court of Appeal felt an opinion was warranted. Applicant was not just driving home from work on any day – he was required to work an extra shift after his regular shift. So, while he would normally be commuting home, he was working, and when he would normally be home and not working, he was driving home. The question is whether requiring an employee to work an additional shift at the same location constitutes a “special mission” that defeats the going and coming rule. The Court of Appeal recognized the special mission exception but also noted that the special mission exception requires: (1) extraordinary activity, as opposed to routine duties; (2) AOE/COE; and (3) activity that was undertaken at the express or implied request of the employer and for the employer’s benefit. Using this standard, the COA readily conceded that prongs 2 and 3 were satisfied – working an additional shift is, no doubt, within the course of the duties of the employee, and the activity was required by the employer for its benefit. On the other hand, the first prong is not so easily satisfied. Is working another shift truly extraordinary? The test is whether the location, nature or hours of the work deviates from the norm. In this case, the COA deferred to the WCAB’s determination that the extra supervisory duties did not rise to the level of extraordinary. Of interest here is the ready recognition by the Court of Appeal that it is possible that a sudden change in work hours would be extraordinary duty. The image comes to mind of a deputy suddenly yanked from dispatch to work intake and processing, or a maître d' asked to help unload a truck. One other nugget to consider here: The Court of Appeal addresses the argument oft cited by lien claimants, applicants’ attorneys and crazies roaming the streets of San Francisco: “Liberal Construction!” No, no, dear readers, this isn’t in reference to a bunch of long-haired college hippies building houses out of recycled milk bottles but, instead, a quote from Labor Code section 3202: “This division and Division 5 … shall be liberally construed by the courts with the purpose of extending their benefits for the protections of persons injured in the course of their employment.” Okay, calm down. I know you’re pounding your keyboard and thinking, “Why is Greg wasting my time with this? I’m not running a prison; why is this case relevant?” Well, here it is, the nugget you can take to every case in the workers’ comp system that is set for an AOE/COE trial: “The policy of liberality is predicated upon there being a person who is ‘injured in the course of [his or her] employment’ and therefore, when given its plain meaning, does not aid in deciding the threshold question of whether the employee was injured in the course of his or her employment.” So, the next time there is a question of whether the injury is compensable at an AOE/COE trial, if there is any effort to use the liberal construction language of 3202 to lower the standard of proof the applicant must otherwise meet, Lantz should be at the ready to negate the argument, as a citeable, binding, published decision.

I was once hired to be the chairman of a return-to-work (RTW) subcommittee for a corporation that owned several major national newspapers. One minute into my first day, I was told: "We can't do this here; we have a union shop."

Several months later, the program we designed had full union support, and the CEO praised it as having the most effective return on investment in the company's history. We reduced lost-wage replacement costs by 33% and saved the company millions of dollars.

How?

The company historically had a passive role and no formal policy about having injured workers return to work until they could perform the "full duties" of their jobs. Consensus formed that, through the development of a "modified duty" program, we could return disabled employees to some form of meaningful work sooner, helping the employee recover while increasing the productivity of the company.

We decided not to use the term "light-duty," which carried a negative connotation among employees. We also had to overcome the traditional mindset of line supervisors that they didn't want employees to return to work unless they were "100%."

We found many other reasons why previous attempts at implementing an RTW policy had failed. The length of restricted-duty "transition periods" wasn't specified, and labor relations problems arose because the company only provided meaningless busywork to injured workers. There was also a lack of commitment at all levels of management -- RTW was considered to be only a human resources issue - so there was little coordination of efforts within the company.

Perhaps most importantly, there was a pervasive lack of knowledge about workers' compensation. Although front-line supervisors play a critical role, they were generally not held accountable for making decisions that accomplished the goals of an RTW program. In addition, workers' compensation costs were not allocated back to specific departments.

I conducted site visits at five business units and reviewed policies, procedures and site-specific circumstances, cultures, resources and needs. I also reviewed best practices during weekly discussions. The unions were included in my site visits to get their input and to gain their respect and cooperation.

We determined that there was potential for significant savings regarding lost-wage replacement costs by developing a consistent RTW policy for both occupational and non-occupational disabilities. We truly believed we could reduce workers' comp and disability abuse and costs, improve productivity and allow disabled employees to return to full-pay quicker. Everybody would win.

The key to success was getting the support of senior management and developing a well-planned, thorough communications campaign. We knew we had to get buy-in from the labor unions.

We designed brochures for employees and developed comprehensive training for supervisors. We improved communication about medical determinations of injured workers' capabilities and restrictions. We arranged for accommodations by supervisors that were not open-ended. Employees' progress was closely monitored, and all communications between injured workers, medical providers, claims administrators and supervisors documented.

The real key to success was to shift accountability for RTW from HR to department supervisors. Originally, 100% of workers' comp costs were allocated to the corporate risk management department; in a paradigm shift, the company tied 25% of supervisors' annual bonus to workers' comp costs in their departments. This change got their attention and encouraged cooperation.

We also changed the policy to allow injured workers on temporary modified duty to earn full pay. This gained the support of the unions by showing that modified duty was truly a benefit to the injured worker. But those on temporary modified duty were not entitled to overtime, to encourage the worker to return to full duty as soon as possible and restore that eligibility.

We also got labor and management to agree that, while state law allowed as much as one year to report an injury, prompt reporting was crucial. This allowed claims administrators to begin paying medical claims and benefits sooner.  It also expedited the necessary state and OSHA reporting, any necessary investigations of the accident and medical documentation of work restrictions.

Supervisors began to cooperate more. One might ask another, "Can you use some help this week?  I have an employee who can answer phones for you." That way, one supervisor got added help while the other avoided having workers' comp costs allocated back to his department. The injured workers benefited by returning to full pay, and management believes that they returned to their normal jobs sooner because there were not allowed to stay home unless it was medically necessary.

"We can't do this here" turned into a corporate-wide written policy that worked. A follow-up analysis found that 50% of the RTW accommodations had zero cost to implement; 20% cost less than $500; and 10% cost less than $1,000.

The company saved millions and greatly improved labor management relations.

A real success story.

Let’s imagine a meeting of the risk committee of the International Mercantile Marine Co. a bit more than a century ago. The meeting was called to order. Mr. Morgan addressed the representatives of its companies: Mr. Clement Griscom of the American Line and Red Star Line (International Navigation), Mr. Bernard Baker of the Atlantic Transport Line, Mr. J. Bruce Ismay of the White Star Line and Mr. John Ellerman of the Leyland Line. The topic was the business of the trust, including opportunities for growth and boosting investor confidence. Mr. Morgan noted with approval that IMMC had met the competitive challenge from Cunard by launching the Olympic. He said he expected that the builder, Harlan & Wolff, would deliver an even more prodigious conqueror of the sea, with Titanic.  He asked Mr. Ismay if plans were proceeding as scheduled for the second jewel of the White Star crown. Mr. Ismay replied that there had been a problem securing sufficient high-quality iron ore for the rivets fore and aft on the hull. Mr. Ismay added that Harlan & Wolff had decided that, to control costs, it would use iron rivets, rather than steel, to secure the hull fore and aft. Steel rivets would still be used amidships. Mr. Morgan cleared his throat.  He said he found it somewhat annoying that Mr. Ismay’s shipbuilder’s plans to lower quality to preserve its profits would, given the cost-plus nature of the contract, cut into IMMC’s own profits. Mr. Morgan also said that Lord Pirrie, the chairman of Harland & Wolff, had cabled him expressing concern about labor shortages and whether the suppliers of the iron rivets were up to the task. Mr. Ismay assured Mr. Morgan that the success of the Olympic vindicated Harland & Wolff’s approach and that it was typical in projects such as these that there would be labor and materiel shortages that must be resolved by using smaller firms to fill the gaps. He was certain that these suppliers would be up to Harland & Wolff’s standards. Every specification for Titanic meets maritime regulatory requirements, he said, and White Star will deliver handsome profits to IMMC.  He expressed his disappointment that Lord Pirrie raised his concerns to Mr. Morgan directly. That was not how a gentleman, let alone a peer, should conduct business. Mr. Morgan said he was also told that Harland & Wolff expressed concerns that not enough lifeboats are planned to be available in the event that the unthinkable were to occur. While the prime objective is to bring value to investors, Mr. Morgan said, IMMC must be prepared in the event that a serious loss, no matter how unthinkable, may occur. Insurance can cover the loss of property, but no policy can indemnify against a loss of reputation. Mr. Ismay reiterated that the number of lifeboats met regulatory standards and reaffirmed White Star’s compliance with the rules governing international shipping. Mr. Ismay also noted with pleasure that, while the announcement had yet to be made, legendary White Star Capt. Edward Smith would be pilotin Titanic on her maiden voyage. There was a deathly silence in the room. The other company officers looked away awkwardly. Mr. Morgan stared at Mr. Ismay and asked, almost under his breath, whether this was the same Capt. Smith whose piloting of the Olympic caused the collision with the HMS Hawke? The same Capt. Smith who caused Olympic to be laid up in Belfast and delay completion of Titanic? The Capt. Smith whom the Royal Navy found to be at fault for that collision; that Capt. Smith? Mr. Ismay replied that using the “Millionaires’ Captain” was necessary to make sure that the elite sailed to New York on Titanic. The ship has an excellent crew and experienced officers and is well-nigh unsinkable, so nothing will happen to her, Mr. Ismay told the group.  He assured all those in the room that the British had a rich tradition of honor and seafaring and that nothing would dim the success of the White Star Line and its crossings from Southampton to New York. Titanic and Capt. Smith would exceed their expectation for return on investment. After a brief pause, Mr. Morgan stated that he hoped that the IMMC would not prove to be his one business failure. With that, he looked to the other operating subsidiaries and asked for their reports. Obviously, this meeting never occurred, but it illustrates many problems that do occur with enterprise risk management (ERM). In our hypothetical meeting, the overall objective of investor return was articulated, but there was no enterprise-wide view of risk and no mechanism by which to measure whether IMMC’s risk tolerances were defined, let alone exceeded. Each subsidiary was a silo even though each subsidiary, and the White Star Line in particular, could put the entire enterprise at risk. From the management of the finances to the assessment of the qualities and capabilities of spot labor and materials, the only “risk” identified was not finishing the project (Titanic) as close to deadline as possible. Had IMMC not been so leveraged in Mr. Morgan’s efforts to create a transatlantic trust to dominate the shipping trade, perhaps an enterprise view of risk could have been articulated that would have allowed for sufficient controls and incentives on identifying and reporting risk, and Titanic would have sailed the Atlantic successfully for decades. But that was not to be. Virtually everything that could go wrong did go wrong. J.P. Morgan considered IMMC to be one of his few failures and was, indeed, a colossal one. Morgan died in 1913, and IMMC sought bankruptcy in 1915. The company continued on until the last vestige of IMMC, the United States Lines, went bankrupt in 1986.  The White Star Line merged with Cunard in 1934, and in 1950 Cunard bought the last remaining shares of White Star Line, ending that marque forever. Harland & Wolff continues to build ships in Belfast.

Series Conclusion

Think back to the transition from horses to cars and note that cars were initially called “horseless carriages.” Cars were defined by what they didn’t have, just as the “driverless car” is being defined by what is being removed from the equation. But doing away with the need for horses did much more than mean it was good to be Henry Ford and no longer so good to be a horse breeder.

The “horseless carriage” had far-reaching effects that not only redefined the transportation network but also provided the basis for the modern economy and even changed how we live, by making suburbs possible.

The “driverless car” will likewise change dynamics in the economy and in our personal lives in ways that are hard to predict at this remove. (The device will also get a real name, focused on what it is or does, not on what it lacks.)

Just in industries directly related to autos, trillions of dollars change hands each year—flowing to and from auto insurers, auto financiers, service and repair shops, rental agencies, taxi operators, fleet managers, oil companies, transportation and logistics companies, emergency rooms, health insurers, medical practices, personal-injury lawyers, government taxing authorities, road-construction companies, parking-lot operators and on and on and on. Driverless cars will inevitably reduce the need for a lot of that spending and throw much of the rest up for grabs.

But if history is any guide, people in these downstream industries feel that it will be decades (at least) before change is pervasive, and therefore decades before they have to worry about their own industry’s collision with the disruptive change. Until then, the reasoning goes, companies in industries peripheral to car-making can simply watch as automakers battle among themselves and with Google.

This is a dangerous point of view. It is the main failing that this series has tried to address. The raw technology is more developed and improving faster than most observers realize. And several scenarios could dramatically accelerate commercialization and adoption.

In addition, the calculation that disruption will not happen until driverless cars are prevalent could be faulty. A modest number of intelligent cars can change the whole dynamic, long before widespread adoption of driverless cars. So, it is important for market leaders in downstream industries to get into the game, rather than be spectators.

Even beyond the world of autos, the Google driverless car should be a wake-up call about the pace of disruptive technological change that looms for every industry. Or, taking an optimistic perspective, the driverless car demonstrates the kind of game-changing killer apps that are now possible in almost any industry.

While the Google car feels like it comes straight from some science fiction movie, it is nothing more than a mashup of widely available technological innovation—combining mobile devices, ubiquitous cameras and sensors, social media, the “cloud” and “big data” analytical tools.

Similarly bold mashups can upend any information-intensive industry. Mary Meeker, the noted venture capitalist and industry analyst, contends that technological forces are putting more than $36 trillion of stock-market value up for “reimagination” in the near future. That $36 trillion is the total market valuation of public companies in the 10 industries that are most vulnerable to change over the next few years—financials, consumer staples, information technology, energy, consumer discretionary, health care, industrials, materials, telecom and utilities. Companies will either do the reimagining and lay claim to the markets of the future or be reimagined out of existence.

No history of success will protect incumbents if they put themselves on the wrong side of innovation. Borders, Circuit City, Blockbuster and many more went from thriving business to out of business in almost no time. Think of how recently Nokia and Blackberry were on top of the world and how they’re now irrelevant.

And change is still accelerating. The near future will be even more brutal and more lethal, with faster cycle times, than the recent past has been.

As I have suggested in my analysis of Google and of Big Auto, the solution for incumbents and new entrants alike is to follow the innovation roadmap that Google demonstrates: Think Big, Start Small and Learn Fast.

Thinking big means innovators must consider the full range of possible futures. Like Google, they should dare to dream big, focusing on the “killer apps,” new products that can rewrite the rules of an organization or industry, rather than just looking for incrementally faster, better or cheaper products (as Big Auto is currently doing).

Starting small means that, rather than jumping on the bandwagon for one potentially big idea, companies must investigate multiple potential ideas and break them down into smaller pieces for testing. Like Google, successful innovators defer important decisions and keep their options open until they have real data, rather than make decisions early, based on intuition and experience. In addition, successful innovators take the time to make sure that everyone—the executive team, employees, partners, any agents and maybe even customers—are working in unison, rather than having people pay lip service to a vision while actually working at cross purposes.

Learning fast means taking a scientific approach to innovation. Successful innovators conduct extensive prototyping before they even get to the pilot phase—let alone the big rollout—so they can gather comprehensive information about their attempts at innovation and quickly analyze both what’s working and what isn’t. The successes also develop the institutional discipline to set aside or alter projects as soon as it’s clear that they’re not working.

Much has been written about the financial and tax power of forming and operating a captive insurance company that qualifies for the tax benefits of section 831(b) of the Internal Revenue Code. But all too often, promoters of this concept forget that each captive must be first and foremost a risk management tool with legitimate risks and properly priced premiums. An "831(b)" captive is an insurance company whose premiums do not exceed $1.2 million a year and that elects to have those premiums exempted from taxation. If the captive has proper "risk distribution" (a topic for another article), then the insured company can deduct the premium being paid to the captive, while the captive pays no income taxes on that premium. After the payment of losses and expenses, any profits in that captive can be distributed at a favorable dividend rate or can be distributed in a full liquidation of the captive, and the shareholders will receive those accumulated profits at capital gains rates. And if the captive is owned by trusts or adult children, the entrepreneur can also enhance the benefits in his or her estate plan by sidestepping the estate tax. But these benefits are only possible if you first get the underwriting right. Over the years, we have conducted audits on existing 831(b) captives formed by some of our competitors. We have been amazed by what people are charging for risks, many of which can be insured in the traditional insurance market at much lower rates. We call it "underwriting by the blind." The IRS is well aware of the pricing abuses in our industry. As we understand it, the majority of negative audits recently have not been because of faulty "risk distribution" mechanisms, but because of badly overpriced premiums being paid to the captive. For example, we found a $10 million (revenue) manufacturer that had purchased a $1 million general liability policy, including products liability, in the insurance market for an estimated $25,000 annual premium. The new captive issued a "differences in condition" policy with a $1 million limit and charged the insured more than $200,000 in annual premium. This type of policy covers things like exclusions in the underlying policy. It does not take an insurance expert to realize that such a premium is unreasonable and bears no relation to either market rates or the real risk that is being assumed (particularly because the insured was manufacturing a non-hazardous consumer product). Another example of egregious pricing is in the area of terrorism risk. One provider is promoting captives with more than $600,000 in premium for $10 million in limits for this type of risk even though the client could purchase that same coverage in the standard insurance market for less than $5,000. How can such a payment be "ordinary and necessary" and therefore be deductible? Knowing that these captives were approved by a regulator, we keep asking ourselves, "Where are the actuaries and the regulators, and why do they not concern themselves with the relationship between the risk assumed and the premiums charged?" The simple fact is that the requirements of the captive insurance laws fall far short of the requirements of the IRS. The laws of each captive insurance jurisdiction in the U.S. require that an actuarial opinion accompany each application for an insurance license. But that opinion is limited to determining "the amount and liquidity of its [the captive's] assets relative to the risks to be assumed [meaning the policy limits]." Thus, a regulator's primary concern is to ensure the solvency of the captive. Typically, this is achieved through pro-formas showing 3- to 5-year expected and adverse loss scenarios. Note that there is no requirement to examine or opine on individual rates used to price specific exposures being assumed by the captive. This "gap" between the captive insurance law and the realities of the tax authorities can be immense. One of the first questions asked by the IRS in the audit of a captive is, "How were the premiums (pricing) determined for each risk assumed?" Without an opinion of an actuary regarding these rates, it then comes down to the knowledge of the underwriter used by the captive management company. It is apparent that many captive managers do not have sufficient depth in this area or do not care to go beyond the specific requirements of the captive licensing requirements. (We, however, require that our actuaries examine every rate that we use in our feasibility studies.) A rule of thumb is that a properly priced portfolio of risk for a captive should equate to total premiums equal to 1% to 2% of the insured's revenue. The reason revenue is a good guide is because the majority of risks being transferred to section 831(b) captives are casualty risks. And the exposure base for casualty risks is generally revenue. The underwriter cannot change the exposure base, but he can raise the rate that is multiplied times the exposure base to get to a higher premium as desired by the client. But the captive will not survive an audit if rates are raised too high. That estimate of 1% to 2% of revenue is only a guideline: There are exceptions. But if you see a captive manager suggest that the premiums payable to an 831(b) captive can be 6% to 10% (or more) of revenue, run! That manager is ignoring the important risk management requirements of this captive concept, to the detriment of its clients. And the clients are playing audit roulette, hoping their "number" does not come up. Authors James Landis collaborated with Rick Eldridge in writing this article. Eldridge is the president and CEO of Intuitive Insurance and the managing partner of Intuitive Captive Solutions.