Eric Schmidt, the executive chairman of Google, said this week that the Internet will disappear -- "There will be so many IP addresses, so many devices, sensors, things that you are wearing, things that you are interacting with, that you won’t even sense it," he said. Now, Eric is a very smart fellow; he's worth several billion dollars more than I am (the score is Schmidt, $8.3 billion, me, $0 billion); and he even has a better hairline than I do despite being two years older. He made his comments in Davos at the World Economic Forum, known as the gathering spot for very serious people. So his remarks have been getting quite a bit of attention and consideration. 

But he's wrong.

He's wrong for the same reason that people have been wrong since I started covering technology for the Wall Street Journal going on 30 years ago. That suggests to me that people will keep being wrong for the same reasons for some time to come, including in the world of insurance, where we are all having to try to figure out how the Internet of Things will play out. So let me point out the two issues that mean that even very smart people in very serious settings can't just assume the sort of technological utopia that Schmidt is describing.

They are:

• Decision rights
• Transaction costs

Let's look at those issues in the context of an article in the New York Times many years ago that got me mad enough to start thinking about the blind spot in the first place. A very bright reporter, and something of a friend, began by painting an idyllic vision of an automated future: A person hopping out of bed would step on a sensing device that would let the house know he was up. The house would then turn on CNN in the family room, start the coffee and probably do some other things that I no longer remember at this remove.

Nice image, right?

Decision rights

But what if I don't want to watch CNN? What if I'm more interested in watching ESPN that morning? Or my kids were already awake and watching cartoons -- would my stepping on the pad change the channel despite the screams that would surely result? What if I'm heading off to meet someone for breakfast and will have coffee there, not at home that day?

A key question with any sort of automation is: Who owns the decision rights? In the case of CNN and the coffee, do I want the house to have the decision rights, or do I want to retain them?

Transaction costs

How much effort do I have to put into the automation? Is it really worth it to put a sensor under my carpet or even to lay something on top of the carpet? What does that cost? How long does it take me to configure the TV and other systems in the house so that they react appropriately?

Those transaction costs then have to be compared against the benefits, which, in the case of CNN and the coffee, are trivial. It's just not that hard to pick up the remote and click the TV on or to fix the coffee in the morning (which you would have had to do before going to bed in the automated scenario.)

People tend to get so excited about the George Jetson-like possibilities that they ignore decision rights and transaction costs and paint visions that simply won't occur in any reasonable timeframe.

That's how we ended up with:

-- The talk back in the early '90s about "agents" that would pull together what some called "The Daily Me," a personalized newspaper that would gather all the news that it knew you were interested in and mix it in with your schedule and other things to lay out your day for you. The problem was that these personalized papers took a huge amount of effort and were so inaccurate that no one would turn all the decision rights over to an agent. What if you didn't have time to read the news that day? What if you had become interested in some topic that you'd never read about before -- how would your agent know?

(I took the talk of agents somewhat personally because the three pieces I wrote for the Wall Street Journal that easily got the most response from readers in my 17 years there were about: a time I sailed across the Atlantic in a small boat, having never sailed before, in what turned out to be some monster storms; my two-week career as a professional wrestler; and my mother (a piece written with my younger brother). I guarantee you that no one who picked up the Wall Street Journal the day those pieces appeared was looking for anything about sailing, professional wrestling, my mother or me, so no one would have ever seen them in a world of agents.)

This talk of agents is cropping up again, by the way, and is surely part of the reason that Schmidt wants to talk about having the Internet disappear. Google wants to make search so efficient that its engine knows what you want to find even before you think to look. The company has made impressive strides -- if you type in Elm Street while looking for directions on your Android phone, Google Maps usually guesses quickly and correctly which Elm Street you want -- but that's a long way from the world that Google is describing, and the transaction-cost and decision-rights issues will still get in the way.

-- The fuss over the "Internet refrigerator" that still crops up from time to time. The idea is that your refrigerator would sense when, say, you were low on milk and reorder it for you. But that requires an awful lot of engineering, both in the refrigerator and in whatever system of grocery delivery would be used, and only makes sense if you're turning just about all your shopping over to your refrigerator -- if you have to go to store anyway, it's simple to grab some milk.

And there is always the issue of decision rights. What if a family goes on vacation? How long will the refrigerator keep ordering? I have a friend whose 21-year-old son drinks a gallon of whole milk a day. When the son -- who is 6'5", weighs 285 pounds and looks like he could bench press a cow -- is home, they can't buy milk fast enough, but when he's gone at school they don't need any. Do they have to let a few gallons of milk sour before the refrigerator figures out the son is gone?

-- The excitement about home controls: remote-controlled lighting, the Internet thermostat that will sense who's in a room and adjust lighting levels and temperature to personal preferences and so on. Those are just an awful lot of work for not much benefit -- you can always flip a light switch or adjust a rheostat -- and doesn't resolve the issues that come up when one person likes a room cooler than the other.

Technology will make plenty of tasks disappear, but let's not be too hasty. We need to think through the costs, the benefits and the potential for errors and conflicts in automated systems, to make sure we don't fall victim to the seductive tendency to ignore transaction costs and decision rights.

The Internet won't disappear in my lifetime, which I'm assuming will be at least 30 more years. I won't even have sensors that turn on CNN and start my coffee when I get out of bed.

We - writers and readers of this site alike - are kindred spirits. We are the "Lighthouse family" because we all want to, or need to, climb to the top of the lighthouse to see what's over the horizon. We know we can't always change what's coming toward us, but we can be ready, perhaps sooner than others, to take action. Every day of my professional career, I have climbed at least some of the spiral steps inside the lighthouse.

When we look over the horizon, we can see all those important issues coming toward us, like digital customers, the impact of regulatory issues, the consequences of the Internet of Things and many others. But these issues don't come to us as a small drips of news, rather as a tsumani of information. Every day - hour - I get new insight and ideas. I have more opinions in one day than I had annually a decade ago.

We shouldn't complain. The alternative to being at the top of the lighthouse is, for me, pretty gloomy. It's about being down at the base of the lighthouse, standing on the rocks, being beaten up by the waves of change. It's like being in the dark when making important decisions, only wetter.

Often coupled with all this text information is the amount of analytics we receive. We are becoming analytics junkies. Perhaps someone should set up "Analytics Anonymous" for those who can't live without their data.

But don't we need to take all this information and the analytics with a pinch of salt? They are only relevant when seen in context. Look at any opinion, set of figures, blog even, at face value, and you are a poorer person. It's only by understanding the context of the information that you gain real insight.

The context might mean understanding how you are doing compared with your nearest competitor. Or even how your insurance customers are behaving at the supermarket checkout - maybe they have less disposable income, and your drop in revenue might be a function of their personal decisions to spend less on insurance so they can feed their families.

So my point is this: Imagine if all the information we received - data, comment, opinion - had an element of context to it. Let's call that prospect "Insight 2.0."

Context is everything. At a personal level, I may not be George Clooney, but at least my wife thinks I'm better looking than the next guy. At least I hope she does...

So, you took my advice and recently hired some 20-something, baby-faced college graduate based on his ambition and determination, hoping he'll turn into one of your key, high potential youths. But you quickly realized he lacks the real-world knowledge many of your other hires bring with them.

Let’s face it, many Millennials lack relevant experience and are missing some of those professional skills that are taught over the course of a career. But don't worry; every great professional was once an amateur.

Think of the group as a bowl of vanilla ice cream. There's a good base, but it's the supervisor's responsibility to add the "toppings."

Here are four ideas on how to engage your Millennials to learn and help speed up that professional development process:

1.     Chocolate Syrup – "Automobile University" (Podcasts)

Unless your employees are working from home, most will face a significant amount of windshield time. Some lucky employees only spend 30-45 minutes commuting to and from work. If they work in sales, they may spend a substantial amount of time in a car. Employers should suggest that ambitious employees use this down time to learn more on the industry. I suggest podcasts.

A podcast is a form of audio broadcasting on the Internet, similar to informative radio talk shows. People can simply download a podcast or series of podcasts onto their phone or iPod and plug it into their stereo using an aux cord for their daily travel (don't worry, your Millennials will know how to do it). Your auditory learners can efficiently gain some industry insight when they're simply doing what they’re going to have to do: drive to work.

These podcast can help your Millennials get some industry insight on current issues from experts for free. If you need a list of podcast series to suggest to your team, Duke Revard wrote a good article: 7 Stitcher Podcast Any Insurance Agent Will Benefit From. As a manager or mentor, you can have follow-up meetings with your subordinates and allow time to answer lingering questions or clarify how something they learned may apply in their positions or your organization.

2.     Whipped Cream - Article of the Day

Reading helps you move up the learning curve but can be time- consuming, and it's hard to filter through all the articles. As a manager, you can simplify this process for your young employees who are looking for some extra help getting up to speed.

Get in a routine where you send your team a daily email with "The Article of the Day," which is simply a short read you found relevant and beneficial. Subscribe to some industry news websites such as Property Casualty 360 or Insurance Thought Leadership for places to start sifting through an abundant amount of topics.

3.     Sprinkles - Junior Management Cabinet

Name it what you want, but the idea is simple. This would be an investment in a group of your younger employees who show high potential for future leadership spots in your organizational. This group would serve many purposes.

First, it could reduce your dysfunctional turnover. Key employees would understand their importance and that they have a place in the future of the organization. Nothing makes me want to work harder and be more dedicated than knowing that I am valued. "You invest in me, I'll invest in you."

Second, this could be used as a tool to train young employees who show the most promise. Organizations could have their "junior management cabinet" meet once a month to discuss a new management problem, then design a solution and present it to a group of managers. Other ideas for the cabinet include participating in top executive mentoring programs, being sent to informative conferences, shadowing board meetings and having more extensive performance appraisals with not only their manager but a development team.

4.     Cherry - Stress the Importance of Professional Development

This is a simple thought but often overlooked. Many supervisors or managers are disappointed in the progression of their employees yet do not stress the importance of development. One way to solve this is by adding "professional development" as a critical criterion on performance reviews. Help Millennials design new ways to progress in their knowledge along with evaluating them on how well they're currently performing.

Another idea is to apply the 80/20 rule: 80% of your time at the office is spent on completing core tasks while the other 20% is spent simulating. Google using this tactic for employees to innovate and design new ideas or concepts. The insurance industry can use the same concept on professional development. During simulation, employees should be encouraged to learn more about parts of the industry that they find fascinating. They could attend workshops, have lunch with an expert from your organization, peruse articles on their favorite website or even be encouraged to write their own thoughts on a topic.

Maybe you don't have 20% of a day to free your employees from, so maybe change it to 30 minutes a day or two flexible hours a week. Who knows what will come of it?

Food for Thought:

"Recently," a manager says, "I was asked if I was going to fire an employee who made a mistake that cost the company $600,000. 'No,' I replied, 'I just spent $600,000 training him. Why would I want somebody to hire his experience?'"

In the past, I've argued that there are legitimate reasons a doctor might dispense medications to a patient and that legislative and regulatory efforts to curb abuses of physician dispensing should be focused on the elimination of the financial incentive to do so while preserving the practice for the limited circumstances in which it might be necessary.

I've changed my mind.

The WCRI report published recently makes it crystal clear that the creativity of physician dispensers will always lead to maximization of revenue (and clearly inappropriate utilization of medications) unless the practice itself is eliminated.

The report shows that, essentially, drug re-packagers in California created novel dosages of certain medications to evade the constraints of the physician dispensing regulations. This allowed them to return to the typical physician-dispensing practice of creating new NDC codes and charging exorbitant amounts of money for drugs that would be have been substantially cheaper had they been secured through a retail pharmacy. Worse, utilization of these medications skyrocketed as a result of the revenue incentive for physicians (my conclusion, not WCRI's).

Physician dispensing doesn't make sense. Not in any circumstances. I could see a potential allowance for a one-time, short-term fill, but the routine dispensing of medications by physicians to patients should be banned. Immediately.

(Disclosure: PRIUM, and our parent company, Ameritox, provide financial support to WCRI).

Demands by the board, senior management and business units for more strategic and forward-looking information, together with competitive and regulatory pressures, have intensified the need to modernize insurance company operations, including the finance function, in particular.

A modernized finance function that provides internal and external stakeholders insightful and actionable information is critical to an insurer's ability to respond to evolving regulatory and reporting requirements and enjoy a competitive advantage in the marketplace.

The case for change

Insurers are reducing costs while managing increasing external and internal requirements for analysis and reporting. To meet these challenges, a common modernization goal - and the core of finance modernization - is the establishment of effective data management and an integrated communication and automation platform. Factors influencing the need to modernize include:

• Margin compression - A soft market and an increase in the severity of catastrophes are affecting insurers' top and bottom lines. As a result, finance and other functions have to reduce expenses while providing effective service. In addition, insurers must address aging infrastructure and build scalable automation solutions that integrate finance, actuarial and risk to facilitate access to data and create an efficient platform for the future.
• Increasing external reporting requirements - Multiple accounting bases have led to a need for additional technical competencies. Regulatory requirements, in particular, have put an added strain on financial organizations; the Insurance Contracts Project, Solvency II, ORSA PBR and real and potential SIFI designations are necessitating expanded access to data and more sophisticated reporting by insurers. These changes may require new measurement models and disclosures, general ledger re-mapping, presentations of financial results and, finally, conversion plans.
• Increasing internal reporting and analytic requirements - Enhanced modeling capabilities have resulted in a need for more robust valuation and asset testing but also have created the potential for product innovation and an overall competitive advantage. At the same time, the demand for better analytics and accelerated reporting is pressuring finance organizations to produce and analyze data at a more granular level in an accelerated timeframe.

In addition to these challenges, life insurance finance teams are contending with complex insurance/investment product offerings with hedging and capital management strategies, vendor extracts and unit value calculations for separate account accounting and reporting. The teams also must deal with insurance asset and liability modeling to calculate reserve valuations and proper asset and capital management, and complex life external treaties and affiliate reinsurance for capital management purposes.

Finance functions that continue to operate in a silo, separate from other related functions and the business, and use disaggregated, manual processes will be unable to be an effective strategic partner for the business. Insurance organizations must revisit their finance service delivery model to better align structure by type of activity and customer and address process, data and technology platform issues to meet growing demands.

Characteristics of a modernized company

A modernized company has efficient processes and clearly defined stakeholder (risk, actuarial, finance and technology (RAFT)) expectations. More specifically, a modernized finance function has the following characteristics:

• Data - Data strategy is consistently defined and "conditioned" to be processed from administrative systems to the ledger and ultimately the reporting environment. There is clear ownership of data. In a modernized company, data flows from commonly recognized sources and is capable of being extracted for analysis with minimal manual intervention.
• Organizational structure - Insurance finance organizations are structured by activity type and customer (transaction processing, specialized services, decision support). Activities are centralized where possible, leveraging shared services, centers of excellence and outsourcing, and decentralized where necessary. More specifically, companies that are able to effectively respond to industry pressures and outperform their peers demonstrate: 1) that finance operations are analyzed objectively as a service provider in terms of scope, cost and performance from their customers' perspective; 2) that, as a strategic business partner, finance's operating model is integrated with related areas (actuarial, risk, investments, reinsurance) and aligns with the business model; and 3) that the finance organization focuses on continuous improvement and seeks out an appropriate sourcing model.
• Tools and technology - Modernized tools and technology help the finance department process transactions in a more integrated environment with automated controls. Integrated platforms enable more flexible reporting that helps finance respond to finance customer and ad-hoc data needs. The general ledger is thin; robust sub-ledgers feature streamlined (hub) accounting rules; and there is a data warehouse structure to store detailed data in commonly recognized sources. Consolidation and business intelligence tools help facilitate streamlined internal reporting.
• Processes - Better data management and integrated automation allow for automated reconciliations and elimination of unnecessary activities. Planning and forecast activities are on a rolling basis with select assumptions. A nimble data environment enables finance to meet changing internal and external reporting requirements. Process owners are accountable for continuous process improvement. Greater than 60% of activity is focused on useful analysis.
• Reporting and governance - Better communication with finance's customers helps the function better manage expectations. Clarified roles and responsibilities and automation allow for more scalable efficient operations. Integrated committees within the RAFT functions and the business provide oversight and facilitate timely decision-making. Controls are well defined, rationalized and automated where possible.
• Business intelligence - Modernized finance functions streamline reporting of financial and operational metrics and align it with the company's strategic objectives. Demand management minimizes unnecessary reporting activities. Business units receive standard reports and provide business user access to data.

The benefits

Finance serves many roles within an organization but essentially strives to balance compliance, efficiency and business insight. A modernized finance function can deliver on all three fronts rather than only one or two of them.

Insurers traditionally have deferred investing time and money to resolve legacy back-office issues. Instead, they have invested in front-office operations and cut spending in other areas. However, as a result of increasing functional interdependencies, modernizing the finance function is now an imperative. Finance must not only ensure compliance with changing reporting requirements but also increase organizational efficiencies and provide valuable analytical insights that help the business quickly make informed decisions to gain a competitive advantage.

Factors for successful modernization/ key considerations

Possibly overhauling entire systems, processes and functional areas may feel daunting to company executives. In most cases, modernization will take several years. Accordingly, it is vitally important to develop a modernization strategy that articulates a path to real change. This will include visualizing a compelling future, clearly communicating expectations, creating a road map with achievable goals and avoiding overreach during implementation - in fact, regardless of the extent of required change, we recommend a staged approach to modernization.

Some high-level recommendations:

• Assess how well your people, process and technology can meet growing demands.
• Create a vision with design criteria/guideposts, a compelling future state and a gap assessment to the future state.
• Create a road map that outlines a staged approach with defined initiatives and clear accountability. This will help you develop a more detailed business case and clearly define implementation plans. Initial steps should address deep dives into bigger issues and potential quick wins.
• Look beyond finance to consider various internal stakeholder perspectives, including actuarial, risk, investment, reinsurance and business leaders, as well as external constituents such as regulators, rating agencies and investors.
• Consider changing organizational models first. Change agents in key decision-making roles should expedite analysis, decisions and change.
• Early wins create momentum and set the stage for behavioral change. Management must set the proper tone to ensure there is no "opt out" potential from the finance team.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Top tips from the "Gainful Employment" article include:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is a Financial Stress Test?

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

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

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

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

Unlike probabilistic simulation modeling, stress testing:

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

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

Examples of Stress Tests

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

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

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

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

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

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

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

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

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

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

Natural Catastrophe Analysis

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

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

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

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

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

Calibration and Interpretation

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

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

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

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

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

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

This article originally appeared on WillisWire.