Tag Archives: AM Best

Why to Never Sell Based on Price

What do most businesses do when competitors steal their customers? Copy them.

That’s the natural, logical tendency. If competitors have a new killer feature, we copy it. If they have a new killer marketing message, we copy it. If they have new killer sales system, we copy it.

Sooner or later, we all start looking the same. (And, yes, consumers can hardly be blamed when they think this insurance is a commodity. Looks like one…acts like one…well, quack!)

And that – the copycat strategy – is among the most dangerous, destructive things we can do. In fact, the massive amount of copying witnessed in the retail insurance industry just might be the early ringing of the death knell.

“But if we don’t copy what is successful for others, then what should we do?”

Of course, agents and brokers read the reports on market share erosion. They see the billion-dollar barrage of advertising from alternative distribution systems. They read the forecasts and predictions about innovators, disruptors and new, well-financed outsiders poised for the kill. They know consumer behavior is changing rapidly and question whether they can keep up.

There is — naturally — a deep, underlying anxiety about the future of this system. These current and impending attacks on what has so long been our safe harbor frighten agents and brokers. They need a strategy.

Screen Shot 2016-07-11 at 8.42.47 PM

And, far, far too many have simply chosen the wrong strategy. They see, hear and read (daily!) GEICO’s message about “price, price, price,” and they see that train only picking up speed.

Naturally, what do they do? Copy it. They advertise on price. They give “quotes” and hope the price is attractive enough to win the business.

If it’s working for the opposition, it should work for us, right?

Wrong.

See also: Integrating Strategy, Risk and Performance  

Three reasons never, ever to copy

Business coaches tell us that “success leaves footprints,” so, what’s wrong with following those footprints and copying a successful strategy? At least three things:

1. We copy what we see. We don’t copy the important behind-the-scenes business processes and systems we don’t see. Staring at “footprints,” we very rarely see the whole story. We see the surface.

Beneath the surface, there is an entire alignment of complex business processes and systems that make that surface shine the way it does.

You think you can see Starbucks’ strategy for being the most successful coffee house on the planet, right? It’s right there in the open.

But, behind charging more and delivering a reliable, delightful customer experience are billions of dollars invested in sourcing, roasting, shipping, presenting, training and other systems that we never see.

Following part of a recipe is a sure way to end up with a plateful of garbage.

2. Generally, following is in itself a bad strategy. The best you’ll do is a weak second place.

Unless your strategy offers something different and something that matters, those you are following have the advantage of leadership. They own that niche in the mind of the customer.

Of course, if you have massive resources, you may be able to leapfrog your leading competitor. With GEICO alone investing a cool billion a year on advertising, that will not and cannot happen.

Those resources simply do not exist in the agent-broker channel.

3. Copying strategy means that you’re skipping the hard work of strategy: clear-eyed analysis of what’s happening in the real world and how you can unleash your best assets to win there.

As every serious student of strategy knows, good strategy is based on an unflinching analysis of internal and external forces, and disciplined choices about where to play and where not to play.

And here, we get to the serious flaw in the most common copycat strategy performed by agencies and brokerages. We see the consumer being “brainwashed” with the incessant pounding of “price, price, price,” and we witness the loss of market share in our channel, and what do we do?

Copy that strategy…and try to sell on price. And, herein, lies the most dangerous part of trying to copy your way to success. A good strategy for one company or one distribution system is almost always a bad strategy for everyone else.

How can we win against our well funded competitors?

Small armies beat big armies. In fact, very, very small armies beat very, very big armies.

You would expect a military that is 10 times the size of its adversary to demolish a small opponent. But no, military historian Ivan Arreguin-Toft has shown us that the 10X behemoth loses 30% of the time.

That’s right. 30% of the time, an army that is 10% the size of the opponent wins.

How does the smaller army win? By fighting a “different war.” (In fact, since 1950, smaller armies have won 55% of the time.)

The same is true in business. We can only win by fighting a different war.

We cannot copy strategy.

What’s wrong with selling on price? Isn’t that what the consumer wants?

Here are four reasons why independent agents and brokers should never sell insurance on price.

1. Our channel is more expensive. So selling on price is just plain dumb. Sure, you’ll find exceptions. Even the slowest lion picks off the slowest gazelle.

But in the long run, put your resources where they have the best chance of winning. The price-shopping insurance customer — and, yes, there are millions of them out there — will seek and find a home. And billions in advertising dollars are helping them navigate their way.

I recently analyzed four years of AM Best industry data and, not to my surprise, discovered that the independent channel was an average 2.3% more expensive to operate. And, with the direct channel’s massive commitment to advertising, a lot of the expense gets consumed there, and proportionately less in other expenses.

Moral of the story: when you’re more expensive, don’t compete on price.

2. Selling on value wins more than selling on price. Researchers from Deloitte, led by Michael E. Raynor and Mumtaz Ahmed, analyzed data on more than 25,000 companies covering 45 years of activity.

Their five-year study began with a statistical analysis to identify which companies have truly exceptional performance, 344 in all.

They discovered that the most successful companies — based on a thorough examination of return-on-asset performance — followed three strategic rules:

  • Better before cheaper. They rarely compete on price.
  • Revenue before cost. They drive profits through price and volume, not thrift.
  • There are no other rules. Everything else is up for grabs, and they are willing to change anything to remain true to the first two rules.

Of course, selling on value can’t just be another empty advertising jingle. Agents and brokers have to deliver value. They have to add value as the product passes through their hands to the consumer.

That may be a new demand for many agents and brokers today. Perhaps in generations past, selling the product was sufficient. But, as today’s consumer is offered a growing array of choices, this is no longer an option.

Especially as the consumer progressively sees more and more of insurance products as a replaceable commodity, value must be added at the retail level.

The inherent and unique strengths of the independent channel — the benefits of relationship — must be leveraged to the consumer’s advantage. Modern communication technology makes this much, much easier. And i’s costs are fractional compared with additional payroll.

3. Selling on price is the ultimate race to the bottom. First of all, selling value costs more. You must do something extra, something more. And that usually costs money. When you’re selling on price, you’re killing your profits. From what bucket do you draw to create that extra value?

If, let’s say, you have a 20% profit margin, and you backed everyone’s premium down by a mere 10 points, that’s half your profit.

Price selling results in a self-inflicted spiral down the drain. First, you sell for less. In response, you invest less in your support staff and systems. Then, your customers feel less satisfied… on and on it goes.

Price selling may result in short-term wins. You’ll sell a few policies that you wouldn’t have otherwise. It’s much, much easier than investing in the blood, sweat and tears work of creating new value. Training staff. Monitoring behavior. Managing new systems. And so forth.

Moral of this story: The industry has matured far beyond the “lifestyle” stage where the retail sector merely acted as “sales reps” for manufacturers. They absolutely must add value. That is what grown-up businesses do.

4. Surprise…consumers don’t care about price nearly as much as you think they do. Price never completely goes away as part of the overall value proposition. But according to  astute research by Bain & Company, consumers are largely compelled to make their insurance buying because of one of these two values: price or peace of mind.

Screen Shot 2016-07-11 at 8.46.18 PM

  • The price-driven customer is perfectly suited to the direct channel. The peace-of-mind-driven customer is perfectly suited to the agency/broker channel. As industry-wide analysis will show you, the price-driven customer is expensive to get and easy to lose.
  • The efficiencies of the direct channel are well suited and well designed to generate value from that demographic. The opportunities for depth of relationship and value-added communications make the peace-of-mind customer perfectly suited for the agency broker channel.

See also: Capturing Hearts and Minds  

But doesn’t price still matter? Yes, of course, but perhaps not nearly as much as you may think it does.

My friend Brady Polansky from EzyLinx, shared what many may consider to be shocking statistics based on a massive study of consumer behavior.

57% of consumers who call independent agencies do not take the lowest quote provided.

Screen Shot 2016-07-11 at 8.46.50 PM

Rather, they choose insurance that costs between 19% and 53% more than the lowest quote provided. (Imagine what that could do to your top-line revenue!)

Moral of this story: It’s a naive assumption to think that all consumers are the same. They’re not. Pursue the ones who best fit this channel: the people who actually care what insurance does.

Screen Shot 2016-07-11 at 8.47.14 PM

Remember when we took pride in saying that “insurance is a relationship business?”

The top 5% or 10% of your customers probably feel that relationship. But recent research from Deloitte makes one thing very clear: The majority of an agent’s customers don’t feel that relationship.

Agencies have simply outgrown the old-school methodologies of getting and keeping relationships. It’s too expensive. Besides, that’s not how customers relate to business anymore.

Consumers expect a well-crafted digital communication strategy with their vendors. And agents and brokers can use today’s digital channels to deliver value.

Using modern technology, they can nurture their customers. They can help protect them. They can make them smarter insurance consumers. They can help prepare them for disasters. They can help prevent accidents, injuries and casualties. They can offer useful products. And they can follow each customer, one-at-a-time, and guide their customer journey, from the “I want a quote” to “I love my broker.”

Price marketing is fine…for the direct channel. Don’t copy them. A winning strategy for their channel is a losing strategy for ours.

But, if relationship and value are the pillars of our promise, deliver on it. Today’s tools let you deliver on that old school promise…with new school technology.

The Ultimate Solution for Maximum Growth 

Is this an impossible situation for the leader of a modern insurance agency or brokerage?

If we don’t have “price” in our quiver, just how do we make a difference in the lives of our customers?

See also: Checklist for Improving Consumer Experience  

If, in fact, they value relationship – that sense that they have an advisor and advocate in their corner – how do we deliver that? The days of glad-handing our clients around town are over.

  • The old methods – one-on-one marketing and nurturing – are over. Those methods are dreadfully expensive.
  • Most agents and brokers of today have a book of business that’s much larger than the average firm of a generation ago. It’s folly to think we have a traditional relationship with them. (How many times have you passed a customer in the vegetable aisle and they didn’t know you…and you didn’t know them.)
  • Besides, the last thing today’s consumer wants is a random telephone interruption from their insurance agent. (They want you there…when they want you there. Not when they’re at work. Not when they’re having dinner.)
  • The answer is simple. Our competing channels – the direct channel and the emerging digital channel – uses technology against us. But, today, agents and brokers can fight back. Using their own technology. Technology that delivers meaningful communications. Technology that treats everyone like an individual. Technology that strengthens your brand. Technology that deepens relationships. Technology that connects the data in your agency management system to a marketing system that fulfills the inherent promise in the agent-broker channel: that we’ll be there…that we’ll protect…that we care.Screen Shot 2016-07-11 at 9.09.13 PMTo learn about how marketing automation can transform the way you communicate to your clients – and make your clients love your agency – download a copy of Buyer’s Guide: Marketing Automation For Independent Agents & Brokers. Readers may get a free copy here.

Insurance Innovation: No Longer Oxymoron

While most insurance technology start-up activity in the U.S. is concentrated in health and auto, there are signs of life (pun intended) in the life insurance sector. Given the business model challenges reported in my last post, optimists will see upside and big commercial white space throughout the ecosystem. People with the skills, smarts and guts to envision how life insurance could work can lead the sector in new directions.

Life insurers ignore the facts at their peril. According to the 2014 Insurance Barometer survey cited in AM Best – Buying Insurance: Evolving Distribution Channels, 83% of consumers would use the internet to research life insurance before purchasing a policy if they had the option. While face-to-face contact with an agent remains the preferred purchase channel, nearly one in four said that given the option they would prefer to research and purchase online. This year’s Insurance Barometer update reports an improving marketplace for life insurance, citing favorable millennial generation attitudes and people’s willingness to share data in exchange for better product pricing.

A check-in on what is happening suggests three groups of potential innovation generators emerging:

  • New entrants developing client-centric offerings sitting between the carrier and the client, displacing traditional agents with a digital experience model
  • Start-ups providing B2B solutions to carriers or distributors, addressing pain points in the traditional product and sales model
  • Carriers themselves, a number of whom are experimenting either in the market themselves or via investments in start-ups or accelerators

This post assesses these three sources of innovation. Tomorrow’s post will highlight players across these categories.

New entrants can change the game … and that will take time

A big beef with the traditional life insurance model is that it is not client-centric. Nonetheless, even the most change-resistant executives will at least nominally agree that a focus on the client is now essential.

From that consensus, though, all bets are off with regard to incumbents’ ability to transform from a model where many of the industry’s own employees believe that the agent is the client, to one where the client (i.e., the person purchasing the insurance product) and his or her needs drive the business strategy.

It is almost impossible for a time-tested, embedded culture to accomplish a 180-degree pivot, so it’s more likely that successful models of client-centricity will come from outside.

See also: InsurTech Can Help Fix Drop in Life Insurance

New entrants who succeed will:

  • Establish presence and meaning for their brands among client segments whose unmet needs can be supported by the business model, creating differentiation and marketplace advantage.
  • Extract insight from wide sources of data, many not used at all today within the industry, to drive product development, client segmentation, personalized offers and communications, a client journey built upon new models for distribution, servicing, payments and account management, or a pivot from protection to prevention – all with heavy focus on digital possibilities
  • Avoid naivete about the inherent complexity of this industry, starting with:
    • Managing the reality of 50 states’ worth of regulation plus federal oversight from multiple agencies
    • Adhering to tight compliance requirements
    • Assessing the financial and risk implications of claims that won’t occur for decades
    • Recognizing that people are irrational to some degree when making financial decisions
    • Having patience (and patient investors) as even new entrants will be affected by sector dependencies and client dynamics that may take years to evolve

Start-ups will provide B2B carrier and distributor solutions, aiming at resolving automation, speed, productivity, technology, compliance and client experience pain points.

When I began to take a close-up look at the insurance industry four years ago, it was exciting to see the low-hanging fruit that could have positive impact with limited downside. Carriers lacked digital and multi-channel capabilities, big data analytics and technologies that had been introduced in consumer financial services at least a decade prior.

There are signs of progress. Entrepreneurs are homing in on specific problems, and executives are more open to outsiders. Consider as a starting point three buckets that are filled with pain: agent, client and broader capabilities.

  • The traditional agent model is riddled with issues, e.g.:
    • A continuous decline in the agent workforce,
    • A mismatch between agent demographics and overall population trends,
    • A prospecting model out-of-touch with the times, and
    • A compensation model that encourages churn and does not align interests between the agent and either the carrier or the client

Emerging agent solutions can successfully focus on reducing sales funnel inefficiencies, especially in the areas of:

  • automation solutions to ramp up agent engagement in digital channels (website and mobile app development, social media, compliance, content development, marketing campaign management),
  • hand-held device-based data capture and submission for policy applications; and
  • improved underwriting and application processing for faster approval, reducing error rates and minimizing or eliminating the need for applicants to provide blood and urine specimens.

Start-ups offering B2B solutions will succeed by:

  • Demonstrating real knowledge and expertise in the vertical.
  • Connecting the dots between their solution and drivers of financial success, especially the core metrics against which the industry and the analysts have historically measured performance.
  • Having a constructive attitude – no one wants to hear that the sky is falling, especially executives and advisers within striking distance of their own retirement.

Carriers are innovating to connect directly to the people who own their products, and also to motivate agents to sell.

The goal of client-centricity is on top of the list for U.S. life insurers. The challenge is translating what starts off as an intellectual abstraction into resource allocation, structure, governance, talent, prioritization, investment and daily tactical delivery… not to mention demonstrable financial impact that will satisfy boards and investors.

See also: Bringing Clarity to Life Insurance  

The pressure is on. Carriers are choosing a variety of areas for focus, and stepping beyond expense reduction to shore up results. Commonly on the short list:

  • Advisers – whether captives or third party – have the direct relationship with the client and tend to maintain connections only with top clients who represent additional sales or referral potential.
  • Client relationship management – Carriers transact infrequently with clients or their beneficiaries – contacts focus on premium notifications, claims and questions about policies.
    • Even when clients or beneficiaries reach out, most carriers are in the early days of figuring out responses beyond answering the immediate question.
    • Across the industry, there are millions of clients referred to as “orphans” – people whose agent has died, retired or is no longer affiliated with the carrier. Even if “assigned” to another agent, these clients do not have strong relationships with whoever issued their policy.
    • Carriers have not done a good job understanding their clients and how to improve the effectiveness of these relationships based on behavioral segmentation or other proven tactics. In the language of the carriers, “in-force management” is a relatively new area of focus, driven initially by risk and expense reduction strategies, with some signs of effort to improve client loyalty and satisfaction.
  • Capabilities – Ranging from basic automation to big data to digital and multi-channel experience platforms, e.g.:
    • data management platforms that unify disparate data sources, making them useful in one, dynamic dataset, speeding up execution, as well
    • data analytics, e.g., to enable active and relevant product migration as well as additional sales. product development and exploration of new business models
    • integrated experience for agents and clients across channels
    • data security enhancements
    • e-document management

See also: What’s Next for Life Insurance Industry?

The business model and culture that enable results to happen, along with the distractions of running a business of such high complexity, will compete with carrier-led efforts. Without restating the obvious challenges, two worth noting are:

  • The dependency on agents and advisers to drive sales, which makes any direct-to-client conversation controversial, as it may be perceived as competitive with the sales force
  • The diversion of attention in life insurance C-suites right now to address the recent U.S. Department of Labor decision on fiduciary standards. The impacts of this ruling are significant.

A 2015 World Economic Forum research study titled “The Future of Financial Services” concluded that while “the most imminent effects of disruption will be felt in the banking sector … the greatest impact of disruption is likely to be felt in the insurance sector.” For entrepreneurs and investors who see the upside and can tackle the complexity, life insurance is territory that appears, at least for now, to have considerable white space for reinvention.

The Case Against Whole Life Policies

One of the longest-running and most heated-discussions is about who is the greatest quarterback of all time. Many will say Joe Montana, but others will go with Tom Brady or Peyton Manning (among others). This discussion depends on your viewpoint and what you feel is valuable. At one time, the common answer may have been Johnny Unitas or Sammy Baugh, but their names don’t even enter the conversation for most of us any more.

Another long-running argument concerns whether whole life or term life is the greater life insurance product. (For the purposes of this article, we are omitting other common types of life insurance, such as universal life, variable life and indexed life.)  

My colleague and friend Chris Huntley, founder of Huntley Wealth & Insurance Services, is organizing a movement to promote awareness of term life insurance and some of the downfalls of investing in whole life. The Whole Life Rebellion fits into the Insurance Consumer Bill of Rights, which provides that consumers should purchase policies that match their needs.

Whole life insurance remains a top-seller. In fact, the American Council of Life Insurers estimates that 64% of all policies purchased in the U.S. are whole life.  

For the majority of consumers, term life insurance is a better fit. Yet, as with everything, it’s not quite so simple.

See also: Bringing Clarity to Life Insurance

The bottom line is that you need to be able to make that decision on your own, and the key is to become educated. The Insurance Consumer Bill of Rights is designed to provide guidance in knowing what questions to ask and what are reasonable expectations for your insurance agent and insurance company.

Rather than starting with the question of whether whole life or term life is better, consider the following points:

  1. Do you need life insurance? If you have no need for life insurance, then you have no need for either term life or whole life. We’ll go through the various reasons why whole life is suggested when there is no need for life insurance; just remember that, if you don’t need life insurance, then you don’t need ANY type of life insurance. Some day, I might buy a Porsche, but I’m not going to buy auto insurance on the Porsche until I own it.   
  2. How long do you need the life insurance? This is the classic question that really gets at the heart of the debate. Life insurance is needed when someone is financially dependent on you. Most needs for life insurance are for a finite period, such as providing insurance for the benefit of your children, most of whom will be financially independent by the age of 18 to 25. You may also need insurance to make sure your family can pay the mortgage. Well, most mortgages are for a fixed period and can be matched with term life policies, almost all of which are guaranteed for a certain time.   
  3. Will you outlive your term life insurance? What if the need for life insurance is permanent, let’s say for a spouse?  Well, in a situation where there are no other investments available to you or you choose not to participate in them, some type of permanent life insurance may make sense. However, according to the Economic Life Cycle Planning Method developed by Dr. Laurence Kotlikoff, your need for life insurance will diminish as your other assets grow. See my article with Dr. Kotlikoff published in AM Best, “A Different Approach,” or visit Dr. Kotlikoff’s site and learn more about the Economic Security Planner.
  4. Isn’t it true that only 1% of term life policies pay a claim? Out of all the term life insurance policies issued, only 1% will result in a claim. But how many homeowners’ policies pay out? Most people are happy if their home doesn’t burn down, and they don’t have to file a claim. Keep in mind that, while great statistics for whole life aren’t available because insurers consider the information proprietary, estimates are that 15% to 20% of whole life insurance policies result in a claim. One of the big reasons that so few whole life policies result in a claim is that many owners let them lapse every year. A joint study by the Society of Actuaries (SOA) and the Life Insurance Marketing Research Association (LIMRA) on 2007 to 2009 found that, in year one, 7% to 9% of whole life policies lapsed; in year two, 6% to 7% lapsed; and in year three, 5% to 6% lapsed. You can find the study by clicking here
  5. What if you have someone who will always financially depend on you or have some other permanent need? Is this finally a reason to have whole life? Well, almost. However, something called guaranteed universal life insurance acts as a term life insurance policy up to age 120 and does not build cash value. The premium is lower than a whole life policy. And of what benefit is a cash value if you intend to keep the policy in-force for the rest of your life? A primary rule in investing is lowering expenses when looking at two similar financial vehicles.
  6. Can you buy term insurance and invest the difference? That doesn’t work. With whole life insurance, there are very high surrender charges in the first few years of a policy, so when a policy lapses before the fourth or fifth year, the policy owner may only recoup 10% to 20% of the premiums paid. The question should really be, Will you still want to and be able to pay the premiums for a whole life policy?    
  7. Doesn’t whole life allow for tax-deferred cash accumulation? Yes, completely true. And so do 401(k)s, IRAs, etc. In these retirement accounts, you can have a wide variety of investments such as exchange traded funds with expense ratios of less than 1% per year. By contrast, whole life is a black box when it comes to quantifying expense. Costs and expenses are not fully disclosed and are at the discretion of the insurance company. And then, of course, there’s the fact that there’s no guarantee that the tax treatment for whole life insurance will continue. Almost every year, the U.S. Senate and House of Representatives discuss the cash value component of permanent life insurance and note that taxation of this “inside buildup” could yield $300 billion over 10 years. Hmmm, with a growing national debt….
  8. Whole life allows me to borrow from my policy: The key here is you are borrowing your own money, which you could do from many other vehicles such as a 401(k). And borrowing from your whole life policy may incur an interest rate that’s higher than interest rates on other types of loans and will also reduce the internal cash value build-up on your life insurance policy. Isn’t this the same as not investing the difference? And if you borrow too much money from your whole life policy, it can lapse without any value AND cause a phantom income tax gain. (See my A.M. Best article on the Pitfalls of Policy Loans.)

Consider that the CEO of Northwestern Mutual, John Schlifske, recently stated that face-to-face meetings are the best way to sell life insurance. Why face-to-face? The key word here is “sell.”

What if the goal was to help consumers make the choice that works for them? Yes, it’s a subtle difference, but the tone of the conversation needs to be changed.

If the only tool you have is a hammer, then every problem is a nail. If the only type of product your insurance agent has is a whole life policy, then every planning issue will be solved by whole life.

See also: What’s Next for Life Insurance Industry?

Having an efficient plan for your insurance and for your finances overall removes the need for whole life. Forty or more years ago, whole life insurance made a lot of sense,  especially as it was pretty much the only type of life insurance sold. But this was before the average consumer had easy access to the stock market through discount brokers, mutual funds and other modern ways to invest.

So, yes, using whole life insurance as a savings vehicle did make sense a long time ago — just like disco, hula hoops, pet rocks and Rubik’s cubes were hot items at one time.  

In today’s financial world, where there are many different types of life insurance and consumers have access to a wide variety of investment options, it does seem like the time for whole life has passed us by.

But the decision is yours. Knowledge is power. Become educated and use the Insurance Consumer Bill of Rights to guide you and your insurance portfolio.

Thought Leader in Action: Chris Mandel

Back in the ’70s, Chris Mandel quite literally stumbled into insurance, as a result of a racketball injury at Virginia Polytech Institute when he suffered a detached retina. After two months of lying flat in a hospital bed, he had to forego his post-graduate job in retail management and start looking for employment in D.C. — he began an unexpected career in managing claims at Liberty Mutual.

Mandel excelled in his job but realized a career in claims management wasn’t what he wanted. So, in the early ’80s, he moved to Marsh brokerage for five years and set up a risk management program for an AT&T spinoff that evolved into what is now Verizon. He then left Marsh to be Verizon’s first risk manager — building its program from scratch.

By the ’90s, he landed in several top corporate risk management positions at the American Red Cross, Pepsico/KFC and Triton Global Restaurants (YUM Brands). Mandel also began his six-year volunteer stint as the president of RIMS (1998-2004), after serving in many different key RIMS leadership roles. He earned an MBA in finance from George Mason University along the way.

By 2001, Mandel was on several advisory boards (i.e. Zurich, AIG, FM Global and Liberty Mutual), before making a career and geographic move to the USAA Group in San Antonio. There, he built an enterprise risk management (ERM) program because he saw a “broken traditional approach” to risk management. After nearly 10 years of developing an ERM program lauded in the industry (including by AM Best, Moody’s and S&P), Mandel was promoted at USAA to head of enterprise risk management, as well as president and vice chair of Enterprise Indemnity, a USAA commercial insurance subsidiary. While at USAA, he was recognized as Business Insurance’s Risk Manager of the Year (2004).

His dream was to be a corporate chief risk officer, but he saw that title more often going to “quants,” (like actuaries), rather than risk professionals. So, as a well-known and sought-out industry spokesperson and visionary, Mandel moved on from USAA in 2010 to found a Nashville-based risk management consulting group, then-called rPM3 Solutions, which holds a patent on a game-changing enterprise risk measurement methodology. Then, in 2013, he moved to Sedgwick as a senior vice president. He is responsible for conducting scholarly research, driving innovation, managing industry relations and forging new business partnerships.

In early 2016, he was appointed director of the newly formed Sedgwick Institute, which is an extension of the firm’s commitment to delivering innovative business solutions to Sedgwick’s clients and business partners — as well as the whole insurance industry. In 2016, Mandel was awarded RIMS’ distinguished Goodell Award (see video below).

When asked what he sees as critical strengths for someone entering risk management, Mandel said: “I try to hire managers who can think strategically and who can convince C-suiters and boards of the value of being resilient in addressing a company’s risk profile. Progressive leaders understand the strategy to leverage risk for value.”

A holistic approach, as he describes it, “seeks a vantage point that can assess both the upside and downside of all foreseeable risks.” He believes true innovation evolves from a company’s risk-taking. “It’s not so much identifying what or when adversity is going to happen, it’s how a company responds to risk in order to minimize disruption,” he said.

In assessing his personal strengths and accomplishments, Mandel feels that a person needs to be “emotionally intelligent” — able to adapt to different people in organizations. He doesn’t consider himself a people person but says he learned to be one the hard way. He advises: “Team spirit is putting other people first and helping them succeed. … Admit your failures and build trustworthiness from your mistakes.”

Besides writing, teaching, speaking and (still) playing racketball, he serves an active role as an advisory board member of Insurance Thought Leadership. He and his wife also serve in church ministries, where he often plays guitar alongside his grown children, who are ordained ministers. Mandel said, “I’m blessed by a Creator who’s had my back.”

Insurance in the Age of the 12th Man

Brian Duperreault, chairman and CEO of Hamilton Insurance Group, told attendees at A.M. Best’s 23rd annual conference in Scottsdale, AZ, that the insurance industry has been an analog laggard rather than a digital leader, and that the clock is ticking on responding to the needs of a digital world. The address follows:

Thank you, Matt, and thanks for that wise review of the forces that have shaped the industry over the years.

Hearing that history line makes me feel pretty old. I lived through a lot of those highlights.

You’ve heard where we’ve been as an industry, and I’ve been asked to give you some thoughts on where we’re going.

The title I’m using is Insurance in the Age of the 12th Man. I’m sure most of you know what I’m referring to by the 12th man – any Seahawks fans with us today? – but in case you don’t:

The reference to a 12th man was first used more than 100 years ago to describe a really dedicated football fan.

It gained some significant traction at Texas A&M, and the Aggies still claim it’s theirs – in spite of what the Seahawks say.

The point is this: Fans can be so fanatically loyal to their team, it’s like having a 12th man on the field. Fans can shape the game and often affect a win or loss.

I’ve heard they can even make the earth move.

Last month, fans at a soccer game in the U.K. celebrated a last-minute goal so “enthusiastically” that it was recorded as a minor earthquake.

Why am I referring to the 12th man in a talk about the future of insurance?

Because we’re doing business in an age that’s profoundly different from anything we’ve ever experienced, and I believe it’s driven by what I’m going to call the 12th man phenomenon.

Virtually every industry has been redefined by an increasingly demanding customer, and it’s doing the same to ours. It’s the fan base – the collective 12th man – that’s driving how we develop, market and distribute our product.

And for many companies, there’s not much time left to figure out how to stay in the game.

PwC just released its annual CEO report and noted that access to digital technologies means that we’re more connected, better-informed and, in PwC’s words, “increasingly empowered and emboldened.”

This isn’t just a shift in market forces. The market has always been changing, and we’re used to that. This is something entirely different.

Given the digital world we’re living in and the impact of real-time communication through social media, the market’s voice is much more crystallized. There’s an immediacy, an intimacy that we’ve never had to deal with before. This is a voice that’s loud, clear and specific.

One of the best examples of the effect of the 12th man is Uber.

You probably know Uber’s story.

Its founders were so fed up with how hard it was to get a cab when they wanted one that they developed an app that puts a taxi at your fingertips. They didn’t just enhance the taxi industry; they blew the existing model apart.

They didn’t care what the regulations were. They just made it work – and it continues to work, because Uber gave customers what they wanted. AirBnB did the same thing to the hotel industry.

  • If you’re used to downloading apps to watch a movie, do your banking or order your groceries;
  • If you customize how, when and where you listen to the radio or watch TV;
  • And if this uncluttered, efficient, highly personalized way of living is what you’ve been used to since you could walk, then

There’s no reason that you’re going to expect anything less when you’re buying insurance.

Maybe this sounds like background noise to those of us who’ve been in the business for a while. After all, our industry has been resilient over the centuries. It’s been a safe bet for decent returns on investment.

But people my age see the world through an analog prism. This is our Achilles heel – because there’s a generation of 80 million Americans who see the world through a digital lens.

This is the workforce that Matt referred to earlier.

They’re going to be the buyers and sellers of our products. They’re going to run our companies. As the largest voting bloc in the U.S., they’re going to elect our governments.

They’re going to be a noisy and demanding 12th man. They already are.

This expectation for a streamlined and efficient buying experience is one of the main drivers behind my company, Hamilton Insurance Group. We believe that insurance has been an analog laggard, not a digital leader. We think we can do something about that.

As I give you thoughts on what will shape our industry over the next decade, I’m going to keep coming back to the 12th man.

I’ve seen lots of lists of future industry trends – some of them are mine – but I think it comes down to:

  • How to build a sustainable company
  • How to be smart about data and
  • How to strip waste out of our industry.

Let’s look at sustainability.

Traditionally, creating shareholder value in an insurance company has had two main components: investments and underwriting.

Right now, we’re between a rock and a hard place on both counts.

We’re in a prolonged zero-lower-bound period where interest rates dip in and out of negative territory.

In a traditional insurance company, there is no money to be made on the fixed instruments that most companies are required to invest in.

Having low-yield assets on a balance sheet for regulatory purposes virtually ensures little investment income.

What’s a CEO or CFO to do?

Well, you can shift your investment philosophy and invest in equities or alternative instruments with a higher yield. But you have to prove you can handle the additional risks that come with a different mix of asset allocations.

You also need an expert asset manager who’s well-versed in current regulations, as well as the commitment of your executives and board, to move to a riskier investment strategy.

You can bank on profitable underwriting – but in a market like this, that’s a grueling experience. Terms and conditions are tough, and margins on most lines of business are razor thin. You have to stay disciplined and resist the siren call to write discounted business. And it seems the days of large reserve takedowns are over.

You can look for M&A opportunities, which in many cases may delay the inevitable and add the stress and cost of effectively integrating what are likely to be legacy systems and cultures.

And while you’re grappling with investments, underwriting and M&A, you have to keep an eye on the rapidly changing digital world, which could render your company obsolete.

So what’s a sustainable business model look like in the age of the 12th man?

I think part of the answer lies in a flexible regulatory environment.

If you’re a company in Bermuda, where your regulator is the Bermuda Monetary Authority, you can establish an alternative investment strategy, as my company has done, in return for putting up additional capital, and work with a data-driven investment manager like Two Sigma, which manages Hamilton’s investments.

Almost a decade ago, the BMA embraced the Solvency II framework and then fought to get Solvency II Equivalency for Bermuda. Their persistence will be rewarded when official recognition of Bermuda’s equivalency takes legal effect on March 24.

I don’t think it’s a coincidence that virtually the day after Bermuda’s Solvency II Equivalency was announced, XL Catlin announced it was moving its company registration to Bermuda. I think others will follow.

Bermuda has reacted well — better than most — in recognizing that flexibility is key to staying solvent.

In the States, things are more complicated. Deloitte released a report last month that said one of the biggest challenges for today’s insurance companies is trying to comply with new capital regulations that were originally designed for banks and don’t provide much flexibility in modifying an investment strategy.

It’s an accepted tenet that regulation works best when it addresses market failures and protects insurance buyers. But regulation can over-correct: In some cases, states have been too slow to rewrite laws, some of which have been in place for almost 100 years.

Today’s regulator has to confront the effect that the digital dynamic is having on both the insurer and the insured. This creates the need for a delicate balancing act: defining the right regulatory regime in a market that’s morphing in front of our eyes.

A word about rating agencies – sometimes referred to as de facto regulators:

Some agencies, like A.M. Best, have been forward-thinking in broadening the factors they consider when assigning ratings. I applaud Best’s for undertaking the survey on predictive analytics that Matt discussed. This is a meaningful contribution to the dialogue. We need more of that from our regulators and rating agencies.

Best’s has also done the work to understand alternative assets. For example, at Hamilton, Best’s spent time onsite with our investment manager, recognizing that these complex strategies require some effort to understand.

Having said that, I’d like to urge rating agencies to put more weight on the 12th man’s voice. How you’re accepted by the market matters. The quality of the relationships you establish, the panels you’re on, the submissions you receive – that all matters.

I said investments and underwriting were traditional aspects of building sustainability. M&A can play a role, and technology definitely does.

However, in this second decade of the 21st century, there’s so much more to running an insurance company.

In addition to a vocal, demanding 12th man, we’re living in a world of extreme political polarization, exchange-rate volatility and social instability.

And against that fragmented, disrupted backdrop, there’s the expectation that a company’s commitment to purpose should be as important as its commitment to profit.

Almost half of the 1,400 CEOs surveyed by PwC feel that, in five years, customers will put a premium on the way companies conduct themselves in global society.

Building a sustainable company is one of most complex issues we’re going to face over the next decade.

Now let’s look at data.

A few years ago, we were all talking about Big Data. It was THE buzz word.

Looking back, I think it’s safe to say that most of us didn’t know what we were talking about.

But living with the effect of disruptive technology, we’ve been on a steep learning curve. We’ve begun to wrap our heads around what we can do with the massive streams of data available to us.

EY just released a study on sensor data. It’s worth a read if you haven’t seen it.

As lead director at Tyco, I have to declare my interest in the subject. We’re spending a lot of time looking at how streaming data can help us develop better products.

We’re taking a holistic, data-driven look at behavior across multiple channels to give our clients the insight that helps them optimize their performance.

EY says top-performing insurance companies are already innovating with telematics, wearable technology and sensor data. EY lists the competitive advantages of being smart about data this way:

  • You can assess risk more precisely
  • You can design products faster
  • You can connect with customers more directly
  • You can revolutionize claims handling
  • And – you can maximize profitability because of better targeting

The implications for what sensor data can do for our industry are remarkable.

We’re talking about sensors on people, on cars, on ships and planes, in offices and homes, on GIS systems that provide data about climate – pretty much anything on the earth, or in the sea and sky.

Understanding this voluminous amount of data, finding correlations and eliminating bias can help us develop policies that are better-written, more comprehensive and more relevant.

Being smart about data also helps us come to grips with emerging risks, particularly a risk like cyber.

At Hamilton, we’re taking a cautious position on cyber. We’re not writing it as a class until we’ve identified an approach that gives us comfort. We haven’t found one yet, mainly because there’s been a tendency to underestimate the interconnectedness of cyber risk.

Too often, discussion about cyber revolves around hacking. But if you put any credence in what I just said about the impact of sensor data, you have to believe that there’s data-based risk in everything we do nowadays. If that’s true, what are the implications for cyber?

Getting back to sensor data –

Access to this type of intelligence has some significant implications for our distribution partners. The role of the broker and agent has been evolving for years, but data analytics is one of the greatest threats – or opportunities – for the partners who help us develop and distribute our products.

Who owns the data? Who interprets it? Does the insurer or the insured need anyone to do that any more?

Then there’s the duality of the role that brokers and agents play. They represent the insurer’s interest as well as the insured or reinsurer. Serving two masters is never easy. How well can you do that in an age of colliding data sets?

I think the answer to whether there’s still value in an intermediary is a qualified yes – IF the broker or agent brings a level of expertise and counsel that far surpasses what the carrier offers or the client can determine by himself. This means setting the gold standard for manipulating and interpreting data.

A last comment on data –

One of my own learnings over the last year or so is that if a company is going to embrace data and technology, it has to be a company-wide initiative. It can’t be done in silos.

I don’t think it works to have an incubation or innovation lab where a dedicated team is exploring a new risk management frontier and the rest of the organization is conducting business as usual. You’ll have constant dissonance between the analog and the digital.

At Hamilton, one of the advantages of being a start-up is that we’ve been able to make technology a focus of our strategic plan from the beginning.

Last year, we bought a Lloyd’s syndicate that we’ve completely rebuilt. The benefit of not having any legacy has allowed us to create an end-to-end, integrated system with all reports coming from one centralized data warehouse.

We’ve already demonstrated the value of this model. When Lloyd’s moved to require its syndicates to report pricing data for gross rather than net performance, a lot of managing agencies struggled. We didn’t.

Finally, I’ll look at the last issue I listed in my opening comments – getting rid of the waste in our industry.

By waste, I mean the massive cost of doing business. I’ve been beating this drum since Hamilton was established a couple of years ago, and I’ll keep at it because, if anything puts our industry at risk, it’s the inefficient way we acquire business.

Thirty to 40% of every premium dollar goes to acquisition and managing the business. At Lloyd’s, it’s even higher, largely because analog data-gathering weighs on the market like an albatross.

The quest to make buying insurance easier and more efficient through data analytics is the DNA of our U.S. operations, where our focus is small commercial business.

We want to remove the pain of the rate/quote/bind experience and sharpen the underwriting. We’re blessed with employees who believe in our mission and who have moved mountains to make it real.

They’ve spent the last year stripping unnecessary questions from the forms used in the acquisition process. We know a lot of that data suffers from human bias or error, and much of it is available from public sources that are more reliable.  We use data that comes from dozens of different sources as part of our risk scoring and underwriting process.

Our long-term goal at Hamilton USA is to get the questions that an agent or broker asks an insured down to two: name and address. Smart data analytics, as well as more informed underwriting, will do the rest.

We’ve also created streamlined portals for quotes and are just weeks away from launching mobile-based technology that rates, quotes and binds business owners policies.

The small commercial segment that we’re working in has an average policy size of under $25,000. This is business with small margins and high transactions. Efficiency is critical if you want to make any money.

And there’s ample room for doing just that. In the U.S., this is a $60 billion market. It’s almost $90 billion when specialty risks are included.

You can see why speed to market can make a huge difference in profitability.

Speed to market doesn’t mean we’re cutting out the middleman.

There’s plenty of room at the table for brokers, agents and MGAs – as long as they want to align their systems and practices with our cutting-edge analytics.

We’re working with partners who are as excited as we are about the potential that data analytics represents. We’re being approached by many others who are interested in taking this journey together with Hamilton.

And there’s a generational component to all of this. Some older clients want to do business with a broker or an agent. It’s a relationship they recognize and feel comfortable with.

But remember that 12th man. There are 80 million of them for whom a middleman just gets in the way.

In closing –

I know that Matt was a keynote speaker at a conference earlier this month organized by Valen Analytics. I understand there was lots of good discussion and some fascinating stats underscoring the imperative to embrace data analytics.

Apparently, 82% of companies surveyed last year by Valen say that underwriters are resisting analytics. 30% worry about a loss of jobs. 30% don’t trust the data.

77% of underwriters and actuaries argue about pricing. The No. 1 reason? Underwriters dismiss data in favor of their own judgment.

While we continue to resist change, venture capital companies are looking at our industry and seeing dollar signs.

In 2015, VCs invested $2.65 billion in start-up insurance companies like Oscar, Gusto and PolicyGenius. Ten years ago, that figure was $85 million.

So the clock is ticking. There’s not a lot of time left to figure out how to build sustainable companies, be smart about data and be more efficient.

Above all else, we need to get over our inherent resistance to change. If insurance as we’ve known it was an ecosystem, large sections of it would be on the endangered species list.

But I’m an eternal optimist. I know we have bold people working in insurance and reinsurance. I know a lot of us get what needs to be done.

So let’s just do it – before that 12th man comes down from the bleachers and does it for us.