Tag Archives: carroll

Why Don’t Most ERM Systems Work?

So why don’t most Enterprise Risk Management system work?  Simply, they don’t “manage” risk, they just record it.  Manage is a verb not a noun. It is activity not an item.  Making a list might be adequate for those who want to check off regulatory compliance, but it’s does not produce a ROI.

They don’t manage threats

To manage threats you need to actively monitor risk drivers and influences thru lead and lag KRIs in real time.  Reporting systems aren’t much use if they’re telling you after the event. By the time it shows up on a heat map it’s not a risk, it’s an incident.  Simply moving your risk management from spreadsheets to a cloud risk register does nothing to pursue an active defence against threats.

To create a workable system, you need to take your risk registers, work out what causes those risks to worsen (drivers and influences), and what lead/lag KRI to use to monitor the movement of those drivers and influences.  You then need to set up a real-time system for collecting those KRIs and alerting the appropriate people who can act on the threats immediately.

They don’t tell you HOW it will affect Objectives

The common practice of recording what objectives might be affected by a risk does nothing to assist in achieving or optimizing those objectives.  The real purpose of risk management is to navigate the myriad of influences on the objective’s outcome as they occur, i.e. it is an interactive real-time activity.

Risk Management’s primary purpose in the strategic and tactical planning phase is to identify the best course to market and thereby optimize resources (time and capital).  This requires specifying HOW risks and actions interrelate and compound effect on one another.  This highlights two things.  For ERM to work it must integrate both risk and actions, and it must know HOW variations in either compound effect.

Once these are in place they can easily be used to monitor progress in achieving objectives. Workflows and Issue reporting become inputs to risk drivers and influences which in turn automatically update risks. With a real-time aggregation of risks (roll-up), alerts can be sent to interested parties when the risk threshold of any objective is threatened.

See also: The Current State of Risk Management  

They don’t improve the quality of decision making

By definition complex systems (the business world) are chaotic (see Chaos Theory), where small variations alter outcomes, like the weather and the winner of the Melbourne Cup.  But risk management was never about predicting the future. It’s about providing advice on the effects of possible decision outcomes and being prepare for any adverse effects.

But here’s the real rub.  For ERM to be useful it has to employ Predictive Analytics and machine intelligence.  In my defence, Predictive Analytics doesn’t actually predict the future, it just highlights obscure facts. It provides true decision making collateral on possible opportunities and threats in any scenario, from which “informed decisions” can be made, instead of “gut feel” guesses.  It helps mitigate decision bias and raise ramifications sometimes overlooked in the heat of a problem.

Obviously many ERM systems have numerous other failing, such as a single hierarchy for aggregating or “rolling-up” risks (wouldn’t it be nice if the world was that simple), and not including Incident Management in ERM to create a closed feedback loop, which drives evolution and effectiveness.  But the single most important thing is to use your risk collateral as part of the day-to-day operational decision making and not to just let it stagnate in risk registers being reviewed annually.

Harvey: First Big Test for Insurtech

As Hurricane Harvey finally relents, the insurance industry is about to experience the flip side of a famous line from Warren Buffett. Talking about how investment portfolios shouldn’t be judged in good times, Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.” Well, with the rain and the rain and the rain that Harvey inflicted on Houston and surrounding areas, we’re going to get to see who in the insurance world can swim.

That question will take two forms, one that we’ve seen in every disaster since time immemorial, but the other a new one, about insurtech.

The normal one is about whether insurers will perform in their moment of truth, or whether we’ll find the kinds of dubious decisions by adjusters and faked engineering reports that led to improperly denied claims and gave insurance a black eye after Superstorm Sandy.

In the case of Harvey, the question for the industry is, essentially: Do insurers want to be Joel Osteen or J.J. Watt?

As you may know, given that he’s all over TV, Osteen is the senior pastor at a megachurch in Houston who was mocked on social media for being slow to open the doors of his “prosperity gospel” Christian church and provide shelter and aid for those displaced by the hurricane. He says that he has been maligned and that he was always ready to help, if the city had asked, but his many critics have noted that nobody had to ask Houston’s mosques to open their doors and made Osteen the king of memes this week. Osteen is damaged. The only question is how badly.

On the flip side is J.J. Watt, the all-everything defensive lineman for the Houston Texans. Very early in the storm, he made a personal pledge of $100,000 and asked for others to kick in, stating a goal of $200,000. Well, his sincerity and concern went viral, drawing donations from tiny to huge, from Drake to Walmart. Last I checked, total donations exceeded $20 million. With the waters receding, Watt and teammates will be personally going around the city, delivering water, clothing and everything else he’s bought to hand out. He could run for king in Texas, and nobody would get in his way.

While acknowledging that insurance is a business that has no obligation to pay more than it owes policyholders, I think the choice is clear: Be like J.J. Watt as much as you can. Don’t be Joel Osteen.

See also: Harvey: Tips to Avoid Claim Issues  

The new question is trickier. The insurtech movement has been around for a few years now, but Hurricane Harvey is the first true catastrophe that has happened during a time when the insurance industry is laying a claim to innovation. (For good measure, Typhoon Hato has been hammering Macau and Hong Kong at the same time.)

We’re about to find out how innovative we really are.

Some companies are following the traditional playbook and dispatching armies of adjusters to the afflicted region. But we’ll also see the skies filled with drones and will learn how effective they can be at documenting the damage and how much their work still has to be supplemented by humans.

We’ll learn a lot about the “gig economy” and whether part-time workers, such as the “Lookers” provided by WeGoLook, can efficiently supplement the full-time insurance workforce, speed the process of claims and slash away at the costs of sorting out a full-on disaster.

Supposedly, insurtech is letting everything happen faster. Startups such as ViewSpection and MondCloud provide for self-service on claims, letting individuals send photos and videos and allowing insurers to do triage and pay easy claims quickly. But reality may intrude.

Every time I see a photo of some aid facility and spot a sign saying “Free legal services,” I want to applaud those who are helping the injured pro bono, but the cynic in me sees lawyers fishing for clients. I suspect that the hurricane is a full-employment act for every recent law school graduate in Texas. The lawyers, of course, have a vested interest in avoiding quick settlements, so they can work the insurers, take thousands of cases to court and perhaps find some lucrative class actions.

Insurtechs, meet lawyers. We’ll have to see how that goes. I don’t often bet against the lawyers.

Insurers have begun using chatbots, such as Pypestream’s, in their call centers, which should help handle the deluge of calls that will come in from customers and allow insurers to contact customers more often and more effectively to keep them up to date on the progress of claims. We’ll have to see how insurers do about handling customers’ concerns in these hours and days and weeks of need, as well as what role technology plays.

Better data and analytics, sometimes powered by AI, are supposedly making us all smarter about mitigating risks, underwriting and everything else, but it’s easy to congratulate yourself on being smart when you don’t face a test.

In the real test — accuracy — I’d say insurtech startup HazardHub wins early points for putting out an analysis right before the storm saying that $77 billion of property was at risk in Houston, quite a bit higher than other estimates I saw – though lower than some estimates now circulating, and damage estimates always seem to grow, never diminish.

We’ll see whether the powerful new analytics let any company in particular get away from the risks in Houston – keeping in mind that ProPublica identified the particular risks in Houston, because of lack of restrictions on real estate development, in a story published last year. If the journalists could spot the risks, how did the insurers do?

The verdicts will take weeks and months to come in, because the damage has been so extensive and because problems are still developing in what continues to be a stew of mold, fetid water and chemicals. But we’ll get a sharp sense of where innovation has, in fact, happened and where it needs to go – if we keep our eyes open, evaluate the results honestly and take the lessons seriously.

There’s one other question that needs to be answered, too, this one on the government policy level. Flood insurance isn’t working in the U.S., so what do we do about it? 

Perhaps lulled by a lack of major storms hitting the U.S., homeowners have increasingly declined to purchase policies, so estimates are that 80% to 85% of homes in Houston were not covered. Meanwhile, the National Flood Insurance Program (NFIP), which provides so much of the coverage, is already heavily in debt because it underprices risk and hasn’t recovered from Superstorm Sandy. By law, the NFIP needs to be renewed this month, but we’ve all seen how dysfunctional Congress is these days, and Congress has even more pressing priorities this month, such as dealing with the budget and raising the national debt ceiling.

The best proposal I’ve seen so far is to require that homeowners and renters insurance, commercial property policies, auto policies and so on all have a flood piece to them, so that citizens carry the responsibility and so that risk is priced in the market, rather than being dumped on the federal government.

See also: Time to Mandate Flood Insurance?

One person attached a compelling comment to this article on how the federal government, not insurers (and, ultimately, the insured public) will pay for the recovery from Hurricane Harvey:

“Homeowners have three options: 1) buy flood insurance through the NFIP, 2) live in a non-flood plain or 3) accept the risk of living in a flood plain. Option 4 of Harvey victims expecting insurers/taxpayers to compensate them for their increased risk is not an option.”

A century ago, in the earliest days of IBM, founding CEO Tom Watson Sr. placed signs in offices that said, “Think.” When the company sparked fears of bankruptcy 25 years ago, wags penciled in two words underneath some of those signs, so they read, “Think – or Thwim.” Flood insurance in the U.S. is in “Think or Thwim” mode. I hope we think.

Future of Digital Transformation

Senior management have to come to grips with the fact that digital transformation is not an event but rather the operating environment of 21st century business.

Like music, photos, TV, and data, once something becomes digital it becomes a consumable and moves from the domain of the specialized expert to a public commodity. As with Blockbuster, Borders, Capital Records and newspapers, businesses based on non-digital product are the hand-crafted hobbies of the 21st century.  Craft markets will exist into the future, but they are generally not profitable and rather a labor of love.

Changing the way we work

Here’s the kicker. Digital transformation is now looking at not just the things we sell, which includes services, by the way, but how we do business. From crowd funding to network marketing to blockchain (how Bitcoin works), the basic principles of how we have traditionally gone about business are changing.

Crowd funding, where a population at large is directly involved in the creation of products, also has ramifications for invention and design. Brainstorming on steroids. Network marketing has wiped out traditional sales channels from cold calling and direct mail to bricks and mortar retailing. And blockchain has the capability to render capital-intensive industries obsolete. What Bitcoin did to money, people are now looking to use to undermine energy, insurance and infrastructure oligarchies. One day, blockchain may even be capable of fixing our political system.

See also: 4 Rules for Digital Transformation  

Understanding Digital Transformation

What really is digital transformation? Gartner, a leading authority on such things, defines digital transformation as “to leverage digital technologies that enable the innovation of their entire business or elements of their business and operating models.

So innovating is not just what we do, but how we do it, our “operating models.” In my last article, “Misunderstanding Innovation,” I wrote on how innovation is not invention but rather the application of invention as a solution to a practical need. As such, innovation is the backbone of digital transformation, just as audit is to compliance or controls are to risk.

Digital Transformation as an Operating Model

Back to my opening statement that digital transformation should not be thought of as an event but rather an operating environment, just as industrialization in the 18th century was not a single event but a period of continual transformation. From the introduction of the weaving loom through production lines to mass production, the transformation fed change that has continued for 200 years.

Senior management have to stop thinking of digital transformation as a passing fad, and embrace the fact that the world has changed.  As in the 18th and 19th centuries, change will drive change, and as the management in those times developed process management models (see, PDCA is NOT Best Practice) to drive the development of automated production, so, too, managers now have to develop transformation models to take account that disruption and innovation will drive further disruption and innovation.

Transformation as a Lifestyle Choice

The fact that you have transformed your operation today is only a temporary reprieve. You need to redefine your business model to be an agile platform continually identifying and innovating to improve end-customer quality of life: That’s your customer’s customer.

Women as the Mothers of Innovation

The current beat-up of getting more women involved in STEM (science, technology, engineering, math) misses the understanding that innovation has at its root, a deep empathy for the quality of life of others. Developing and elevating women’s inherent intuition as to the plight of others will do more to foster innovation than a plethora of inventions. Hundreds of inventions never see the light of day, yet a handful of innovations have changed the world. Again, please re-read my previous article on Misunderstanding Innovation.

If Malcolm Turnbull truly wants Australia to develop an innovative culture, we should be promoting more people into psychology, sociology, anthropology and statistics. These are the strategic vocations of innovation, while STEM and invention are the tactical solutions. Yes, stats is math, but it allows us to understand bias as well as predictive analytics, which identifies and prioritizes targets for innovation.

See also: Why You Need a Digital Leader  

Where to From Here?

Accepting the need to transform your business model is in itself an inherent risk. Just as a window cleaner straps on a safety harness before scaling a building, so having an active risk and compliance system operational is a mandatory prerequisite before embarking on any transformation. You will need systems that alert you to emerging issues and to give you continual insight, throughout the transformation process, without the need to go and look for it. The business graveyard is as full of those who lost their footing on the way as those who did nothing. This is not a shameless plug for what I do but rather the reason I do it.

Q&A With Iowa’s New Commissioner

Q: Congratulations on becoming the new Iowa insurance commissioner. You’re a Missouri native with 30 years of experience in the industry. What brought you to Iowa?

A: Thank you very much. About four years ago, I met Nick Gerhart, who was beginning his tenure as Iowa’s insurance commissioner. We had really good discussions at NAIC meetings, and he needed another member for his senior leadership team. Things really just fell into place. I’ve spent my entire career in consumer protection, and I shared Nick’s values of making government work for the people we serve — in our case, the consumers of insurance products.

Another draw for me was that Iowa is a huge insurance hub. From the outside looking in, I knew that Iowa’s regulatory culture was open communication with the regulated industry. We protect consumers and have high standards for the industry we regulate, but we communicate openly. We may not always agree with insurers, but we are willing to talk about it. I feel many states don’t have that mindset. It makes a big difference to have a focus on consumers while also working with industry in a fair, flexible and positive way. Industry ultimately wants stability and to be treated fairly, and I think that is why Iowa is home to so many insurance companies.

See also: A Commissioner’s View of Innovation  

Q: How does it feel to have the title of insurance commissioner once again? Not many can say that.

A: I am confident that those insurance commissioner statistics are not kept, but in the 150 years of state insurance regulation, I may be the sixth or seventh to serve as insurance commissioner in two separate states. Perhaps I’ll be the answer to a Jeopardy question someday. I’m very pleased to have been appointed by Gov. Branstad and Lt. Gov. Reynolds so that I can continue working to help protect consumers. We have a really, really good staff here at the Iowa Insurance Division, and I consider it an honor to lead them.

Q: What’s your vision for the Iowa Insurance Division moving forward?

A: Consumer protection will be the main focus. Our multi-faceted team is in place to make sure that Iowans are protected.

We have a market regulation team that works with consumers on complaints, enforcement attorneys that ensure companies and producers who are doing what they are supposed to be doing, a fraud bureau that consists of law enforcement officers that investigate insurance fraud and a Senior Health Insurance Information Program (SHIIP) that helps Iowans on Medicare get the information they need to make informed decisions.

Another huge part of consumer protection is ensuring that the insurance companies are solvent to be able to pay claims when needed. Our financial team works hard every day so consumers are protected that way.

We also just recently launched a new website, which really puts consumers first so they can quickly and easily get the information they need.

Q: There’s always talk during a new president’s term about the first 100 days and discussions about the cabinet picks. Is it the same for a new commissioner taking over?

A: Well, in my case, I’ve been appointed by the same administration that my predecessor was. On one level, much stays the same. Early on in Commissioner Gerhart’s tenure, he knew there was a crisis coming as much of our staff was retirement-eligible in the coming years. We put in a lot of work in terms of strategic hires, putting our younger staff in positions to both learn and lead and reorganizing as necessary. We’ve been able to add necessary staff to those regulating company solvency to keep up with the growing and increasingly complex nature of our domestic industry. Still, we may look to continue adding to our senior leadership, whether that be from inside Iowa or outside given the strategic plans put in place under Commissioner Gerhart. I will work with industry, our universities, Lt. Gov. Reynolds and Gov. Branstad to help make Iowa an attractive place to do business and a home for talented insurance professionals.

As for the first 100 days, I think a lot depends on what happens at the federal level in a few areas. What happens with the ACA is yet to be seen but will have a huge impact on what we do here in Iowa. The DOL fiduciary rule is also out there as something we are waiting to see how the new administration deals with. There’s also FIO, and I suppose the list could go on. We’ll continue to be active at the NAIC level to bring ideas forward and work for the best interest of Iowans.

See also: What Is the Right Innovation Process?  

Q: Iowa has generally been very forward-thinking in terms of innovation in the industry. ITL has even joined as a partner to the Global Insurance Symposium that the Iowa Insurance Division helped create. What should we expect at this year’s event?

A: The Iowa Insurance Division has been a founding partner of the Global Insurance Symposium, which is held each spring in Des Moines. This year will be the fourth year, and I think it will be the best one yet. There really is something for everyone. Many of the topics such as artificial intelligence, blockchain, corporate strategy, risk mitigation and innovation in the industry truly transcend all types of insurance. This event brings together top thought leaders in industry from around the world, industry executives, regulators and insurtech startups. I think this event is in a caliber of its own, and I’m really proud to be in a position to help the event grow and showcase all we are doing in Iowa to the rest of the insurance world.

This will be an event that folks won’t want to miss.

What Trump Means for Business

Donald Trump’s stunning win in the U.S. presidential election, together with the election of Republican majorities in both the House and the Senate, has generated a wave of coverage about the deep changes that will surely occur with Obamacare but not nearly as much about what the voting will likely mean for businesses in general and the insurance ecosystem in particular. While there are far more questions than answers, I’ll venture a few observations.

The biggest concern is that Trump brings with him enormous uncertainty that could cause a pause in planning for investments, especially given that we are in the year-end budgeting season. Yes, a transition of power at the presidential level always brings uncertainty, especially when the new president is from the other party, but the uncertainty surrounding Trump will likely last longer than usual — possibly far longer — for three reasons and could cause significant problems for the economy.

First, while companies plan investments based partly on an incoming administration’s policies, it’s not at all clear what Trump’s policies are in many instances. Often, he said something startling during one portion of the campaign, such as that he planned a 45% levy on goods from China that would start a trade war, but then backed off and let the furor die. Will he try to impose that levy; build a wall that would damage relations with Mexico, one of our biggest trading partners; cut taxes so much that he adds $500 billion a year to the federal deficit? Who knows? He likely doesn’t even know at the moment on many issues.

He has expressed some plans consistently. For instance, he expects to lower nominal tax rates on businesses and simplify the tax structure, which businesses will welcome and which congressional Republicans will likely support. Trump plans to invest heavily in infrastructure, which draws mixed reviews among Republicans. He plans to reduce regulation, including defanging a major consumer watchdog group, which businesses generally welcome, though his thinking on regulation could cause consternation on health insurance. (He says he thinks health insurance costs can be driven way down by allowing any policy approved in one state to be sold in other states — an approach that state regulators would surely resist and that would leave many companies in limbo while the fight played out.)

But even when Trump has been thematically consistent, he has been shy on details or even contradictory — his campaign simultaneously cited two different versions of his tax plans that were $1.2 trillion apart in terms of how much revenue they would generate over 10 years.

Even under the best of circumstances, it will take many weeks for Trump’s team to build out the details of the many policies that an incoming administration needs to have — and that most have on Election Day. It could be months before the team even gets to the point of starting to turn the policies into legislation.

Which brings me to the second point about the unusual uncertainty surrounding a Trump administration: He doesn’t have a team.

He needs to build a team numbering in the thousands to take leadership roles in the vast federal bureaucracy, but he just has the core of a team at this point, which is very late in the game as it’s usually played. That core is mostly his family, four politicians and two political operatives. Two of those politicians — former New York City Mayor Rudy Giuliani and former Speaker of the House Newt Gingrich — have experience but have been out of office at least 15 years and don’t bring sizable organizations with them. The two sitting governors on the team — Indiana’s Mike Pence, the vice president-elect, and New Jersey’s Chris Christie — have access to organizations, though Christie may be hampered by the Bridgegate scandal. The two political operatives — campaign Chairwoman Kellyanne Conway and campaign Chief Executive Stephen Bannon — have only modest resources to contribute to a team, and Bannon’s organization, Breitbart News, is toxic to many.

Traditionally, the Republican Party would provide the core of the incoming president’s team, but Trump has been at war with most of the leaders of his party — notably not Chairman Reince Priebus — almost as much as he has with the Democrats. In addition, many politicians will avoid Trump, at least initially, because of the racist, xenophobic and misogynistic things he said during his campaign.

He will surely build a team. The lure of high office will overcome the scruples for many. But the mechanics will likely take longer than normal, and there could be more than the usual sorts of problems getting the people Trump wants in the jobs where he wants them.

My third and final point: Even once Trump builds a team, it’s not clear that he really wants one. He has said that he runs his business pretty much as a solo operator, reserving all key decisions to himself, and he certainly ran his campaign that way. He publicly contradicted his vice presidential nominee on a policy matter related to Russia. Trump and Gingrich reasonably often ventured contradictory opinions in public. Conway has said that she sometimes said things on TV to get Trump’s attention, because she knew he was watching her on TV and couldn’t always get his attention in private.

What will Trump delegate, and which decisions will he keep for himself? Will he be consistent in the division of responsibility? He has said that he trusts his instincts and doesn’t read, so how will he manage a bureaucracy traditionally built on careful analysis, detailed briefings and internal debate? Does he have something entirely different in mind?

Those answers aren’t yet clear, and they need to be as Trump figures out how to delineate policy and work with an enormously large team for the first time in his life.

This list of three reasons for additional uncertainty actually assumes otherwise benign conditions. It assumes that he controls his worst impulses, even though he surely wants to wreak revenge on or at least belittle so very many people at the moment. It assumes that he doesn’t get bogged down in the lawsuits that are either already proceeding (the Trump University fraud trial begins later this month) or that may be filed against him, including by the women who allege he sexually assaulted them. It assumes that no crisis erupts in, say, Syria or in the economy, which could well pose some problems.

For me, the first big test will be whether he can make peace with the congressional leaders of the Republican Party. If he can, then he has the chance of building a team quickly enough to eliminate much of the uncertainty. But that will be tricky. His personal relationships with many of the leaders are awful, and allying with them would mean turning his back on the many supporters who urged him to “drain the swamp” in Washington, by which they meant getting rid of the entire elite, perhaps mainly Democrats but with many Republicans included.

The uncertainty will be with us for a while – and could well cause a pause in investment during a still fragile time for the economy.