Producer management and compensation is an essential downstream process and a critical component of the insurance value chain. It is in place before a policy is even sold and extends all the way into billing and claims. It occupies a unique place in insurance organizations, connecting data, processes and people in distribution, marketing, actuarial, operations, finance, servicing and even human resources. To attract and retain producers and encourage more sales, insurers must:
–Meet evolving producer expectations to increase the ease of doing business and service them in an on-demand, omni-channel manner.
–Design attractive and flexible compensation plans, administer them accurately and ensure timely payments via preferred modes.
Historically, transforming this integral function hasn’t been top of mind at insurance companies. However, producer management and compensation transformation has recently become a hot topic. In this two-part blog series, we’ll lay out the current landscape and share what we’ve seen in successful transformations.
First and foremost, transformation is all about what matters to you most and where you, as an insurance leader, want to create the biggest impact for the function and the producers you serve. Contrary to popular belief, not all transformations require platform replacements; in fact, many can be surgical enhancements to your current state (e.g., service-focused operating model improvements and enhancement of distribution capabilities for the field through digital portals). However, there exist key business drivers that can significantly affect your business and help anchor these efforts. These drivers, which we list below, answer the fundamental question, “Why transform?” and can help you make the case for change:
Service-oriented operating model, to deliver differentiated experiences and effectively manage demand via a producer-focused, service-centric operating model.
Producer self-service, to increase access, transparency and visibility through a service-centric platform with producer portals that enable easy viewing and generation of reports and statements.
Optimized operational efficiency, to create efficiencies throughout the organization and provide flexibility to administer and manage compensation.
Increased process automation, to provide operational efficiency and accuracy with centralized automated processing and administration.
Data-driven decision making, to provide insights that can generate greater productivity from producers and operational teams, as well as explore analytic endeavors like incentive analytics and penetration models.
If these drivers resonate, then you know the “Why?” Your next question is likely, “How?” This is where most insurers are tempted to issue an RFP, start a vendor bake-off, mobilize teams and start implementing. However, as we address in the next post, there are key considerations before starting this journey that will help you create an overall vision, establish guiding principles and provide a framework to stay true to your business drivers and transformation goals.
I welcome and applaud the federal government’s interest in the regulation of our nation’s insurance industries and markets. In response to the Federal Insurance Office’s request for comments on the “gaps” in state regulation, I appreciate this opportunity to present my views. Indeed, your request, Director McRaith, for comments upon such “gaps” seems to reveal what a keen, yet heretofore unpublicized, good sense of humor you must have.
To very briefly introduce myself, I am an economist, a CFA and a life insurance agent of more than 20 years who has worked with scores of life insurers. My views have been published by the Journal of Insurance Regulation, the American Council on Consumer Interests and various other industry trade publications. My positions are based on my extensive experiences with our nation’s profoundly problematic state-based insurance regulatory system, problems that those who have not been intimately involved with in the marketplace might find inconceivable.
State insurance regulators have never required the proper disclosure of cash value life insurance policies. Markets do not work properly without adequately informed consumers. While life insurance is, conceptually, a simple product, without the proper conceptual understanding of and the necessary relevant information, consumers cannot effectively search for good value. “The Life Insurance Buyer’s Guide,” published by regulators and mandatorily distributed with policies by insurers and their agents, is not just a little deficient—it is misleading, seriously incomplete and defective. And, it, in all of its various state editions, has been that way for almost 40 years.
Professor Joseph Belth has written about this national problem for more than 40 years. In 1979, the Federal Trade Commission issued a scathing report on the life insurance industry’s cash value products. Cash value policies are composed of insurance and savings components, and consumers need appropriate information about both. This specifically requires appropriate disclosure of these policies’ annual compounding rates on consumers’ savings element as well as annual costs regarding their insurance element. Both Professor Belth and I have separately developed very similar disclosure approaches. (More information about my approach and its comparative conceptual and marketplace tested-advantages is available on my website or upon request.)
The exceptional nature of this regulatory failure can be grasped by specifically contrasting the states’ regulatory track record on cash value policy disclosures with those of other financial regulators’ actions. Investment product disclosures have been mandated since the 1930s. Truth in Lending was enacted in 1969. And yet, while a consumer’s potential risks in making a poor life insurance purchase can arguably be shown to be greater than those in purchasing a poor investment or obtaining an unattractive loan, Truth in Insurance or Truth in Life Insurance legislation has never been promulgated by any state.
A second insightful perspective, and one with much more tangible consequences on its harmful impacts on consumers, can be grasped by reviewing a few basic facts about the current life insurance marketplace.
Fact No. 1: The life insurance marketplace is awash with misinformation; this should hardly be surprising. Life insurers actually run misleading advertisements and conduct training in deceptive sales practices. Evidence of such has been repeatedly submitted to state regulators. Moreover, given the industry’s commission-driven sales practices (commissions that can make those of mortgage brokers, now notorious for their own misrepresentations, look tiny), sales misconduct is pervasive. The harmful consequences of such agent misrepresentations are manifested every day, both directly and indirectly, in unwise purchases or other costly life insurance mistakes by American families. These misrepresentations go unrecognized because of consumers’ inadequate financial grasp of a product’s true conceptual framework, and these go unpunished because, as a past president of the national largest agent organization has written in widely quoted published articles, state laws prohibiting deceptive life insurance sales practices have virtually never been enforced.
Fact No. 2: Cash value life insurance policies that are sold to be lifelong products have extraordinary high lapse rates. Data shows that over an eight-year period, approximately 40% of all the cash value policies of many life insurers are discontinued. It is true there are many possible causes for consumers to discontinue coverage, but age-old evidence of consumer dissatisfaction has been a virtual five-alarm that state regulators have ignored for more than 40 years. Such lapses are especially financially painful to consumers, as the typically sold cash value policy has huge front-end sales loads (sales loads regarding which agents are trained to make misrepresentations).
It is very important that all readers fully understand that, contrary to pervasive misconceptions and misrepresentations, cash value policies do not avoid the increasing costs of annual mortality charges as a policyholder ages. The fundamental advantages of cash value life insurance products come from the product’s tax privileges. Tax privileges, however, are essentially a free, non-proprietary input. In a competitive marketplace, firms cannot charge consumers or extract value for a free, non-proprietary input. No one pays thousands of dollars in sales costs to set up an IRA. Cost disclosure will enable consumers to evaluate cash value policies by the policies’ price competitiveness and, as such, will drive the excessive sales loads out of cash value policies.
The heart of the battle over disclosure is that disclosure threatens to—and, in fact, will—undermine the industry’s traditional sales compensation practices. For example, over the past five years, Northwestern Mutual, the nation’s largest insurer, with $1.2 trillion of individual coverage in force, paid $4.5 billion in agent life insurance commissions and other agent compensation, while its mortality costs for its death claims were only $3.5 billion. (Northwestern paid more than $12 billion to policyholders surrendering their coverage during the same five years.)
Agents, naturally, do not like the idea of reduced compensation, but their arguments are not compelling. Insurers believe little life insurance would be sold without such agent compensation; that is, that the large and undisclosed agent compensation cash value policies typically provide is, 1) necessary to compensate agents for their sales efforts and yet, 2) could not be obtained from an informed consumer.
My position is that good disclosure on life insurance will drive the excessive and unjustified sales loads out of cash value policies, making them price competitive with pure-term policies, thereby enabling consumers to truly benefit from the product’s tax privileges. Also, product cost disclosure is an essential component of any fair business transaction (and, as all readers properly educated about life insurance know, a cash value policy’s premium and annual cost are different.)
Fact No. 3: It is undeniable that the sales approaches used today are not effective. Unbiased experts have, for decades, demonstrated that Americans have insufficient life insurance. In August 2010, the Wall Street Journal’s Leslie Scism reported that levels of coverage have plummeted to all-time lows. Contrast that with data showing consumers’ ever-increasing voluntary purchases of additional coverage via their employers’ group life insurance plans. Marketing research shows that fear making a mistake is the primary reason consumers avoid or postpone purchases and financial decisions. Inadequate disclosure on life insurance policies not only prevents consumers from being appropriately informed; it is also a main factor in their avoidance of the very product they so often need.
I predict publicity of appropriate disclosure will lead to: unprecedented sales growth, policyholder persistency, different levels of coverage, positive impacts on all other measurements of satisfaction regarding consumers’ future life insurance purchases and life insurance agents becoming trusted and esteemed professionals. Admittedly, appropriate disclosure could lead to litigation over agents’ and insurers’ prior misrepresentations.
As I think you may now understand, inadequate life insurance policy disclosure is a regulatory “gap” that is virtually the size and age of an intergalactic asteroid.
As it is currently marketed, long-term care insurance (LTCI) constitutes another serious problem. While, theoretically, LTCI can make sense, the devil is in the details. Essentially, LTCI is a contingent deferred annuity, yet one where insurers retain an option to increase the premiums for entire “classes of insureds” and where consumers must confront post-purchase price risks without the information necessary to assess alternatives. Furthermore, consumers cannot transfer their coverage to a new insurer without forfeiting the value they’ve previously paid. Defective LTCI policies have let consumers be shot like fish in a barrel; in fact, the policies’ inherent unfairness makes loan sharks envious. Appropriate disclosure on LTCI would bring consumers drastically superior value and understanding.
Regulation of life insurance agent licensing is incredibly deficient. Agents should truly be financial doctors. However, states’ agent licensing requirements fail to make sure consumers are served by financially knowledgeable professionals; licensing exams are a joke. While there are many competent agents, it is quite possible that the overwhelming majority of agents—many of whom are new and inexperienced, as more than four out of five recruits fail in the commission-based environment within the first few years—do not possess the basic knowledge necessary to accurately assess a consumer’s needs or to properly evaluate different companies’ policies.
There is virtually no state regulation of fee-only advisers who charge for providing advice about life insurance industry products. Such individuals can cause harm to consumers in multiple ways: improperly assessing needs and evaluating policies and recommending policy terminations or other actions (beneficiary or ownership changes, inappropriate policy loans, etc.) that lead to policies being mismanaged. To my knowledge, the only state that actually requires licensing for fee-only advisers is New Hampshire. A cursory review of public records, however, reveals shocking omissions in New Hampshire’s enforcement of such rules. One of the state’s former insurance commissioners, who for years has operated a prominent website providing and charging for advice on life insurance, has never been licensed.
Agent continuing education (CE) requirements are problematic. Outdated courses are still deemed acceptable, similar courses can be submitted virtually indefinitely to fulfill bi-annual CE requirements, and many courses are so devoid of meaningful information that they are vacuous. While the potential merits of CE are undeniable, only serious testing and recordings provide the means of monitoring the true effectiveness of instruction and learning.
Another area for improved regulation concerns the insurer-agent relationship. This is not to suggest draconian involvement by the government, rather to recognize the legitimate public interests in properly structuring such relationships—just as is done in relationships between pilots and airlines, construction workers and contractors, nurses and hospitals. The contracts between insurers and agents show unequal bargaining power. Insurers have not only exercised their power unfairly but have—possibly illegally—prohibited certain agent conduct, while requiring other, on matters clearly outside the boundaries of the contract. Attorneys specializing in franchise law have stated that the typical agent’s contract is the most one-sided arrangement they have ever seen.
Over the past 20 years, I have written many articles and submitted extensive documentation of sales and managerial fraud in the life insurance marketplace, yet no one with any marketplace authority or power has ever taken any effective action. Nonetheless, my commitment to reform the life insurance industry and marketplace remains. In fact, while federal regulatory action and any other private assistance would be greatly appreciated, all that is needed for the transformation of the age-old, dysfunctional life insurance industry is the dissemination—the genuine and effective mass market dissemination—of the type of life insurance policy disclosure information that is available on my web site, BreadwinnersInsurance.com. [The full version of this letter is available on the site.]
Successful businesses continuously draw on their strengths – and their people – for growth.
How do you describe the strengths of your business now? How would you describe the strengths that you’ll likely need in a year? In a few years? And how do these strengths translate into the skills your people will need in the future? For most companies, the answers to these questions are always evolving, as disruption increases and the pace of business picks up.
We’ve seen the recent evolution of companies’ capabilities — like fast-food chains rolling out deluxe coffee-shop menus, or utilities delving into smart home appliances.
A lot of organizations have solid processes for evolving their business strategies. But as sound as the development and approval process is, it often leaves out an important aspect: Can your people evolve, too?
Most CEOs aren’t certain that theirs can. In our latest CEO survey, nearly 80% of U.S. business leaders say they’re concerned that a lack of key skills threatens their organizations’ growth prospects.
This stat raises the question: Are some of these organizations taking their growth strategies too far afield, beyond their core strengths, in a desperate search for faster growth?
It takes a substantial effort. As we say in the story, “If you respond to disruption by changing your business model and capabilities system, you can’t dabble. You have to commit fully.”
That level of commitment is only possible, of course, with the right people to step up and deliver on your company’s greatest strengths.
Think of the potential talent issues at hand for so many businesses: How does a legacy technology company avoid disruption and commoditization? How can a fast-food chain turn up its café side of the business without trained baristas on hand? How can a utility amp up the tech-savvy talent needed to design Internet-and-data-fueled thermostats and security devices?
They’ll all need to align their talent strategy with their business strategy.
In our advisory work with clients, we are in frequent talks with companies that need to make these moves. And talent is at the top of the priority list.
Before preparing to grow your strengths, think about the capabilities in your current ecosystem of people and where gaps might pop up:
People strategy, leadership and culture: Does our people strategy support our growth initiatives (and, more importantly, is there a strategy)? Is the right leadership development system in place, including a robust global mobility program? Will our culture support the execution that’s required?
Reward: Does our compensation and benefits strategy still fit? Is pay competitive? Are there areas to be restructured that could free capital for re-investment?
Talent acquisition: Do we need to pull in brand-new talent by strategically hiring from the outside or by making strategic acquisitions?
Organization design and operating model: Have we designed an organizational structure and operating model that have clear links between all our capabilities?
Change management and communications: Do we have the right program management structure and strategic change methods for execution? Do we know who the real information brokers are in the organization who will informally drive the change?
Technology: Do we have the right technology to support the kind of employee experience our people need? Are we leveraging workforce analytics to retain our top-performing people, and are we conducting frequent employee surveys to understand the pulse of the organization?
These are just a few of the talent areas that are important to understand.
Odds are you won’t need to revamp all of them. But a carefully designed and innovative talent strategy underlies the successful evolution to get growing.
Cyber attacks were once on the periphery of American business consciousness. That mindset changed over the past two years. A series of devastating events, including the 2014 cyber attack against Sony, catapulted cyber liability concerns from an IT department issue to a major priority for boardrooms across America. As U.S. government officials concluded that North Korea was behind the attack, many C-suite executives suddenly found themselves asking questions. Is this the start of a cyber war? Could we be the next victim? If we are, how will it affect our operations and our bottom line? Do our insurance policies cover any of these costs?
Today, many insurance buyers look to their cyber insurance policies to fill coverage gaps that often exist in other policies. For example, a property policy may respond to physical damage from a named peril, but it will likely exclude loss for non-tangible assets as a result of a cyber attack. Similarly, a commercial general liability policy will likely provide liability coverage for causing bodily injury because of negligence but exclude coverage for liability because of a failure to secure sensitive data from hackers.
Many policyholders may be unaware that some, though not all, of these cyber policies contain specific terrorism and war exclusions. As a result, gaps in cyber insurance coverage can exist in cases like the Sony breach, where government agencies, like the FBI, conclude that a foreign government or terrorist organization is responsible for the attack.
Is a Cyber Attack “Terrorism” or “War”?
Immediately following the Sony attack, President Obama referred to it by saying, “I don’t think it was an act of war . . . but cyber vandalism.” Then, on April 1, 2015, President Obama signed the Executive Order on Cybersecurity with the goal of protecting the private sector against hackers and thereby bolstering national security. The order seeks to identify and punish individuals behind attacks, but it could also lead some to categorize an apparent hacking event or act of cyber terrorism as an “act of war.”
Changes in government definitions trickle down into coverage disputes because many policies that exclude or include “war,” “terrorism” or “cyber terrorism” either fail to define those terms or define them by referring to standard government definitions.
Government Definitions of Terrorism, Cyber Terrorism and War
THE TERRORISM RISK INSURANCE ACT (TRIA)
“Act of terrorism” is defined as any act certified by the secretary of the Treasury in concurrence with the secretary of State and the attorney general of the U.S. to be:
» an act of terrorism
» a violent act or an act that is dangerous to human life, property or infrastructure
» an act resulting in damage within the United States or Outside (on a U.S.-flagged vessel, aircraft or U.S. mission)
» an act committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the civilian population, U.S. policy or the U.S. government.
The secretary of the Treasury may not delegate his certification authority, and his decision to certify an act or not is not subject to judicial review.
DEPARTMENT OF DEFENSE (DOD)
The DOD defines “terrorism” as “the unlawful use of violence or threat of violence, often motivated by religious, political or other ideological beliefs, to instill fear and coerce governments or societies in pursuit of goals that are usually political.” The term “act of war” is understood to mean “a use of force [that may] invoke a state’s inherent right to lawful self-defense.”
DEPARTMENT OF JUSTICE (DOJ)/FEDERAL BUREAU OF INVESTIGATION (FBI)
The FBI defines “cyber terrorism” as “the premeditated, politically motivated attack against information, computer systems, computer programs and data [that] results in violence against non-combatant targets by subnational groups or clandestine agents.”
DEPARTMENT OF HOMELAND SECURITY (DHS)
The National Infrastructure Protection Center (NIPC), (formally a branch of DHS), defines “cyber terrorism” as “a criminal act perpetrated through computers resulting in violence, death and/or destruction and creating terror for the purpose of coercing a government to change its policies.”
Cyber Terrorism and the ‘Act of War’ Exclusion
Cyber policies are relatively new and manuscript products; as such, the wording varies significantly. Many policies contain a standard exclusion for “war, invasion, acts of foreign enemies, hostilities (whether war is declared or not), civil war, rebellion, revolution, insurrection, military or usurped power, confiscation, nationalization, requisition, or destruction of, or damage to, property by or under the order of any government, public or local authority…” An attack by the Taliban, for example, would probably fit within the exclusion as an act sponsored by a “public or local authority.”
Traditionally, war exclusions were relatively narrow; they required an actual war or, at the very least, “warlike operations”; “for there to be a ‘war,’ a sovereign or quasi-sovereign must engage in hostilities.” Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 1005 (2d Cir. 1974) (finding that a Jordanian terrorist group that hijacked a plane was not a de facto government for the purposes of applying the war exception).
However, the events of Sept. 11, 2001, changed the way certain events and groups were perceived and classified, ultimately leading many to label the 2014 cyber attack on Sony an “act of war.”
Litigation surrounding the Sept. 11 attacks led directly to an expanded view of the war exclusion. For one thing, the Second Circuit Court of Appeals ruled that the attacks were an “act of war.” In re Sept. 11 Litig., 931 F. Supp. 2d 496, 512 (S.D.N.Y. 2013), an owner of a building near the site of the World Trade Center attacks sought to recover cleanup and abatement expenses for removing pulverized dust that infiltrated into the owner’s building after the collapse of the Twin Towers. He sued under the Comprehensive Environmental Response, Compensation, and Liability Act [CERCLA], which allows strict liability claims in pollution cases, but the court applied CERCLA’s “act of war” exception to strict liability.
In concluding that the attacks were an act of war, the court commented that “Al Qaeda’s leadership declared war on the United States, and organized a sophisticated, coordinated, and well-financed set of attacks intended to bring down the leading commercial and political institutions of the United States,” id. at 509, and that “as we learned in the twentieth century, and as has been true throughout history, war can take on a formal structure of armies in contrasting uniforms confronting each other on battlefields, and war can persist for years, fought by irregular, insurgent forces and capable of causing extraordinary damage,” id. at 511.
This expansion of the legal definition of “act of war” to include acts by “irregular, insurgent forces and capable of causing extraordinary damage” could lead to attacks by hacktivist groups or foreign intelligence services being considered acts of war and therefore excluded from cyber policies.
Cyber Insurance and TRIA
The Terrorism Risk Insurance Act (TRIA) is a government program designed to provide a backstop for reinsurers in the event of large terrorism-related losses (more than $100 million). There is debate over whether TRIA applies to cyber policies at all. TRIA applies to commercial property and casualty insurance coverage, but some cyber policies are written as another line of coverage, such as professional liability, which is not included in TRIA.
Even assuming that TRIA would apply to cyber insurance, for TRIA coverage to be in effect, (1) there must be losses, resulting from property damage, exceeding $100 million; and (2) they must be caused by a certified terrorism event:
(1) Property Damage: For TRIA to apply, physical property damage must occur, and what constitutes “physical damage” in the context of a cyber attack remains an open question. What we do know is that TRIA will probably not cover business interruption or reductions in business income absent some physical loss or property damage. Many cyber attacks do not involve any physical damage, which would exclude TRIA coverage.
(2) A Certified Terrorism Event: For TRIA to apply to any event, the event would need to be certified as an act of terrorism. This onerous and political certification process requires the secretary of the Treasury, secretary of State and attorney general to agree that an incident was an “act of terrorism.” Many political and economic issues factor into certifying a terrorism event, which can lead to counterintuitive results. For instance, as of the date of this publication, the April 2013 Boston Marathon bombing has not been certified as a terrorist act.
To ensure coverage for cyber terrorism and cyber warfare, buyers of cyber insurance will need to seek out a cyber risk insurance policy that explicitly includes this coverage in the broadest terms possible. As more insurance carriers enter the cyber insurance market, one must be wary that policy terms will vary from one policy form to the next, and some will have coverage terms superior to others.
At the risk of alienating most people within the workers’ comp world, here’s how things look from my desk:
Most workers’ comp executives – C-suite residents included – do not understand the business they are in. They think they are in the insurance business – and they are not. They are in the medical and disability management business, with medical listed first in order of priority.
That statement is bound to lead more than a few readers to conclude I’m the one who doesn’t know what I’m doing. For those willing to hear me out, press on – for the rest, see you in bankruptcy court.
Twenty-five years ago, the health insurance business was dominated by indemnity insurers and Blues plans; big insurers like Aetna, Travelers, Great West Life, Met Life and Connecticut General and smaller ones including Liberty Life, Home Life, Jefferson Pilot, Time and UnionMutual. Where are those indemnity insurers today?
With the exception of Aetna, none is in the business; the only reason Aetna survived is it took over USHealthcare, or, more accurately, USHealthcare took over Aetna. The Blues that became HMO-driven flourished, as did the then-tiny HMOs – Kaiser, UnitedHealthcare, Coventry. Why were these provider-centric models successful while the insurers were not? Simple: The health plans understood they were in the business of providing affordable medical care to members, while insurers thought they were in the business of protecting insureds from the financial consequences of ill health.
The parallels between the old indemnity insurers and most of today’s workers’ comp insurers are frightening. Senior management misunderstands their core deliverable; they think it is providing financial protection from industrial accidents, when in reality it is preventing losses and delivering quality medical care designed to return injured workers to maximum function.
That lack of understanding is no surprise, as most of the senior folks in top positions grew up in an industry where medical was a small piece of the claims dollar. Medical costs were considered a line item on a claim file or number on a loss run, and not “manageable” – not driven by process, outcomes, quality.
Think I’m wrong?
Then why is the industry focused almost entirely on buying medical care through huge discount-based networks populated by every doc capable of fogging a mirror (and some who can’t)? Even with those huge networks, why is network penetration barely above 60% nationally? Why has adoption of outcome-based networks been a dismal failure? Why do so few workers’ comp payers employ expert medical directors, and, among those who do, why don’t those payers give those medical directors real authority? Why do non-medical people approve drugs, hospitalizations, surgeries, often overriding medical experts who know more and better?
Because senior management does not understand that success in their business is based on delivering high-quality medical care to injured workers.
At some point, some smart investor is going to figure this out, buy a book of business and a great third-party administrator (TPA) for several hundred million dollars, install management who understand this business is medically driven and proceed to make a very healthy profit. Alas, the current execs who don’t get it will be retired long before their companies crater, leaving their mess behind for someone else to clean up.